Hardee's of Maumelle, Ark., Inc. v. Hardee's Food Systems, Inc.

• Decision Date: 04 August 1994
• Docket Number: No. 93-3055,93-3055
• Citation: 31 F.3d 573
• Parties: HARDEE'S OF MAUMELLE, ARKANSAS, INC., an Indiana corporation, McNeely-Eubanks Enterprises, an Indiana partnership, Ronald R. Eubanks, Sharon Eubanks, Lee McNeely and Rose McNeely, Plaintiffs-Appellants, v. HARDEE'S FOOD SYSTEMS, INC., a North Carolina corporation, qualified and admitted to do business in the State of Indiana, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 573

31 F.3d 573

HARDEE'S OF MAUMELLE, ARKANSAS, INC., an Indiana

corporation, McNeely-Eubanks Enterprises, an Indiana partnership, Ronald R. Eubanks, Sharon Eubanks, Lee McNeely and Rose McNeely, Plaintiffs-Appellants, v. HARDEE'S FOOD SYSTEMS, INC., a North Carolina corporation,

qualified and admitted to do business in the State

of Indiana, Defendant-Appellee.

No. 93-3055.

United States Court of Appeals,

Seventh Circuit.

Argued Feb. 17, 1994.

Decided Aug. 4, 1994.

M. Michael Stephenson, McNeely, Sanders, Stephenson & Thopy, Shelbyville, IN, W. Michael Garner (argued), Schnader, Harrison, Segal & Lewis, New York City, for plaintiffs-appellants.

Donald E. Knebel, Dwight D. Lueck, Barnes & Thornburg, Indianapolis, IN, John F. Dienelt, Ellen R. Lokker (argued), David Ober, Reed, Smith, Shaw & McClay, Washington, DC, for defendant-appellee.

Before BAUER and CUDAHY, Circuit Judges, and MORAN, District Judge. ^*

CUDAHY, Circuit Judge.

The McNeely and Eubanks families decided to open a Hardee's restaurant, touted in the Hardee's literature as "the last great franchise opportunity in America." After several meetings with Hardee's Food Systems, Inc. (Hardee's) officials, the McNeelys and Eubanks opened a restaurant in Maumelle, Arkansas. Sales did not go well, and the McNeelys and the Eubanks discovered that they could not expand their franchise as they had hoped. They brought this diversity action against Hardee's on various theories of fraud. The district court entered judgment in favor of Hardee's, and we affirm.

I.

In May 1990, Lee McNeely, a practicing attorney in Indiana, applied to become a Hardee's franchisee and received a Hardee's Franchise Offering Circular. Ronald Eubanks, also an Indiana resident, agreed to come on board as an on-site manager, but emphasized that he wanted multiple franchise units and an income of $50,000. McNeely and Eubanks formed McNeely-Eubanks Enterprises (M-E) to own the Hardee's franchise, and the Hardee's of Maumelle, Arkansas, Inc. (HOMAI) corporation to operate the restaurant.

McNeely and Eubanks decided to pursue opportunities in Arkansas. In July, they travelled to Little Rock to meet with Gary Lee, Director of Franchise Development for Hardee's Area V, and Tim Mosbacher, Senior Real Estate Manager for Area V. The entourage visited an existing store in Sheridan--described by the Hardee's officials as a "million dollar store"--and a proposed site for a new store in Fordyce. McNeely and Eubanks said that they were interested in multiple franchises and that they wanted to grow rapidly. Lee and Mosbacher explained that company policy required a franchisee to wait six to twelve months before building a second store, but discussed the possibility of expanding more rapidly by purchasing company-owned stores.

On August 2, 1990, McNeely and Eubanks submitted a franchise business plan to Hardee's Area V. In the plan, they requested information regarding the opportunity to expand the scope of their enterprise by purchasing existing company-owned restaurants in addition to expanding through new franchise units. In a subsequent all-day meeting with Area V employees, McNeely and Eubanks did not ask about purchasing company-owned restaurants. The plaintiffs claim that even after this meeting, however, Hardee's employees led them to believe that they could purchase company-owned stores, and that at one point Gary Lee told McNeely that all company-owned stores in Arkansas would be available for purchase.

In September 1990, Hardee's suggested that McNeely develop the Maumelle rather than the Fordyce location. Hardee's sent McNeely the Maumelle site package, which included a "Cost Estimate & Site Approval Presentation" Hardee's had developed for its own use in 1989-90 when it was considering developing the Maumelle site as a company-owned restaurant. The Cost Estimate listed three Hardee's representatives' sales estimates for the first year of the Maumelle site as $800,000, $825,000 and $800,000. The plaintiffs claim that Mosbacher assured them that he expected the Maumelle store to be another "million dollar store."

As part of an application for financing from AT & T Commercial Finance, Eubanks prepared operating pro formas using the gross sales estimates provided in the Maumelle site package. Eubanks asked Lee to review his draft pro formas to see if they were in proper form; Lee assured him that they were basically sound. Eubanks also produced other pro formas which contained gross sales figures which varied from $600,000 to at least $1.2 million.

In the fall of 1990, Eubanks quit his job and moved to Indiana with his wife, Sharon Eubanks, to begin training at a Hardee's store in Arkansas. On November 14, 1990, Lee and Rose McNeely (Lee's wife) signed a licensing agreement with Hardee's and officially became franchisees. The Maumelle restaurant began operation in late February 1991. It performed more poorly than expected, with gross sales of $508,000 during the first year of operation and $611,000 the second year.

Meanwhile, in early November 1990, Mosbacher told McNeely and Eubanks about a proposed restaurant site in Russellville, Arkansas. McNeely and Eubanks sought to develop the Russellville site and also to buy an existing Russellville store to provide cash for the development. But in June 1991, John Lentz, the Hardee's Area V Vice President, refused to sell the existing Russellville restaurant, informing the plaintiffs that Hardee's rarely sold company-owned restaurants. Lentz later testified that no Arkansas company-owned stores were for sale in 1990 or 1991. Disappointed, McNeely and Eubanks canceled their plans in Russellville.

The plaintiffs brought suit against Hardee's alleging fraud in the sale of the Maumelle franchise. The alleged misrepresentations fell roughly into two groups: claims based on Hardee's sales estimates for its Arkansas stores, and claims based upon Hardee's statements about the possibility of buying company-owned stores after developing the Maumelle site (the "build one-buy one" policy).

The district court granted in part and denied in part Hardee's motion for summary judgment. ¹ The plaintiffs appeal only from the summary judgment in favor of Hardee's on the claim that Hardee's violated the disclosure provisions of the Indiana Franchise Act (IFA), Ind.Code Secs. 23-2-2.5-9 & 10. The district court held a bench trial on the remaining claims alleging fraud under the IFA, Ind.Code Sec. 23-2-2.5-27, and FTC disclosure rules; Indiana common law; Arkansas common law; and fraudulent concealment and constructive fraud under Arkansas law. The district court found in favor of Hardee's on all counts, and the plaintiffs appeal.

II.

Before we address the plaintiffs' various causes of action, it is useful to consider separately the linchpin of the case. The district court found after the bench trial that the plaintiffs did not actually rely, or were not entitled to rely, on Hardee's alleged misrepresentations when deciding to enter into the Maumelle transaction. The plaintiffs dispute these findings, often indirectly or under the guise of arguments that the district court applied an incorrect legal standard. We will reverse a district court's findings of reliance only if they are clearly erroneous, Rowe v. Maremont Corp., 850 F.2d 1226, 1234 (7th Cir.1988), and, although the plaintiffs point to disputed issues of fact, they have not shown that the district court clearly erred in resolving these disputes.

With respect to the "build one-buy one" policy, the district court found that the plaintiffs had not actually relied upon such a policy when deciding to buy the Maumelle store. In particular, the district court noted that the business plan McNeely and Eubanks submitted to Hardee's did not mention a "build one-buy one" policy, but only requested more information on buying company-owned restaurants. The plaintiff's application for financing from AT & T Commercial Finance also did not reference a "build one-buy one" policy, but only the possibility that the plaintiffs might develop additional sites.

The district court also concluded that, even if the plaintiffs relied on Hardee's statements, such reliance was unreasonable. For the most part, Lee, Mosbacher and Mike Gent (another Hardee's employee) spoke only about the possibility of selling company-owned restaurants, but neither agreed to sell any restaurants nor stated that the company had a definite policy. The district court found that reliance upon Gary Lee's statement that all company-owned restaurants in Arkansas were for sale was unreasonable. Moreover, although the parties dispute this, the district court found that McNeely and Eubanks knew that any purchase of a company-owned restaurant had to be approved by headquarters in Rocky Mount, North Carolina, and that Mosbacher and Lee had no authority to sell a restaurant. The plaintiffs never inquired of Rocky Mount before opening Maumelle, and never asked that the policy of selling company-owned stores be put in writing. Moreover, it would have been particularly unreasonable for McNeely to rely on any of these representations since he had signed a licensing agreement containing an integration clause that McNeely, a lawyer, must have understood. ² The district court properly concluded, "it is simply unreasonable to continue to rely on representations after stating in writing that you are not so relying."

The district court made similar findings with respect to the plaintiffs' claims that they relied on Hardee's representations that the Maumelle store would generate $800,000 sales. The plaintiffs argued that they relied on Lee's review of the pro formas prepared by Eubanks for AT & T, but the district court found that the plaintiffs only relied on Lee's statements that the pro formas looked good enough to submit; they did not take his statement as an assurance that the sales estimates were correct. Moreover, Eubanks prepared his own pro formas...