Mister Donut of America, Inc. v. Harris, 1

• Decision Date: 14 November 1985
• Docket Number: No. 1,CA-CIV,1
• Citation: 723 P.2d 696,150 Ariz. 347
• Parties: MISTER DONUT OF AMERICA, INC., a Delaware corporation, Plaintiff Counter- defendant-Appellant, v. Dean HARRIS and Jane Doe Harris, his wife; and Jack Lane and Jane Doe Lane, his wife, Defendants Counter-claimants-Appellees. 7020.
• Court: Arizona Court of Appeals

Page 696

723 P.2d 696

150 Ariz. 347

MISTER DONUT OF AMERICA, INC., a Delaware corporation, Plaintiff Counter- defendant-Appellant, v. Dean HARRIS and Jane Doe Harris, his wife; and Jack Lane and Jane Doe Lane, his wife, Defendants Counter-claimants-Appellees.

No. 1 CA-CIV 7020.

Court of Appeals of Arizona Division 1, Department D.

Nov. 14, 1985.

[150 Ariz. 348] Lewis and Roca by Peter D. Baird, Edward M. Lewis and Patricia Norris Halstead, Phoenix, for plaintiff counter-defendant-appellant.

Toci, Murphy & Beck by Philip E. Toci, Prescott, for defendants counter-claimants-appellees.

OPINION

HAIRE, Judge.

This appeal is from the denial of plaintiff's motion for new trial and from a judgment awarding damages to the defendants on their counterclaim. The action arises out of a franchise agreement pursuant to which the defendants, Dean Harris, Jack Lane and their wives owned and operated a Mister Donut shop in Prescott, Arizona. After some five years of operation under the agreement, Mister Donut sued the defendants (hereinafter Harris) to collect unpaid franchise fees and to enforce a covenant not to compete. Harris denied that the covenant was enforceable and counterclaimed for breach of contract and fraud in its inducement. The jury ruled in favor of Harris on both the contract and fraud claims, but, following instructions, awarded damages on the fraud claim only.

In reviewing this judgment entered on a jury verdict, we must view the evidence in the light most favorable to the defendants as the prevailing party, and must give them the benefit of all reasonable inferences arising from the evidence. McFarlin v. Hall, 127 Ariz. 220, 619 P.2d 729 (1980); Hallmark v. Allied Products Corp., 132 Ariz. 434, 646 P.2d 319 (App.1982).

The defendants are Prescott residents who own or operate several businesses in that area. Mister Donut is a franchiser of Mister Donut Shops. These shops sell donuts, coffee and related food products and utilize certain trademarks, recipes and formulas developed by Mister Donut. Mister Donut is a wholly-owned subsidiary of International Multifoods. The two corporations are housed in the same building and there is a significant degree of communication and interrelation at the management level between the two.

In 1973, International Multifoods sold a flour mix plant to DCA Industries and as part of the agreement International Multifoods was prohibited from selling its baking mix products in Arizona until November 1980. Mister Donut proceeded to sell franchises in Arizona, however, emphasizing the unique quality of its product. It attributed this uniqueness to its use of International Multifoods mixes, despite its knowledge that Arizona franchisees would be unable to obtain International Multifoods products from sources within the state prior to November 1980.

The defendants' interest in a Mister Donut franchise began when Mr. Harris saw an advertisement in a national trade magazine. Upon contacting the company, he was sent a brochure which claimed that the kinds of donuts the company produced could not be purchased in a supermarket or other bakery. The donuts were produced from unique recipes owned by Mister Donut and were made only from the finest products. The brochure stated that the perfection of the donuts was maintained through a stringent system of quality control, and because the donuts tasted better, more were sold.

Russell Johnson, a Mister Donut franchise salesman, met with Harris in Prescott in November 1976. He emphasized the fact that Mister Donut was owned by International Multifoods, which manufactured its unique donut mixes specifically for Mister Donut. He said that the resulting product's superior taste and the wide variety of donuts that could be made with International Multifoods mixes would distinguish a Mister Donut shop from the other bakeries in Prescott. Based upon Johnson's representations, Harris understood that Mister Donut was expanding into Phoenix and Tucson, and thus that International Multifoods would be establishing a distributor in Arizona from which Harris could obtain International Multifoods products when he opened his store.

Harris was told by his district manager in late September 1977, just prior to opening his store, that there were no International Multifood distributors in Arizona and that he could obtain supplies from a company in St. Louis, Missouri. He would have to have them shipped by common carrier or meet the distributor's supply truck in Albuquerque. Harris testified that the district manager did not inform him of the restrictive agreement between International Multifoods and DCA. Instead, Harris was assured that the supply problem was temporary. Over the next three years, Harris was continually assured that Mister Donut was doing everything it could to remedy the supply problems and to set up an International Multifoods distributorship in Arizona.

In April 1980, Harris went to a regional sales meeting in Chicago. He testified that at that meeting he learned for the first time of the restrictive covenant which precluded the establishment of an International Multifoods distributorship in Arizona prior to November 1980. The flour mixes Harris had been able to obtain during the interim were not manufactured by International Multifoods and produced unreliable results. Mister Donut provided no instruction or training in their use, and Harris was forced to experiment, resulting in excessive waste. In addition, the mixes he was able to obtain were the same mixes used by the other bakers in Prescott, so Harris' products were not the unique donuts promised by Mister Donut. After some five years of making donuts, only eleven or twelve months of which proved profitable, he ceased operation in March 1982 and leased the building and equipment to a third party.

Thereafter, Mister Donut commenced this action against Harris for unpaid franchise fees and to enforce a covenant not to compete. As previously stated, the jury found for Harris on his counterclaim for breach of contract and common law fraud. On the fraud claim, compensatory damages of $54,618 and punitive damages of $750,000 were assessed against Mister Donut. The jury also returned a verdict in favor of Harris on Mister Donut's complaint for unpaid franchise fees.

Mister Donut raises several issues on appeal. It argues that Harris' fraud claim was barred by the statute of limitations, that the trial court erred in refusing to force Harris to elect between his contract and fraud claims before sending the case to the jury, that the court erred in admitting testimony by one witness and portions of the deposition of another, and challenges both the amount and award of punitive damages.

Harris contends that Mister Donut waived the right to object to the jury's decision on the statute of limitations because of its failure to move for a directed verdict at the close of evidence. While Harris' contention might be correct under federal law, the Arizona Rules of Civil Procedure do not require such a motion. Singleton v. Valianos, 84 Ariz. 51, 323 P.2d 697 (1958). Mister Donut properly preserved the issue by filing its alternative motion for new trial. Accordingly, we consider first the statute of limitations issue.

Both parties agree that the applicable statute of limitations is the three-year period provided by A.R.S. § 12-543. Pursuant to that statute, the cause of action accrues when the injured party discovers the facts constituting the fraud. The party need not be aware of all the facts relating to the claim, but only of facts which would cause a prudent person to investigate and discover the fraud. Condos v. Felder, 92 Ariz. 366, 377 P.2d 305 (1962); Guerin v. American Smelting & Refining Co., 28 Ariz. 160, 236 P. 684 (1925); Richards v. Powercraft Homes, Inc., 139 Ariz. 264, 678 P.2d 449 (App.1983).

Mister Donut contends that the claim accrued shortly after the franchise opened in October 1977, when Harris admittedly discovered that there were no Arizona distributors of International Multifoods products. Accordingly, Mister Donut argues that the statutory period expired in the fall of 1980 or spring of 1981, well before Harris filed the counterclaim in March 1982, and thus that the jury's verdict was contrary to the evidence.

Harris responds that Mister Donut misrepresented that International Multifoods products would be made available shortly, knowing that the restrictive covenant made this legally impossible. He argues that he did not have knowledge of the facts constituting the fraud until he discovered the existence of the covenant in 1980. We cannot agree.

In a case involving promissory fraud, such as this one, the intent not to perform must be present at the time the promise is made. See Employer's Liability Assurance Corp. v. Lunt, 82 Ariz. 320, 313 P.2d 393 (1957); Berry v. Robotka, 9 Ariz.App. 461, 453 P.2d 972 (1969). Notwithstanding Harris' admitted early knowledge of the falsity of the representations which were made by Mister Donut, Harris contends that his cause of action did not accrue for statute of limitations purposes until he received knowledge in 1980 of the existence of the DCA covenant not to compete. He has not cited any authority, however, supporting this contention. In our opinion promissory fraud falls within the general rule that knowledge of sufficient facts to warrant a diligent investigation of the situation triggers the running of the statute of limitations.

Within a few months after opening the donut shop, Harris had knowledge of the falsity of the representations made by Mister Donut. He knew at that time that there was no Arizona distributor of International Multifoods products. There were no profits of $4,000 to $6,000 per week as predicted; the shop operated at a loss from the beginning. The approved mixes which Harris used as substitutes were not unique, they were being used by several other bakeries in Prescott. Early on, therefore,...