Bad Ass Coffee Co. of Haw. Inc. v. Royal Aloha Int'l LLC

• Decision Date: 20 August 2020
• Docket Number: No. 20190181-CA,20190181-CA
• Citation: 473 P.3d 624
• Parties: BAD ASS COFFEE COMPANY OF HAWAII INC., Appellant and Cross-appellee, v. ROYAL ALOHA INTERNATIONAL LLC and FranCounsel Group LLC, Appellees and Cross-appellants.
• Court: Utah Court of Appeals

473 P.3d 624

BAD ASS COFFEE COMPANY OF HAWAII INC., Appellant and Cross-appellee,

v.ROYAL ALOHA INTERNATIONAL LLC and FranCounsel Group LLC, Appellees and Cross-appellants.

No. 20190181-CA

Court of Appeals of Utah.

Filed August 20, 2020

Blake T. Ostler, Salt Lake City, Attorney for Appellant and Cross-appellee

Joshua R. Furman, Amy F. Sorenson, and Tanya N. Lewis, Salt Lake City, Attorneys for Appellees and Cross-appellants

Judge Jill M. Pohlman authored this Opinion, in which Judges Gregory K. Orme and Diana Hagen concurred.

Opinion

POHLMAN, Judge:

¶1 Following negotiations in 2011, Bad Ass Coffee Company of Hawaii Inc. (BACH) and FranCounsel Group LLC (FranCounsel) entered into an operating agreement (the Operating Agreement) to form Royal Aloha International LLC (Royal) as well as a license agreement (the License Agreement) for the purpose of developing BACH's international presence. The parties’ relationship eventually deteriorated, and litigation ensued. After the completion of two phases of trial adjudicating BACH's claims related to both agreements and FranCounsel and Royal's counterclaims, BACH now appeals several of the district court's rulings regarding the validity of the agreements and the supportability of the jury's damages verdict in FranCounsel's favor. For their part, Royal and FranCounsel cross-appeal the district court's denial of their request for attorney fees and costs under both agreements. We affirm.

BACKGROUND¹

¶2 In 2011, BACH was looking to develop an international presence for its established coffee business. BACH—through its former president and director, Harold Hill—approached FranCounsel, an international franchise consultancy for help with that effort. Eventually, BACH and FranCounsel—through its owner, Bachir Mihoubi—agreed to form Royal, a new entity, to pursue BACH's international expansion.

¶3 Hill, on behalf of himself and BACH, and Mihoubi, on behalf of FranCounsel, executed the Operating Agreement for Royal. The Operating Agreement divided Royal's membership interests between BACH, FranCounsel, and Hill. Specifically, the Operating Agreement provided Hill a 25% personal membership interest, BACH a 25% interest, and FranCounsel the remaining 50% interest.

¶4 As relevant to the issues raised on appeal, the Operating Agreement provided that FranCounsel's initial capital contribution would be "its time for the day-to-day management and the international franchise development," which had a "fair market value of approximately $500,000.00." It also included an indemnification provision for its members.

¶5 Following Royal's formation and the execution of the Operating Agreement, Hill and Mihoubi, on behalf of BACH and Royal respectively, executed the License Agreement. The agreement provided Royal rights to use and exploit BACH's franchise system, in exchange for which BACH received a 25% interest in Royal.

¶6 In 2013, BACH filed suit against FranCounsel and Royal (collectively, Appellees), alleging that through the Operating Agreement and the License Agreement, Appellees conspired to defraud BACH of the value of its international franchising rights. On this basis, BACH sought a declaration from the district court that the Operating Agreement and the License Agreement were void and unenforceable, estopping Appellees from asserting the validity of both agreements. In response, Appellees asserted several counterclaims against BACH, including breach of contract claims arising out of the License Agreement and the Operating Agreement.

¶7 The case was tried in two phases. The first phase was tried to the bench, where the district court adjudicated all BACH's claims in Appellees’ favor. In particular, the court rejected BACH's arguments that Hill lacked authority to enter into the agreements on BACH's behalf and that Mihoubi had a duty to further investigate Hill's authority before entering into the agreements. Thus, the court ruled that the Operating Agreement and the License Agreement were valid and enforceable.

¶8 In the second phase, and following various rulings, only FranCounsel's breach of contract claim regarding the Operating Agreement was tried to the jury. The jury was asked to determine whether BACH had breached the Operating Agreement and, if so, to set the amount of damages.

¶9 Regarding the amount of damages, in its initial disclosures FranCounsel claimed $2,000,000 in damages for lost profits, $500,000 for the reasonable value of its marketing and promotion work, and $500,000 for its lost capital investment in Royal. However, the only damages theory FranCounsel was allowed to present to the jury was one based on the $500,000 in-kind capital contribution identified in the Operating Agreement.²

¶10 The jury found that BACH had breached the Operating Agreement and awarded FranCounsel $100,000 in damages. BACH then filed a motion for judgment notwithstanding the verdict (the JNOV), arguing that the jury's damages award was not supported by the evidence. The district court denied the motion, reasoning that BACH had "failed to meet its burden of demonstrating" entitlement to relief.

¶11 Following the phase-two jury trial, Appellees filed a motion for attorney fees. Appellees cited provisions in both the Operating Agreement and the License Agreement, claiming that such provisions entitled them to recover all attorney fees they incurred in both phases of the case.³ The court disagreed, concluding that the cited provisions did not provide a basis for an attorney fees award. Accordingly, the court denied Appellees’ request for fees.⁴

¶12 BACH appeals the district court's resolution of its claims in the first phase of this case, challenging the court's ruling regarding Hill's authority to enter into the Operating Agreement⁵ and Mihoubi's alleged duty to have investigated such authority. BACH also appeals a range of decisions related to the damages awarded, including the court's denial of the JNOV. Appellees cross-appeal the court's denial of their request for attorney fees.

ISSUES AND STANDARDS OF REVIEW

¶13 BACH challenges the district court's ruling, following the phase-one bench trial, that the Operating Agreement is valid and enforceable. On appeal from a bench trial, "we review the court's legal conclusions for correction of error," and "we will not disturb the court's findings of fact unless they are clearly erroneous." Hale v. Big H Constr. Inc. , 2012 UT App 283, ¶ 13, 288 P.3d 1046 (cleaned up); see also VT Holdings LLC v. My Investing Place LLC , 2019 UT App 37, ¶ 17, 440 P.3d 767 ("On appeal from a bench trial, we review the findings of fact for clear error and give due regard to the district court's opportunity to judge the credibility of the witnesses." (cleaned up)).

¶14 BACH also challenges the damages award on three grounds. First, BACH claims that the district court erred by allowing FranCounsel's breach of contract claim to be tried because FranCounsel did not comply with the damages disclosure requirement under rule 26 of the Utah Rules of Civil Procedure. We review a district court's discovery decisions, including decisions about discovery sanctions, for abuse of discretion. Bodell Constr. Co. v. Robbins , 2009 UT 52, ¶ 16, 215 P.3d 933 ; see also Thurston v. Workers Comp. Fund , 2003 UT App 438, ¶ 11, 83 P.3d 391 ("Generally, the trial court is granted broad latitude in handling discovery matters, and we will not find abuse of discretion absent an erroneous conclusion of law or where there is no evidentiary basis for the trial court's rulings." (cleaned up)).⁶

¶15 Second, BACH argues that the court erred by allowing, through a summary judgment ruling, FranCounsel's damages to be based on the value of its capital contribution to Royal. Summary judgment is appropriate "if the moving party shows that there is no genuine dispute as to any material fact and the moving party is entitled to judgment as a matter of law." Utah R. Civ. P. 56(a). We "review a district court's legal conclusions and ultimate grant or denial of summary judgment for correctness, viewing the facts and all reasonable inferences drawn therefrom in the light most favorable to the nonmoving party." Penunuri v. Sundance Partners Ltd. , 2017 UT 54, ¶ 14, 423 P.3d 1150 (cleaned up).

¶16 Finally, BACH challenges the sufficiency of the evidence supporting the damages award, arguing that the court erred by denying the JNOV and that there was no basis in the evidence to support the fact of damages or the amount. "On a motion for judgment notwithstanding the verdict, we will reverse the trial court's ruling only if, viewing the evidence in the light most favorable to the prevailing party, we conclude that the evidence is insufficient to support the verdict." Pinney v. Carrera , 2019 UT App 12, ¶ 33, 438 P.3d 902 (cleaned up), aff'd , 2020 UT 43, 469 P.3d 970.

¶17 In their cross-appeal, Appellees challenge the district court's denial of their request for attorney fees. "Whether attorney fees are recoverable is a question of law, which we review for correctness." Fisher v. Davidhizar , 2018 UT App 153, ¶ 9, 436 P.3d 123 (cleaned up).

ANALYSIS

I. BACH's Appeal

A. The Enforceability of the Operating Agreement

¶18 BACH asks that we reverse the district court's conclusion that the Operating Agreement is valid and enforceable. Citing Mihoubi's purported knowledge about the circumstances surrounding the corporate opportunity Hill acquired through the Operating Agreement—a 25% interest in Royal—BACH claims that the court erred in concluding that Hill had the apparent authority to bind BACH to the agreement. BACH asks us to hold that the court erred in determining that Mihoubi had no obligation to further investigate Hill's authority to enter into the Operating Agreement in light of Mihoubi's alleged knowledge that Hill was personally benefiting from the transaction.

¶19 "Under agency law, an agent cannot make its principal responsible for the agent's actions unless the agent is acting pursuant to either actual or apparent...