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


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  •                           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
    17