Rand v. CM Franchise Systems, Inc.

Full title: ALLAN RAND ET AL., Appellants, v. CM FRANCHISE SYSTEMS, INC., ET AL.…

Court: The Court of Appeals of Washington, Division One

Date published: Mar 16, 2009

149 Wn. App. 1023 (Wash. Ct. App. 2009)

149 Wash. App. 1023

Opinion

No. 61828-8-I.

March 16, 2009.

Appeal from a judgment of the Superior Court for King County, No. 07-2-08799-1, Steven C. Gonzalez, J., entered July 14, 2008.

Affirmed by unpublished opinion per Appelwick, J., concurred in by Schindler, C.J., and Grosse, J.

UNPUBLISHED OPINION

APPELWICK, J.

Under the discovery rule of RCW 4.16.080, an action for fraud must commence within three years of a plaintiff discovering the facts underlying the claim. The discovery rule requires a plaintiff to use due diligence in discovering the basis for the cause of action. Because Rand failed to exercise due diligence, he is not entitled to benefit from the discovery rule. His claims are therefore barred by the statute of limitations. We affirm.

FACTS

In September 2002, Allan Rand learned of Tacone franchises through an old family friend, Michael Bernstein. Michael Bernstein is the Chairman of the Board of CM Franchise Systems, Inc. Over the next several months, Rand visited Los Angeles to explore the Tacone franchise opportunity. During this period, CM Franchise gave Rand a copy of the August and the October 2002 Profit and Loss Statements for the Century City Tacone franchise. CM Franchise also provided Rand with a list of franchisees and told him to contact any of the owners.

On October 31, 2002, Rand entered into a letter of intent with CMJ Franchise Systems, Inc., ¹ to acquire the "master franchise territory" for the exclusive operation of Tacone and City Kitchen stores in Washington and Oregon. In April 2003, the parties extended the letter of intent. On May 5, 2003, Rand received CMJ Franchise's Offering Circular, used in California. It contained no earnings claims.

1 Some documents are executed by CM Franchise Systems, Inc. and some by CMJ Franchise Systems, Inc. The parties treat the documents the same regardless of which name is used.

Rand established the Iron Horse Venture Group, a corporation, in the spring of 2003, to act as the subfranchisor with CM Franchise. Rand and his wife are the sole shareholders in the Iron Horse Venture Group. On June 11, 2003, Iron Horse Venture Group and CM Franchise entered into a Subfranchise Agreement, drafted by Rand's counsel. The Agreement contained a provision limiting any legal action arising out of the Agreement. The Agreement also included an acknowledgement by the subfranchisor, Rand, that he has conducted an independent investigation of the business contemplated by the Agreement.

At the time of the Agreement, CM Franchise failed to register with the State of Washington, as required by the Franchise Investment Protection Act ("FIPA"), Chapter 19.100 RCW, in order to sell franchises. Rand acknowledges that he knew CM Franchise was unregistered in Washington.

Rand created a limited liability company called MNNY Group One to operate as a franchisee. Rand opened the restaurant in December 2003.

On October 11, 2004, Rand received a copy of a report of 2003 average yearly sales of Tacone stores operating one year or more. The report also listed the earnings for January to September 2004 and projected earnings for October to December 2004. It indicated that average sales for the chain in 2003 were $609,715 and the Century City store had sales of $1,102,992. At the time of contract, Rand knew the Century City store was the best earning store of the Tacone franchises. But, he claims he did not know that an extreme gap existed between the performance of the Century City store and the other franchises.

Rand's Seattle Tacone restaurant failed in November 2006.

In March 2007, Rand filed a complaint for rescission and damages, arising from CM Franchise's alleged violations of FIPA. CM Franchise filed a motion for summary judgment on April 17, 2008. It argued that Rand's claims were untimely under the contract, applicable statute of limitations, and common law equitable defenses to rescission. The trial court granted CM Franchise's motion for summary judgment finding the claim for rescission untimely. The order does not state whether the finding is based on statutory, common law, or contractual grounds.

Rand filed a motion to reconsider and asked for clarification regarding whether all claims had been dismissed. The court denied the motion. CM Franchise filed a motion for entry of final judgment and award of attorneys' fees. The trial court entered findings of fact, conclusions of law, and order entering final judgment. Based on the Subfranchise Agreement attorney fees provisions, the trial court awarded CM Franchise $81,970 in fees.

Rand appeals the original grant of summary judgment, dated May 16, 2008; the order denying reconsideration, dated June 12, 2008; and the findings of fact, conclusions of law, and order entering final judgment, dated July 14, 2008.

DISCUSSION

This court reviews a trial court's summary judgment order de novo. Folsom v. Burger King, 135 Wn.2d 658, 663, 958 P.2d 301 (1998). A motion for summary judgment may be granted when there is no genuine issue as to any material fact, and the moving party is entitled to a judgment as a matter of law. CR 56(c). All facts and reasonable inferences are viewed in the light most favorable to the nonmoving party. Atherton Condo. Apartment-Owners Ass'n Bd. of Dirs. v. Blume Dev. Co., 115 Wn.2d 506, 516, 799 P.2d 250 (1990).

I. Statute of Limitations

Rand appeals the trial court's grant of summary judgment to CM Franchise arguing that his claim was not untimely. The trial court did not specify a basis for its decision. At oral argument, Rand acknowledged that claims for technical violations of FIPA are subject to RCW 4.16.130, which provides a two year statute of limitations when a statute does not otherwise specify one. Unisys Corp. v. Senn, 99 Wn. App. 391, 395, 994 P.2d 244 (2000). CM Franchises alleged violations of FIPA occurred in 2003, when the Subfranchise Agreement was signed. Rand filed his complaint in March 2007, nearly four years after the alleged FIPA violations. We hold that the trial court correctly found that Rand's claims of technical violations are barred under the two-year provision contained in RCW 4.16.130. Consequently, we evaluate Rand's appeal based upon the longest possible statute of limitations he claims, the statute of limitations for fraud as tolled by the discovery rule. Here, we assume Rand's claims for fraud are subject to RCW 4.16.080, which provides a three year statute of limitations.²

2 If the claim is untimely under the statute of limitations for fraud, the challenge to the enforceability of the contract is barred. We need not reach the issue of the contract's provision limiting any challenge to the agreement to one year.

A cause of action accrues, and the applicable statute of limitations begins to run, when a party has a right to apply to a court for relief. U.S. Oil Ref. Co. v. Dep't. of Ecology, 96 Wn.2d 85, 91, 633 P.2d 1329 (1981).

As a threshold issue, Rand claims that "[s]tatutes of limitations never run against defenses. . . ." Allis — Chalmers Corp. v. City of N. Bonneville, 113 Wn.2d 108, 112, 775 P.2d 953 (1989). Rand implies that CM Franchise is precluded from asserting the statute of limitations issue, because it filed the summary judgment motion. In Cellular Eng'g, Ltd. v. O'Neil, the Washington Supreme Court held that a statute of limitations applied only to those parties who sue, not to a defendant asserting an affirmative defense. 118 Wn.2d 16, 23, 820 P.2d 941 (1991). Rand sued CM Franchise asserting violations of FIPA. A statute of limitations time bar applies to Rand even if CM Franchise filed for summary judgment.

Rand also claims that prior to the Agreement, CM Franchise fraudulently misrepresented the earnings data for the other Tacone franchises and failed to provide an offering circular registered in Washington. RCW 4.16.080 provides a three year statute of limitations for claims of fraud. The suit was not brought within three years of signing the contract. But, Rand asserts that the statute was tolled, because under RCW 4.16.080 an action for relief upon the grounds of fraud does not accrue until the discovery by the aggrieved party of the facts constituting the fraud. RCW 4.16.080(4). Application of the discovery rule tolls the limitation period until such time as the plaintiff knew or, through the exercise of due diligence, should have known of the fraud. Crisman v. Crisman, 85 Wn. App. 15, 20, 931 P.2d 163 (1997); Interlake Porsche Audi, Inc. v. Bucholz, 45 Wn. App. 502, 516-17, 728 P.2d 597 (1986).

In order to prove fraud, including FIPA claims, "the plaintiff must establish each of the following elements by clear, cogent, and convincing evidence: (1) A representation of an existing fact, (2) its materiality, (3) its falsity, (4) the speaker's knowledge of its falsity or ignorance of its truth, (5) his intent that it should be acted on by the person to whom it is made, (6) ignorance of its falsity on the part of the person to whom it is made, (7) the latter's reliance on the truth of the representation, (8) his right to rely upon it, (9) his consequent damage." Kirkham v. Smith, 106 Wn. App. 177, 183, 23 P.3d 10 (2001.

Here, Rand admits that he knew from "day one" that the Century City store was the best performing franchise in the Tacone chain. According to the record, Rand's relationship with CM Franchise began in September 2002. Rand received a 2002 profit and loss statement for the Century City store in December 2002. In October 2004, Rand received a report outlining the revenues for the other Tacone restraunts operating one year or more. It was in October 2004 that Rand claims he learned he was mislead. Under this timeline, Rand's claims for fraudulent misrepresentation fall within the three year statute of limitations contained in RCW 4.16.080.

The discovery rule, however, requires a plaintiff to use due diligence in discovering the basis for the cause of action. Allen v. State, 118 Wn.2d 753, 758, 826 P.2d 200 (1992); Reichelt v. Johns-Manville Corp., 107 Wn.2d 761, 772, 733 P.2d 530 (1987). "In other words, the discovery rule will postpone the running of a statute of limitations only until the time when a plaintiff, through the exercise of due diligence, should have discovered the basis for the cause of action." Allen, 118 Wn.2d at 758. Rand is only entitled to benefit from the discovery rule of RCW 4.16.080, if he could not have, through due diligence, discovered the claimed misrepresentations. Rand acknowledges that he always knew the Century City store performed best, but did not know the disparity with the other Tacone stores. Here, CM Franchise provided Rand with contact information of franchise owners in order for him to conduct his own independent investigation. He conducted an investigation and visited many of the existing franchises. In the Subfranchise Agreement Rand drafted, he acknowledged that he had conducted an independent investigation in contemplation of the business arrangement. He was on notice that the Century City store performed better than other stores. Through due diligence, Rand could have discovered in 2003 the extent of the earnings disparities existing between the Century City store and the other Tacone restaurants. These are the facts that now constitute the basis of his fraud claims. Rand does not receive the benefit of the discovery rule. His claims to rescind the contract are therefore barred by the statute of limitations.

Because we affirm on these grounds, we need not reach the alternative basis advanced by the respondent to affirm under common law.

II. Attorney Fees

If a contract provides for attorney fees and costs, the prevailing party in any action on the contract is entitled to reasonable attorney fees. RCW 4.84.330. The court must enter findings of facts and conclusions of law in support of an attorney fee award. Mahler v. Szucs, 135 Wn.2d 398, 435, 957 P.2d 632 (1998). Section 17.7 of the Subfranchise Agreement states:

Except as expressly provided in this Agreement, in any action or proceeding brought to enforce any provision of this Agreement or arising out of or in connection with the relationship of the parties hereunder, the prevailing party shall be entitled to recover against the other its reasonable attorneys' fees and costs in addition to any other relief awarded by the court. As used in this Agreement, the 'prevailing party' is the party who recovers greater relief in the action.

Rand claims the trial court erred in granting attorney fees to CM Franchise, because the contract is void due to CM Franchise's technical violations of FIPA. We disagree. A franchisor's failure to comply with FIPA's registration requirements does not make a franchise agreement void. Allison v. Medicab Int'l, 92 Wn.2d 199, 203, 597 P.2d 380 (1979). A contract that violates a statutory business regulation is not void, unless made so by the terms of the statute. Ritter v. Shotwell, 63 Wn.2d 601, 606, 388 P.2d 527 (1964). Here, FIPA does not render a contract that violates its technical provisions void. Instead, the remedy under RCW 19.100.190(2) is rescission. Rescission for statutory violations is subject to a two-year statute of limitations. RCW 4.16.130. Since rescission was not sought in timely fashion, rescission on those grounds is not available. The contract remains enforceable, including the attorney fees provision.

CM Franchise prevailed both below and on appeal. We affirm the award of attorney fees and award fees and costs associated with this appeal.

AFFIRMED.