Progressive Child Care Systems, Inc., Karry L. Dunn, and Heather Dunn v. Kids 'R' Kids International, Inc. and Patrick D. Vinson ( 2008 )

COURT OF APPEALS
SECOND DISTRICT OF TEXAS
FORT WORTH
NO. 2-07-127-CV
PROGRESSIVE CHILD CARE APPELLANTS
SYSTEMS, INC.,
KARRY L. DUNN, AND HEATHER
DUNN
V.
KIDS ‘R’ KIDS INTERNATIONAL, INC. APPELLEES
AND PATRICK D. VINSON
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FROM THE 211TH DISTRICT COURT OF DENTON COUNTY
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MEMORANDUM OPINION 1
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I. INTRODUCTION
Appellants Progressive Child Care Systems, Inc., Karry L. Dunn, and
Heather Dunn 2 appeal the trial court’s judgment based on a jury verdict in favor
1
… See Tex. R. App. P. 47.4.
2
… The Dunns are the owners of Progressive Child Care Systems, Inc. and
the personal guarantors of the contracts entered into by Progressive with Kids
‘R’ Kids. Unless necessary for clarity, Appellants will be collectively referred
to as Progressive.
of Appellees Kids ‘R’ Kids International, Inc. and Patrick D. Vinson 3 . The
verdict awarded Kids ‘R’ Kids past-due and future royalty payments related to
two franchise agreements. In three issues, Progressive argues that there was
legally and factually insufficient evidence to support the amount of past and
future royalties, that there was legally and factually insufficient evidence that
Progressive proximately caused the amount of damages, and that the amount
of damages are excessive. We will affirm.
II. F ACTUAL AND P ROCEDURAL B ACKGROUND
In late November 1995, Progressive entered into a franchise agreement
with Kids ‘R’ Kids to operate a child-care facility in Plano, Texas. Per the
agreement, Progressive would operate the child-care facility under the name
“Kids ‘R’ Kids.”
In early October 1999, Progressive again contracted with Kids ‘R’ Kids
to operate a second franchise. In addition to a second franchise agreement,
Progressive signed an assignment, transfer of franchise, and asset purchase
agreement whereby Progressive would agree to operate a child-care
facility—located in Flower Mound, Texas, and formerly known as Fantastic
Kids, Inc.—as a Kids ‘R’ Kids franchise. Among Progressive’s obligations under
3
… Vinson is the founder and president of Kids ‘R’ Kids.
2
both franchise agreements was Progressive’s agreement to pay five percent of
enrollment-derived gross revenues to the franchisor—Kids ‘R’ Kids. Both
franchise agreements, as well as the transfer agreement pertaining to Fantastic
Kids, Inc., provide that the franchise agreement’s initial term was to be twenty-
five years.
Ostensibly driven by the belief that Kids ‘R’ Kids provided poor
organizational support for Progressive’s two franchises, Karry Dunn informed
Vinson that Vinson either needed to hire someone to better support the “kids
and the franchisees, . . . let [him] take over the state of Texas to help support
the whole system, or just buy [him] out.” In March 2002, Progressive made its
last royalty payment to Kids ‘R’ Kids. In early spring 2003, Progressive began
operating both of its child-care facilities under the name, “Legacy Learning
Center.”
Kids ‘R’ Kids sued Progressive on October 3, 2003. It alleged breach of
contract, breach of personal guaranty, fraud, and conspiracy. Kids ‘R’ Kids also
sought a permanent injunction against Progressive’s operating the two child-
care centers as anything other than Kids ‘R’ Kids centers but eventually
withdrew this cause of action.
3
In addition to a general denial, Progressive counterclaimed against Kids
‘R’ Kids for fraud, fraud in the inducement, intentional and negligent
misrepresentation, deceptive trade practices, and rescission.
At trial, Gregory Schuelke—Kids ‘R’ Kids’s forensic accountant and
designated damages expert—testified that he had examined “the books and
records” pertaining to both the Plano and Flower Mound child-care centers.
Schuelke stated that he had examined over twenty different documents
concerning the two centers, including Kids ‘R’ Kids’s petition, enrollment
records for both centers, cash receipts, deposit records, tax returns, tuition
records, and royalty summaries. Schuelke stated that he had also reviewed
Karry Dunn’s deposition testimony.4
Schuelke testified that he calculated past-due royalties for the Plano
center at $316,662.00 and for the Flower Mound center at $247,461.00. He
also testified that his calculations for future royalties based on a continuing
contract through a twenty-five year agreement, and discounting to present
day’s dollars, were $873,879.00 for the Plano center and $767,771.00 for the
Flower Mound center.
4
… Shuelke’s document list incorporated all records that Karry Dunn
testified in his deposition constituted all of the franchisee’s available business
records relating to both franchises’ incomes.
4
The jury returned a verdict in favor of Kids ‘R’ Kids on all claims. The trial
court entered its judgment in favor of Kids ‘R’ Kids and against Progressive.
Based on the jury verdict, the trial court awarded Kids ‘R’ Kids $1,385,008.72.
This appeal followed.
III. G EORGIA L AW A PPLIES
As a preliminary matter, Progressive argues that Georgia law applies to
this case because the franchise agreements state that they “shall be governed
by and construed in accordance with the laws of the State of Georgia.” We
agree.
A trial court’s determination of choice of law is a question of law and is
reviewed de novo. Pittsburgh Corning Corp. v. Walters, 1 S.W.3d 759, 769
(Tex. App.— Corpus Christi 1999, pet. denied). Generally, the parties’
contractual choice of law will be given effect if the contract bears a reasonable
relationship to the chosen state and no countervailing public policy of the forum
demands otherwise. SAVA Gumarska in Kemijska Industria D.D. v. Advanced
Polymer Scis., Inc., 128 S.W.3d 304, 314 (Tex. App.—Dallas 2004, no pet.).
However, a preliminary motion must be filed asking the court to apply another
state’s laws. Burlington N. and Santa Fe Ry. Co. v. Gunderson, Inc., 235
S.W.3d 287, 289 (Tex. App.—Fort Worth 2007, pet. withdrawn) (citing
Pittsburgh Corning Corp., 1 S.W.3d at 769); see also Tex. R. Evid. 202.
5
In this case, both parties filed motions asking the trial court to take
judicial notice of Georgia law. Both parties’ motions contain extensive Georgia
case law pertaining to breach of contract and damages. Further, Kids ‘R’ Kids
is a Georgia corporation. The franchise agreements in this case bear a
reasonable relationship to the state of Georgia. Thus, we will analyze
Progressive’s issues under Georgia law.
IV. P ROGRESSIVE’S B REACH E NTITLED K IDS ‘R’ K IDS TO S EEK D AMAGES
In its second issue, Progressive argues that there was legally and factually
insufficient evidence that it proximately caused the amount of damages
awarded for past-due and future royalty payments. The gist of Progressive’s
argument is that it could not have proximately caused any damages arising from
the failure to make royalty payments after late spring–early winter 2003,
because the franchise agreement had been terminated by the franchisor’s
president, Vinson. Progressive cites what it labels a “finding as a matter of
law” by the trial court, in which the trial court discussed during the directed
verdict stage of trial, and again during the hearing on entering its judgment, the
franchise agreement between Progressive and Kids ‘R’ Kids as having been
terminated during that time frame.5 Progressive also cites Vinson’s trial
5
… The trial court does refer to the agreements as having been
“terminated” and “breached” during the directed verdict stage of trial and again
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testimony where he states “as far as I’m concerned, I wouldn’t have [the
Dunns] back as a franchisee” as evidence that it was Vinson—the
franchisor—who terminated the franchise agreement.
Based on these presuppositions and admitting that neither Georgia nor
Texas has decided the issue of whether a franchisee can be liable to pay
damages for past-due and future royalties when there has been a breach of
contract, Progressive relies on Postal Instant Press, Inc. v. Sealy, 43 Cal. App.
4th 1704, 1709 (1996), and its progeny for the proposition that a franchisor
cannot recover past-due and future royalties after the termination of a franchise
agreement. See also Kissinger, Inc. v. Singh, 304 F. Supp. 2d 944, 951 (W.
D. Mich. 2003); Burger King Corp. v. Hinton, Inc., 203 F. Supp. 2d 1357, 1366
(S.D. Fla. 2002); I Can’t Believe It’s Yogurt v. Gunn, 1997 WL 599391, No.
Civ. A. 94-OK-2109-TL (D. Colo. 1997). Contra Am. Speedy Printing Ctrs.,
Inc. v. AM Mktg, Inc., 69 Fed. App’x 692, 699 (6th Cir. 2003) (designated not
for publication by the court).
In Sealy, the franchisee failed to make several royalty payments as
specified in the franchise agreement, and the franchisor declared that the
during the hearing on entering its judgment but states that there was a “fact
issue . . . about when the contract was terminated” to be left for the jury.
Given the posture of our holding in this case, we do not find these statements
by the trial judge to be outcome determinative.
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franchisee was in breach and terminated the agreement. Sealy, 43 Cal. App.
4th at 1707. The Sealy court found that the franchisor could not recover for
future profits where it had terminated the agreement because the damage was
proximately caused by the franchisor’s termination rather than by the
franchisee’s breach. Id. at 1713. In addition, the Sealy court found that an
award of future profits under those circumstances would amount to
“unreasonable, unconscionable or grossly oppressive” damages. Id. at 1714.
According to the Sealy court, the possibility of an award of future profits would
provide the franchisor with a bludgeon in every contract dispute, because
unless the franchisee complies, it is faced with the threat of the franchisor
terminating the agreement and being awarded future profits. Id. at 1709. But,
significantly, the Sealy court expressly refused to consider whether damages
for future profits would be available if the franchisee terminated the agreement.
Id. at 1710 n.2. Moreover, the Sealy court did not preclude the award of future
royalties even if the franchisor terminated the agreement, if it was the
franchisee’s conduct that proximately caused the damages, and the award is
neither excessive, oppressive, nor disproportionate. Id. at 1711. But Sealy is
not the only persuasive authority pertaining to the issues that arises in this
case.
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In contrast to Sealy, in American Speedy, the Court of Appeals for the
Sixth Circuit affirmed a district court’s ruling awarding future royalties to a
franchisor of print shops. American Speedy, 69 Fed. App’x at 699. There, the
parties entered into a twenty-year franchise agreement. Id. at 693. With nine
years remaining on the term of the agreement, the franchisor terminated the
franchise agreement based on the franchisee’s failure to pay royalties. Id. The
trial court granted summary judgment in favor of the franchisor based upon the
franchisee’s failure to provide any evidence that created an issue of material
fact regarding the allegations in the franchisor’s pleadings. Id. at 694–95. The
trial court awarded the franchisor past-due and future royalties. Id. In affirming
the trial court’s award, the appellate court held that the franchisor was entitled
to all damages necessary to put itself in a position equivalent to that in which
it would have found itself if the franchise agreement had continued in effect for
the full twenty-year term. Id. at 699.
While both Sealy and American Speedy are instructive in the area of
franchise agreements and damages for the breach of those agreements, neither
are wholly instructive in this present case. Unlike either Sealy or American
Speedy, in this case, in addition to the franchisee’s failure to make royalty
payments, Progressive also independently withdrew from the franchise and ran
its child-care facility under an independent label. The jury in this case also
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found that Progressive had failed to comply with a material obligation of the
agreement. And unlike in the above cited cases in which the franchisor
terminated the franchise agreements prior to filing suit, the jury in this case
found that Kids ‘R’ Kids—the franchisor—had not failed to comply with the
franchise agreement.
In addition to identifying the distinctions between this case and other
cases like Sealy or American Speedy, this court must determine what Georgia
would do in this case of first impression for that state. The U.S. District Court
for the Eastern District of Pennsylvania decision in Maaco Enterprises., Inc. v.
Cintron is helpful in crafting our holding. No. 99-CV-5935, 2000 WL 669640
(E.D. Pa. May 17, 2000). In Cintron, Maaco, a franchisor of auto painting and
body repair centers, was awarded lost future royalties even though it had
terminated the franchise relationship based on the franchisees’ failure to
perform. Id. at *1. Rather than engaging in a proximate cause analysis, the
Cintron court relied on a traditional contract analysis under Pennsylvania law,
which governed the franchise agreement, to support the award of lost future
royalties in a breach of contract case. Id. at *4. The Cintron court reasoned
that because Pennsylvania law allowed for the recovery of lost profits—“the
difference between what the plaintiff[s] actually earned and what they would
have earned had the defendant not committed the breach”—Maaco was entitled
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to receive the lost future royalties that it would have received had the
franchisee not breached the franchise agreement. Id. Applying Pennsylvania
law, the court held that, as the nonbreaching party, Maaco was entitled to be
placed in nearly the same position that it would have occupied had there been
no breach. Id.
This court, like the court in Cintron, will also rely on a traditional contract
law analysis for this issue because Georgia law is similar to Pennsylvania law
in the area of contract damages. Under Georgia law, damages growing out of
a breach of contract must be such as could be traced solely to breach, must
have arisen according to the usual course of things, and be such as the parties
contemplated as a probable result of such breach. Lay Bros., Inc. v. Golden
Pantry Food Stores Inc., 616 S.E.2d 160, 163 (Ga. Ct. App. 2005). The policy
that drives Georgia law is “to place the injured party, as near as may be, in the
situation he would have occupied absent the breach.” Camp v. Eichelkraut,
539 S.E.2d 588, 596 (Ga. Ct. App. 2000) (citing Albany Phosphate Co. v.
Hugger Bros., 62 S.E. 533, 535 (Ga. 1908)). Lost profits are recoverable as
damages if such are shown with reasonable certainty and such profits were in
the contemplation of the parties at the time of the contract. Authentic
Architectural Millworks Inc. v. SCM Group USA, 586 S.E.2d 726, 731 (Ga. Ct.
App. 2003); DeVane v. Smith, 268 S.E.2d 711, 713 (Ga. Ct. App. 1980).
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In this case, the jury found that Progressive materially breached the
franchise agreements—agreements that memorialized the contemplation of the
parties that Progressive would pay five percent of gross-enrollment income over
an initial twenty-five year term. We hold that Kids ‘R’ Kids was entitled to seek
recovery of lost past-due and future royalties that it would have received but
for Progressive’s breach that led to the termination of the franchise agreement
before the original twenty-five year term was completed. We overrule
Progressive’s second issue.
V. E VIDENCE OF D AMAGES
In its first issue, Progressive argues that there was legally and factually
insufficient evidence to support the amount of past-due and future royalties.
Progressive contends that the contract language specifically defines a franchise
as a child-care facility operating under the name “Kids ‘R’ Kids.” Progressive
further contends that because they were operating under the name “Legacy
Learning Center,” they were no longer a franchise per the parties’ agreement.
Thus, Progressive argues, by the express terms of the franchise agreement,
they were obligated to make payments to Kids ‘R’ Kids only during the time
they operated as “Kids ‘R’ Kids.” And, Progressive argues, because Kids ‘R’
Kids’s damages expert testified to a time period when Progressive operated as
12
Legacy Learning Center—and thus no longer a franchise—the expert’s
testimony over-calculated past due and future royalty payments.
Kids ‘R’ Kids contends that Progressive’s having operated under a
different name was only one breach 6 among many that led the jury to find that
it was Progressive that breached the franchise agreement. Further, Kids ‘R’
Kids argues that Progressive first breached the franchise agreement when it
refused to pay royalties well before it began operating under a different name.
Thus, Kids ‘R’ Kids argues, there is sufficient evidence of past-due and future
royalties, calculated from the date of default—the date of Progressive’s
expressed refusal to pay royalties. We agree with Kids ‘R’ Kids.
Under Georgia law, “generally, [a reviewing court] affirms civil awards
that are supported by any evidence.” C & F Svcs. Inc. v. First So. Bank, 573
S.E.2d 102, 107 (Ga. Ct. App. 2002) (citing Walker v. Bruno’s, Inc., 492
S.E.2d 336, 337 (Ga. Ct. App. 1997)). When there exists any evidence to
support the jury’s verdict, and no reversible error is otherwise committed, the
6
… Kids ‘R’ Kids points to the franchise agreement where section
15(a)—a non-compete clause—disallows the operation of a competing child-
care facility within a two-mile range of each of the child-care facilities at issue
in this case. Thus, Kids ‘R’ Kids argues, the operation of a child-care facility
under “Learning Legacy Center” is also a breach of the franchise agreement
itself. Kids ‘R’ Kids argues, however, that evidence exists that the material
breach in this case was Progressive’s failure to continue to pay royalties under
the franchise agreements.
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verdict will stand. Bill Jones Motors v. Mitchell, 110 S.E.2d 555, 557 (Ga.
App. 1959). A reviewing court will not substitute its judgment for that of the
jury and will neither weigh evidence nor determine witness credibility. See
Almond v. McCranie, 643 S.E.2d 535, 536 (Ga. Ct. App. 2007) (citing Adler
v. Adler, 61 S.E.2d 824, 832 (Ga. 1950)). “After a jury returns a verdict and
the trial judge approves it, it must be affirmed on appeal if there is any evidence
to support it as the jurors are the sole and exclusive judges of the weight and
credit given the evidence.” Richardson v. Vaughn, 581 S.E.2d 689, 691 (Ga.
Ct. App. 2003).
In this case, it is clear that Kids ‘R’ Kids argued that Progressive breached
the franchise agreement when Progressive refused to make any additional
royalty payments. Progressive admitted at trial that they refused to pay royalty
payments after the spring of 2002. The jury found that Progressive failed to
materially comply with the franchise agreement. The trial judge entered
judgment on this verdict. We hold that there was sufficient evidence to support
the verdict and that Progressive has shown no reversible error that was
otherwise committed. We overrule Progressive’s first issue.
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VI. A MOUNT OF D AMAGES
In its third issue, Progressive argues that the amount of damages is
excessive. Under Georgia law, “the general rule on appeal of an award of
damages is that a jury’s award cannot be successfully attacked . . . unless it
is so flagrantly excessive or inadequate, in light of the evidence, as to create
a clear implication of bias, prejudice, or gross mistake on the part of the jurors.”
Dennis-Smith v. Freeman, 627 S.E.2d 872, 874 (Ga. Ct. App. 2006). The trial
court’s approval of the verdict creates a presumption of correctness that will
not be disturbed absent compelling evidence. Id.
In the context of lost profits, the rule against the recovery of vague,
speculative, or uncertain damages relates more especially to the uncertainty as
to cause, rather than uncertainty as to the measure or extent of the damages.
See T.C. Prop. Mgmt., Inc. v. Tsai, 600 S.E.2d 770, 772 (Ga. Ct. App. 2004).
Mere difficulty at fixing the exact amount of lost profits, where proximately
flowing from the alleged injury, does not constitute a legal obstacle in the way
of their allowance. Id.
The jury’s verdict was within the range of evidence presented at trial.
Kids ‘R’ Kids’s designated forensic accountant and damages expert testified to
prospective losses of royalty payments from the date of Progressive’s last
payment made in March, 2002. He concluded prospective lost revenues of
15
$66,000.00 per year for the Flower Mound child-care facility and $73,000.00
per year for the Plano facility, through the unexpired terms of each franchise
agreement. These revenue calculations were based on the two franchisee’s
business records, including enrollment records, cash receipts, account deposit
records, check registers, income tax returns for the last five years, weekly
revenue reports, sign-in sheets, tuition and income spreadsheets, and monthly
royalty summaries. Ultimately, based on this evidence, the jury returned a
verdict of $753,561.94 in past-due and future royalties for the Plano child-care
facility and $631,346.78 in past-due and future royalties for the Flower Mound
child-care facility. Based on this verdict, the trial court entered judgment in
favor of Kids ‘R’ Kids in the amount of $1,384,008.72. We hold that, in light
of the evidence, the jury’s award was not so flagrantly excessive as to create
a clear implication of bias on the part of the jury and that Progressive has not
provided compelling evidence to overcome the presumption that the trial court’s
approval of the verdict should be disturbed. We overrule Progressive’s third
issue.
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IV. C ONCLUSION
Having overruled all of Progressive’s issues, we affirm the trial court’s
judgment.
DIXON W. HOLMAN
JUSTICE
PANEL: CAYCE, C.J.; HOLMAN and WALKER, JJ.
WALKER, J. concurs without opinion.
DELIVERED: November 6, 2008
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