Hacienda Mexican Restaurant of Kalamazoo Corp. v. Hacienda Franchise Group, Inc.

• Decision Date: 08 April 1991
• Docket Number: No. 71A04-9005-CV-00234,71A04-9005-CV-00234
• Citation: 569 N.E.2d 661
• Parties: HACIENDA MEXICAN RESTAURANT OF KALAMAZOO CORP., et al, Defendants-Appellants, v. HACIENDA FRANCHISE GROUP, INC., Plaintiff-Appellee. 1
• Court: Indiana Appellate Court

Page 661

569 N.E.2d 661

HACIENDA MEXICAN RESTAURANT OF KALAMAZOO CORP., et al Defendants-Appellants, v. HACIENDA FRANCHISE GROUP, INC., Plaintiff-Appellee.

No. 71A04-9005-CV-00234. ¹

Court of Appeals of Indiana Fifth District.

April 8, 1991.

Transfer Denied May 30, 1991.

Ross E. Chapman, Deming, Hughey, Lewis, Allen & Chapman, P.C., Kalamazoo, Mich. and Donald E. Wertheimer, South Bend, for defendants-appellants.

Joseph L. Amaral and Richard D. Bonewitz, Hammerschmidt, Bonewitz, Amaral & Jonas, South Bend, for plaintiff-appellee.

SHARPNACK, Judge.

Defendants-appellants-franchisees, Hacienda Mexican Restaurant of Kalamazoo Corp., Albert Mickelson, and Scott Borsodi (hereinafter "franchisees") bring this interlocutory appeal from the grant of a preliminary injunction. Plaintiff-appellee-franchisor, Hacienda Franchise Group, Inc. (hereinafter "franchisor") has filed a motion to dismiss the appeal on the basis that the questions presented are moot. We find that the appeal is not moot, and we affirm in part and reverse in part.

Franchisor raises one issue:

Is franchisees' appeal moot due to the fact that franchisees have ceased operation as a restaurant, abandoned the property upon which they operated, and disposed of their equipment?

Franchisees raise four issues for review which we restate and reorganize as:

1. Did the trial court abuse its discretion when it issued a preliminary injunction on the basis that:

A. Franchisor did not establish that it had properly terminated the franchise agreement?

B. Franchisor did not prove that it would have had no adequate remedy at law if its application for a preliminary injunction was denied?

C. The trial court improperly placed the burden upon franchisees to prove that the potential harm to them stemming from the grant of the injunction outweighed the potential harm to franchisor from the denial of an injunction, and that the franchisor did not meet its burden on this issue?

2. Did the trial court err when it issued a preliminary injunction without requiring franchisor to post security?

The parties entered into a franchise agreement on January 5, 1989, and franchisees began operations in October of that year. Franchisees fell behind in royalty payments almost immediately. They made no payments for January. Franchisor sent a letter demanding payment on February 2, 1990 and franchisees brought themselves current on February 19. They made payments, which were a week or more late, on March 10. Royalties due on March 29 were a week late when, on April 5, 1990, franchisor sent a letter to franchisees invoking its right to terminate the franchise agreement without notice under Article XIV(A)(15) of the agreement which provides for termination by franchisor upon three defaults. Franchisees paid on April 6, unilaterally treated the matter as a cured default, and continued operation.

Franchisor filed a complaint seeking an order permanently enjoining franchisees from: continuing to operate as a Hacienda Mexican Restaurant, operating as a Mexican restaurant in general, using or possessing any trade marks or copyrighted materials belonging to franchisor, using or possessing any food or beverage recipes belonging to franchisor, and using or possessing any confidential information, signs, symbols, trade dress, advertising or other property bearing the name and style of Hacienda Mexican Restaurants or belonging to franchisor. Franchisor also sought damages. Franchisor filed a motion for preliminary injunction asking that franchisees be enjoined from the same acts enumerated in the original complaint. Franchisees filed a cross motion for preliminary injunction.

The court scheduled a hearing on the motion for preliminary injunction for April 17. At that hearing, franchisees asked for a continuance arguing that they believed franchisor intended to litigate alleged violations of the franchise agreement beyond tardy royalty payments and that their reading of the complaint led them to prepare only for the issue of tardy royalty payments. The court continued consideration of any violations of the agreement beyond a default in royalty payments to a hearing on April 25 and admonished the attorneys to confine their questions accordingly. The parties limited their evidence to the issue of late royalty payments. Upon the conclusion of evidence, counsel for franchisor asserted that a provision in the franchise agreement (Article XVIII(A)) allowed for equitable relief to be granted without the posting of a bond.

At the conclusion of the hearing, the court discussed with the attorneys what the hearing had accomplished and what issues were to be presented at the April 25th hearing. The court agreed to rule on the issue of whether the contract had been properly terminated on the basis of defaults in royalty payments and whether to grant a preliminary injunction on that basis.

The court issued a preliminary injunction on April 24 accompanied by its findings. The court's order states:

[I]t is Ordered that the Defendant, its agents, servants, employees and attorneys and all persons in active concert and participation with Defendant be and they are hereby restrained and enjoined, pending determination of this action from:

1. Operating a Mexican restaurant under the name and style of Hacienda Mexican restaurant.

2. Operating a Mexican restaurant in general.

3. Using or possessing any trademarks or copyrighted materials belonging to Hacienda Franchise Group, Inc.

4. Using or possessing any food or beverage recipes belonging to the Plaintiffs.

5. Using or possessing any confidential information, signs, symbols, trade dress, advertising or other property bearing the name and style of Hacienda Mexican Restaurants or belonging to the Plaintiff.

The court was silent as to the need for franchisor to post security and no security was given.

On February 28, 1991, Franchisor filed a motion to dismiss the appeal as moot. Franchisor alleges that franchisees continued in the restaurant business under the name Santa Fe Bar & Grill following the injunction, but that they subsequently discontinued operation and abandoned the premises, leaving their equipment on the premises.

Other relevant facts will be set out in the opinion as necessary.

Franchisor contends that this appeal has become moot due to the fact that franchisees have discontinued operation as a restaurant, relinquished possession of the property upon which they operated as a restaurant, and disposed of their equipment. Franchisor argues that franchisees have rendered themselves unable to continue operation as a franchisee or otherwise.

This court will only decide real questions or controversies and will not consider moot or abstract propositions. International Harvester Co. v. Snavely (1959), 129 Ind.App. 567, 158 N.E.2d 802. An issue becomes moot when:

1. it is no longer "live" or when the parties lack a legally cognizable interest in the outcome;

2. the principal questions in issue have ceased to be matters of real controversy between the parties; or

3. the court on appeal is unable to render effective relief upon an issue.

Haggerty v. Bloomington Board of Public Safety (1985), Ind.App., 474 N.E.2d 114, 115-116. There is a real controversy between the parties in this case. Franchisees presently are subject to contempt of court if they try to operate as a Hacienda franchise or as a Mexican restaurant in general. It may be unlikely that they will do so, but it is not impossible. They dispute the court imposed restraint upon their actions. This court can render effective relief by removing this constraint if we decide that the trial court erred when it granted the preliminary injunction. We find that the appeal is not moot, deny the motion to dismiss the appeal, and now turn to the merits of the appeal.

There are several factors upon which a court must base the exercise of its equitable discretion when deciding whether to issue a preliminary injunction. The party seeking the injunction must make at least a prima facie showing of the violation of some legal right. Indiana Annual Conference Corporation v. Lemon (1956), 235 Ind. 163, 167, 131 N.E.2d 780, 782. The movant also must demonstrate that he will suffer irreparable harm if his request for a preliminary injunction is denied. Id. Indiana courts have also held that the party requesting a preliminary injunction must show the lack of an adequate remedy at law, McKain v. Rigsby (1968), 250 Ind. 438, 444, 237 N.E.2d 99, 103, although in this case, as in most cases, proof of one necessarily serves as proof of the other. Steenhoven v. College Life Ins. Co. of America (1984), Ind.App., 458 N.E.2d 661, 665, reh'g denied, (1984), Ind.App., 460 N.E.2d 973. The extent to which the movant has shown the likelihood of success on the merits of his claim will affect the degree and likelihood of the potential harm the movant must demonstrate. See Wells v. Auberry (1982), Ind.App., 429 N.E.2d 679, 683, trans. denied. In addition, the trial court must weigh the relative potential harms to the parties stemming from the issuance of an injunction as well as the effect of the grant or denial of the injunction on the public interest. Rees v. Panhandle Eastern Pipe Line Co. (1978), 176 Ind.App. 597, 609, 377 N.E.2d 640, 648.

In reviewing the grant or denial of a preliminary injunction, we will only reverse where the trial court has clearly abused its discretion. Lemon, 235 Ind. at 167, 131 N.E.2d at 780. To make this determination, we must look to the special findings the trial court is required to file under Trial Rule 52(A) when it grants or denies a preliminary injunction. Such findings are adequate unless they are "clearly erroneous." Steenhoven, 458 N.E.2d at 665. If the findings are sufficient to disclose a valid basis under the issues for the legal result reached in the judgment and are supported by evidence of probative value, they are not clearly erroneous. Id.

Although franchisees did not...