Opinion
Civil Action No. SA-02-CV-1209-XR.
June 10, 2005
FINDINGS OF FACT AND CONCLUSIONS OF LAW
Relevant to these proceedings, Defendants Taco Cabana of New Mexico, Inc. ("TCNM"), and T.M.S. Enterprises, L.P. ("TMS"), bring a counterclaim for declaratory judgment against Plaintiffs Texas Taco Cabana L.P. ("TTC"), T.C. Management, Inc. ("TCM"), and Carrols Corp. Defendants seek a declaration that the 1994 License Agreement at issue grants them exclusivity as to the operation of Taco Cabana restaurants in the entirety of the City of Albuquerque, New Mexico. A bench trial was held from May 23 through May 24, 2005. After hearing all the evidence, the Court denies relief on the declaratory judgment claim and finds that the 1994 License Agreement covers only those restaurants in existence at the time of the filing of this lawsuit. Because the remaining claims in this case are dependent upon a ruling on the scope of the 1994 License Agreement favorable to Defendants, judgment is granted in favor of Plaintiffs on all of Defendants' remaining counterclaims. Pursuant to FED. R. CIV. P. 52(a), the Court hereby makes its findings of fact and conclusions of law as follows:
TCNM is a subsidiary of Taco Cabana of El Paso, Inc. ("TCEP"). Melvin Sloan is the Chief Executive Officer of both TCNM and TCEP.
FINDINGS OF FACT
1. For the sake of convenience, at times, TCNM and TMS will be referred to collectively as "New Mexico," and TTC, TCM, and Carrols will be referred to collectively as "Texas."
2. On May 27, 1987, TCEP entered into a development agreement with Taco Cabana International, Inc., the predecessor of TCM. TCEP was granted the right to develop and operate licensed restaurants in El Paso County, Texas and Dona Ana County, New Mexico. The agreement provided for TCEP to open at least three Taco Cabana restaurants no later than September 1989. The agreement provided that a separate license agreement was required to be executed for each new restaurant. In an addendum to the agreement, also executed May 27, 1987, the parties agreed that if TCEP fulfilled its obligation to build three restaurants, it would have the option of developing additional restaurants in the area.
3. TCEP and Taco Cabana International, Inc. also entered into a license agreement on May 27, 1987. The license agreement granted TCEP "the right to operate a restaurant business . . . only at the following location: `see attachment A.'" Attachment A states:
This License Agreement is executed simultaneously with a Development Agreement between the same parties. Upon identification and acquisition of the licensed restaurant location, the address of such location shall be automatically considered the "restaurant location". . . .
4. TCEP built and operated three restaurants in El Paso between May 1987 and September 1989. TCEP and Taco Cabana International, Inc. did not enter into separate license agreements to specifically cover any of the first two restaurants built subsequent to the initial restaurant. TCEP and Taco Cabana International, Inc. treated the license agreement as though it applied to each of the three restaurant locations and each restaurant paid the royalties and fees set forth in the agreement.
5. TCEP and Taco Cabana International, Inc. entered into a second license agreement on October 30, 1991 that specifically covered a fourth restaurant location at the Cielo Vista Mall. On March 31, 1993, the same parties entered into a third license agreement that specifically covered a fifth restaurant located at 4810 Hondo Pass, El Paso, Texas.
The language in the granting clauses of the fourth and fifth El Paso license agreements detail the locations as "Cielo Vista Mall, El Paso, Texas, and more particularly described on Exhibit `B' hereto" and "4810 Hondo Pass, El Paso, Texas, and more particularly described on Exhibit `B' hereto." There is no Exhibit "B" to either license agreement.
6. At all times, Melvin Sloan was the Chief Executive Officer of TCEP.
7. On May 5, 1988, TCNM entered into a development agreement with Taco Cabana International, Inc. for the development and operation of a minimum of three Taco Cabana franchises in the Albuquerque and Santa Fe, New Mexico restaurant markets ("the 1988 Development Agreement"). This development agreement required TCNM to develop a minimum of three restaurants in strict accordance with the development schedule. TCNM was to build the first two restaurants in Albuquerque and the third in Santa Fe, with all three restaurants to be opened or under construction by July 15, 1991.
8. TCNM did not develop any restaurants under the 1988 Development Agreement.
9. On July 1, 1994, TCNM and TCM, entered into a second development agreement ("the 1994 Development Agreement"). This agreement granted to TCNM the right to develop and operate a minimum of three restaurants at locations to be determined within the State of New Mexico, exclusive of Dona Ana County. TCNM was required to open the third restaurant within 36 months after execution of the agreement. TCNM was given the right to extend its exclusive development period for another three restaurants if it met the development schedule for the first three restaurants.
10. The 1994 Development Agreement states that the "former Development Agreement . . . has terminated and [TCNM] has no further rights with respect thereto. All rights of [TCNM] to develop Taco Cabana stores in New Mexico are set forth in this Taco Cabana Restaurant Development Agreement."
11. Section III(A)(2) of the 1994 Development Agreement provides that should the right to extend the exclusivity period be exercised, a "Second Development Fee" of $100,000 would become due. "The Second Development Fee of $100,000 represents (i) a development fee of $25,000 for each of the fourth, fifth and sixth restaurants . . . and (ii) $25,000 as payment in full of the fee under the License Agreement for the fourth restaurant."
12. Section III(B) of the 1994 Development Agreement provides that "[a] License Agreement must be signed for each restaurant subsequent to the first restaurant at the time the Developer is prepared to begin developing such restaurant. . . . Each License Agreement to be executed pursuant to this Development Agreement shall require payment of a license fee of Fifty Thousand Dollars ($50,000). . . ."
13. Section IV of the 1994 Development Agreement provides for "Development Procedure and Coordination with License Agreement." Section IV(A) provides that "Developer must apply for and obtain license and site approval (not to be unreasonably withheld) from Licensor for each restaurant to be established." Section IV(B)(2) provides "Developer and Licensor shall enter into the then current form of Taco Cabana Restaurant License Agreement for the second and third restaurants." Section IV(B)(6) provides that "[a]ll license agreements executed pursuant to this Development Agreement shall provide for [certain royalty terms]; in the same manner as in the License Agreement executed concurrently herewith for the previously approved location at 6500 San Mateo, Albuquerque, New Mexico."
14. Section X(B) of the 1994 Development Agreement provides that "[n]o failure of Licensor to exercise any power reserved to it by this Agreement, or to insist upon strict compliance by Developer with any obligation hereunder, and no practice of the parties at variance with the terms hereof, shall constitute a waiver of Licensor's right to demand strict compliance with any of the terms herein."
15. Section XII of the 1994 Development Agreement provides that the "Agreement, the documents referred to herein (including the License Agreement executed concurrently herewith), and the Exhibits hereto, if any, constitutes the entire Agreement between the parties . . ., and supersede all prior agreements."
16. Termination of the 1994 Development Agreement does not terminate any existing license agreement.
17. The 1994 Development Agreement provided for a right of first refusal after expiration of the development agreement. Section I of the 1994 Development Agreement provides:
Development rights under the 1994 Development Agreement "expired," as opposed to "terminated," upon the completion of the first three restaurants, or the first six if the right to extend the exclusive period was exercised. The Court has previously ruled that the 1994 Development Agreement, and development rights thereunder, "terminated" rather than "expired."
In the event Developer elects not to exercise its right of first refusal as to a particular site, Developer shall lose any right of first refusal with regard to the township in which such rejected site is located, unless such rejected site is in either Albuquerque, New Mexico or Santa Fe, New Mexico metropolitan areas, in which case Developer shall only lose its right of first refusal as to that particular site and shall continue to have a right of first refusal as to other sites in the Albuquerque and Santa Fe metropolitan areas.
(emphasis added).
18. Simultaneously, TCNM and TCM executed a license agreement ("the 1994 License Agreement") granting TCNM the right to operate a Taco Cabana "restaurant business" and providing that TCM would not operate a restaurant within a radius of two miles of the "site" of the licensed business. The granting clause of the License Agreement places the "location" of the "site" of the licensed business as: "4810 Hondo Pass, El Paso, Texas Albuquerque, New Mexico, and more particularly described on Exhibit B hereto." There is no "Exhibit B" attached to the License Agreement. The agreement is labeled "Hondo Pass License Agreement" at the bottom of each page. The agreement contains numerous word processor "strikeouts" and additions.
19. Section I(C) of the 1994 License Agreement provides that "Licensor shall not operate or license any third party to operate a Taco Cabana restaurant within a radius of two miles of the site of the licensed business. . . . If Licensee should wish to relocate the site of its restaurant, a $5,000 relocation fee shall be paid." The term of the License Agreement may reach forty (40) years.
20. The 1994 License Agreement is to be construed according to the laws of Texas.
21. Section XXII of the 1994 License Agreement states,
(A) . . . Licensor and Licensee agree that if any of the provisions of this Agreement may be construed in two ways, one of which would render the provision illegal or otherwise voidable or unenforceable, such provision shall have the meaning which renders it valid and enforceable. The language of every provision of this Agreement shall be construed according to its fair meaning and not strictly against Licensor or Licensee. In the event any court or other public agency shall determine that any provision in this Agreement is not enforceable as written, Licensor and Licensee agree that the provision shall be deemed thereby amended so that it is enforceable to the fullest extent permissible under the laws and public policies of the jurisdiction in which enforcement is sought. If any provision in this Agreement is held invalid or otherwise unenforceable by any court or other public agency, such findings shall not invalidate the remainder of this Agreement.
. . .
(C) All references to the masculine, feminine, neuter or singular shall be construed to include masculine, feminine, neuter or plural, where applicable. . . .
22. Melvin Sloan testified that he understood the granting clause to mean that TCNM had acquired a license to operate Taco Cabana restaurants within the entirety of the City of Albuquerque and that TCNM had exclusive rights to the city.
23. James Eliasburg, former General Counsel of TCM, testified that the ordinary practice in drafting license agreements was to specify a street address for a restaurant in the agreement, and that the license agreement is intended to cover only one restaurant. Eliasburg further testified that when a development agreement and license agreement are negotiated at the same time, one typical practice of the company was to leave a blank in the draft copy of the license agreement, with the assumption that it would be filled in at a later point.
24. Eliasburg testified that Sloan never asked for exclusivity within the entire City of Albuquerque.
25. At the time the 1994 License Agreement was signed, TCNM had begun the process of constructing a Taco Cabana restaurant at 6500 San Mateo, Albuquerque, New Mexico. Prior to the execution of the 1994 License Agreement, Eliasburg and Richard Cervera, President of TCM, had participated in the site selection for the San Mateo restaurant and provided construction support to the location.
26. At some point in time, a license agreement was drafted that eliminated all strikeouts and incorporated all changes that were present in the 1994 License Agreement. This "completed" license agreement included a granting clause that placed the site of the location as 6500 San Mateo, Albuquerque, New Mexico. This agreement was never executed and no attempt was ever made to have this agreement executed.
27. TCNM opened two restaurants in Albuquerque by the end of 1995. One restaurant was located at 6500 San Mateo. The second restaurant was located at 8330 Montgomery Blvd. A second license agreement was not executed to specifically reference the restaurant at 8330 Montgomery Blvd.
28. In November of 1996, Sloane was diagnosed with a brain tumor. Sloan was told by representatives of Texas to concentrate on his health, rather than development. Sloan did not return to work until January of 1998. After this, Sloan set up TMS with the manager of the two New Mexico restaurants, Ed Rodriguez.
29. At some point in 1999 until mid-2000, New Mexico and TCM began entering into some preliminary discussions as to continued development of the New Mexico market. The Chief Financial Officer of TCM sent Sloan a letter on June 12, 2000 stating that the company was as "excited as ever to have [Sloan] consider building another restaurant in the Albuquerque market." At approximately the same time, TCM sent a development agreement amendment to Sloan. This amendment was eventually signed August 17, 2000 ("the 2000 Amendment").
30. Despite the fact that the 1994 Development Agreement specifically states that the 1988 Development Agreement was terminated, the 2000 Amendment states that it is "an extension and amendment to that certain Taco Cabana Restaurants Development Agreement dated May 5, 1988." Becky Rainey, former assistant General Counsel and former General Counsel of TCM, testified that shortly after she began her employment in 1996 she attempted to clean up the filing system that had previously been in place and had attempted to collect all development agreements operative at the time. She testified that the only signed development agreement between the parties that could be found was the 1988 Development Agreement. Rainey further testified that she intended the 2000 Amendment to cover "all development agreements."
In conjunction with this effort, Rainey testified that she instructed her paralegal to contact Sloan in an effort to obtain all executed documents, but did not specifically recall what documents were received, if any.
The corporate files included an unexecuted copy of the 1994 Development Agreement and an unexecuted copy of the "completed" license agreement for 6500 San Mateo.
31. Section 3 of the 2000 Amendment states,
Paragraph 2 and 5 of the Development Agreement are hereby amended to extend the term of the Agreement through November 1, 2001, and to extend to Developer the right to develop additional restaurant within the Developed Area . . . in compliance with the terms of the Agreement and related standard form Franchise Agreement to be executed for such restaurant; provided, however, that the $25,000 initial franchise fee otherwise due and payable in connection with such restaurant shall be deferred and be payable only by means of an additional monthly payment equal to 1% of gross sales (payable in the same manner and at the same time monthly as the 4% royalty) which shall be payable with respect to such addition restaurant until the total of such additional 1% payments equals $25,000, at which time such payment obligation shall terminate.
(emphasis added). Becky Rainey testified that the term "Franchise Agreement" was used interchangeably with the term "License Agreement," and that this language in the 2000 Amendment contemplated the execution of a new license agreement in conjunction with the opening of a new store in Albuquerque.
32. Development rights were thus extended under the 2000 Amendment until November 1, 2001.
33. No development took place on a third restaurant.
34. Consistent with the Court's previous Orders on summary judgment, the 1994 License Agreement remains in effect, while the 1994 Development Agreement, as well as the 1988 Development Agreement, have terminated. New Mexico no longer has development rights, but continues to have the right to operate the store(s) covered by the 1994 License Agreement.
35. In August of 2004, Texas opened a Taco Cabana restaurant in Albuquerque. New Mexico claims that this action violates its exclusivity under the 1994 License Agreement. This restaurant is not located within a two-mile radius surrounding either the 6500 San Mateo or 8330 Montgomery Blvd. locations.
CONCLUSIONS OF LAW
1. This Court has jurisdiction under 28 U.S.C. § 1332 (diversity) and 28 U.S.C. § 2201 (declaratory judgment). Texas law governs this suit.
2. Any finding of fact herein above which also constitutes a conclusion of law is adopted as a conclusion of law. Any conclusion of law herein made which also constitutes a finding of fact is hereby adopted as a finding of fact.
3. Though both sides argue vehemently as to their interpretation of the language of the 1994 License Agreement, they each, at least tacitly, accept the premise that the granting clause can be read in two different manners. The 1994 License Agreement could be read to grant a two-mile exclusive radius around either "Albuquerque, New Mexico" or "[blank] Albuquerque, New Mexico." New Mexico argues that the plain language of the agreement grants a two-mile exclusive radius around the City of Albuquerque, and that this is what was intended by the parties when it was signed. Texas argues that the only reasonable interpretation of the language is that the blank is meant to stand in for a specific address, to be filled in later.
4. Whether a contract is ambiguous is a consideration of law for the Court. Nat'l Union Fire Ins. v. CBI Indus., Inc., 907 S.W.2d 517, 520 (Tex. 1995). Under Texas law, any ambiguities in contract language should be construed against the drafter. Gonzales v. Mission Am. Ins. Co., 795 S.W.2d 734, 737 (Tex. 1990). The determination of whether a contract is ambiguous is made by looking at the contract as a whole in light of the circumstances present when the parties entered the agreement. See Coker v. Coker, 650 S.W.2d 391, 393 (Tex. 1983). Conflicting interpretations of a contract, or unclear language, will not necessarily make a contract ambiguous. Forbau v. Aetna Life Ins. Co., 876 S.W.2d 132, 134 (Tex. 1994).
5. A contract is ambiguous only if there is uncertainty as to which of two reasonable interpretations is correct. Texas Farm Bureau Mut. Ins. Co. v. Sturrock, 146 S.W.3d 123, 126 (Tex. 2004). If there is only one reasonable interpretation of the contract, it is unambiguous, id., and the court will construe the contract as a matter of law. Nat'l Union, 907 S.W.2d at 520. "Courts should not strain to find an ambiguity in a contract if, in doing so, they defeat the probable intentions of the parties." Appleton v. Appleton, 76 S.W.3d 78, 84 (Tex.App. — Houston [14th Dist.] 2002, no pet.) (citation omitted).
6. "[A]greements executed at the same time, with the same purpose, and as part of the same transaction, are construed together." In re Prudential Ins. Co. of America, 148 S.W.3d 124, 135 (Tex. 2004). The 1994 Development Agreement and the 1994 License Agreement were executed on the same day and as part of the same transaction. The 1994 Development Agreement contains an integration clause that provides that the "License Agreement executed concurrently herewith" is part of the agreement. The Court finds that the 1994 Development Agreement and the 1994 License Agreement are to be construed together.
7. The parties' course of conduct evidences the fact that multiple license agreements are needed to cover multiple restaurant development. In El Paso, only one license agreement was signed during the time that the first three Taco Cabana restaurants were developed by TCEP. This was despite language in the development agreement between TCEP and Taco Cabana International, Inc., requiring a new license agreement be entered into for the development of every restaurant. However, when TCEP developed the fourth and fifth restaurants at the Cielo Vista Mall and Hondo Pass locations, respectively, a new license agreement specifically addressing these locations was signed. At the most, this course of conduct between the parties indicates that Texas, as the franchisor, was willing to allow multiple restaurant locations to be covered by a single license agreement, but reserved the right to require a new license agreement for future development. Had the parties' prior dealings included an understanding that license agreements automatically cover an entire city, or an entire development area, there would have been no need for new license agreements covering the Cielo Vista Mall and Hondo Pass locations.
8. New Mexico's argument that the plain language of the granting clause of the 1994 License Agreement clearly grants exclusivity to the entirety of the City of Albuquerque is inconsistent with the other language of that agreement, and with the language of the 1994 Development Agreement. The language of the 1994 License Agreement contains multiple indications that it is intended to cover only one restaurant location. The mere fact of the blank before the name of the city in the granting clause infers that a specific location was intended to be inserted at a later date. In addition, the 1994 License Agreement contains multiple references to "the Restaurant" in the singular. Further, the 1994 License Agreement requires an initial licensing fee of only $50,000. It is highly unlikely that a licensor would agree to license the entire City of Albuquerque, New Mexico, which undoubtedly has the capacity to support more than three individual Taco Cabana restaurants, for this fee.
Somewhat informing this argument is the fact that the 1994 License Agreement states that the term "restaurant business" is to be referred to as "the Restaurant."
9. As to New Mexico's argument that the term "site" in the granting clause of the 1994 License Agreement can be read to include an entire city, the language of Section I of the 1994 Development Agreement provides a context for the interpretation of this term. Section I provides,
In the event Developer elects not to exercise its right of first refusal as to a particular site, Developer shall lose any right of first refusal with regard to the township in which such rejected site is located, unless such rejected site is in either Albuquerque, New Mexico or Santa Fe, New Mexico metropolitan areas, in which case Developer shall only lose its right of first refusal as to that particular site and shall continue to have a right of first refusal as to other sites in the Albuquerque and Santa Fe metropolitan areas.
(emphasis added). The development agreement thus stands as evidence that the term "site" is intended to refer to a particular location within the Albuquerque metropolitan area. If the term "site" is intended to refer to the entirety of the city, there would be no need to reference the continued right of first refusal "as to other sites" in Albuquerque. Though the use of the term "site" in section I of the 1994 Development Agreement is in a somewhat different context than the use of the term in the language at issue in the 1994 License Agreement, this section is strong evidence as to what is meant by the term throughout both documents.
10. The language of the 1994 Development Agreement confirms that the parties intended a license agreement to cover only specific restaurant locations, rather than the entire City of Albuquerque. That agreement specifically requires that a new license agreement "must be signed for each restaurant subsequent to the first restaurant at the time the Developer is prepared to begin developing such restaurant." That Texas did not specifically enforce this contractual requirement by requiring the execution of a second license agreement when the 8330 Montgomery location was built is of little weight because the 1994 Development Agreement also contains a waiver provision. Under this provision, the failure "to insist upon strict compliance by Developer with any obligation hereunder . . . [does not] constitute a waiver of Licensor's right to demand strict compliance" at a later date. Though strict compliance with the requirement of an independent license agreement covering the 8330 Montgomery restaurant was not insisted upon, this conduct does not evidence an intention on the part of the parties that the 1994 License Agreement cover all restaurant locations within the City of Albuquerque. Texas maintains the ability to require strict compliance with the terms of the 1994 Development Agreement — including the requirement that a new license agreement be signed for each newly developed restaurant.
11. Further, Section IV(B)(6) of the 1994 Development Agreement largely confirms that the 1994 License Agreement was intended, at the time of execution, to cover only a single restaurant location: 6500 San Mateo. In fact, this section specifically references the concurrently executed license agreement, i.e., the 1994 License Agreement, as "the License Agreement executed concurrently herewith for the previously approved location at 6500 San Mateo, Albuquerque, New Mexico." Considering that the 1994 License Agreement and the 1994 Development Agreement are to be construed together, this section is highly persuasive evidence as to what the parties intended in signing the 1994 License Agreement. Though a similar provision could easily have been included in the actual integration clause in the 1994 Development Agreement, thereby giving stronger credence to this argument, that does not change the persuasive effect of the language of Section IV(B)(6).
The integration clause, Section XII of the 1994 Development Agreement, provides only that the "Agreement, the documents referred to herein (including the License Agreement executed concurrently herewith), and the Exhibits hereto, if any, constitutes the entire Agreement between the parties."
12. Texas courts will supply missing terms "when necessary to effectuate the purposes of the parties under the agreement." Lidawi v. Progressive County Mut. Ins. Co., 112 S.W.3d 725, 732 (Tex.App.-Houston [14th Dist.] 2003, no pet.); RESTATEMENT (SECOND) OF CONTRACTS § 204 (1981) ("When the parties to a bargain sufficiently defined to be a contract have not agreed with respect to a term which is essential to a determination of their rights and duties, a term which is reasonable in the circumstances is supplied by the court."). "Where there is tacit agreement or a common tacit assumption or where a term can be supplied by logical deduction from agreed terms and the circumstances," that term may be supplied into the contract. RESTATEMENT (SECOND) OF CONTRACTS § 204, comment c.
13. The Court finds that there is only one reasonable interpretation of the 1994 License Agreement: the granting clause provides a two-mile exclusive radius around "[blank]Albuquerque, New Mexico." The "blank" is clearly a place-holder that was meant to be filled in at a later point. This reading of the 1994 License Agreement is supported by both the language of the agreement itself and of the 1994 Development Agreement, as well as by the parties' course of conduct.
14. The parties prior dealings confirm that a license agreement may be used to license multiple restaurant locations. There is no basis for inferring from the parties' course of conduct, however, that a single license agreement would ever have been intended to cover all restaurants in an entire metropolitan city. Further, the language of the 1994 License Agreement and the 1994 Development Agreement, construed together, is consistent with reading the license agreement as intended to cover only a single restaurant location. Finally, the actions of the parties post-1994 contradict the contention that the 1994 License Agreement was intended to cover all restaurants to be built in Albuquerque, as the 2000 Amendment contemplates the execution of a new "Franchise Agreement" in conjunction with the development of a third restaurant.
15. Because the Court finds that reading the 1994 License Agreement to grant exclusivity to the entire City of Albuquerque is an unreasonable interpretation, that there exists a waiver provision in the 1994 Development Agreement, and that the Court is permitted to supply missing or omitted terms to otherwise valid contracts, the Court holds that the 1994 License Agreement covers only those restaurant locations developed by New Mexico at the time of the filing of this lawsuit. The 1994 License Agreement therefore grants a two-mile radius of exclusivity around the locations of 6500 San Mateo and 8330 Montgomery Blvd, and nothing more.
16. New Mexico is entitled to no relief on their declaratory judgment action (Count Two of Defendants' Amended Counterclaim). As the other remaining claims in Defendants' Amended Counterclaim are dependent upon a favorable ruling on Count Two, resolution of this declaratory judgment action in favor of Texas renders all other claims moot. Judgment will be entered that Defendants take nothing on their counterclaim and that this action is dismissed on the merits.