Dollar Systems, Inc. v. Avcar Leasing Systems, Inc.
| Decision Date | 13 November 1989 |
| Docket Number | No. 87-6422,87-6422 |
| Citation | 890 F.2d 165 |
| Parties | DOLLAR SYSTEMS, INC., Plaintiff-Counterclaim-Defendant-Appellant, v. AVCAR LEASING SYSTEMS, INC.; William H. Schroff; William Smoot, Conrad Marshall; Ralph Apton, Defendants-Appellees, Avcar Leasing Systems, Inc., Counterclaim-Plaintiff-Appellee, Henry J. Caruso; E. Woody Francis, Counterclaim-Defendants-Appellants. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Theodore F. Schwartz, Clayton, Mo., for plaintiff-counterclaim-defendant-appellant.
David J. Butler, Brownstein, Zeidman, and Schomer, Washington, D.C., for defendants-counterclaim-plaintiffs-appellees.
Ralph J. Apton, pro se.
Appeal from the United States District Court for the Central District of California.
Before NORRIS, NOONAN and LEAVY, Circuit Judges.
OVERVIEW
Dollar Systems, Inc. ("DSI") brought this action against Avcar Leasing Systems, Inc. ("Avcar") for breach of a franchise contract. Avcar counterclaimed for rescission and restitution under California Franchise Investment Law, Cal.Corp.Code Secs. 31101, 31110, and 31119 (West Supp.1989). Following a bench trial on the rescission counterclaim, the district court: (1) rescinded the franchise agreement; (2) awarded Avcar restitution and damages; (3) dismissed DSI's breach of contract action; and (4) awarded attorneys' fees to Avcar. Dollar Sys., Inc. v. Avcar Leasing Sys., Inc., 673 F.Supp. 1493 (C.D.Cal.1987). We affirm as to all issues except damages. We remand for further findings on the issue of damages.
DSI is a wholly-owned subsidiary of Dollar Rent A Car Systems, Inc. ("DRACSI"). Both corporations have their principal place of business in Los Angeles, California. The individual appellants, Henry J. Caruso and E. Woody Francis, are the principal executives of DSI and DRACSI.
Representatives of Avcar, a Virginia corporation, and DSI held their first meeting on May 14, 1984, at DSI's headquarters in Los Angeles, California to discuss a possible franchise sale. Present were Francis and Caruso, William Schroff, the President of Avcar, and Avcar shareholders Ralph Apton and Conrad Marshall. The parties discussed the purchase of a Dollar franchise and the purchase of Dollar Rent A Car-Washington, the DRACSI subsidiary that operated the Dollar franchise in the Virginia-Maryland-D.C. area. The parties also discussed leases and concession agreements for Baltimore/Washington International Airport and the airport lease and concession agreement for Dulles International Airport, as well as the construction of a service facility at Dulles.
Representatives of DSI and Avcar met again at DSI's offices in Los Angeles to execute the franchise agreement on June 15, 1984. When DSI refused to sell the Dollar-Washington subsidiary outright, the parties agreed to a sale of certain Dollar-Washington assets instead. The franchise agreement, as executed, gave Avcar the right to operate car rental businesses in Maryland, Virginia, and Washington, D.C. The parties agreed to a total purchase price of $500,000, including $290,000 for the franchise rights, $60,000 for the Dollar-Washington assets, and $150,000 for DSI's equity in certain automobiles. Pursuant to the agreement, Avcar assumed remaining payments to General Motors Acceptance Corporation (GMAC) and Ford Motor Company (Ford Motor) on the automobile loan, with DRACSI remaining liable as guarantor.
Prior to the June 15, 1984 meeting, Schroff, William Smoot, Marshall, Apton and Dr. George Derry personally guaranteed Avcar's obligations to DSI under the franchise agreement. The franchise agreement also incorporated a promissory note for $300,000 signed by Avcar's shareholders in their personal capacities.
At the time the parties executed the franchise agreement, DSI was not registered to offer or sell franchises in California, Maryland, or Virginia. As of January 1, 1984, "large franchisors" such as DSI were required to file a notice of exemption in California in order to become exempt from the registration requirements. See Cal.Corp.Code Sec. 31101(e). When DSI and Avcar signed the franchise agreement, six months after the new notice of exemption requirement came into effect, DSI had not yet filed a notice of exemption in California.
At the end of the meeting of June 15, 1984, DSI gave Schroff a document entitled "FTC Disclosure Document," dated July 30, 1982. The document did not disclose that Caruso and Francis were prohibited from offering or selling franchises in California because of their previous failure to comply with the registration requirements. The document also failed to disclose the existence of five civil actions involving DSI and two 1982 Wisconsin criminal convictions for unlawful franchise sales activity Avcar began its operations on or about July 1, 1984, and operated at a profit through September of 1984. By the end of 1984, however, Avcar stopped paying system fees or royalties to DSI. Avcar also did not file monthly system reports and monthly financial statements, failed to pay, or was late in paying, reservation fees, airport lease and concession fees, and third-party creditors, all in violation of the franchise agreement. Avcar did not file federal tax returns. On occasion, Avcar rented cars without having liability insurance.
one for DSI, and one for Dollar Rent A Car-Wisconsin, Inc., a wholly owned DRACSI subsidiary.
DSI terminated Avcar's franchise rights in February 1986. Avcar nevertheless continued to operate under the Dollar name until June 1986, but only to receive cars previously rented during May of 1986. Despite DSI's notice of termination of the franchise agreement and demand to cease operations, Avcar refused to turn over to DSI the operating locations on all of the airport concessions.
DSI thereafter brought this action against Avcar, and guarantors Schroff, Smoot, Marshall, and Apton, for breach of the franchise agreement. DSI sought damages totalling $1,373,678.81. Avcar and the individual guarantors asserted as both affirmative defenses and as counterclaims against DSI, Caruso, and Francis: (1) rescission of the franchise agreement due to DSI's failure to comply with California Franchise Investment Law; and (2) breach of the franchise agreement by DSI for failing to provide adequate services in accordance with the agreement. Avcar requested restitution and damages.
At trial, the district court bifurcated the issues and tried the rescission claim first without a jury. After a thirteen-day bench trial, the district court rescinded the franchise agreement based on its findings and conclusions that DSI violated the California Franchise Investment Law, Cal.Corp.Code Secs. 31101, 31110, and 31119, by its failure to file a notice of exemption from registration and by the inadequacies and untimeliness of the disclosures contained in the FTC Disclosure Document of 1982. The district court determined that DSI's violations were "willful" under the California Franchise Investment Act and thus Avcar was entitled to rescind the franchise agreement pursuant to Sec. 31300.
The district court then dismissed DSI's breach of contract claim. Concluding that Avcar was not barred from recovery on its counterclaims by the unclean hands doctrine, the district court held that DSI, Caruso and Francis were jointly and severally liable to Avcar for damages and restitution in the amount of $209,729.75 under Cal.Civ.Code Sec. 1692 (West 1985). In adjusting the equities between the parties, the district court calculated what it called "restitutionary damages" by first listing all payments made to DSI by Avcar:
Cash purchase money for franchise agreement $200,000.00
Installment payments on franchise note 29,763.80
Advance last month's rent and security deposit 30,000.00
Payments on BWI improvements
(7/84--12/85 @ $700/month) 12,600.00
Reservation fees 43,199.22
System fees 155,538.47
Unallocated payments 5,827.48
Supplies 5,704.73
Rent and taxes (including first month's rent) 205,785.21
Gas and S & H stamps 26,832.00
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Total: $715,250.91
Next, the court allowed DSI the following set-offs, for benefits conferred
Net value of fleet at time of turnover 150,000.00
Value of furniture at time of turnover 60,000.00
Rental value of BWI facility
(7/84--2/86 @ $700/month) 14,000.00
Reservation arrangements 43,199.22
Supplies 5,704.73
Rent and taxes (including first month's rent) 205,785.21
Gas and S & H stamps 26,832.00
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Total: $505,521.16
In addition, the district court required DSI to indemnify and hold harmless Avcar and the individual guarantors for any liability to GMAC or Ford Motor arising from the assumption and guaranty agreements on the vehicles assigned to Avcar.
The district court also awarded Apton $1,335 and Avcar, Schroff, and Smoot DSI contends that the district court erred in: (1) deciding to try the counterclaim for rescission to the court before holding a jury trial on its contract claim; (2) applying California Franchise and Investment Law to the rescission counterclaim; (3) determining that DSI's breaches of the California Franchise and Investment law were willful; (4) refusing to apply the doctrine of unclean hands to bar Avcar's claim for rescission and restitution; (5) awarding "restitutionary damages;" (6) awarding attorneys' fees to Avcar; and (7) holding Caruso and Francis jointly and severally liable.
$298,130.73 in attorneys' fees. Followin...
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