Baal v. McDonald's Corp.

• Decision Date: 18 June 1981
• Docket Number: No. 80-3077,80-3077
• Parties: , 52 Ill.Dec. 957 Edwin BAAL, Jennie D. Baal, and Mac-Thomas Corporation, a corporation, Plaintiffs-Appellants, v. McDONALD'S CORPORATION, Defendant-Appellee, and Rene Dayan, Defendant.
• Court: United States Appellate Court of Illinois

Page 1166

422 N.E.2d 1166

97 Ill.App.3d 495, 52 Ill.Dec. 957

Edwin BAAL, Jennie D. Baal, and Mac-Thomas Corporation, a corporation, Plaintiffs-Appellants, v. McDONALD'S CORPORATION, Defendant-Appellee and Rene Dayan, Defendant.

No. 80-3077.

Appellate Court of Illinois, First District, Fourth Division.

June 18, 1981.

William J. Harte, Richard J. Prendergast, Chicago (Eugene L. Shepp, Chicago, of counsel), for plaintiffs-appellants.

Foran, Wiss & Schultz, Chicago (Richard G. Schultz, Stephen A. Gorman, Chicago, of counsel), for defendant-appellee.

JOHNSON, Justice:

Plaintiffs, Edwin Baal, Jennie D. Baal, and Mac-Thomas Corporation, instituted suit on November 13, 1980 against McDonald's Corporation seeking a temporary restraining order and a preliminary injunction. Plaintiffs sought to enjoin McDonald's from terminating their license and lease for the operation of a McDonald's restaurant located in Grand Junction, Colorado.

On November 20, 1980, plaintiffs' petition for a temporary restraining order was denied. At the close of the evidentiary hearing, the motion for preliminary injunction was denied. The trial court found that plaintiffs had failed to establish a clear and certain right in the Grand Junction franchise that would be entitled to protection and a likelihood of success on the merits. The trial court found that the doctrine of "unclean hands" further barred plaintiffs from seeking relief. Plaintiffs moved for and obtained an order staying all proceedings in the trial court, pending the determination of this interlocutory appeal pursuant to Supreme Court Rule 307(a)(1). Ill.Rev.Stat.1979, ch. 110A, par. 307(a)(1).

Plaintiffs present for review the issues of (1) whether the trial court erred as a matter of law in requiring plaintiffs to establish by clear and convincing evidence their right to preliminary injunctive relief, and in ruling that the existence of any doubt precludes the issuance of a preliminary injunction; (2) whether the trial court erred as a matter of law in determining that plaintiffs had failed to establish the existence of a clearly ascertainable property right; (3) whether where that finding was based on alleged misrepresentations of plaintiffs, which rendered the franchise agreement voidable, the trial court erred as a matter of law in applying the "clean hands" doctrine to preclude preliminary injunctive relief; and (4) whether plaintiffs were entitled to preliminary injunctive relief to prevent the revocation of their franchise by McDonald's Corporation. We reverse.

At the hearing, Jennie Baal testified that she and her husband, Edwin Baal, are the sole shareholders of Mac-Thomas Corporation, a corporation organized and operated under the laws of Colorado. The corporation is engaged in the business of managing a McDonald's restaurant in Grand Junction, Colorado.

Jennie Baal stated that her association with McDonald's began in 1973 when she and her husband acquired a franchise to operate a McDonald's fast-food restaurant in Sikeston, Missouri. Prior to that time, Edwin Baal was a Chicago police officer. The witness had worked at a McDonald's restaurant on Central Avenue in Chicago. She met defendant Dayan who was the previous owner of that McDonald's until he sold it to Ernie Cochanis around 1971 or 1972. Mr. Cochanis suggested to the witness that since her husband was leaving the police department they should acquire a McDonald's franchise. According to the witness, she learned that a franchise would require an initial investment of $100,000. They could raise between $45,000 and $50,000. Dayan informed them that he would be willing to offer the financial backing necessary to raise the money. They decided to purchase the McDonald's that was under construction in Sikeston, Missouri. Dayan handled all arrangements including retaining counsel.

Further testifying, the witness said she and her husband executed a pre-incorporation agreement with Dayan which provided that they would have a 45 percent interest and Dayan would have a 55 percent interest in the Sikeston restaurant and in any future McDonald's restaurants acquired by the witness and her husband. They never operated the Sikeston franchise but exchanged it for the franchise in Paducah, Kentucky. The Paducah franchise was assigned to Mac-Thomas Corporation. Dayan instructed them to state to McDonald's on the assignment of the license that they owned 100 percent interest in the Paducah franchise. Although they owned only 45 percent in Paducah, Dayan advised them that by rights they would be operating the store 100 percent.

Jennie Baal further stated that in late 1974 or early 1975, they received a letter from McDonald's concerning whether they had undisclosed partners. At that time, they learned that McDonald's prohibited such arrangements. They informed Dayan of their intention to disclose to McDonald's that he had an interest in the Paducah franchise. Dayan indicated that they should not disclose this information because McDonald's would ruin them financially, and if McDonald's did not, he would. Since they had no funds of their own, they thought it best to comply with Dayan's order.

The witness stated that on November 26, 1974, she, her husband and Dayan executed a letter of agreement providing for a restructuring of ownership. Dayan's equity interest would increase to 70 percent and their equity would decrease to 30 percent. They protested, but Dayan threatened to disclose their agreement to McDonald's if they did not cooperate. This occurred at the time they were preparing to purchase two more McDonald's, one in north Chicago, and the other in Waukegan. Dayan created Thomas of Illinois No. 1, Inc. and Thomas of Illinois No. 2, Inc. to reflect the new interests.

Edwin Baal testified that he and his wife operated their franchises profitably. Dayan never participated in the actual operation of the franchises. Since the fees of McDonald's were based on a percentage of the gross receipts, Dayan's share of the franchise did not affect McDonald's profits. They received several awards from McDonald's for high volume sales.

Stephen Schaeffer, a McDonald's field consultant for the Chicago stores, testified that he generally rated the Baals' stores good. They had extremely high sales for the territory and two of the stores were rated among the top ten.

Further testimony of Jennie Baal revealed that in 1975 or 1976 she and her husband learned that a McDonald's in Grand Junction, Colorado, would become available for purchase. They agreed with the owner of the Grand Junction franchise to purchase it in early 1979. According to the witness, she and her husband advised Dayan of their intention to sell the Chicago area restaurants. Dayan was not agreeable to the sale because he would lose a large amount of income, but they persisted. On March 11, 1979, they all agreed to sell the three Chicago area franchises for $2.8 million. They further stipulated that once these restaurants were sold, they and Dayan could sever their business arrangement.

The witness stated that they were unable to find a purchaser for $2.8 million because it would be difficult for a purchaser to make a profit at that price. They eventually sold the restaurants for.$2.1 million. Although there was no evidence of a written agreement indicating that.$2.1 million would be acceptable to Dayan, the witness stated that Dayan agreed to the latter amount instead of the $2.8 million. She also stated that this ended their relationship with Dayan. The proceeds from the sale of the restaurants were as follows: Dayan received.$1.4 million in cash; the Baals received $187,000 cash and $200,000 in notes; they were forced by Dayan to place $44,000 in a tax escrow account because they initiated the sale. The Mac-Thomas Corporation had been created by them to operate the Grand Junction franchise.

Edwin Baal corroborated his wife's testimony. He stated that there were no false statements in the Grand Junction documents because they had severed their relationship with Dayan. He and his wife are the sole owners of the Grand Junction franchise. They have not made a profit on Grand Junction yet. They have lost $38,000 and have made expenditures totaling over $100,000 for improvements. They have always made their payments to McDonald's. The witness indicated that on October 30, 1980, Thomas of Illinois No. 1, Inc. and Thomas of Illinois No. 2, Inc. were dissolved.

Sam Pfeffer testified that he was the attorney who handled the acquisition of the Chicago area franchises, the closings in the sale of the Chicago stores, and the purchase of the Grand Junction store. Pfeffer also handled the dissolution of Thomas of Illinois No. 1, Inc. and Thomas of Illinois No. 2, Inc. He testified that he represented only the Baals in the acquisition of the Grand Junction restaurant. To his knowledge, Dayan had no interest in the Grand Junction franchise.

James Owens, a field service manager for McDonald's in Denver, Colorado, testified that McDonald's was pleased that the previous owner of the Grand Junction franchise decided to sell that store. He indicated that the Baals are good managers.

Jennie Baal further testified that she and her husband received an undated and unsigned letter from Dayan claiming an interest in the Grand Junction restaurant. On April 15, 1980, they received another letter from Dayan's attorney indicating he intended to enforce their agreement giving him a 70 percent interest in the Grand Junction franchise. They met with Dayan. Subsequently, on July 2, 1980, they had a meeting with representatives of McDonald's to discuss their prior association with Dayan. They explained that Dayan had no interest in the Grand Junction franchise. On September 9, 1980, McDonald's advised them, in writing, that it was terminating their license and lease agreements for the Grand Junction franchise. Plaintiffs then filed suit against McDonald's and sought injunctive...