RCS Capital Dev., LLC v. A.B.C. Developmental Learning Ctrs., Inc.

• Court: Arizona Court of Appeals
• Writing for the Court: ANDREW W. GOULD
• Decision Date: 12 June 2012
• Docket Number: 1 CA-CV 11-0363
• Citation: RCS Capital Dev., LLC v. A.B.C. Developmental Learning Ctrs., Inc., 1 CA-CV 11-0363 (Ariz. App. Jun 12, 2012)
• Parties: RCS CAPITAL DEVELOPMENT, LLC, an Arizona limited liability company, Plaintiff/Appellee/ Cross-Appellant, v. A.B.C. DEVELOPMENTAL LEARNING CENTERS (U.S.A.), INC., a Delaware corporation; ABC LEARNING CENTRES LIMITED, an Australian corporation, Defendants/Appellants/ Cross-Appellees.

RCS CAPITAL DEVELOPMENT, LLC an Arizona limited liability company, Plaintiff/Appellee/ Cross-Appellant, v. A.B.C. DEVELOPMENTAL LEARNING CENTERS (U.S.A.), INC. a Delaware corporation; ABC LEARNING CENTRES LIMITED an Australian corporation, Defendants/Appellants/ Cross-Appellees.

1 CA-CV 11-0363

COURT OF APPEALS STATE OF ARIZONA DIVISION ONE DEPARTMENT A

Dated: June 12, 2012

NOTICE: THIS DECISION DOES NOT CREATE LEGAL PRECEDENT AND MAY NOT BE CITED

EXCEPT AS AUTHORIZED BY APPLICABLE RULES.

See Ariz. R. Supreme Court 111(c); ARCAP 28(c);

Ariz. R. Crim. P. 31.24

MEMORANDUM DECISION

(Not for Publication -

Rule 28, Arizona Rules of

Civil Appellate Procedure)

Appeal from the Superior Court in Maricopa County

Cause No. CV2008-026273

The Honorable Larry Grant

AFFIRMED IN PART; VACATED IN PART

Baird Williams & Greer LLP

By Craig M. LaChance

Phoenix

And

Noel Fidel, Attorney at Law

By Noel Fidel

Attorneys for Plaintiff/Appellee-Cross Appellant

Phoenix

Ryley Carlock & Applewhite

By David W. Kash

Julie E. Maurer

Attorneys for Defendants/Appellants/Cross-Appellees

Phoenix

GOULD, Judge

¶1 A.B.C. Developmental Learning Centers (USA) and ABC Learning Centers Limited (collectively "ABC") appeal from a jury verdict awarding RCS Capital Development ("RCS") over $47 million in damages for a breach of contract. ABC also appeals the award of attorneys' fees and costs to RCS. RCS cross-appeals the denial of pre-judgment interest on the verdict. For the reasons stated below, we affirm the verdict in favor of RCS and the denial of prejudgment interest. We vacate the enhancement fee portion of the attorneys' fees award.

FACTUAL AND PROCEDURAL BACKGROUND

¶2 ABC is an international child care company that owns and franchises Tutor Time child care centers. RCS, through its principals, siblings Rick and Cheryl Sodja, develop and operate child care centers. The Sodjas developed and operated Tutor Time Centers in Arizona. Edmond Groves, ABC's former C.E.O., met with Rick Sodja to discuss expanding ABC's operations in the United States.

¶3 The parties began negotiations that resulted in an Exclusive Development Agreement ("EDA"). Under the EDA, RCS was obligated to develop and operate child care centers at sites approved by ABC. Once a center reached "target utilization," asdefined in the EDA, or had been operating for two years, ABC was required to purchase the center from RCS at a price specified in the EDA. The purchase price was based upon "Final Three Year Plans" RCS submitted to ABC during the approval process.

¶4 At the time the EDA was signed, there were 31 sites ("Pipeline Sites") in Arizona that RCS had already begun developing. These sites were deemed pre-approved. ABC's accountants prepared a three-year pro forma for these Pipeline Sites. A pro forma is an estimate of future operating profits based on occupancy rates, fees, and expenses.

¶5 The EDA also required ABC to make a $7 million earnest money deposit by September 3, 2008. RCS was to apply this money toward the purchase price of the last five Pipeline Sites. The EDA provided an alternative in the event RCS failed to apply the earnest money deposit to the last five Pipeline sites: ABC was entitled to set-off the deposit against the purchase price. ABC belatedly paid only $2 million of the earnest money deposit.

¶6 As part of the EDA, ABC granted RCS a license to use the Tutor Time brand on its centers. The license allowed RCS to sublicense use of the Tutor Time brand to an "affiliate." These terms were contained in a Trademark, Service Mark and System Sublicense Agreement (the "Sublicense"). The Sodjas operate another company, PDG America, which owns and develops shoppingcenters. PDG America's site plans and some marketing materials included the Tutor Time logo to indicate the location of Tutor Time centers in PDG America shopping centers. ABC claimed this violated the sublicense terms because PDG America is not an "affiliate" as defined in the EDA. ABC notified RCS of this alleged violation in March 2009, and RCS immediately removed all Tutor Time logos from PDG America materials.

¶7 Pursuant to the EDA, if a party was provided written notice of a default in their contractual obligations, and then failed to cure the default within a prescribed period of time after delivery of the written notice, the non-defaulting party could terminate the contract and sue for breach. On October 1, 2008, RCS sent ABC formal notice of default for failure to pay the $7 million earnest money deposit. RCS sent a second notice of default on October 10, 2008 for ABC's failure to accept site review books and to hold site review meetings to approve non-Pipeline Sites. After the time to cure the earnest money default passed without payment from ABC, RCS filed this action.

¶8 At trial, RCS claimed lost profits of approximately $82 million for 25 Pipeline Sites. RCS was operating six Pipeline Sites under its new brand, Children's Learning Adventure, and so did not include these sites in their claim for lost profits.

¶9 The jury returned a verdict for $47,031,574. The judge denied RCS' request for prejudgment interest, finding the verdict was not liquidated. The court awarded RCS $2,126,786.29 in attorneys' fees and $7,270.17 in costs. The attorneys' fee award included a $1,640,000 "enhancement fee" in addition to the hourly fees. The court rejected ABC's objections to the fees and costs and later denied ABC's motion for new trial. ABC filed a timely notice of appeal from the verdict and denial of its motion for new trial. RCS cross-appealed from the denial of prejudgment interest. This court has jurisdiction under Arizona Revised Statutes ("A.R.S.") section 12-2101(A)(1), (5)(a) (Supp. 2011).

DISCUSSION

I. Breach of Contract

¶10 ABC challenges the jury's implicit conclusion that RCS did not breach the EDA. The jury was instructed that it could not award damages to RCS if it found that RCS did not perform its obligations under the EDA. The question of whether a contract has been breached is ordinarily a question for the jury. Matson v. Bradbury, 40 Ariz. 140, 144, 10 P.2d 376, 378 (1932). In determining whether there is sufficient evidence to support the jury's verdict, the appellate court resolves every conflict in the evidence and draws every reasonable inference infavor of the prevailing party. St. Joseph's Hosp. & Med. Ctr. v. Reserve Life Ins. Co., 154 Ariz. 307, 312, 742 P.2d 808, 813 (1987). "[I]f there is any substantial evidence from which reasonable men could have found ultimate facts to be such as will sustain the verdict, the judgment will be affirmed." Id.

A. Personal Guaranty From Sodja

¶11 ABC argued that RCS breached the EDA in three respects. First, ABC argues that the jury ignored RCS' failure to provide a separate personal written guaranty from Rick Sodja. ABC relies on the following provision in section 9.4 of the EDA: "Concurrently with the execution of this Agreement, Rick Sodja agrees to guarantee Developer's performance of its obligations under this Section 9.4, on terms acceptable to ABC, acting reasonably." No separate guaranty form relating to this provision is attached to the EDA.

¶12 "When interpreting a contract, . . . it is fundamental that a court attempt to 'ascertain and give effect to the intention of the parties at the time the contract was made if at all possible.'" Taylor v. State Farm Mut. Auto. Ins. Co., 175 Ariz. 148, 153, 854 P.2d 1134, 1139 (1993) (quoting Polk v. Koerner, 111 Ariz. 493, 495, 533 P.2d 660, 662 (1975)). The EDA does not clearly state when or how Sodja was supposed to provide a personal guaranty "on terms acceptable to ABC." The meaningof this provision is further confused by the fact the EDA did not include a separate guaranty form for this provision, whereas two other provisions of the EDA requiring personal guarantees did include separate forms appended to the EDA. See EDA § 3.4/Exhibit G & § 3.5/Exhibit K.

¶13 However, even if the EDA required Sodja to execute a separate written guaranty, the evidence supports the jury's implicit conclusion that either: (1) Sodja/RCS did not breach the EDA by failing to sign a separate guaranty form, or (2) the failure to provide such a guaranty was not a material breach. ABC's conduct certainly suggests that it did not believe that Sodja's failure to provide the guaranty was a material breach. See Dev. Found. Corp. v. Loehmann's, Inc., 163 Ariz. 438, 446-47, 788 P.2d 1189, 1197-98 (1990)(whether a breach is material is a question for a jury). ABC never asked Sodja to provide a guaranty at the time the parties executed the EDA on June 26, 2008, nor did ABC mention the guaranty when it submitted its $2 million earnest money payment on September 11, 2008. In fact, ABC never sent any written notice of default concerning the guaranty to RCS until June 24, 2009 - a year after the contract was executed, and eight months after RCS filed its complaint. See EDA, § 12.1(c)(providing that for purposes of the EDA, a party "shall be deemed to be in default" if the party breaches amaterial provision of the agreement "and fails to rectify the breach within thirty (30) days after delivery of written notice thereof, or such longer period of time as is agreed between the parties.").

B. Sublicense Agreement

¶14 ABC also contends that RCS breached the Sublicense Agreement prior to any alleged breach by ABC. ABC argues that RCS violated the Sublicense when PDG America placed the Tutor Time logo on site plans and marketing materials for shopping centers in which Tutor Time centers were located. ABC also argues that RCS used the Tutor Time logo on signs that directed calls to the Sodjas' competing business, Children's Learning Adventure.

¶15 RCS contends the logos were on PDG America materials prior to the EDA being signed, and that ABC was aware of this when it was negotiating the EDA. Despite this knowledge, ABC executed the EDA and did not object until several months after RCS had filed suit. Once ABC notified RCS about its...