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

• Citation: 641 N.E.2d 1036
• Decision Date: 24 October 1994
• Docket Number: No. 71A04-9402-CV-37,71A04-9402-CV-37
• Parties: HACIENDA MEXICAN RESTAURANT OF KALAMAZOO CORP., Albert Mickelson and Scott Borsodi, Appellants, v. HACIENDA FRANCHISE GROUP, INC., Dean Goodwin, Kenneth Zmudzinski, William Shannon, III, Lance Malling and Gary White, Appellees.
• Court: Court of Appeals of Indiana

Page 1036

641 N.E.2d 1036

HACIENDA MEXICAN RESTAURANT OF KALAMAZOO CORP., Albert Mickelson and Scott Borsodi, Appellants, v. HACIENDA FRANCHISE GROUP, INC., Dean Goodwin, Kenneth Zmudzinski, William Shannon, III, Lance Malling and Gary White, Appellees.

No. 71A04-9402-CV-37.

Court of Appeals of Indiana Fourth District.

Oct. 24, 1994.

Ross E. Chapman, William T. Webb, Deming Hughey Lewis Allen & Chapman, P.C., Kalamazoo, MI, for appellants.

Stephen Hodge, Indiana Securities Com'r, Indianapolis, amicus curiae.

Joseph L. Amaral, Gregg A. Hixenbaugh, Hammerschmidt Amaral & Jonas, Richard B. Urda, Jr., South Bend, for appellees.

OPINION

CHEZEM, Judge.

Case Summary

Defendants-Appellants, Hacienda Mexican Restaurant of Kalamazoo Corp., Albert Mickelson, and Scott Borsodi ("Franchisees") appeal the judgment in favor of Hacienda Franchise Group, Inc. ("Franchisor"). We affirm.

Issues

Franchisees present seven issues for review, consolidated and restated as:

I. Whether the trial court properly required proof of scienter upon Franchisees' counter-claim for franchise fraud.

II. Whether the trial court should have imposed personal liability against the principals of Franchisor.

III. Whether Franchisees' motion for summary judgment on its counter-claim of franchise fraud was improperly denied.

IV. Whether the trial court properly denied Franchisees' demand for a jury trial.

V. Whether the trial court properly denied Franchisees' motion to amend the pre-trial order.

VI. Whether the trial court properly awarded attorney fees to Franchisor.

Facts and Procedural History

Franchisees and Franchisor are both incorporated in Indiana. On January 5, 1989, Franchisees entered into a franchise agreement with Franchisor for a Hacienda Mexican Restaurant. Franchisees began operating Hacienda Mexican Restaurant of Kalamazoo in October of the same year. Almost immediately, Franchisees fell behind in their royalty payments. After three defaults by Franchisees, Franchisor invoked its right to terminate the franchise agreement without notice under Article XIV(A)(15) of the franchise agreement. Franchisor filed a motion for a preliminary injunction and a complaint seeking a permanent injunction and damages against Franchisees on April 9, 1990. Franchisees filed a counter-claim and third-party complaint on April 18, 1990. The trial court granted the preliminary injunction on April 24, 1990. Franchisees filed an interlocutory appeal contesting the injunction with the Court of Appeals. This court held that the trial court properly granted the preliminary injunction, but reversed the part of the order enjoining Franchisees from operating a Mexican restaurant in general. ¹

On April 26, 1990, Franchisees filed a demand for jury trial. Franchisor filed a motion to strike the jury trial demand, which the trial court granted on June 13, 1991.

Franchisees filed a motion for summary judgment on December 10, 1990. The trial court denied the motion on January 14, 1992. Franchisees filed a motion to amend the pre-trial order on September 29, 1992. The court held a hearing on October 20, 1992, and denied the motion to amend. The parties tried the matter to the bench November 2-9, 1992. After hearing the evidence, the trial court took the matter under advisement. On June 2, 1993, the trial court entered its written findings of fact and conclusions of law in favor of Franchisor. By agreement of the parties, the trial court held a separate hearing concerning attorney fees on September 24, 1993. The trial court took the matter under advisement and entered final judgment on October 4, 1993. The court entered judgment in favor of Franchisor on all claims and awarded Franchisor $131,027.85 in attorney fees. Franchisees filed their praecipe for appeal on November 3, 1993. The trial court granted a stay of enforcement proceedings pending appeal on November 5, 1993.

Discussion and Decision

I.

Franchisees first argue that the trial court misapplied the law on their counter-claim of franchise fraud under the Indiana Franchise Disclosure Act, Ind.Code § 23-2-2.5-1, et seq.

When a judgment is attacked as being contrary to law, we look solely to the evidence most favorable to the judgment, together with all reasonable inferences drawn therefrom. We will reverse the judgment only when the evidence is without conflict and leads to but one conclusion and the trial court reached a contrary conclusion. Popovich v. Blackburn (1991), Ind.App., 573 N.E.2d 918, 919. We will not consider the credibility of the witnesses or weigh the evidence on appeal. Id.

Franchisees contend the trial court committed reversible error when it required proof of scienter for franchise fraud. The requirements for franchise fraud are set forth at Ind.Code § 23-2-2.5-27. Section 27 provides It is unlawful for any person in connection with the offer, sale or purchase of any franchise, or in any filing made with the commissioner, directly or indirectly: (1) to employ any device, scheme or artifice to defraud; (2) to make any untrue statements of material fact or to omit statements of material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading; or (3) to engage in any act which operates or would operate as a fraud or deceit upon any person.

At the time the trial court entered its judgment, the existing case law required proof of scienter for claims of franchise fraud under § 27. See Enservco, Inc. v. Indiana Securities Div. (1992), Ind.App., 605 N.E.2d 256, rev'd 623 N.E.2d 416.

Prior to Franchisees filing their appeal, our supreme court reversed this court's decision in Enservco. See Enservco, Inc. v. Indiana Securities Div. (1993), Ind., 623 N.E.2d 416. In its opinion, the court engaged in a careful analysis and discussion of the role of scienter in franchise fraud claims under I.C. § 23-2-2.5-27. The Court held that "[t]o prove section 27(1) franchise fraud, one must show the alleged violator employed a 'device, scheme or artifice' with the knowledge or intent that it might defraud another." Enservco, 623 N.E.2d at 423. In essence, the court held that scienter remains a part of section 27(1). The court further held that

to prove a violation of I.C. § 23-2-2.5-27(2) or (3) by false statement or omission, one need not prove any degree of fault on the part of the alleged violator. The elements of section 27(2) and (3) are, in sum, a false statement or omission, materiality, and harm caused by reliance on the statement or omission.

Id. at 425. It is clear the court intended to limit this holding to franchise fraud under section 27(2) and (3) by false statement or omission. The court stated that "[i]n regard to violations of section 27(2) and (3) by false prediction, promise or representation about the future, however, the legislature quite clearly intended to include fault as an element of proof. Such statements are actionable under section 27 only if they were not made honestly and in good faith." Id. at 423, n. 11; I.C. § 23-2-2.5-1(f).

Pursuant to Franchisees' counter-claim, only section 27(2) and (3) are at issue here. Franchisees argue that, based on the Indiana Supreme Court decision in Enservco, the judgment should be reversed because the trial court required proof of scienter for section 27(2) and (3). While Franchisees are correct in their assertion that scienter is no longer an element of franchise fraud by false statement or omission under section 27(2) and (3), our analysis cannot stop at this point. Even without scienter as an element, Franchisees must have proved two other elements to prevail on their claim of franchise fraud by false statement or omission. Additionally, Franchisees charged in their counter-claim that Franchisor committed franchise fraud by making false predictions, promises or representations about the future. As stated above this type of franchise fraud requires proof of fault.

We will first address Franchisees' claim that Franchisor violated section 27(2) and (3) by making a false statement of a material fact. The evidence showed that Franchisor was involved in a civil lawsuit which was pending at the time the parties entered into the franchise agreement. This lawsuit alleged that several of the partners of Franchisor had made an ultra vires transfer of the Hacienda trademark. The offering circular provided to Franchisees affirmatively stated that Franchisor did not have any material civil action pending against it. The trial court found the following concerning this alleged violation:

1. that the statements concerning pending litigation were false and material

2. that the statements were not made with intent to deceive, manipulate or defraud

3. that there was no evidence to suggest that any of Franchisees' losses were related in any way to the false statements about the lawsuit.

The trial court erred by requiring scienter as an element of franchise fraud involving a false statement, contrary to our supreme court's holding in Enservco. However, in deciding whether or not the impact of an alleged error was prejudicial, we must determine whether or not the right result was reached notwithstanding the error. Terpstra v. Farmers and Merchants Bank (1985), Ind.App., 483 N.E.2d 749, 761, reh'g denied, trans. denied. The record supports the trial court's findings that Franchisees did not prove that their harm was caused by reliance on the false statement. Even without scienter as an element, Franchisees failed to prove one of the remaining necessary elements. Therefore, the trial court's error was harmless. The trial court properly ruled against Franchisees on this claim of franchise fraud.

Franchisees also claimed that Franchisor violated section 27(2) and (3) by making false predictions, promises or representations about the future. The legislature specifically incorporated the speaker's culpability in fraud by future promise, prediction, or representation. Under I.C. §...