O'Neal v. Burger Chef Systems, Inc.

• Decision Date: 01 November 1988
• Docket Number: Nos. 88-3284,88-3318,s. 88-3284
• Citation: 860 F.2d 1341
• Parties: Rita C. O'NEAL, Plaintiff-Appellee, Cross-Appellant, v. BURGER CHEF SYSTEMS, INC., and General Foods Corporation, Defendants-Appellants, Cross-Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 1341

860 F.2d 1341

Rita C. O'NEAL, Plaintiff-Appellee, Cross-Appellant, v. BURGER CHEF SYSTEMS, INC., and General Foods Corporation,

Defendants-Appellants, Cross-Appellees.

Nos. 88-3284, 88-3318.

United States Court of Appeals, Sixth Circuit.

Argued Aug. 25, 1988.

Decided Nov. 1, 1988.

William P. Ortale, Ortale, Kelley, Herbert & Crawford, Nashville, Tenn., James E. Reeves, [NTC ret] Ward & Reeves, Caruthersville, Mo., Peter W. Herzog, Jr. (argued), Caruthers, Herzog, Crebs & McGhee, St. Louis, Mo., for Rita C. O'Neal.

John J. Kirby, Jr. (argued), Mudge, Rose, Guthrie, Alexander & Ferdon, New York City, for Burger Chef Systems, Inc. and General Foods Corp.

Before JONES and GUY, Circuit Judges, and HILLMAN, District Judge. ^*

RALPH B. GUY, Jr., Circuit Judge.

Defendants, Burger Chef Systems, Inc., and its former parent company, General Foods Corporation, appeal the jury verdict awarding $175,859.23 in compensatory damages and $100,000.00 in punitive damages to plaintiff, Rita O'Neal, a former Burger Chef franchisee. The award of damages was based on a theory of "wrongful non-disclosure." In her complaint plaintiff alleged that General Foods had reached a firm decision in 1978 to sell Burger Chef Systems, but failed to disclose this decision to the Burger Chef franchisees, including plaintiff. Plaintiff further alleged that she would not have continued to invest money in her restaurants had she known that General Foods was planning to sell the franchise in 1981. The defendants argued that General Foods management did not decide to sell Burger Chef until it was approached by the purchaser, Hardee's Food Systems, Inc., in 1981. Defendants admitted that General Foods periodically considered selling the financially troubled Burger Chef Systems, but defendants maintained that the sale of the system was simply one of several options which were considered during the 1970s and that no firm decision to sell was reached until 1981 shortly before the sale was announced publicly. Therefore, defendants contend that General Foods was not under a duty to disclose the ongoing internal debate over corporate strategy. The district court held, as a matter of law, that if General Foods had reached a "firm decision" to sell Burger Chef by 1978 and failed to disclose its decision to Burger Chef's franchisees, this non-disclosure was actionable. The jury returned a verdict against defendants on this theory. The district court also granted a partial summary judgment to the defendants dismissing plaintiff's contract claims on the ground that such claims were barred by the contractual limitations period set forth in the franchise agreements. Plaintiff has filed a cross-appeal contesting the dismissal of her contract claims.

Because we find that General Foods was not under a duty to disclose its alleged intention to sell Burger Chef Systems, Inc., the jury verdict awarding plaintiff damages for fraudulent non-disclosure must be reversed. With respect to the plaintiff's cross-appeal, we affirm the decision of the district court dismissing her claims as being untimely.

I.

In 1962, plaintiff's husband, Robert Wigger, opened his first Burger Chef restaurant in Nashville, Tennessee. Between 1962 and 1968, Mr. Wigger opened four additional Burger Chef restaurants in Kentucky and Tennessee. ¹ In 1968, defendant General Foods Corporation purchased the Burger Chef franchise for sixteen million dollars and the assumption of fifty-eight million dollars in outstanding liabilities. Plaintiff testified that she and her husband were initially optimistic about the future of the Burger Chef chain after its acquisition by General Foods. By 1971, however, it was clear that the acquisition had been a financial disaster for General Foods. As a result, General Foods closed 460 of the company owned franchises, and wrote off its entire investment in the Burger Chef Systems in an attempt to obtain favorable tax treatment from the Internal Revenue Service.

Despite the financial difficulties faced by the franchisor, Burger Chef, and its parent company, General Foods, Mr. Wigger continued to operate his restaurants as part of the remaining system which included approximately 900 other independently owned Burger Chef restaurants. Plaintiff testified, however, that she and her husband began to notice several problems with the system beginning in 1972, including a shortage of new menu items, a lack of advertising, and insufficient supervision and support from area representatives. The Wiggers also began to experience a decline in their profit margin during this period. Nevertheless, the Wiggers chose to renew their franchise agreements and remain within the Burger Chef system. In 1975, Mr. Wigger died of a heart attack and plaintiff assumed her husband's former role as the owner and operator of the franchises. ² Under plaintiff's management, profits continued to decline and she was forced to sell one of the restaurants in 1979. On June 16, 1979, plaintiff executed a termination agreement with Burger Chef which provided for a waiver of two and one-half months rent by Burger Chef, and a mutual general release of all claims by either party.

In December of 1981, General Foods publicly announced its decision to sell the Burger Chef Systems to Hardee's, and the sale was consummated in March of 1982. According to the terms of the acquisition, Burger Chef franchisees would be allowed to convert their restaurants into Hardee's restaurants, provided they were not located within two miles of an existing Hardee's franchise. If a franchisee could not convert to a Hardee's, or did not wish to do so, they were free to continue operating as part of the Burger Chef franchise. In addition, Hardee's agreed to release the restaurant owners from their franchise agreements thereby allowing them to affiliate with another restaurant chain or to become independent. Plaintiff testified that she did not have the capital required to convert her existing restaurants into Hardee's, so she continued to operate her two remaining restaurants as Burger Chefs. In November of 1982, plaintiff closed another one of her restaurants and again signed another mutual release of claims as part of the termination agreement with Burger Chef. Finally, plaintiff closed her last Burger Chef restaurant in July of 1985. This time, however, she refused to sign the termination agreement which contained a general release of claims against Burger Chef.

On September 25, 1985, Mrs. O'Neal filed the present action in federal district court in Tennessee, and the case was subsequently consolidated as part of the multi-district litigation involving other Burger Chef franchises currently pending before the United States District Court for the Northern District of Ohio. In her complaint, plaintiff alleged a variety of claims against Burger Chef, General Foods, and Hardee's, including breach of contract, wrongful non-disclosure, tortious interference with contract, and unfair competition.

Plaintiff's claim of wrongful non-disclosure was directed primarily at General Foods. As previously noted, plaintiff alleged that General Foods secretly decided to sell its Burger Chef subsidiary several years prior to 1981, but concealed the decision from the Burger Chef franchisees and continued to encourage them to invest in their restaurants. In support of her allegations, plaintiff relied on documentary evidence obtained from General Foods. Plaintiff noted that General Foods had written off its investment in Burger Chef as early as 1971 and had unsuccessfully attempted to sell the system at that time. Plaintiff also cited to an internal memorandum written in 1971 in which a General Foods executive used the metaphor "bear by the tail" to describe the relationship between General Foods and its subsidiary. According to the memorandum, the Burger Chef system was burdened with huge liabilities, but could not be liquidated because of the system's legal obligations to its hundreds of franchisees. A similar memo written in 1983 described the Burger Chef system as "much worse than worthless."

Plaintiff also relied heavily on an internal General Foods memorandum dated August 28, 1978. The document was part of a study designated "Project B" or "Project Beethoven." The document set forth the steps that would have to be taken by General Foods in order to execute any decision to sell the Burger Chef franchise. Plaintiff claims that this document was a "blueprint" for the sale of Burger Chef and was indicative of the general consensus among General Foods executives that the sale of Burger Chef was a foregone conclusion. Plaintiff also relied on a study conducted by the investment banking firm of Goldman, Sachs at the behest of General Foods recommending that General Foods refrain from selling Burger Chef until the "spring of 1981." By that time it was hoped that Burger Chef Systems would be financially stable and more attractive to prospective buyers. All during this period of time, General Foods continued to invest millions of dollars in its Burger Chef subsidiary.

In addition to documentary evidence, which supposedly demonstrated a "firm decision" on the part of General Foods to sell Burger Chef, plaintiff also alleged that General Foods kept this decision from the Burger Chef franchisees while continuing to encourage them to invest more money in their restaurants. For example, plaintiff quotes from an article which appeared in a 1976 issue of the magazine distributed to Burger Chef franchisees. In the article, a General Foods executive stated that the "we/they" attitude was a thing of the past. Plaintiff also places heavy reliance on the theme of the annual Burger Chef conference which was held in Innisbrook, Florida, in January of 1978. The theme for the conference was "Whatever It Takes." In 1980, Burger Chef sponsored a further modernization program which encouraged Burger Chef franchisees, including Mrs. O'Neal, to invest...