Jenkins Subway, Inc. v. Jones

• Decision Date: 18 November 1998
• Citation: 990 S.W.2d 713
• Parties: JENKINS SUBWAY, INC. and Rose Jenkins, Plaintiffs/Appellants, v. Lynn JONES, Defendant/Appellee.
• Court: Tennessee Court of Appeals

Page 713

990 S.W.2d 713

JENKINS SUBWAY, INC. and Rose Jenkins, Plaintiffs/Appellants, v. Lynn JONES, Defendant/Appellee.

Court of Appeals of Tennessee.

Nov. 18, 1998.

Application for Permission to Appeal

Denied by Supreme Court April 19, 1999.

Douglas W. Wilkerson, W. Lewis Jenkins, Jr., Wilkerson Gauldin & Hayes, Dyersburg, Tennessee Attorneys for Plaintiffs/Appellants.

William R. O'Bryan, Jr., C. Dale Allen, Ryan A. Kurtz, Trabue, Sturdivant & Dewitt, Nashville, Tennessee Attorneys for Defendant/Appellee.

FARMER, J.

Plaintiffs Jenkins Subway, Inc., and Rose Jenkins appeal the trial court's final judgment dismissing their claims for breach of contract and breach of fiduciary duty against Defendant/Appellee Lynn Jones. The trial court's judgment in favor of Jones was based primarily on the court's ruling that, even if the subject contracts survived the December 1993 death of Rose Jenkins' husband, Ed Jenkins, Rose Jenkins and Jenkins Subway effectively waived or were estopped from asserting their rights under the contracts. We conclude that this ruling was in error, and, thus, we reverse the trial court's judgment and remand for further proceedings.

I. Factual and Procedural History

In November 1991 Ed Jenkins and Lynn Jones entered into an agreement for the acquisition and management of a Subway sandwich shop franchise located in the Lynnwood shopping center in Jackson, Tennessee. In the event their franchise application was successful, the agreement required Ed Jenkins to finance the acquisition of the franchise's assets and the operation of the franchise by guaranteeing and furnishing the collateral for a $160,000 note. The $160,000 note represented the $150,000 purchase price for the assets plus $10,000 in working capital for the franchise. In exchange, Jones agreed to attend any training sessions required by the Subway franchisor and to manage the franchise's business. Following their acquisition of the franchise and assets, the agreement required the parties to transfer the assets to a newly-formed corporation. The agreement gave Jones the right to serve as an officer and director in the corporation. Under the terms of the agreement, all of the corporate stock initially would be owned by Ed Jenkins. Once the $160,000 note was paid in full and Ed Jenkins was released from his guaranty, the agreement required him to transfer twenty-five percent (25%) of the corporation's stock to Jones. In the event that Jones ceased to manage the Subway franchise prior to the note being paid, Jones would forfeit any interest in the corporation's stock and assets.

In accordance with the 1991 agreement, Ed Jenkins formed a new corporation called Jenkins Subway, Inc. Thereafter, the Lynnwood Subway franchise's assets were transferred to the corporation, and Lynn Jones became the corporation's vice president. In 1992, Ed Jenkins and Jones acquired another Subway franchise in Camden, Tennessee. Because Ed Jenkins contemplated the acquisition of additional franchises, Ed Jenkins and Lynn Jones executed a second agreement in August 1993. The 1993 agreement recited that Subway had changed its requirements for franchisees by requiring that all named franchisees attend Subway's training school. Inasmuch as Ed Jenkins did not wish to attend the training school, and inasmuch as Jones had attended and successfully completed the training school, the parties agreed that any franchises acquired by Ed Jenkins after the date of the agreement would be acquired in the name of Jones, although the funding for same would be provided by Ed Jenkins. To this end, the 1993 agreement provided that:

1. From and after the effective date of this Agreement and for so long as Subway requires its franchisees to attend its training school, any franchises acquired by Jenkins shall be in the name of Jones. Although the franchise will show Jones as the franchisee, it is the understanding and agreement of the parties that Jenkins shall be the real party in interest, and Jones shall if requested by Jenkins execute such documents as may be necessary to vest ownership of said franchise in Jenkins.

2. If at a future time the Corporation may be the franchisee of the franchises acquired in the name of Jones from and after the date of this Agreement, then Jones shall execute such documents as may be necessary to transfer said franchises to Corporation.

3. Jones agrees to continue to manage the various Subway franchises owned by Jenkins, including those acquired in Jones' name subsequent to the execution of this Agreement, under and pursuant to that Agreement between the parties dated the [17th] day of November, 1991, under which, among other things, Jones will acquire twenty-five percent (25%) of the stock of Corporation upon the repayment of those obligations made or guaranteed by Jenkins.

This Agreement shall be binding upon the parties, their heirs and assigns.

In accordance with their 1993 agreement, Ed Jenkins and Lynn Jones acquired two additional Subway franchises, one in McKenzie, Tennessee, and another in Huntingdon, Tennessee. In December 1993, however, Ed Jenkins died unexpectedly. Ed Jenkins' widow, Plaintiff Rose Jenkins, inherited his assets, including his Subway franchises and all of the stock of Jenkins Subway, Inc.

In early 1994, Lynn Jones was offered the opportunity to participate in a partnership which would own and operate a new Subway franchise located in the Jackson-Madison County General Hospital. Jones already knew the other partners, who included Mark and Nancy Bradford and Cheri Childress, because they also owned Subway franchises in various cities. Initially, the other partners merely offered Jones two percent (2%) of the new franchise's profits. ¹ Jones responded by stating that, out of respect for Ed Jenkins, he believed he should discuss the proposal with Rose Jenkins. When they subsequently discussed the proposal, Rose Jenkins asked Jones if they should get more than the two percent offered, and she indicated that they should "look into it" further.

After further negotiations, the Bradfords and Cheri Childress proposed that they form a partnership with Lynn Jones to own and operate the hospital Subway franchise. The Bradfords and Childress proposed that Jones would own fifty percent (50%) of the new partnership, but they made clear that they did not want Rose Jenkins to be a partner because they did not know her. After Jones discussed this proposal with Rose Jenkins, she agreed that Jones should participate in the hospital Subway franchise as a 50% partner. Jones suggested that, if the hospital Subway franchise was profitable, at some future date he might be able to reduce his salary from Jenkins Subway and instead support himself with the income from the hospital Subway franchise. Jones and Rose Jenkins agreed that such an arrangement would be beneficial for Jenkins Subway.

In July 1994 Lynn Jones and the other partners signed an agreement whereby they formed a partnership called Health Ventures. The stated purpose of the partnership was to acquire, develop, and operate a Subway franchised facility in space to be leased from the Jackson-Madison County General Hospital. Paragraph 9.1 of the partnership agreement prohibited any of the partners from assigning, selling, transferring, hypothecating, conveying, mortgaging, or otherwise encumbering "his or her respective interest in the Partnership without the prior express consent of the other Partners."

Lynn Jones' participation in the partnership required an initial investment of almost $30,000, including $1250 for the franchise fee, $1700 for the first month's rent, and $25,000 for operational expenses. As Ed Jenkins had done in acquiring past Subway franchises, Rose Jenkins provided the investment funds by obtaining a $30,000 loan from Volunteer Bank. As collateral for the loan, Rose Jenkins pledged 1500 shares of Wal-Mart stock.

The hospital Subway store opened in October 1994. The new franchise quickly became so profitable that, by the end of March 1995, Health Ventures had earned enough income to repay most of Rose Jenkins' $30,000 loan from Volunteer Bank. Around May 1995, Lynn Jones began reducing the salary he received from Jenkins Subway. In lieu of his salary, Jones began receiving income from the hospital Subway franchise's profits. By 1996, Jones no longer was drawing any salary from Jenkins Subway. During this time, Jones provided Rose Jenkins with monthly balance sheets and income statements for Health Ventures' hospital Subway franchise; however, Health Ventures did not pay any income to Rose Jenkins other than the funds used to repay her loan with Volunteer Bank.

Although the sequence of events is not entirely clear, the relationship between the parties quickly deteriorated in the spring of 1996. The last balance sheet and income statement Rose Jenkins received from Lynn Jones were dated April 30, 1996. In May 1996, Rose Jenkins hired Travis Davidson, a certified public accountant, to assume control of Jenkins Subway's financial affairs because the corporation was losing money and she was dissatisfied with Jones' explanation for the corporation's losses. Rose Jenkins did not inform Jones that she had hired Travis Davidson until after the fact.

During the spring of 1996, Rose Jenkins also asked her attorney, Collins Bonds, to draft a memorandum of understanding for Lynn Jones' signature acknowledging Jenkins Subway's interest in the Health Ventures partnership. As drafted, the memorandum of understanding required Jones to acknowledge (1) that Jenkins Subway furnished the funding for the initial capital contribution made by Jones to the Health Ventures partnership, (2) that Jenkins Subway was the true owner of Jones' 50% interest in the partnership, (3) that Jones held his interest in the partnership in trust for the corporation, (4) that Jones' interest in the partnership was a corporate asset, and (5) that the parties reaffirmed their previous...