Walker v. KFC Corp.

• Decision Date: 22 February 1984
• Docket Number: Nos. 81-5600,81-5639,s. 81-5600
• Citation: 728 F.2d 1215
• Parties: William O. WALKER and Z of San Diego, Ltd., Appellants and Cross-Appellees v. KFC CORPORATION and Heublein, Inc., Appellees and Cross-Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1215

728 F.2d 1215

William O. WALKER and Z of San Diego, Ltd., Appellants and Cross-Appellees v. KFC CORPORATION and Heublein, Inc., Appellees and Cross-Appellants.

Nos. 81-5600, 81-5639.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Dec. 10, 1982.

Decided Feb. 22, 1984.

Robert E. Currie, Jon D. Anderson, Latham & Watkins, Newport Beach, Cal., Donald McGrath, II, Sullivan, Delafield, McGrath & McDonald, San Diego, Cal., for appellants and cross-appellees.

Stanley H. Williams, P.C., John Sobieski, P.C., Peter O. Israel, P.C. Margot A. Metzner, Hufstedler, Miller, Carlson & Beardsley, Los Angeles, Cal., Gerald L. McMahon, Seltzer, Caplan, Wilkins & McMahon, San Diego, Cal., for appellees and cross-appellants.

Appeal from the United States District Court for the Southern District of California.

Before TANG and NORRIS, Circuit Judges, and EAST, ^* District Judge.

NORRIS, Circuit Judge:

KFC Corporation ("KFC"), a subsidiary of Heublein, Inc., is known principally for its franchised "Kentucky Fried Chicken" chain of fast-food restaurants. It also franchises Zantigo Mexican-American restaurants. In 1976, KFC entered into franchise agreements designating a limited partnership, Z of San Diego ("Z"), as Zantigo restaurant franchisee for the San Diego area. William O. Walker is the principal shareholder of the corporation that acts as general partner of Z.

This litigation is the result of disputes relating to the franchise agreements. At trial, the jury awarded Z and Walker damages in the amount of $1,214,989 on theories of promissory estoppel and fraudulent concealment. The jury found in favor of KFC on its counterclaim against Walker and Z for trade debts in the amount of $117,778.19 incurred for franchise fees and restaurant equipment and supplies. Both sides appeal. We affirm the judgment against Walker and Z on KFC's counterclaim for trade debts, but reverse the judgment awarding damages to Z on its promissory estoppel and fraud claims.

I KFC's Counterclaim

Walker and Z, the plaintiffs below, appeal the judgment against them on KFC's counterclaim for trade debts on the ground that the district court erred in refusing to admit evidence showing that they were released from a substantial part of their liability for trade debts under the doctrines of novation and release of sureties. Their offer of proof related to the sale by Z of two Zantigo restaurants to Malcolm Elliott. The sale was effected by a "Transfer of Interest Agreement" (the Agreement) to which KFC was a party. Walker and Z claim that the Agreement constituted a novation because KFC knowingly substituted Elliott as trade debtor, thereby intentionally releasing Walker and Z from their obligations.

We agree with the district court that the evidence proffered by plaintiffs was inadmissible on the issue of novation. A novation occurs when a creditor substitutes a new debtor in place of the original debtor with the intent to release the latter from the obligation. Combs v. Jameson, 236 Ky. 733, 33 S.W.2d 686 (1930); Kushner v. Knopf, 227 Ky. 369, 13 S.W.2d 271 (1929). ¹ Although the Agreement provided that Elliott assumed Z's obligations to KFC, it also expressly provided that Z and Elliott "jointly and severally promise[d]" to pay these obligations. The Agreement thus showed a clear intent to add Elliott as a new obligor, but not to release Z as the original obligor. As the court stated in National Bank of Lima v. Deaton, 279 Ky. 606, 609, 131 S.W.2d 495, 497 (1939),

[i]n order to constitute a novation such as will release an obligation, it is necessary that there be a new contract which, by agreement of the parties, extinguishes the existing contract or obligation, and to this end, it must appear that the creditor unconditionally released the original obligor and accepted the third person in his stead.

Plaintiffs argue that notwithstanding the unambiguous language of the written Agreement, the jury could have inferred from the circumstances of the transaction and the conduct of the parties thereafter that KFC intended to release Z from liability for the trade debts. Acknowledging that such an intent must be shown to prove a novation, they cite as extrinsic evidence of that intent the fact that KFC accepted new promissory notes from Elliott and granted him an extension of time to repay the debts. While it is true that the creditor's intent to release the original debtor may be inferred from circumstantial evidence, Combs v. Jameson, 33 S.W.2d at 687; Kushner v. Knopf, 13 S.W.2d at 272, we agree with the district court that here the Agreement unambiguously provided that Z continued to be a debtor. In such a case, extrinsic evidence of the intent of the parties is inadmissible under Kentucky's parol evidence rule. O.P. Link Handle Co. v. Wright, 429 S.W.2d 842, 847 (Ky.1968); G.T. O'Bryan v. Massey-Ferguson, Inc., 413 S.W.2d 891, 893 (Ky.1966).

Even had the written agreement been ambiguous, it would not have been prejudicial error for the trial court to exclude the proffered evidence of the new promissory notes executed by Elliott and of KFC's agreement to alter the method and timing of payment because this evidence is insufficiently probative of KFC's intent to release Z as an obligor. Absent other evidence of intent, "the taking of a note from one who has assumed the debt is not a novation releasing the old debtor ...." Truscon Steel Co. v. Thirlwell Electric Co., 265 Ky. 414, 418, 96 S.W.2d 1023, 1026 (1936). Nor does a reasonable extension of time, standing alone, evince an intent to release a joint obligor. Robert Simmons Construction Co. v. Powers Regulator Co., 390 S.W.2d 901, 904 (Ky.1965).

The district court also correctly ruled that plaintiffs could not introduce evidence purporting to show they were released from liability as sureties when KFC consolidated Elliott's obligations and extended his time for payment. Neither Walker nor Z ever became sureties for Elliott. Under the express terms of the Agreement, Z remained jointly and severally liable with Elliott to KFC. Walker was a surety for Z, not for Elliott. He "unconditionally" guaranteed Z's obligations under the equipment purchase agreement and remained as a surety for Z under the Elliott Agreement. Walker explicitly agreed that even if Z and KFC changed the method or timing of payment of Z's debts, he would "remain bound" as a surety for Z until all its obligations were satisfied. That, however, does not make him a surety of Elliott.

We affirm the judgment against Walker and Z on KFC's counterclaim.

II Promissory Estoppel

The jury found that KFC did not breach its contract in any way, but also found KFC liable on promissory estoppel. KFC argues in appealing the denial of its motion for judgment n.o.v. that the doctrine of promissory estoppel is inapplicable as a matter of law because all the promises made by KFC were bargained for and supported by consideration. ²

In challenging the promissory estoppel verdict, KFC relies on Youngman v. Nevada Irrigation Dist., 70 Cal.2d 240, 449 P.2d 462, 74 Cal.Rptr. 398 (1969), and Healy v. Brewster, 59 Cal.2d 455, 380 P.2d 817, 30 Cal.Rptr. 129 (1963), as stating applicable California law on the issue. In Youngman, the California Supreme Court stated that

[t]he purpose of [the doctrine of promissory estoppel] is to make a promise binding, under certain circumstances, without consideration in the usual sense of something bargained for and given in exchange. If the promisee's performance was requested at the time the promisor made his promise and that performance was bargained for, the doctrine is inapplicable.

Healy v. Brewster, (1963) 59 Cal.2d 455, 463 [380 P.2d 817, 30 Cal.Rptr. 129] ... explained: "Under such circumstances, the only reliance which can make the promisor's failure to perform actionable is the promisee's doing what was requested. If that reliance was detrimental, it would constitute consideration. If it was not detrimental, it would not constitute consideration; and since detrimental reliance is an essential feature of promissory estoppel, that doctrine could not be invoked to make the promisor liable.... In other words, when the promisee's reliance was bargained for, the law of consideration applies; and it is only where the reliance was unbargained for that there is room for application of the doctrine of promissory estoppel.

Youngman v. Nevada Irrigation District, 70 Cal.2d at 249-250, 449 P.2d 462, 74 Cal.Rptr. 398 (citations omitted).

Plaintiffs concede that "promissory estoppel is an additional method developed by the courts to enforce promises that do not meet the consideration requirement of a contract. If bargained for consideration exists, then the promises can be enforced as part of a contract and promissory estoppel is unnecessary." Appellants' and Cross-Appellees' Reply and Answering Brief at 9 (emphasis in original). They argue, however, that KFC made promises outside the written contracts which were not supported by bargained for consideration and therefore could have formed the basis for the jury's finding that plaintiffs have proved all the elements required to establish promissory estoppel. Specifically, plaintiffs contend that KFC promised to develop a nationwide system of Zantigo restaurants, to promote the Zantigo restaurants on television, and to provide equipment financing for Zantigo franchisees. Because none of these alleged promises is mentioned in any of the written option or franchise agreements, ³ plaintiffs claim the doctrine of promissory estoppel is brought into play. They argue that they relied upon these promises to their detriment in entering into three long term leases and spending over $230,000 in establishing, promoting and developing the Zantigo restaurants in San Diego.

Plaintiffs' reliance on both promissory estoppel and conventional breach of contract theories puts us on uncharted waters. What is novel about the question presented is that the...