Legacy Acad., Inc. v. Doles-Smith Enters., Inc.

• Decision Date: 09 June 2016
• Docket Number: A16A0175,A16A0174
• Parties: Legacy Academy, Inc. et al. v. Doles–Smith Enterprises, Inc. et al.; and vice versa.
• Court: Georgia Court of Appeals

337 Ga.App. 575
789 S.E.2d 194

Legacy Academy, Inc. et al.
v.
Doles–Smith Enterprises, Inc. et al.; and vice versa.

A16A0174
A16A0175

Court of Appeals of Georgia.

June 9, 2016
Reconsideration Denied June 28, 2016

Gregory, Doyle, Calhoun & Rogers, Charles L. Bachman, Jr., Marietta, for appellants.

Ichter Kresky & Associates, Cary Ichter, William D. Davis, for appellees.

Barnes, Presiding Judge.

337 Ga.App. 575

These companion appeals from a jury verdict arise out of a dispute between a franchisor of daycare businesses and its franchisee. The franchisor was Legacy Academy, Inc., (“Legacy”) owned by Melissa and Franklin Turner (collectively, the “Legacy Parties”). The franchisee was originally GMI Smith, LLC, and later Doles–Smith Enterprises, Inc., both of which were owned by Michele Doles–Smith and Gary Smith (collectively, the “DSE Parties”). Alleging that false and misleading information had been provided to them when they entered into the franchise agreement, the DSE Parties sued the Legacy Parties and asserted multiple claims, including claims for negligent misrepresentation and negligence under OCGA § 51–1–6

789 S.E.2d 197

for the breach of duties imposed by federal franchise regulations. The Legacy Parties answered, denying liability, and Legacy asserted counterclaims for lost royalties, lost advertising fees, and attorney fees.

Following a trial, the jury returned a verdict in favor of the DSE Parties on their claims for negligent misrepresentation and negligence and in favor of Legacy on its counterclaims for lost royalties and lost advertising fees. The jury returned a verdict in favor of the DSE Parties on Legacy's counterclaim for attorney fees. The parties now appeal from the final judgment entered on the jury verdict, challenging the trial court's rulings on their motions for directed verdict and judgment notwithstanding the verdict (“j.n.o.v.”) made during the course of the proceedings.

In Case No. A16A0174, the Legacy Parties contend that the trial court erred in denying their motions for directed verdict and j.n.o.v. on

337 Ga.App. 576

the DSE Parties' claims for negligent misrepresentation and negligence under OCGA § 51–1–6. Additionally, Legacy contends that the trial court erred in denying its motion for directed verdict on its counterclaim for attorney fees. As explained below, because the DSE Parties failed to prove that they suffered any out-of-pocket economic damages as a result of the alleged misrepresentations, the trial court erred in denying the Legacy Parties' motions for directed verdict and j.n.o.v. on the DSE Parties' claims for negligent misrepresentation and negligence. In contrast, the trial court committed no error in denying Legacy's motion for directed verdict on its counterclaim for attorney fees.

In Case No. A16A0175, the DSE Parties cross-appeal from the judgment, contending that the trial court erred in denying their motions for directed verdict and j.n.o.v. on Legacy's counterclaims for lost royalties and lost advertising fees. For the reasons discussed below, the trial court committed no error in denying the DSE Parties' motions for directed verdict and j.n.o.v. on these counterclaims.

“On appeal from the denial of a motion for a directed verdict or for j.n.o.v., we construe the evidence in the light most favorable to the party opposing the motion, and the standard of review is whether there is any evidence to support the jury's verdict.” (Citation and punctuation omitted.) Redmon v. Daniel , 335 Ga.App. 159, 160, 779 S.E.2d 778 (2015). So viewed, the evidence shows that in 2006, the Smiths spoke with several potential franchisors, including Legacy, about purchasing a daycare center franchise to operate in South Fulton County. As part of those discussions, the Turners, who owned and operated Legacy, provided the Smiths with a Franchise Offering Circular (the “Offering Circular”) for prospective Legacy daycare franchisees in September 2006. Among other things, the Offering Circular contained disclosures about the litigation history of Legacy and a “Three Year Pro–Forma Statement of Cash Flows” that included projections of potential gross revenues and net profits for a Legacy daycare franchise in its first three years of operation.

After reviewing the Offering Circular, the Smiths decided to purchase a Legacy daycare franchise and formed GMI Smith, LLC (“GMI”) for that purpose. On November 6, 2006, GMI entered into a franchise agreement with Legacy that incorporated the representations made in the Offering Circular. Under the terms of the franchise agreement, GMI paid an initial franchise fee of $40,000 to Legacy. GMI also agreed to pay Legacy five percent of its gross monthly revenue as royalty fees and one percent of its gross monthly revenue as advertising fees over the term of the franchise agreement, which was twenty-five years with the possibility of renewal. Pursuant to the

337 Ga.App. 577

franchise agreement, the Smiths personally guaranteed the prompt payment and performance of GMI's financial obligations to Legacy.

There were no existing Legacy daycare franchises in Fulton County, and the franchise agreement provided that the construction and development of GMI's daycare center would be performed by Legacy's affiliate owned by Mr. Turner, Commercial Contractors Enterprises, Inc. To that end, GMI agreed to pay $2,650,000 to Commercial Contractors for the purchase of the land for the daycare center and its construction and furnishing with equipment. The construction

789 S.E.2d 198

agreement was financed with two bank loans. The Smiths also incurred an additional $200,000 in personal loan obligations on their home and other family property to pay the interest on the two bank loans until the daycare center became operational.

The daycare center opened for business in June 2008. By that time, the franchise agreement had been amended to substitute a second company formed by the Smiths, Doles–Smith Enterprises, Inc. (“DSE”), as the franchisee. GMI continued to own the land where the daycare center was located, while DSE took over the operations of the daycare business. DSE struggled financially in its daycare operations and suffered net losses in 2009, 2010, and 2011. As a result of its financial troubles, DSE stopped paying Legacy monthly royalties and advertising fees after March 2011.

In late 2011 and early 2012, the Smiths learned of problems between Legacy and its other franchisees and became concerned that the Offering Circular had contained inaccurate information. Ultimately, in August 2012, DSE sent a letter to Legacy stating that DSE was terminating the parties' franchise relationship upon discovering false and misleading information in the Offering Circular. DSE removed all indicia of Legacy affiliation from the daycare center and continued its daycare operations under a different name. After terminating its relationship with Legacy and changing its director and curriculum, DSE made a net profit in 2012.

Contending that false information had been provided to them when they entered into the franchise agreement, the DSE Parties filed this lawsuit against the Legacy Parties.¹ In their complaint, as amended, the DSE Parties alleged that the representations in the Offering Circular about Legacy's litigation history and the projected cash flow of its franchises were materially false and misleading and violated the Federal Trade Commission's “Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity

337 Ga.App. 578

Ventures Rule,” 16 CFR § 436.1 et seq. (the “FTC Franchise Rule”), which had been in effect when the franchise agreement was signed in November 2006.² Based on the alleged misrepresentations in the Offering Circular, the DSE Parties asserted, among other things, claims for negligent misrepresentation and for negligence under OCGA § 51–1–6 for the breach of duties imposed by the FTC Franchise Rule. The DSE Parties also asserted a claim for rescission but later withdrew it.

The Legacy Parties answered, denying liability for any alleged misrepresentations. Additionally, Legacy asserted counterclaims against DSE and the Smiths for breach of the franchise agreement, seeking recovery of lost royalties and advertising fees, and for attorney fees.

A jury trial was conducted on the parties' claims and counterclaims over several days in February 2015. After hearing all of the evidence, the jury found in favor of the DSE Parties on their claims for negligent misrepresentation (awarding $350,000 in damages) and negligence under OCGA § 51–1–6 (awarding $40,000 in damages). The jury found in favor of Legacy on its breach-of-contract counterclaim for lost royalties and lost advertising fees (awarding $46,300 in damages). The jury declined to award attorney fees to Legacy. The trial court entered final judgment on the jury's verdict, resulting in these appeals in which the parties challenge the trial court's denial of their motions for directed verdict and j.n.o.v. on their various claims and counterclaims.

Case No. A16A0174 ...