FRANCHISEE WOULD
RATHER FIGHT THAN SETTLE
by Philip A. Kramer
Defendant Tat-Mau Wong (Wong), a
Kung-Fu expert, is the president and sole owner of the common stock of two
California corporations, Choy Lay Fut Kung Fu
Institute, Inc. (Choy Lay Institute) and Champion Arts, Inc. (Champion Arts).
Choy Lay Institute operated three Kung-Fu academies, including an academy in Concord,
California. Champion Arts was formed to
franchise Kung-Fu Academies under the trame name ATat Wong Kung Fu Academies@. Evelina Deocares-Lengyel was an employee of the Choy Lay Institute
and became program director for the Concord
academy in 1997. After a period of preliminary negotiations, Wong proposed to
sell the Concord academy to Deocares-Lengyel under a franchise agreement with his
wholly owned corporation, Champion Arts. For this purpose, Evelina
Deocares-Lengyel and her husband Andre organized the
plaintiff corporation, Iron & Silk, Inc., of which they are the sole
owners.
On October 31, 2000, Iron & Silk, Inc. executed
a separate Purchase Agreement and Franchise Agreement with Champion Arts, Inc.
which called for the payment of a purchase price of $35,000 and a franchise fee
of $25,000. The Purchase Agreement involved among other things the assignment
to Iron & Silk of existing student instruction contracts with Choy Lay
Institute. The Ceocares-Lengyels assumed management
and control of the Concord academy
and operated it under the Franchise Agreement between Champion Arts and Iron
& Silk, but they fell into a series of disputes with Wong, who continued to
exercise a degree of control over the business.
On February 25, 2002, Iron & Silk filed a
complaint for the damages and equitable relief against Wong, Choy Lay Institute
and Champion Arts alleging five causes of action for violation of the
California Franchise Investment Law, the Unfair Competition Law, fraud and
deceit, breach of contract, and for equitable relief. Before the complaint was
served, the Deocares-Lengyels and Wong participated,
with the assistance of counsel, in a private mediation conference on March 21, 2002. At the close of the
day, the parties agreed on a settlement, which was memorialized in a four
paragraph memorandum signed by Wong, Evelina Deocares-Lengyel, and counsel for both parties.
The full text of the settlement
memorandum is as follows:
AThe
undersigned hereby enter into the following settlement agreement as a full and
final settlement of all claims arising out their franchise relationship and the
civil action listed below:
A1.
Iron & Silk, Inc., Evelina Lengyel
and Andre Lengyel (referred to herein collectively as
ALengyel@) agree to pay Champion Arts, Inc., a total sum of
$93,500 payable as follows: a $25,000 lump sum payment made in cash or cashier=s check upon the execution of a final settlement
agreement and thereafter twenty-four monthly payments of $2,854.17, the first
of which is to be made one month after the execution of the final settlement
agreement and each mother thereafter payable no later than the first day of
each month. Evelina Lengyel
and Andre Lengyel, however, make
no personal guarantee of these payments; these payments shall be secured as set
forth in paragraph 2.
2.
As security for these monthly payments, Lengyel
agrees that in the event any payment is no paid when due and becomes deliquent for over sixty days, Champion Arts shall have the
right to immediate possession of the premises located at 5400 Ygnacio Valley Road, Suite A-13, Concord, California, as
well as a security interested in the assets of the Concord Kung Fu academy
which is presently being operated as the Tat Wong Kung Fu Academy.
3.
Lengyel agrees to dismiss with prejudice the civil
action presently filed in Contra Costa County Superior Court, Action No. C02-00418 filed February 15, 2002,
entitled Iron & Silk, Inc. v. Champion Arts, Inc., et al.
4.
The parties agree to mutually terminate their
franchise relationship, except that those post termination obligations set
forth in their Franchise Agreement dated October 31, 2000 shall remain in full
force and effect.@
The settlement was never
reduced to a final formal written settlement agreement. Instead, Iron &
Silk, Inc. filed a first amended complaint on April 29, 2002, seeking rescission of the settlement
agreement and alleging new causes of action for breach of fiduciary duty,
intentional interference with contractual relations, and intentional
interference with prospective economic relationships. The amended pleading
named as additional Defendants as an employee of the Choy Lay Institute,
Michele Harris, and three employees of the Concord
academy, Pedro Luiz Barbosa,
Brian Yee, and Michael Lee.
The Deocares-Lengyels
claim that, within 10 days after the meditation conference, they discovered
that Wong and Defendant Harris were attempting to lure away three key employeesB Barbosa,
Yee, and LeeB to a new
martial arts academy that they planned to open in Concord.
These activities began before the mediation conference and continued
afterwards. The Deocares-Lengyels alleged that,
shortly after learning of the franchise termination, Defendants Lee and Yee Acalled a secret meeting with the
students@ and
informed them that Wong Awas
about to open a new martial arts
school in Concord@ and
encouraged them Ato breach
their instruction contracts with Iron & Silk.@
Lee and Yee later resigned and posted open letters to students of the Concord
Academy on the tat Wong website
suggesting that students contact them or Wong regarding future instruction. The
open letters stated that Barbosa, who still worked
for the academy as chief instructor, would be Aposting
a letter soon.@ Barbosa submitted his resignation on April 8, 2002.
The principal asset of Iron
& Silk as an ongoing business consisted of instruction contracts with
students, which were typically one year or longer in term. As a result of the
defections of Lee, Yee, and Barbosa, the Deocares-Lengyels claim that numerous students requested
cancellation of their instruction contracts and Ait
has been exceedingly difficult ... to maintain operations at the Concord
Academy.@
The Deocares-Lengyels
filed an application for a preliminary injunction, which the trial court
denied. They responded by filing a motion to enforce the settlement agreement
pursuant to Code of Civil Procedure section 664.6 and to enter a judgment
dismissing the action with prejudice. The matter came up for hearing on June 20, 2002. The trial court
granted the motion, but informed counsel for the Plaintiff, Iron & Silk,
that it was free to file a new action seeking damages fro the Defendant=s conduct after the mediation
conference:
ATHE
COURT: ... to the extent that you [Plaintiff] are seeking damages for conduct
... after March 21st, your remedy is to file a new action seeking
damages for that conduct.@
In a formal order granting the
motion to enforce the settlement agreement filed July 2, 2002, the court refrained addressing Aany issues@
regarding the Plaintiff=s
right to assert Aclaims in
another proceeding for conduct by Defendant=s
occurring after the execution of the settlement agreement.@ The court retained jurisdiction over
the action Ato
enforce the terms of the settlement agreement@
and ordered entry of a judgment of dismissal.
The judgment of dismissal
recited that APlaintiff
Iron & Silk, Inc. and its owners Evelina Lengyel and Andre Lengyel@ had agreed to settle Athe above-entitled cause pursuant to
Code of Civil Procedure section 664.6" and ordered that the action be Adismissed in its entirety with
prejudice.@
As a first assignment of error,
Plaintiff maintains that the four-paragraph memorandum formulated at the
mediation conference on March 21, 2002,
does not constitute an enforceable settlement agreement under the Code of Civil
Procedure section 664.6. In ruling on a motion to enter judgment on a
settlement agreement, the trial court must resolve disputed issues relating to
the binding nature or terms of the settlement Aand
ultimately determine whether the parties reached a binding mutual accord as to
the material terms.@
ACompromise
settlements are governed by the legal principals applicable to contracts
generally. Under California law,
a contract will be enforced if it is sufficently
definite (and this is a question of law) for the court to ascertain the parties= obligations and to determine whether
those obligations have been performed or breached. Stated otherwise, the
contract will be enforced if it is possible to reach a fair and just result
even if, in the process, the court is required to fill in some gaps.[T]he failure to reach a meeting of the minds on all
material points prevents the formation of a contract even though the parties
have orally agreed upon some of the terms, or have taken some action related to
the contract. [W]hen something is reserved for the future agreement of both
parties, the promise can give rise to no legal obligation until such future
agreement.@
The disputed four-paragraph
memorandum provided for the purchase of the academy by the Plaintiff and the
termination of the existing franchise agreement. We find that the memorandum
was sufficiently definite to allow the court to determine whether the parties=
obligations have been performed or breached.
The memorandum states the
purchase price, the schedule and form of payment, and the Defendant=s security interest in the business. In
the event of a default of payment, it provides that the Defendants have a right
to take immediate possession of the premises but cannot hold Plaintiff=s shareholder, the Ceocares-Lengyels,
to be personally liable. The memorandum resolves the principal issues regarding
the parties=
future dealings with each other by requiring the Plaintiff to dismiss with
prejudice its civil action and calling for complete termination of the franchise
relationship in compliance with the portion of the Franchise Agreement dealing
with post-termination obligations of the parties.
In challenging the sufficiency
of the settlement agreement, the Plaintiff argues that the memorandum
represented no more than an agreement to agree since it contemplated execution
of a final settlement agreement. We hold that the trial court properly rejected
this argument by finding that the settlement agreement was not Aconditioned upon execution of a final
settlement agreement.@
The reference to a final settlement agreement suggests only that the parties
intended to work out details of the transaction; it is entirely consistent with
a mutual manifestation of consent to the material terms of the agreement.
The provision calling for
payments to start Aone month
after the execution of the final settlement agreement@
has a direct reference only to the timing of the payments and need not be
construed more broadly so as to place a condition on the basic obligations of
both parties. By finding that the provision reflected the Plaintiff=s Aobligation
to begin making payments within a reasonable time after March 21, 2002,@
the court properly exercised its prerogative Ato
fill in some gaps@ in the
agreement so as to uphold the parties= agreement as to material terms.
Plaintiff also argues that the
reference to Aincomplete
and ambiguous terms in another document@
i.e., the post-termination obligations in the Franchise agreement, renders the
settlement memorandum unenforceable. The memorandum, however, expresses an
agreement to dissolve the franchisor-franchisee relationship. We find that this
agreement to disassociate is clear enough to be enforceable without anything
more. The reference to the Franchise Agreement provisions on post-termination obligations
provides some assistance to the parties by identifying steps required to
disassociate the business, even though the provisions may be fragmentary and
partially inapplicable.
More generally, Plaintiff
contends that the settlement agreement is only a Abare-bones
sketch of several terms of the inchoate understanding,@
which does not resolve many potential areas of disagreement. Among other
things, the parties failed to reach agreement on the waiver of liability under
Civil Code section 1542. Immediately after it was executed, the Defendants
created a potential impasse in further negotiations by proposing a draft
settlement agreement with provisions Areferred
to only tangentially in the settlement memorandum.@
We do not think, however, that it can be reasonably contended that a section
1542 waiver is a necessary term of an enforceable settlement agreement or that
the acrimony following the mediation conference establishes an absence of
agreement. As the trial court found, A[p]laintiff does not point to any material terms or issues
that cannot be resolved by reference to the settlement agreement.@
The judgment is affirmed. Costs
are awarded to the Defendants.
©2003 Kramer
& Kaslow PC