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Legacy Academy, Inc. v. Doles-Smith Enterprises, Inc.

Court of Appeals of Georgia, Second Division

February 28, 2018

LEGACY ACADEMY, INC.
v.
DOLES-SMITH ENTERPRISES, INC.

          MILLER, P. J., DOYLE, P. J., and REESE, J.

          Reese, Judge.

         This appeal arises from an adverse ruling on Legacy Academy, Inc.'s claim against its franchisee, Doles-Smith Enterprises, Inc. ("DSE"), for unpaid royalty and advertising fees. The trial court conducted a bench trial and ruled that Legacy's claim was barred by the doctrine of res judicata. This appeal followed. For the reasons set forth, infra, we affirm.

         Viewed in the light most favorable to the trial court's findings of fact, [1] the evidence shows that Legacy is a franchisor of child daycare centers, and it entered into a 25-year franchise agreement with DSE in November 2006.[2] In addition to funds paid up-front to Legacy by DSE for the franchise, start-up assistance, etc., the agreement required DSE to pay Legacy five percent of DSE's gross revenue each month for royalty fees and one percent of gross revenue each month for advertising fees throughout the 25-year term of the agreement.

         DSE operated the daycare center in Atlanta until August 2012, when it sent a letter to Legacy stating that it was terminating its relationship with Legacy due to Legacy's fraudulent behavior, Legacy's loss of essential personnel, and Legacy's "despicable conduct" in dealing with its franchisees, all of which DSE claimed had seriously impaired the value of the Legacy Academy brand name. DSE stopped paying the monthly royalty and advertising fees and informed Legacy that it would be removing all signage and other marks affiliating the center with Legacy by August 10. Legacy concedes that these actions constituted DSE's repudiation of the franchise agreement.

         The First Suit

         In addition to sending the letter to Legacy, DSE filed suit against Legacy for, inter alia, negligent misrepresentation and violation of federal franchise rules ("the first suit").[3] In response to DSE's letter and the first suit, Legacy immediately stopped providing to DSE the services outlined in Section 5.2 of the franchise agreement, as well as any other assistance or support Legacy had been providing since the execution of the agreement.[4] Legacy answered the lawsuit and filed a counterclaim asserting that DSE had breached the agreement. As a result of this breach, Legacy sought unpaid royalty and advertising fees "in an amount to be determined at trial."[5] The counterclaim also stated that the franchise agreement was effective for 25 years, beginning in November 2006, and that it was seeking an award of "all sums owed under the Franchise Agreement, including all unpaid Royalty and [Advertising] Fees[.]"

         Subsequently, in a response to a motion to compel filed by DSE, Legacy asserted that the information sought by DSE was only relevant to "Legacy's claim for future damages, which will only be an issue when and if this matter goes to trial."[6]And, in a proposed pre-trial order, Legacy clarified the damages it was seeking, stating that, as a result of DSE's default and breach of the franchise agreement, "DSE owes to Legacy Academy an amount to be proven at trial (for both royalty and advertising fees) both to date and through the term of the Agreement[.]"[7]

         On November 20, 2014, however, after the filing of Legacy's counterclaim in the first suit, but before the jury trial, this Court issued an opinion in Legacy Academy, Inc. v. JLK, Inc., [8] a separate, but similar, breach-of-contract case involving Legacy and a different franchisee. As in the instant case, the franchisee, JLK, sent Legacy a letter stating that JLK was terminating the franchise agreement.[9] In response, Legacy stopped communicating with or providing services to JLK, and it sued JLK for unpaid royalty and advertising fees for previous months, as well as unaccrued fees that would have been due from JLK in the future, i.e, for the remainder of the 20-year agreement.[10] Following a bench trial, the court entered judgment for $9, 729 in favor of Legacy for past unpaid royalty fees (plus interest and attorney fees), but nothing on the claims for the future, unaccrued royalty and advertising fees.[11] On appeal, this Court ruled that, even though Legacy was authorized to pursue its claim for the future royalty and advertising fees in that suit, [12]Legacy had failed to present sufficient competent evidence at trial to prove the value of the royalty fees.[13] Consequently, under the doctrine of res judicata, [14] Legacy was permanently precluded from recovering the future, unaccrued royalty fees.

         Then, in February 2015, about three months after this decision was issued, the jury trial on the first suit in the instant case commenced. On the first day of trial, Legacy abruptly abandoned its claim against DSE for the royalty and advertising fees that would have become due under the franchise agreement from January 2015 through November 2031 (hereinafter, "future fees"). Legacy announced for the first time that it was not seeking those future fees but, instead, was only seeking unpaid fees from August 2012 through December 2014. Legacy's counsel added: "I just wanted to make sure [this decision] was on the record because it may serve [sic] important later."

         Following the jury trial on the first suit, the court issued a judgment in favor of DSE on its misrepresentation and negligence claims and in favor of Legacy on its counterclaim.[15] Legacy appealed the judgment to this Court, and DSE cross-appealed.[16]

         The Second Suit

         In May 2015, while those appeals were still pending, Legacy filed the instant suit against DSE ("the second suit"), claiming that DSE had breached the franchise agreement by failing to pay royalty and advertising fees for two months, January and February 2015, and seeking those fees, plus 18 percent interest, a $200 administrative fee, and attorney fees. In response, DSE argued, inter alia, that the claim was barred by res judicata. Further, in a motion for partial summary judgment, DSE argued that

Legacy's claim for breach of the Franchise Agreement in this action will inevitably be barred by res judicata. DSE anticipatorily repudiated the Franchise Agreement. Legacy responded by electing to treat that repudiation as an immediate breach that suspended its reciprocal performance obligations and accelerated DSE's future obligations to pay royalty and advertising fees to Legacy. Indeed, Legacy sued DSE for such future damages in the [first suit]. While Legacy abandoned its prayer for those [future] damages the morning of the trial in the [first suit], this issue plainly could have been litigated in the [first suit]. As a result, once the pending appeals are decided - no matter the outcome - res judicata will attach and bar Legacy's claim for unpaid royalty and advertising fees in this action.[17]

         The trial court denied DSE's motion for partial summary judgment, however, ruling that "[t]here exists a question of material fact as to [Legacy's] choice of remedy when [DSE] anticipatorily repudiated the [franchise agreement]."

         In March 2017, the court conducted a bench trial on Legacy's suit for unpaid fees from January and February 2015. At the conclusion of the trial, the court found that DSE's 2012 actions in notifying Legacy that it was terminating the contract, removing Legacy signage, etc., and then filing suit against Legacy constituted DSE's anticipatory repudiation of the franchise agreement. The court also found that, in response to DSE's actions, Legacy stopped providing DSE with any services under the agreement and concluded that, under the totality of the circumstances, Legacy had accepted DSE's actions as a breach of the entire 25-year contract. Consequently, according to the court, when Legacy filed a counterclaim for damages from that breach in the first suit, that counterclaim was for a breach of the entire agreement and there was "nothing left after that lawsuit to sue under." As a result, the court ruled that Legacy's claim in the second suit was barred by the doctrine of res judicata. This appeal followed.

         "Appeals from bench trials, where the trial judge sits as the trier of fact and has the opportunity to assess the credibility of the witnesses, are reviewed under the clearly erroneous standard. And we will not disturb a trial court's findings if there is any evidence to support them."[18] With these guiding principles in mind, we turn now to Legacy's specific claims of error.

         Legacy contends that the trial court erred in finding as a matter of fact that it had accepted DSE's repudiation of the franchise agreement and that it had elected to treat the repudiation as a breach of the entire agreement. It argues that, as a result, the court erred in denying its motion for a directed verdict[19] as to DSE's res judicata defense.

         1. "The anticipatory repudiation of a contract occurs when one party thereto repudiates his contractual obligation to perform prior to the time such performance is required under the terms of the contract."[20] The repudiation must apply to the entire contract and must include an unqualified refusal to fulfill any future obligations under the contract.[21] "It is ordinarily a question for the trier of fact as to whether a party to a contract engaged in conduct sufficient to give rise to a repudiation of the contract and amount to an anticipatory breach."[22] Here, as Legacy concedes, there was more than sufficient evidence to support the court's finding that DSE's actions in August 2012 constituted an unqualified anticipatory repudiation of the entire franchise agreement.

         When presented with DSE's repudiation of the agreement, Legacy had to choose from three options as to how it was going to respond. It could (1) rescind the contract altogether and, if it had already rendered any performance under the contract, recover its value on principles of quasi-contract; (2) treat the repudiation as a breach of the entire agreement and bring an action for damages; or (3) continue to fulfill its obligations under the agreement while waiting for the time for performance of the contract and then bring suit after the time has arrived.[23] If Legacy chose either the first or second option, it would have been relieved of its obligation to continue performing under the franchise agreement, but if it chose the third option, it would be required to continue performing under the agreement, regardless whether DSE fulfilled its obligations.[24]

         As shown above, it is undisputed that Legacy did not seek rescission of the agreement under the first option. It is also undisputed that, after receiving DSE's August 2012 repudiation letter, Legacy took numerous affirmative actions to sever ties with DSE, such as removing DSE's information from the franchise website, cancelling DSE's website and e-mail address, and discontinuing required inspections and staff training; in fact, Legacy stopped communicating with DSE completely after August 2012. Thus, Legacy's complete failure to perform under the agreement after August 2012 forecloses Legacy's argument that it chose the third option.

         Regarding the second option, Legacy argues that there was no evidence to support the court's finding that it had accepted DSE's repudiation of the agreement. According to Legacy, in order to find that it accepted DSE's repudiation of the agreement, it was required to do some affirmative action manifesting such choice, for example, notifying DSE of its decision.[25] Although Legacy claims it took no affirmative actions in response to DSE's August 2012 letter and lawsuit, the evidence cited above demonstrates that this argument lacks merit.

          Moreover, the fact that Legacy gave notice on the first day of trial in the first suit that it was not going to pursue the future fees does not mean that Legacy could reverse or disregard its complete failure to perform under the agreement between August 2012 and the February 2015 trial. Having chosen the option of treating DSE's letter as a repudiation of the entire agreement and acting accordingly for two-and-one-half years, Legacy was not entitled to suddenly reverse course and elect a different ...


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