Karns v. Jalapeno Tree Holdings, L. L.C.

• Citation: 459 S.W.3d 683
• Decision Date: 20 February 2015
• Docket Number: No. 08–13–00314–CV,08–13–00314–CV
• Parties: Michael D. Karns, Appellant, v. Jalapeno Tree Holdings, L.L.C., Mark S. Parmerlee, and Paul Bambrey, Appellees.
• Court: Court of Appeals of Texas

459 S.W.3d 683

Michael D. Karns, Appellant

v.Jalapeno Tree Holdings, L.L.C., Mark S. Parmerlee, and Paul Bambrey, Appellees.

No. 08–13–00314–CV

Court of Appeals of Texas, El Paso.

February 20, 2015

Stephen F. Malouf, Malouf & Nockels LLP, Dallas, TX, for Appellant.

Martin R. Griffin, Law Offices of Martin R. Griffin, Dallas, TX, for Appellees.

Before McClure, C.J., Rodriguez, and Hughes, JJ.

OPINION

YVONNE T. RODRIGUEZ, Justice

Appellant Michael Karns, owner of the El Fenix chain of Mexican food restaurants in the Dallas–Fort Worth Metroplex, sought to purchase a competing chain of Mexican food restaurants from Appellees Jalapeno Tree Holdings, L.L.C., Mark S. Parmerlee, and Paul Bambrey (collectively “Jalapeno Tree”). Although the parties initially agreed to certain terms outlined in a letter of intent (“LOI”), negotiations stalled and the deal ultimately collapsed. The question here is whether Karns can hold Jalapeno Tree liable for breach of the LOI when the parties' subsequent attempts to reach a final, “definitive” sales agreement failed. Under these facts, the trial court held that Karns cannot. We affirm.¹

BACKGROUND

Factual History

Initial Offers and Preliminary Negotiations

In August 2011, after several months of discussions, two companies made competing offers to purchase the Jalapeno Tree chain of restaurants. The first company was TaMolly's and the second was El Fenix, owned by Karns through Firebird Restaurant Group, L.L.C, a holding company. On August 14, Mark Parmerlee, Jalapeno Tree's owner, sent Karns an e-mail informing him that Jalapeno Tree received two offers from TaMolly's and stating that if Karns wished to move forward with the sale, it was “imperative” that the parties reach an agreement “as soon as possible” at a meeting scheduled for August 15.

The next day, Parmerlee and his team met with Karns, Firebird CFO Brian Livingston, and Firebird general counsel Bob Morrison to discuss terms of the parties' LOI. At the time of the proposed sale, Jalapeno Tree operated sixteen restaurants throughout the Dallas–Fort Worth area. Ten restaurants were located in buildings with long-term leases personally guaranteed by Parmerlee and his associate, Paul Bambrey. Jalapeno Tree owned the remaining six restaurant buildings, which were subject to various liens. The parties discussed numerous terms of sale before executing an LOI (“the August 15th LOI”). The parties revised the August 15th LOI numerous times over the next several days, but ultimately agreed to terms on August 25, executing a new LOI that superseded the previous LOI (“the August 25th LOI” or “the operative LOI”). Neither party disputes that the August 25th LOI is the document that governed this transaction.

The August 25th LOI

The August 25th LOI is broken up into seven sections based on subject matter. Section 1 identified the assets to be sold and their proposed valuation. Jalapeno Tree's assets and operations excluding real estate were estimated to be worth $3.4 million. Jalapeno Tree's real estate holdings were valued at almost $8.75 million. The valuation was based on an understanding “that the assets of at least twelve (12) restaurants and real property (when conveyed) are and will be free and clear of any and all liens and that the real property is otherwise unencumbered except for such encumbrances that are standard for similar properties and which do not adversely affect such valuation.” Jalapeno Tree promised to use “reasonable best efforts to obtain releases of liens on equipment for other four (4) locations[.]”

Section 2 of the LOI established the structure and mechanics of the proposed transaction. Karns agreed to form a shell company that would buy all of Jalapeno Tree's assets except for real estate for $2.4 million in cash and a $1 million promissory note personally guaranteed by Karns. Karns also agreed to retain two Jalapeno Tree executives for one year. The shell corporation would buy the six buildings owned outright by Jalapeno Tree over a scheduled seven-year period in a lease-to-own arrangement. With respect to the remaining locations subject to long-term leases, Karns agreed to assume and personally guaranteed the leases through the shell corporation, provided that Firebird Restaurant Group, L.L.C., could assume his guarantee obligations in the event the L.L.C. continued to perform as well as it did at the time of the LOI. According to Karns, this was a compromise move stemming from Jalapeno Tree's concerns about securing the transaction. Jalapeno Tree initially wanted to retain liens on the six buildings Karns purchased and foreclose on them in the event Karns defaulted on the remainder of the agreement. Karns rejected this proposal and proposed the shell corporation indemnity provision that appears in the August 25 LOI accepted by all parties. The security terms of the loans were vital to Jalapeno Tree and, as discussed below, they would later prove to be grounds for dispute in later negotiations.

Sections 3 and 4 outlined the due diligence procedure leading up to the formal purchase. Jalapeno Tree agreed to furnish financial information and other due diligence information within seven days of a final agreement. Thereafter, Karns would have forty-five days to conduct a due diligence review. Closing would occur within forty-five days after the due diligence period expired, unless the parties agreed to extend that time period. Karns agreed to deposit $150,000 in earnest money with a title company as a show of good faith. If there were “any material adverse change in the Company or its operations[,] or if the information obtained during due diligence shows that the Company and/or its operations and assets are materially different that [sic] what has been represented by Company [sic],” Karns had the right to terminate the LOI and receive a refund of the earnest money deposit. The parties also agreed to maintain confidentiality throughout the process in Section 5.

In Section 6, the parties agreed that they “will use their reasonable good faith efforts to enter into a definitive agreement regarding the transaction on or before the expiration of twenty (20) days from the date this LOI is executed by each party. The definitive agreement will be on commercially reasonable terms and will include such representations, warranties, covenants, indemnities, conditions and post-closing cooperation ... as are customary and usual for transactions of the nature described in this LOI.” Jalapeno Tree, “in consideration of the convents contained herein and the Deposit” of earnest money, agreed to refrain from negotiating or entering into agreements with other buyers unless a definitive agreement could not be reached² “or this LOI is terminated by consent of each party or by default by Buyer in the performance of its obligations hereunder ....” Finally, Section 7 established that “[i]f either party breaches its obligations under and pursuant to this LOI, the other party shall have such remedies as may be available at law or in equity.”

Further Negotiations Stall

Following execution of the August 25th LOI, the parties continued negotiations. On September 9, Jalapeno Tree sent Karns a proposed draft for a definitive agreement. In response, Morrison, Firebird's general counsel, sent Jalapeno Tree an “issues list.” The list contains more than thirty topics, some of which contain multiple sub-topics that Morrison wished to discuss further. At trial, Morrison testified that he believed all the terms outlined in the issues list were significant. Jalapeno Tree representatives agreed to meet Morrison and discuss terms further on September 16. Parmerlee testified that after several hours of discussion, the parties had made progress on several points, but further negotiation was needed to resolve other terms, including the security terms of the loans. During this meeting, Jalapeno Tree provided Morrison with a proposed “security outline,” to which Morrison later provided an itemized response agreeing to certain terms, but not others. Parmerlee continued to express concern about the security terms of the loans, but he and Morrison discussed several alternate options for the security terms. The negotiation period set by the LOI was set to expire on September 20. However, both parties agreed to extend negotiations until September 30.

Following the extension, negotiations continued. On September 28, Morrison proposed a new security agreement which eliminated Karns' prior personal guarantee, but he would now agree to increase the purchase price by $170,000. Parmerlee declined that proposal and testified at trial that he thought the proposed offer would leave him personally liable for $30 million in lease payments in exchange for what was essentially a five-percent down payment which he considered “ridiculous.” Consequently, Parmerlee sent a counter-proposal, testifying that he was beginning to have doubts about the deal. Morrison did not accept Parmerlee's proposal, but instead asked for another extension of the negotiation period. Parmerlee said he was interested in pursuing a deal, but did not want to extend the negotiation period any further.

The September 30 deadline passed without the parties reaching a definitive agreement. On October 3, Jalapeno Tree sent Karns an e-mail stating that it was exercising its power to terminate the LOI under Section 6. Karns then brought this suit.

Procedural History

The parties consented to appointment of a special judge in this matter.³ Following trial, the Special Judge rendered a take-nothing verdict in favor of Jalapeno Tree. In his findings of fact, the Special Judge found that paragraph six of the LOI expressly conditioned the asset sale on the parties negotiating and entering a final agreement within the specified time frame. The Special Judge also found inter alia that the parties did not intend to be bound to the asset sale absent a final agreement, that the asset sale terms were incomplete, that there was no meeting of...