Annaco Inc. v. John Corbin

• Court: Court of Appeals of Tennessee
• Decided: December 31, 1998
• Docket: 02A01-9804-CH-00111
• Status: Published

Opinion

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

2 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:

3 (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.

4 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.

5 / 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.

6 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.

7 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.

8 HIGHERS, J.

FARMER, J.

LILLARD, J.