Annaco Inc. v. John Corbin ( 1998 )

IN THE COURT OF APPEALS OF TENNESSEE
AT JACKSON
ANNACO, INC., )
)
Plaintiff/Appellant, ) Shelby Chancery No. 109046-3 R.D.
)
VS. ) Appeal No. 02A01-9804-CH-00111
)
JOHN H. CORBIN, CORBIN, INC., )
F/K/A PAUL DAVIS SYSTEMS, INC.
OF MEMPHIS, a Tennessee
)
)
FILED
Corporation, and PAUL W. )
DAVIS SYSTEMS, INC., ) December 31, 1998
)
Defendant/Appellee. ) Cecil Crowson, Jr.
Appellate C ourt Clerk
APPEAL FROM THE CHANCERY COURT OF SHELBY COUNTY
AT MEMPHIS, TENNESSEE
THE HONORABLE D. J. ALISSANDRATOS, CHANCELLOR
JEFFREY D. GERMANY
R. LEE WEBBER
MORTON, BREAKSTONE & GERMANY, PLLC
Memphis, Tennessee
Attorneys for Appellant
REED L. MALKIN
STEVEN R. WALKER
Memphis, Tennessee
Attorneys for Appellee
AFFIRMED
ALAN E. HIGHERS, J.
CONCUR:
DAVID R. FARMER, J.
HOLLY KIRBY LILLARD, J.
Annaco Inc. (“Annaco”) has appealed the trial court’s grant of summary judgment
to John H. Corbin (“Mr. Corbin”) and Corbin Inc. For the reasons stated hereafter, we
affirm.
Facts and Procedural History
In May 1987, Corbin Inc. and Paul W. Davis Systems, Inc. (“PDSI”) entered into a
franchise agreement whereby Corbin Inc., the franchisee, obtained from PDSI, the
franchisor, a Paul Davis Systems franchise. The franchise agreement described the
purpose of the franchise as “the operation of a general contracting business,” which
encompassed “general construction and associated services of contracting, repairing,
remodeling and altering homes, buildings and structures.” Under the terms of the franchise
agreement, Corbin Inc. was obligated, among other things, to pay PDSI a $50,000
franchise fee and to pay PDSI royalty fees on all contracts in the amount of 2½ percent of
Corbin Inc.’s “closed gross sales and services each month.” In consideration for the
obligations that Corbin Inc. undertook, it received, among other things, the right to use
PDSI’s systems, methods, procedures, computer programs, and other services. Corbin
Inc. also received the exclusive right to conduct business using PDSI’s trade name within
a specified territory. The agreement established that its initial term was for only five years,
though the term would renew from year to year with the payment of a $100 annual renewal
fee, which would be waived for any year in which royalties paid to PDSI exceeded $5,000.
The agreement also provided Corbin Inc. with the right to assign the agreement under
certain conditions. One limitation on assignment was the prior written consent of PDSI.
At some point, Mr. Corbin, who is the President and principal stockholder of Corbin
Inc., decided to sell the franchise, and he contacted PDSI to find out who represented
PDSI in selling franchises. PDSI referred Mr. Corbin to Dave Kelly. Mr. Corbin contacted
Kelly, and arranged for Kelly to act as Corbin Inc.’s agent for advertising and negotiating
the sale of the franchise. After Kelly became involved, Kelly negotiated a deal for the sale
of the franchise with Phillip Currier of Annaco. At some point during the sales and
negotiation process, Currier was informed that the franchise royalty fee that Annaco would
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be required to pay to PDSI would be 3½ percent, to which Currier (Annaco) agreed. At no
point during Corbin Inc.’s ownership and operation of the franchise, however, had Corbin
Inc. paid royalty fees in excess of 2½ percent.
On January 15, 1992, Corbin Inc. and Annaco entered into an agreement, entitled
“Franchise Purchase and Sale Agreement,” that provided, among other things, the
following:
[Annaco] has agreed to purchase the Franchise Territory from [Corbin Inc.].
....
1. Purchase and Sale. [Corbin Inc.] agrees to sell to [Annaco] and
[Annaco] agrees to purchase from [Corbin Inc.]:
(a) All franchise rights owned by [Corbin Inc.] in the Franchise
Territory.
(b) The assets described [therein].
2. Purchase Price. The purchase price for [Corbin Inc.’s] rights to the
Franchise Territory and the Personal Property Assets shall be $137,000 ....
....
6. Franchise Compliance. All parties agree to execute any documents to
effect this transfer in order to comply with the requirements of [PDSI]
concerning the transfer. [Annaco] agrees to at all time comply with all
applicable requirements of [PDSI] under the new franchise agreement to be
signed by [Annaco] at or following the closing.
....
15. Closing Requirements-Seller. At closing, [Corbin Inc.] shall deliver to
[Annaco] the following:
a) A Tri-Party Agreement as required by [PDSI], whereby [Corbin Inc.]
transfers and [Annaco] assumes all rights and obligations for the Franchise
Territory.
....
23. Franchise Agreement. Purchaser shall execute a new current
Franchise Agreement with [PDSI].
As contemplated by paragraph 15(a) of the Franchise Purchase and Sale Agreement,
Corbin Inc., Annaco, and PDSI also entered into a separate “Tri-Party Agreement” at the
same time the Franchise Purchase and Sale Agreement was executed. This Tri-Party
Agreement provided, among other things, the following:
WHEREAS, [Corbin Inc.] wishes to sell and [Annaco] wishes to purchase all
of [Corbin Inc.’s] right to operate a [PDSI] franchise, as evidenced by and
incorporated in a Franchise Agreement between [PDSI] and [Corbin Inc.]
dated May 18, 1987 (the “Franchise Agreement”) ....
....
1. [PDSI] hereby agrees to the transfer of the Franchise from [Corbin Inc.]
to [Annaco].
....
8. [Annaco] acknowledges that it has received and examined the Franchise
Agreement .... [Annaco] agrees to abide by and be bound by the terms and
provisions of the Franchise Agreement ....
....
12. [Annaco] HEREBY ACKNOWLEDGES THE FOLLOWING:
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(1) [Annaco] IS PURCHASING THE FRANCHISE FROM [Corbin
Inc.], NOT FROM [PDSI].
....
On February 4, 1992, which was after the sale of the franchise to Annaco, Annaco
and PDSI both signed and executed a new franchise agreement. The terms of this new
agreement, however, are notably different from the terms of the earlier Corbin Inc. / PDSI
franchise agreement that had been assigned to Annaco. Most notably, under the terms
of the new franchise agreement, Annaco was to pay PDSI royalty fees on all contracts in
the amount of 3½ percent of Annaco’s closed gross sales and services each month.1
Also, at some point after the sale of the franchise and after execution of the new
Annaco / PDSI franchise agreement, Mr. Corbin reached an agreement with PDSI,
whereby Corbin Inc. began receiving 28.6% percent of Annaco’s royalty payments to PDSI,
which is equivalent to the one percent increase in royalty payments that Annaco began
paying under its new franchise agreement. Mr. Corbin had already been aware of another
originating franchisee in Kentucky who, several years before, sold his franchise and then,
after the sale, continued to receive such payments. Therefore, in April or May of 1992, Mr.
Corbin contacted PDSI to inquire about whether it was possible for him to receive these
payments. PDSI agreed to the payments. The agreement was not, however, any part of
the franchise sale from Corbin Inc. to Annaco, and Mr. Corbin and PDSI did not reach any
such agreement prior to or at the time of the sale of the franchise. According to the
undisputed proof before this Court, PDSI’s agreement to make these payments, which
have stopped since the filing of this lawsuit, was merely a subsequent gift and was not
supported by any consideration.
On February 26, 1997, Annaco filed suit against Mr. Corbin and Corbin Inc., alleging
breach of contract, fraud, and conversion based upon the “royalty” payments from PDSI
1. In addition to other changes, the new franchise agreement also increased the minimum royalty fee
rate, whic h is a m inim um am oun t to be paid f or ea ch on e tho usa nd pe ople in the fr anc hise territo ry.
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to Corbin Inc.2 After both Mr. Corbin and Corbin Inc. filed separate answers to Annaco’s
Complaint, they moved for summary judgment. Subsequently, depositions of Mr. Corbin
and of Phillip Currier, which set forth the above undisputed facts, were filed. After the trial
court heard arguments on March 6, 1998, the trial court granted summary judgment to both
Mr. Corbin and Corbin Inc. Thereafter, Annaco appealed. Therefore, the issue presented
to this Court on appeal is whether the trial court erred in granting summary judgment to Mr.
Corbin and Corbin, Inc. (hereafter collectively referred to as “Defendants”).
Analysis
On appeal, Annaco argues that the trial court’s grant of summary judgment was
improper with respect to each of the claims that Annaco asserted, including breach of
contract, fraud, and conversion. We disagree.
A. Breach of Contract
Annaco’s claim for breach of contract is premised upon either of the following two
theories:
1. Corbin Inc. agreed to sell “all franchise rights” owned by Corbin Inc., and it breached
this agreement because, while Corbin Inc. was obligated to pay only a 2½ percent royalty
fee, Annaco ultimately was required to pay a higher 3½ percent royalty fee.
2. Corbin Inc. had or obtained the right to receive the “royalty” payments from PDSI at the
time of the execution of the Franchise Purchase and Sale Agreement, and Corbin Inc.’s
receipt and acceptance of the payments amounted to a breach of Corbin Inc.’s agreement
to sell all franchise rights owned by Corbin Inc.
Essentially, as summarized in Annaco’s brief, Annaco asserts either that Corbin Inc. failed
to transfer its right to pay PDSI a 2½ percent royalty fee or that it secretly retained a right
that existed at the time of the franchise sale to receive a one percent kickback on the
royalty payments. Neither of these theories, however, is supported by proof. The
undisputed proof in the record before this Court establishes that the Franchise Purchase
and Sale Agreement did, in fact, assign all rights and obligations of the original Corbin Inc.
2. Anna co also n ame d Paul D avis System s, Inc. as a defend ant, seek ing an interlo cutory injun ction to
preven t the paym ents from Paul Da vis System s, Inc. to C orbin Inc. p ending th e outco me o f this litigation.
Annaco, however, subsequently voluntarily nonsuited Paul Davis Systems, Inc., and Paul Davis Systems,
Inc. was dismis sed witho ut prejud ice.
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/ PDSI franchise agreement to Annaco. This assignment included the obligation to pay
only a 2½ percent royalty fee.3 Moreover, the undisputed proof establishes that Corbin Inc.
did not possess any right to receive a “kickback” on royalty payments at the time of the
franchise sale. Accordingly, we find Annaco’s arguments relating to breach of contract to
be without merit. In fact, we find it interesting to note that, even though Annaco later bound
itself to pay a higher royalty fee rate to PDSI, the franchise sale, in a sense, initially
transferred to Annaco a greater benefit than that for which it bargained, because it had
expressly agreed to a 3½ percent royalty fee rate.
B. Fraud
As outlined and argued by Annaco, its claim for fraudulent misrepresentation is
based upon the assertion that Corbin Inc. affirmatively misrepresented, prior to the
execution of the Franchise Purchase and Sale Agreement, that Corbin Inc. paid royalty
fees at the rate of 3½ percent. Though the depositions that were filed regarding summary
judgment merely address a representation that Annaco would pay a 3½ percent royalty fee
(not what Corbin Inc. previously paid), Annaco’s Complaint asserts the unrebutted
allegation that Corbin Inc. misrepresented the royalty fees that Corbin Inc. previously paid.
Even taking this allegation as true, however, we find that summary judgment in this case
was proper.
In an action for fraudulent misrepresentation, a plaintiff must show: (1) that the
defendant made a representation of an existing or past fact; (2) that the representation was
false; (3) that the representation related to a material fact; (4) that the representation was
made either knowingly, recklessly, or without belief in its truth; (5) that the plaintiff acted
reasonably in relying on the representation; and (6) that the plaintiff suffered damage as
a result of the representation. Metropolitan Gov’t v. McKinney, 852 S.W.2d 233, 237
(Tenn. App. 1993).
This Court has previously recognized that the reasonableness of a plaintiff’s reliance
3. Th oug h the issue is not befo re this Cou rt, we are u naw are o f any c ons idera tion fo r Ann aco ’s
subsequent separate agreement with PDSI to pay a higher royalty fee rate.
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on an alleged misrepresentation, which is one of the essential elements to a claim of
fraudulent misrepresentation, is generally a question of fact inappropriate for summary
judgment. City State Bank v. Dean Witter Reynolds, Inc., 948 S.W.2d 729, 737 (Tenn.
App. 1996). However, as with other questions of fact, the reasonableness of reliance must
amount to a genuine issue in order to defeat summary judgment. See Byrd v. Hall, 847
S.W.2d 208, 215 (Tenn. 1993). Disputed material facts do not create a genuine issue
unless a reasonable jury could legitimately resolve that fact in favor of either party. Id. If
a reasonable jury could not resolve that fact in favor of either party, then summary
judgment is proper as a matter of law. Id.
Factors relevant to a determination of the reasonableness of a plaintiff’s reliance on
a misrepresentation include, among other things, the following: (1) the plaintiff’s business
expertise and sophistication; (2) the existence of longstanding business or personal
relationships between the parties; (3) the availability of the relevant information; (4) the
existence of a fiduciary relationship; (5) the concealment of the fraud; and (6) the
opportunity to discover the fraud. See City State Bank, 948 S.W.2d at 737. Based upon
the undisputed proof presented to this Court, each of these factors weigh against a finding
of reasonable reliance. As to Phillip Currier’s (Annaco’s) business expertise and
sophistication, we note that Mr. Currier has a degree in business administration and has
many years of prior experience in dealing with business contracts, including, among other
things, real estate, insurance, and securities. No longstanding business or personal
relationship existed between the parties prior to negotiations and execution of the
Franchise Purchase and Sale Agreement. No fiduciary relationship existed between
Annaco and Corbin Inc. or Dave Kelly, who acted as Corbin Inc.’s agent. Most importantly,
however, the Tri-Party Agreement, to which Annaco was a party, expressly provided that
Annaco received and examined the original Corbin Inc. / PDSI franchise agreement, which
clearly evidenced Annaco’s right to pay a franchise fee of only 2½ percent.
Generally, a party dealing on equal terms with another is not justified in relying upon
representations where the means of knowledge are readily within its reach. Solomon v.
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First American Nat'l Bank, 774 S.W.2d 935, 943 (Tenn. App.1989). Moreover, a party to
a written agreement is charged with knowledge of the agreement’s contents. Id. In this
case, the express terms of the Tri-Party Agreement establish that Annaco received and
examined the original Corbin Inc. / PDSI agreement. Accordingly, Annaco’s right to pay
only 2½ percent was revealed to Annaco. We conclude, therefore, that under the facts of
this case, a reasonable jury could not find that Annaco reasonably relied upon Corbin Inc.’s
alleged misrepresentation when it later bound itself to pay a higher royalty fee rate to
PDSI.4 As such, summary judgment relating to Annaco’s fraud claim was appropriate.
C. Conversion
Annaco’s only remaining claim against Mr. Corbin and Corbin Inc. is based upon
conversion. We find this issue to be without merit. The undisputed proof in the record
before this Court fails to demonstrate either that Annaco possessed the amounts received
by Corbin Inc. at the time of the alleged conversion or that Annaco possessed a right to
immediate possession of the amounts at such time. See Mammoth Cave Production
Credit Ass’n v. Oldham, 569 S.W.2d 833, 836 (Tenn. App. 1977).
Conclusion
Our disposition of this appeal does not contemplate whether, under the facts set
forth herein, any claim for relief could have been maintained by Annaco. We conclude,
however, that summary judgment was proper as to those claims asserted and as to those
parties from whom relief was sought. Therefore, we affirm the trial court’s grant of
summary judgment to Mr. Corbin and Corbin Inc. Costs of this appeal are taxed to
Annaco, Inc., for which execution may issue if necessary.
4. Prior to An naco’s e xecution of a new franchis e agree men t with PDS I, it posses sed all the s ame rights
and duties that Corbin Inc. previously possessed.
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HIGHERS, J.
CONCUR:
FARMER, J.
LILLARD, J.
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