Court Opinion

ID: 2852840
Source: CourtListenerOpinion
Date Created: 2015-09-04 16:44:44.661166+00
Date Added: 2024-06-11T11:30:48.491613
License: Public Domain

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
                              ------------

           FROM THE 211TH DISTRICT COURT OF DENTON COUNTY

                                    ------------

                         MEMORANDUM OPINION 1

                                    ------------

                                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

                                        6
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.

                                       7
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.

                                       8
      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

                                         9
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

                                       10
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).

                                        11
      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.

                                        13
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.

                                        14
                            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.

                                      16
                              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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