Court Opinion

ID: 4649235
Source: CourtListenerOpinion
Date Created: 2021-01-05 21:00:21.311642+00
Date Added: 2024-06-11T08:01:23.434262
License: Public Domain

NOT RECOMMENDED FOR PUBLICATION
                                 File Name: 21a0005n.06

                                           Case No. 19-2335

                            UNITED STATES COURT OF APPEALS
                                 FOR THE SIXTH CIRCUIT
                                                                                             FILED
                                                                                      Jan 05, 2021
LITTLE CAESAR ENTERPRISES, INC., et al.,                      )                   DEBORAH S. HUNT, Clerk
                                                              )
        Plaintiffs-Appellees,                                 )
                                                              )       ON APPEAL FROM THE
v.                                                            )       UNITED STATES DISTRICT
                                                              )       COURT FOR THE WESTERN
LITTLE CAESARS ASF CORPORATION, et al.,                       )       DISTRICT OF MICHIGAN
                                                              )
        Defendants-Appellants.                                )
                                                              )

        BEFORE: SUTTON, BUSH, and MURPHY, Circuit Judges.

        SUTTON, Circuit Judge. After some of its franchisees fell behind on payments, Little

Caesar Enterprises, “Little Caesars” for short, ended their franchise agreements. It sued the

franchisees in district court, seeking to obtain monetary damages and to enforce the termination.

The district court granted summary judgment in Little Caesars’ favor, and we affirm.

        Little Caesars is the third-largest pizza chain in the country. As a franchisor, it contracts

with franchisees, who run their own shops under the Little Caesars umbrella. As with many

national restaurants intent on ensuring quality control and uniform offerings, Little Caesars holds

a tight leash on its franchisees. It dictates ingredients, sets prices, and enforces other rules to ensure

a predictable and consistent product, slice for slice.

        Rollie and Beverly Knox ran several Little Caesars franchises for decades. The couple

used at least three corporate entities to govern 20 franchises located in six States.
Case No. 19-2335, Little Caesar Enters. et al. v. Little Caesars ASF Corp. et al.

       A franchise agreement governs the relationship between the Knoxes and Little Caesars.

The Knoxes agreed to pay weekly royalties to Little Caesars, report their earnings, and purchase

pizza ingredients from a Little Caesars affiliate. If they did not comply with the terms, Little

Caesars could place them in default. If the Knoxes failed to cure a default within 10 days, Little

Caesars could terminate the agreement.

       The franchise agreement laid out other roads that could lead to a termination. Little

Caesars, for example, could end the agreement if the Knoxes accumulated three or more notices

of default in one year. In the event of a termination, the Knoxes agreed to close their Little Caesars

restaurants and to pay up to three years of royalties as liquidated damages.

       Early in 2017, the Knoxes stopped making timely royalty payments and started violating

other provisions of the agreement. In March, May, and June, they received default notices for

failing to make timely royalty payments, refusing to produce financial records, and failing to pay

for supplies. By June, they owed over $200,000. Little Caesars gave them a chance to cure the

defaults, and the Knoxes pledged to do so through a letter from their attorney. Promises made

became promises broken, prompting Little Caesars to terminate the franchise agreement and to

demand that the Knoxes comply with their post-termination obligations: closing the franchises

and paying up liquidated damages, among other duties.

       The termination letter explained that, if the Knoxes contested the termination, Little

Caesars would seek relief in court. It added that, if the Knoxes continued to operate the franchises

during any litigation, Little Caesars would accept payments from them “without waiver of its rights

and claims, including the right to enforce the termination of the Franchise Agreements.” R.50-10

at 4. The pizza company reserved “all of its post-termination rights until it receive[d] a court

order.” Id.

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Case No. 19-2335, Little Caesar Enters. et al. v. Little Caesars ASF Corp. et al.

        Little Caesars sued the Knoxes in federal district court, alleging breach of contract and

other claims. The Knoxes counterclaimed on several fronts. As the proceeding progressed, the

Knoxes continued to operate the restaurants. But when the Knoxes stopped making any payments,

Little Caesars sought a preliminary injunction to close the restaurants. The court granted the

injunction, but the Knoxes largely ignored it. A contempt hearing brought the restaurants to a

close. The court granted summary judgment to the company and ordered the Knoxes to render

unto Little Caesars $2.6 million in liquidated damages plus other damages and fees.

        We review the district court’s grant of summary judgment with fresh eyes. At stake is

whether the franchise agreement allowed Little Caesars to terminate it in this manner and to collect

liquidated damages in the process.

        Under the agreement, Little Caesars could terminate in the event of three defaults by the

Knoxes in one year or if the Knoxes failed to make an overdue payment within 10 days of receiving

written notice. Both conditions, each sufficient, occurred: The Knoxes received three valid notices

of default in 2017, and they failed to cure the missed payment triggering the third notice of default

within 10 days. The agreement also entitled Little Caesars to liquidated damages. In the event of

a default-induced termination, the franchise agreement gave Little Caesars the right to receive up

to three years’ worth of royalty payments and advertising fees. Nothing in the record indicates the

district court erred in setting this figure at $2.6 million.

        The Knoxes attempt to counter this conclusion in several ways. They contend that the

franchise agreement made this award of liquidated damages premature. As the Knoxes see it, the

agreement prohibited Little Caesars from collecting liquidated damages until the stores had closed.

By continuing to run their franchises—in defiance of a court order, mind you—the Knoxes claim

that they rendered the damages provision unavailable. But that reading of the agreement does not

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Case No. 19-2335, Little Caesar Enters. et al. v. Little Caesars ASF Corp. et al.

work. Even if the Knoxes could circumvent the liquidated damages clause by refusing to close

their stores (a doubtful proposition), the restaurants had closed by the time the district court granted

summary judgment. The agreement plainly permitted Little Caesars to collect royalty payments

then.

        The Knoxes add that Little Caesars waived its right to terminate the franchise agreement

and collect liquidated damages by supplying ingredients during the early stages of the litigation.

The district court ruled that the Knoxes failed to “provide any factual or legal support for their

argument” below, R.79 at 5 n.2, and the Knoxes fail to offer a sound reason for second-guessing

that decision on appeal. The argument rests on a thin reed anyway. The Knoxes would have to

show by “clear and convincing evidence” that Little Caesars “knowingly waived enforcement” of

the termination provision by supplying ingredients. Quality Prods. & Concepts Co. v. Nagel

Precision, Inc., 666 N.W.2d 251, 258 (Mich. 2003). That is a heavy lift. Recall that the

termination letter contemplated continued dealings between the parties as they awaited a court

order. And it warned the Knoxes not to construe these dealings as a “waiver of” Little Caesars’

“rights and claims, including the right to enforce the termination of the Franchise Agreements.”

R.50-10 at 4. Our court has already rejected a similar argument involving a Little Caesars

franchisee. Little Caesar Enters., Inc. v. Miramar Quick Serv. Rest. Corp., No. 19-1860, 2020 WL

4516289, at *3 (6th Cir. June 25, 2020).

        The Knoxes also maintain that one of the defendant corporations, Southern Utah Pizza

Service, is not liable to Little Caesars because it sold all of its franchises before the Knoxes

defaulted. But the Knoxes waited until after the district court granted summary judgment to raise

this argument, which is too late. Thurman v. Yellow Freight Sys., Inc., 97 F.3d 833, 835 (6th Cir.

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Case No. 19-2335, Little Caesar Enters. et al. v. Little Caesars ASF Corp. et al.

1996). At any rate, the record suggests that Southern Utah Pizza Service continued to operate

franchises well into the litigation.

        That leaves several other arguments: that Little Caesars waived the right to terminate the

agreement by agreeing to a repayment plan, that the liquidated damages clause is an unenforceable

penalty provision, that Little Caesars failed to mitigate damages, and that Little Caesars named the

wrong Southern Utah Pizza Service entity in its complaint. But the Knoxes failed to raise each of

these arguments in the district court. That amounts to a forfeiture. They offer no sound basis for

treating this as the kind of “exceptional case[]” that overlooks this defect. Pinney Dock & Transp.

Co. v. Penn Cent. Corp., 838 F.2d 1445, 1461 (6th Cir. 1988) (quotation omitted).

        One last point, an administrative one at that. Rollie Knox and Southern Utah Pizza Service

filed for Chapter 11 bankruptcy after the district court entered judgment. During the pendency of

this appeal, Little Caesars successfully converted the Chapter 11 bankruptcy into a Chapter 7

bankruptcy, making the trustees of their estates the real-parties-in-interest here. See Auday v. Wet

Seal Retail, Inc., 698 F.3d 902, 904 (6th Cir. 2012). Rollie Knox and Southern Utah Pizza Service

say that the trustees prefer these proceedings to continue in the name of the trustees. That

substitution is consistent with the publicly available bankruptcy docket, including the bankruptcy

court’s modification of the automatic stay under 11 U.S.C. § 362, which permitted this appeal to

continue. We therefore substitute the trustees for Rollie Knox and Southern Utah Pizza Service

under Rule 43 of the Federal Rules of Appellate Procedure.

        We affirm.

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