Ayu’s Global Tire v. Big O Tires
Filed 5/24/13 Ayu’s Global Tire v. Big O Tires CA2/4
PUBLISHED IN THE OFFICIAL REPORTS
California
Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or
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as specified by rule 8.1115(b). This
opinion has not been certified for publication or ordered published for
purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION FOUR
AYU’S GLOBAL TIRE, LLC et
al.,
Plaintiffs and Appellants,
v.
BIG
O TIRES, LLC,
Defendant and Respondent.
B236930
(Los Angeles County
Super. Ct. No. BC420725)
APPEAL from a
judgment of the Superior Court of
William F. Highberger, Judge. Affirmed.
Hornberger Law
Corporation and Nicholas W. Hornberger for Plaintiffs and Appellants.
Bryan Cave, Jonathan Solish, Glenn J. Plattner,
Kristy A. Murphy and Nickolas B. Solish for Defendant and Respondent.
In the underlying action, the trial court granted
Hailemariam and Ayu’s Global Tire, LLC, in their action against respondent Big
O Tires, LLC (Big O). We affirm.
RELEVANT
FACTUAL AND PROCEDURAL BACKGROUND
There are no
material disputes about the following facts:
Hailemariam had been employed at Kaiser Permanente in the information
technology business for 16 years and had managed several large projects. He had also completed some of the
requirements for a Masters of Business Administration degree. In 2005, he investigated buying a tire store
franchise from Big O, after ruling out two competing tire store
franchisors. In February 2008, Ayu’s
Global Tire entered into a franchise
agreement with Big O. Hailemariam, a
member of Ayu’s Global Tire, guaranteed its obligations under the franchise
agreement. In May 2008, appellants began
operating a Big O store in Hawthorne.
In August 2009, they closed the store.
On August
28, 2009,
appellants initiated the underlying action against Big O and several other
parties, predicated on appellants’ purchase of the franchise. In November 2010, the trial court ruled that
under the terms of the franchise agreement, Colorado law governed appellants’
nonstatutory causes of action.
The third
amended complaint (TAC), filed November 30, 2010, alleged that before
appellants entered into the franchise agreement, Big O promised to provide many
services and benefits to support their franchise, but withheld unfavorable
information regarding the franchise’s likelihood of success. The TAC further alleged that Big O’s promises
and omissions induced appellants to enter into the franchise agreement, and
that Big O failed to honor its commitments after they did so. Although the TAC asserted numerous claims
against Big O and other defendants, following a demurrer by Big O, a
stipulation of the parties, and other developments, the TAC was effectively
reduced to asserting claims solely against Big O for declaratory relief, breach
of contract, breach of the implied covenant of good faith and fair dealing, and
fraud in the inducement of a franchise sale.
In February
2011, Big O filed a motion for summary judgment or adjudication on the
operative causes of action in the TAC.
In opposing the motion, appellants abandoned their claim for declaratory
relief. Following a hearing, the trial
court granted the motion, concluding that appellants’ remaining claims failed
for want of a triable issue of fact.
On September 14, 2011, judgment was entered in favor of
Big O and against appellants. This
appeal followed.
DISCUSSION
erred in granting summary judgment with respect to their claims for breach of
contract and fraud in the inducement. As
explained below, we disagree.
A.
Standard of Review
“On appeal
after a motion for summary judgment has been granted, we review the record de
novo, considering all the evidence set forth in the moving and opposition
papers except that to which objections have been made and
sustained. [Citation.]†(Guz v.
Bechtel National Inc. (2000) 24 Cal.4th 317, 334.) Thus, we apply “‘the same three-step process
required of the trial court.
[Citation.]’†(
(1995) 35 Cal.App.4th 1654, 1662 (Bostrom).) The three steps are (1) identifying the
issues framed by the complaint, (2) determining whether the moving party
has made an adequate showing that negates the opponent’s claim, and (3)
determining whether the opposing party has raised a triable issue of fact. (Ibid.)
Generally,
“the party moving for summary judgment bears an initial burden of production to
make a prima facie showing of the nonexistence of any triable issue of material
fact; if he carries his burden of production, he causes a shift, and the
opposing party is then subjected to a burden of production of his own to make a
prima facie showing of the existence of a triable issue of material fact.†(Aguilar
v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 850.) Furthermore, in moving for summary judgment,
“all that the defendant need do is show that the plaintiff cannot establish at
least one element of the cause of action -- for example, that the plaintiff
cannot prove element X.†(
Although we
independently assess the grant of summary judgment (Lunardi v. Great-West Life Assurance Co. (1995) 37 Cal.App.4th 807,
819), our review is subject to two constraints.
Under the summary judgment statute, we examine the evidence submitted in
connection with the summary judgment motion, with the exception of evidence to
which objections have been appropriately sustained. (Mamou
v. Trendwest Resorts, Inc. (2008) 165 Cal.App.4th 686, 711; Code Civ.
Proc., § 437c, subd. (c).) Moreover, our
review is governed by a fundamental principle of appellate procedure, namely,
that “‘[a] judgment or order of the lower court is presumed correct,’†and
thus, “‘error must be affirmatively shown.’â€
(Denham v. Superior Court (1970)
2 Cal.3d 557, 664, italics omitted, quoting 3 Witkin, Cal. Procedure (1954)
Appeal, § 79, pp. 2238-2239.) Appellants
thus bear the burden of establishing error on appeal, even though Big O had the
burden of proving its right to summary judgment before the trial court. (Frank
and Freedus v. Allstate Ins. Co. (1996) 45 Cal.App.4th 461, 474.) For this reason, our review is limited to
contentions adequately raised in appellants’ briefs. (Christoff
v. Union Pacific Railroad Co. (2005) 134 Cal.App.4th 118, 125-126.)
The two constraints narrow the scope
of our inquiry. Here, the parties raised
numerous evidentiary objections to the showing proffered by their adversary,
which the trial court sustained in part and overruled in part. With the exception of the objections
discussed below, appellants do not challenge these rulings on appeal, and to
that extent, have forfeited any contention of error regarding the rulings.
Appellants
have also forfeited contentions that summary judgment was improper with respect
to their claims, to the extent they fail to challenge the trial court’s
determinations regarding those claims.
Because appellants do not discuss their claim for breach of the implied
covenant, we exclude that claim from our review. (Wall
Street Network, Ltd. v. New York Times Co. (2008) 164 Cal.App.4th 1171,
1177; Yu v. Signet Bank/Virginia
(1999) 69 Cal.App.4th 1377, 1398; Reyes
v. Kosha (1998) 65 Cal.App.4th 451, 466, fn. 6.) Our review is further limited by the narrow
scope of appellants’ contentions regarding their claims for fraud in the
inducement and breach of contract.
Although those claims were predicated on numerous specific allegations
of misconduct, appellants challenge
summary judgment only with respect to some of those allegations. As appellants are required “to point out the
triable issues [they] claim[] are present,†we restrict our review to those
“issues which have been adequately raised and briefed.†(Lewis v.
County of Sacramento
(2001) 93 Cal.App.4th 107, 116.)
B. Governing
Principles
At the outset,
we examine the principles applicable to appellants’ claims for breach of
contract and fraud in the inducement, which are governed by Colorado law. The TAC alleges that Big O induced appellants
to execute the franchise agreement by making certain promises and suppressing
facts unfavorable to the franchise’s viability; the TAC further alleges that
Big O breached the franchise agreement by failing to honor its promises. In seeking summary judgment, Big O contended
that because the franchise agreement was fully integrated, appellants’ claims failed in light of Colorado’s parol
evidence rule. Big O further maintained
that appellants could not establish the element of reasonable reliance required
for the claim for fraud in the inducement, and that Colorado’s economic loss
rule also barred the fraud claim. As we
explain below, because Big O’s challenges to the claims invoke interrelated
doctrines, our inquiry initially focuses on appellants’ fraud claim.
Under Colorado
law, the parol evidence and economic loss rules are ordinarily inapplicable to
claims for fraud in the inducement.
Regarding the former, the Colorado Supreme Court has explained: “Integration clauses generally permit
contracting parties to limit future contractual disputes to issues relating to
the reciprocal obligations expressly set forth in the executed document. [Citations.]
Thus the terms of a contract intended to represent a final and complete
integration of the parties’ agreement are enforceable and parol evidence
offered to establish the existence of prior or contemporaneous agreements is
inadmissible to vary the terms of such contract.
(Keller v. A.O. Smith Harvestore
Products (Colo. 1991) 819 P.2d 69, 72-73 (Keller).) The rule thus
prevents parties from asserting breach of contract claims predicated on alleged
obligations not stated in the relevant integrated agreement. (Nelson
v. Elway (Colo. 1995) 908 P.2d 102, 108.)
However, claims for fraud in the inducement are generally not subject to
the rule. (Keller, supra, 819 P.2d
at p. 73; see also Bill Dreiling Motor
Co. v. Shultz (1969) 168 Colo. 59, 62 [450 P.2d 70, 71];
521 P.2d 1276, 1277-1278.)
Similarly,
Colorado’s economic loss rule is ordinarily inapplicable to claims for fraud in
the inducement. Under that rule, “a
party suffering only economic loss from the breach of an express or implied
contractual duty may not assert a tort claim for such a breach absent an
independent duty of care under tort law.â€
(Town of Alma v. Azco Constr.,
Inc. (Colo. 2000) 10 P.3d 1256, 1264.)
However, tort claims predicated on a noncontractual duty -- including
claims for fraud in the inducement -- are “simply outside the scope of the
rule.†(Id. at p. 1263 & fn. 10.)
In view of
these principles, our inquiry properly begins with an evaluation of
appellants’ fraud claim. If there
are triable issues regarding the fraud claim, summary judgment was improper,
regardless of whether the parol evidence rule may bar the breach of contract
claim; moreover, the application of the economic loss rule to the fraud claim
requires us to assess whether that claim relies on an independent
noncontractual duty. We therefore
examine Colorado law governing claims for fraud in the inducement.
Under Colorado
law, reasonable reliance is an essential element of such claims, regardless of
whether they are predicated on an affirmative misrepresentation or concealment
of a material fact. To establish
fraudulent misrepresentation, a plaintiff must show that he or she relied on
the misrepresentation, and was justified in doing so.
(Barfield v. Hall Realty, Inc. (Colo.App.
2010) 232 P.3d 286, 290.) Similarly,
when relying on a theory of fraudulent concealment, a plaintiff must show that
he or she relied on the assumption that the concealed fact did not exist (
Inc. (Colo.App. 2010) 251 P.3d 9, 17 (Colorado Coffee Bean)).
These principles are applicable to claims for fraud in the
inducement. (Squires v. Goodwin (D. Colo. 2011) 829 F.Supp.2d 1062, 1075
[inducement by affirmative misrepresentation]; see Colorado Coffee Bean, supra, 251 P.3d at pp. 15-17 [inducement by
concealment].) Although the existence of
reasonable reliance is ordinarily consigned to the factfinder, it may be
resolved as a question of law when the relevant facts are not in dispute. (Nielson
v. Scott, supra, at p. 780;
(Colo.App. 2000) 8 P.3d 581, 587 (Balkind);
19-20; see M.D.C./Wood, Inc. v. Mortimer
(Colo. 1994) 866 P.2d 1380, 1382.)
For purposes
of assessing the existence of reasonable reliance, Colorado applies the
doctrine of “inquiry notice.†(
(Colo.App. 2009) 211 P.3d 714, 725.) As
the Colorado Supreme Court has explained, under this doctrine, “‘[w]hatever is
notice enough to excite attention, and put the party upon his guard, and call
for inquiry, is notice of everything to which such inquiry might have led. When a person has sufficient information to
lead him to a fact, he shall be deemed conversant of it. “The presumption is that, if the party affected
by any fraudulent transaction or management might, with ordinary care and
attention, have reasonably detected it, he reasonably had actual knowledge of
it.†“Concealment by mere silence is not
enough. There must be some trick or
contrivance intended to exclude suspicion and prevent inquiry.â€â€™â€ (Cherrington
v. Woods (1955) 132 Colo. 500, 506 [290 P.2d 226, 228], quoting
[151 P. 914, 915].) Thus, “‘[w]here the
means of knowledge are at hand and equally available to both parties, and the
subject of purchase is alike open to their inspection, if the purchaser does
not avail himself of these means and opportunities, he will not be heard to say
that he has been deceived by the vendor’s representations.’†(Ibid.,
quoting Groves v. Chase,
Under this
doctrine, a party to a contract cannot show reasonable reliance on
misrepresentations regarding the contract when the party had full access to the
relevant facts. In Balkind, a title company
told the plaintiffs -- falsely -- that some real property they intended to buy
was not subject to certain restrictions on its use. Before the sale occurred, the seller
mentioned the restrictions to the plaintiffs, who also received title
instruments describing them. (
583-584.) After the sale, the plaintiffs
asserted fraud claims based on the title company’s misrepresentations. (Id.
at p. 587.) In affirming summary
judgment on the claims, the appellate court concluded that the information
available to the plaintiffs precluded reasonable reliance on the
misrepresentations. (
For purposes
of the doctrine, the terms of a fully integrated contract and related
pre-contractual documents may conclusively demonstrate the absence of
reasonable reliance on misrepresentations or nondisclosures that purportedly
induced the contract. In
bought a retail coffee shop franchise after receiving the defendant’s uniform
franchise offering circular (UFOC), which disclosed the gross sales of existing
stores, but stated that it contained no data regarding profits and no guarantee
of profitability, and advised prospective franchisees to conduct their own
financial analyses. (
p. 15, 18.) The franchise agreement
itself was integrated, and contained general exculpatory clauses disclaiming
reliance on representations not found in the agreement. (Id.
at pp. 20-21.) The plaintiff asserted a
claim for fraudulent nondisclosure based on two theories, namely, that the
franchisor had concealed (1) losses at existing stores and (2) the franchisor’s
own losses. (Id. at p. 18.)
Following a
discussion of Colorado decisions and other authority, the appellate court
determined that suitably “‘clear and specific language’†in the UFOC or the
absence of reasonable reliance on the purported omissions. (Colorado
Coffee Bean, supra, 251 P.3d at
pp. 19-20, quoting Keller,
concluded that the statements in the UFOC precluded reasonable reliance under
the first theory, but that the UFOC and franchise agreement contained no terms
sufficient to nullify reasonable reliance under the second theory. (Colorado
Coffee Bean, supra, at
pp. 19-22; see also Universal
Drilling Co. v. Camay Drilling Co. (10th Cir. 1984) 737 F.2d 869, 872-873 (
inducement claim failed, as integration and exclusion of warranty clauses in
written contract foreclosed reasonable reliance on alleged oral
misrepresentations regarding oil rig’s operability].)
C. Appellants’
Claims
In assessing the propriety of summary judgment, we look first
to appellants’ allegations in the TAC, which frame the issues pertinent to a
motion for summary judgment.
name="_ftnref6" title="">[6]
(Bostrom, supra, 35 Cal.App.4th at
p. 1662 [“‘“[I]t is [the complaint’s] allegations to which the motion must
respond by establishing a complete defense or otherwise showing there is no
factual basis for relief on any theory reasonably contemplated by the
opponent’s pleading.
[Citations.]â€â€™â€].) Here, the TAC
alleged that Hailemariam, who had never owned a business, intended to buy a tire
store franchise to operate after he retired.
According to the TAC, before appellants executed the franchise
agreement, Big O’s representatives made affirmative misrepresentations and
omitted material facts relevant to the agreement. This misconduct allegedly induced appellants
to execute the agreement. Moreover,
because many of the misrepresentations and omissions concerned contractual
obligations that Big O failed to honor, Big O also breached the agreement.
The
TAC alleged that upon meeting with Big O’s representatives, Hailemariam
disclosed that he did not know how to establish and operate a tire store. Big O told him -- falsely -- that he needed
no experience to be successful in the tire business, and that his investment in
a tire store was prudent. Although Big O
assured him that it would offer all the training that he needed to operate his
store, the training that he received was inadequate.
The
TAC further alleged that Big O misrepresented and suppressed facts regarding
the benefits it rendered to franchisees.
Big O provided exaggerated estimates of the profits of a typical Big O
store, and concealed that many of its franchisees had failed. Although Big O promised to assist
franchisees, including supplying tires to them at competitive prices, it hid
the fact that most of those tires were available from other suppliers at lower
prices; moreover, Big O compelled franchisees to buy excessive amounts of
tires. In addition, Big O falsely stated
that it developed new proprietary products and services.
The
TAC further alleged that Big O falsely represented that it had expertise in
locating and outfitting stores, and provided an exaggerated estimate of the
profits that appellants could expect from their store. Big O gave Hailemariam a demographic study of
a particular area, and assured him that his store would acquire five to six
percent of the market share within that area.
Hailemariam relied on the study in preparing his “pro forma†financial
statement, which he provided to his lender and Big O. However, the pro forma “was not based on true
facts and was a grossly inaccurate projection of the business
. . . and the profits [he] could expect.†Relying upon Big O’s advice, appellants paid
an excessive rent for their store, and invested heavily to remodel it in a
failed effort to enhance their sales. Big
O also said that it would select the correct inventory and equipment for the
store, but chose an unsuitable inventory and required appellants to buy
unnecessary equipment.
D.
The initial question concerning the propriety of summary
judgment is whether Big O shifted the burden to appellants to raise triable
issues of fact. As explained below, Big
O’s showing was sufficient to do so.
1. Big O’s
Evidence
In
seeking summary judgment, Big O challenged the fraud claim, arguing that its
pre-agreement disclosures to appellants precluded reasonable reliance on the
purported misrepresentations (if any), and that appellants had no evidence that
Big O misrepresented or concealed any obligations or facts relevant to
agreement. On similar grounds, Big O
contended that appellants’ breach of contract claim failed because appellants
had no evidence that Big O breached its contractual obligations, as stated in
the franchise agreement.
Big O provided
declarations and other evidence supporting the following version of the
underlying facts: When Hailemariam
investigated buying a Big O franchise, Big O sent him several copies of its
UFOC. The cover page of each UFOC
stated: “Study [the UFOC]
carefully. While it includes some
information about your contract, don’t rely on it alone to understand your
contract. . . . ‘If possible,
show your contract and this information to an advisor, like a lawyer or
accountant.’†However, Hailemariam
admitted in his deposition that he neither read the UFOC carefully nor asked
his lawyer to review it.
After
receiving the UFOC, appellants executed the franchise agreement, which
contained an integration clause.
Hailemariam also executed a separate closing acknowledgment that
stated: “I am not relying on any
promises of Big O which are not contained in the Big O franchise
agreement.â€
According to
Big O, the purported pre-agreement misrepresentations and omissions that
appellants attributed to Big O contradicted the UFOC and the franchise
agreement, and were unsupported by the evidence disclosed during
discovery. Regarding Big O’s alleged
assurance that franchisees required no experience in the tire business to
succeed, Big O pointed to the UFOC, which described the competitive nature of
the tire market, and stated: “Your
ability to compete . . . will be largely and significantly
dependent on your management, sales and marketing capabilities, your
involvement with your store, your financial strength, general economic
conditions, geographical area and specific location.†In addition, the UFOC stated: “BIG O DOES NOT GUARANTEE THE SUCCESS OR
PROFITABILITY OF YOUR STORE IN ANY MANNER.â€
Big O also submitted evidence that numerous franchisees had, in fact,
been successful even though they lacked experience in the tire business.
Regarding
Big O’s purported offer of training that guaranteed success, Big O noted that
Hailemariam testified in his deposition that he was told only that he would
receive training equivalent to “[T]ire 101.â€
Big O also submitted evidence that it has an extensive training
program. Hailemariam attended a training
course, and received more training “than the typical franchisee.†Following the course, Big O trainers visited
appellants’ store to offer advice, and were prepared to give him any additional
training that he requested.
Regarding
Big O’s alleged misrepresentations concerning the profitability of its
franchisees, Big O pointed to an attachment to the UFOC, which displayed data
from 211 stores confirming Big O’s own estimate of the average sales per
store. The UFOC further stated that Big
O would substantiate the data upon request, and invited prospective franchisees
to conduct an independent investigation.
Big O also denied that it concealed failed franchises, noting that the
UFOC enumerated transferred, cancelled, and terminated franchises for specified
periods preceding the franchise agreement.
In addition, Big O submitted evidence that the failed franchises were
not material to Hailemariam’s decision to buy a Big O franchise, as he
testified that knowledge of them would probably not have affected his decision
to buy a Big O franchise.
Regarding
Big O’s purported misrepresentations concerning the provision of tires, Big O
pointed out that the UFOC stated that Big O did not guarantee a specific supply
of tires. Furthermore, the franchise
agreement contained no provision obliging Big O to supply tires to franchisees
at competitive prices, and imposed only limited obligations on Big O to assist
franchisees. With respect to these
matters, the agreement required Big O to provide tires “to the extent
available,†but permitted Big O to set the recommended prices for the
tires. In executing the agreement,
Hailemariam expressly acknowledged that no Big O representative had guaranteed
that he would receive a “specific or sufficient amount of [p]roducts.â€
Big
O also submitted evidence that it honored its obligations of assistance to
appellants. As Big O observed,
Hailemariam testified in his deposition that Big O usually provided the tires
that he requested, although he had to wait one day for deliveries. In addition, Big O offered evidence that it
supplied appellants with competitively priced tires, adjusted tire prices to match
their competitors, never required them to buy an excessive inventory, and
assisted them in many ways.
Regarding
Big O’s purported misrepresentations regarding the development of products and
services, Big O noted that Hailemariam testified in his deposition that he
recalled no specific pre-agreement assurances by Big O regarding “anything
newâ€; in addition, the franchise agreement did not oblige Big O to develop new
products or services. Big O also
presented evidence that it offered many products and services, including a
warranty program, and that it did in fact develop new products.
Regarding
Big O’s purported misrepresentations concerning Hailemariam’s store, Big O
noted that the UFOC entrusted the “final decision†regarding a store’s location
to the franchisee, and disclaimed Big O’s liability for that decision. According to Big O’s showing, Big O
representatives assisted Hailemariam as he scouted sites for a store. In 2008, after a three-year search,
Hailemariam selected an established Firestone tire store in Hawthorne as the
site for appellants’ business.
Hailemariam negotiated the purchase of the store and its equipment with
the assistance of his counsel.
Big
O submitted evidence that it never advised appellants that their store would be
profitable, noting that Hailemariam testified in his deposition that no one
told him what his gross profits were likely to be. According to Big O, it merely provided
Hailemariam with some data that he used in creating his pro forma. The data included the financial information
in the UFOC, as well as demographic data that Big O obtained from an
unaffiliated company to assist Hailemariam in preparing his pro forma. Hailemariam also had information from Big O
stores operated by Tad Kyle and from other franchises, as well as the records
of the tire business at the location he had chosen. Hailemariam performed his own calculations in
creating the pro forma, and also used the services of an accountant.
Regarding the
store’s rent, remodeling, equipment, and inventory, Big O denied that it
breached its contractual obligations, and further maintained that appellants
could not have reasonably relied on any pre-agreement misrepresentations or
omissions. Regarding the parties’
contractual obligations, the UFOC identified “‘[s]ite selection and
acquisition/lease’†as among the franchisee’s obligations, and also stated that
the cost of appropriate equipment and fixtures ranged from $100,000 to
$220,000, depending on whether the franchisee bought new or used equipment. The franchise agreement required appellants
to install equipment, fixtures, and signs that Big O approved; in addition, the
agreement obliged Big O to assist appellants in selecting their initial
inventory.
According to
Big O’s evidence, Hailemariam negotiated the acquisition of the store and its
existing equipment. He also decided to
remodel the store due to its shabby state, rejected a proposal submitted by Big
O’s preferred contractor, and instead selected his own contractor to perform
the renovations. Big O advised him that
certain modifications he proposed were unnecessary and expensive. When Big O offered Hailemariam three options
concerning equipment, he rejected the option that Big O recommended, chose a
more expensive option valued at $177,906, and later bought more equipment. In selecting appellants’ initial tire
inventory, Big O used a predictive model based on tires sales near appellants’
store, and afforded them the right to return unsold tires.
2. Analysis
shifted the burden to appellants to raise triable issues concerning their
claims. Regarding the fraud claim, Big O
challenged the existence of many of the purported pre-agreement
misrepresentations and omissions on the basis of Hailemariam’s own deposition
testimony; in addition, Big O presented evidence that appellants could not
reasonably have relied on the purported pre-agreement misrepresentations and
omissions (if any), in light of the disclosures in the UFOC and the provisions
of the franchise agreement. Furthermore,
regarding the breach of contract claim, Big O presented evidence that it
complied with its obligations, as stated in the franchise agreement. Accordingly, we must examine appellants’
showing to determine the propriety of summary judgment.
E. Fraud
in the Inducement
For the
reasons discussed above (see pt. B., ante),
our inquiry into the existence of triable issues begins with appellants’ fraud
claim.
1. Appellants’
Showing
In opposing
summary judgment, appellants relied primarily on a declaration from
Hailemariam, who stated that he became interested in buying a Big O franchise
in 2005.
title="">[10]
He was inexperienced, and came to trust Bill Ketchem, a Big O franchise
development director, who appeared to have his best interests at heart. Ketchem misadvised Hailemariam that “there
was minimal risk to the venture as long as [he] followed the Big O
systems.†In addition, Ketchem and other
Big O employees, including Roger Anderson and Duane Freshnock, made false statements
regarding the efficacy of Big O’s training program, the profitability of its
stores, its ability to supply tires, and its products and services. They did not disclose that many franchisees
had complaints regarding Big O’s supply and pricing of tires, and that one
large franchisee had terminated his franchises due to these problems. Big O’s representatives also told Hailemariam
that he needed no experience to succeed, but failed to reveal a memorandum from
Freshnock to Anderson that expressed his concerns regarding the high failure
rate of new franchisees who lacked experience in the tire business.
According to
Hailemariam, he relied on Big O to select the appropriate location for the
store because he did not know how to do so.
Although Hailemariam “involve[d] himself in the process, . . . Big O . .
. took the lead.†In addition, because
he had no experience with pro formas, he also relied on data and advice from
Big O in preparing his pro forma.
Unknown to Hailemariam, Anderson prepared a pro forma “for internal use
only†projecting that appellants’ store would earn approximately $70,000 per
year less in profits than stated in Hailemariam’s pro forma. Nonetheless, Big O encouraged Hailemariam to
seek financing based on his own pro forma.
Relying on Big
O’s advice, Hailemariam bought new equipment from Big O, which he later learned
was unnecessary and overpriced. Big O
also selected his inventory, which turned out to be inappropriate. Although Big O promised continuing
assistance, its aid was “meaningless and useless.†After opening the store, appellants lost
money every month until August 2009, when they ended their business because
their financial resources were exhausted.
In addition to
Hailemariam’s declaration, appellants submitted a declaration from Tad Kyle,
who had owned a business that operated several Big O stores. He opined that Anderson’s pro forma, though
“unrealistic, [was] certainly more realistic†than Hailemariam’s pro forma,
which he viewed as relying on excessive estimates of the store’s market share,
sales, and gross profits. Appellants
also submitted copies of Anderson’s pro forma and an e-mail dated January 29,
2008, from Freshnock to Anderson.
Freshnock’s e-mail enumerated several proposals intended to assist
appellants’ store, and then stated: “Jim
. . . any other[] [measures] that you would like to recommend
. . . feel free. We must
come up with a plan to stop these new [o]wners with no experience from failing
at such a high rate.â€
2.
In granting
summary judgment on the fraud claim, the trial court determined that appellants
failed to show reasonable reliance on any pre-agreement misrepresentations or
omissions. We agree.
Under the
circumstances, Colorado’s “inquiry notice†doctrine precludes appellants from
establishing the existence of reasonable reliance. That doctrine provides that parties asserting
claims for fraud in the inducement are presumed to know the terms of the
contract when “a reasonably prudent man†would have read the contract before
signing it. (Clayton Brokerage Co. v. Stansfield (D.Colo 1984) 582 F.Supp. 837,
841.) Here, Hailemariam received
multiple copies of the UFOC, which became part of the franchise agreement by
virtue of the integration clause. For
purposes of Colorado’s inquiry notice doctrine, the express warnings in the
UFOC to “study [it] carefully†and seek professional advice, coupled with the
large financial investment required of a franchisee, were sufficient to
“‘excite [Hailemariam’s] attention, . . . and call for inquiry’â€
into the UFOC and agreement. (
However,
Hailemariam engaged in no such inquiry, despite ample opportunity to do
so. As the trial court observed,
although Hailemariam negotiated with Big O for three years before executing the
franchise agreement and relied on an attorney in obtaining the lease for his
store, he paid little attention to the UFOC and the agreement, and never sought
legal advice regarding them. Because
appellants must be charged with full knowledge of the terms and disclosures in
these documents, the fraud claim fails for want of triable issues regarding
reasonable reliance, notwithstanding any oral misrepresentations or omissions
by Big O. (Colorado Coffee Bean, supra,
251 P.3d at pp. 19-21; Universal Drilling,
supra, 737 F.2d at pp. 872-873.)
Appellants
challenge the grant of summary judgment regarding the fraud claim on several
grounds, which we address below.
a.
Appellants
contend there are triable issues whether Big O engaged in fraud by informing
Hailemariam that no experience was necessary for running a Big O
franchise. We disagree. Under Colorado law, “‘[t]he gist of a
fraudulent misrepresentation is the producing of a false impression upon the
mind of the other party . . . .’†(Corder
v. Laws (1961) 148 Colo. 310, 314 [366 P.2d 369, 372].) For this reason, a party may engage in fraud
by making a true statement that nonetheless creates a false impression unless
other facts are disclosed. (
Systems, Inc. (Colo.App. 1990) 795 P.2d 1380, 1383-1384.) As explained below, appellants failed to show
the existence of fraud in connection with Big O’s purported representation.
To begin, the record discloses no
evidence that the purported representation to Hailemariam was, in fact,
false. The formulation of the
representation upon which appellants rely is found in Hailemariam’s
declaration, which states: “I was told that I did not need experience.†In seeking summary judgment, Big O submitted
evidence that there were at least 41 successful Big O franchisees with no prior
experience in the tire industry.
Appellants offered no evidence challenging this showing.
Moreover, to
the extent the representation may have suggested that appellants’ store would
succeed despite Hailemariam’s inexperience, the record does not show that Big O
failed to disclose other pertinent facts.
The UFOC describes the competitive nature of the tire sales market and
states: “BIG O DOES NOT GUARANTEE THE
SUCCESS OR PROFITABILITY OF YOUR STORE IN ANY MANNER.†Because appellants must be charged with full
knowledge of this disclaimer, they cannot show that they reasonably regarded
the purported representation as an assurance of success. (Colorado
Coffee Bean, supra, 251 P.3d at
pp. 19-21; Universal Drilling,
In an effort
to show the existence of a triable issue regarding the truth of the
representation, appellants direct our attention to Freshnock’s January 2008
e-mail to Anderson, in which he proposed measures to assist appellants’ store,
asked Anderson to suggest other measures, and stated, “We must come up with a
plan to stop these new [o]wners with no experience from failing at such a high
rate.†Although the e-mail shows that
Big O was aware that the failure rate for inexperienced franchisees was high,
the statement in the e-mail is consistent with the representation purportedly
made to Hailemariam, and thus raises no issues material to its truth. Nor does the e-mail show that Big O concealed
the failure rate among inexperienced franchisees: aside from disclaiming any guaranty of
success, the UFOC disclosed those franchises that had been transferred,
cancelled, and terminated, and provided contact information for franchisees who
had “[l]eft the [s]ystem†(see pt. E.2.c.iv., post). Appellants’ fraud
claim thus fails, insofar as it relies on Big O’s alleged statement that no
experience was necessary to operate a franchise.
b. Big O’s
Pro Forma
Appellants
maintain that Big O fraudulently concealed its own pro forma financial analysis
of their store, which Big O relied upon in approving appellants’
franchise. They argue that Big O was
obliged to disclose its pro forma, and engaged in fraud by failing to do
so. We reject this contention.
Under Colorado
law, “[t]o succeed on a claim for fraudulent concealment or non-disclosure, a
plaintiff must show that the defendant had a duty to disclose material
information. [Citation.] A defendant has a duty to disclose to a
plaintiff with whom he or she deals material facts that ‘in equity or good
conscience’ should be disclosed.
[Citation.]†(
Inc. (Colo. 1998) 965 P.2d 105, 111.)
For purposes of determining the existence of the duty, Colorado courts
find guidance from section 551(2) of the Restatement Second of Torts, which
enumerates several situations in which the duty arises, only one of which is
potentially pertinent here.
(See ibid.)
Under section
551(2)(e) of the Restatement Second of Torts, a party to a business transaction
is subject to a duty to disclose
[(1)] that the other is about to enter into it under a mistake as to them, and
[(2)] that the other, because of the relationship between them, the customs of
the trade or other objective
circumstances, would reasonably expect a disclosure of those facts.†For purposes of this rule, the phrase “facts
basic to the transaction†refers to facts “assumed by the parties as a
basis for the transaction itself.â€
(Rest.2d Torts, § 551, com. j, p. 123.)
Such a fact “goes to the basis, or essence, of the transaction, and is
an important part of the substance of what is bargained for or dealt with. Other facts may serve as important and
persuasive inducements to enter into the transaction, but not go to its
essence. These facts may be material,
but they are not basic. If the parties
the existence of a fact on one party . . . the other party
has no duty of disclosure.†(Ibid.,
italics added.)
Regarding Big O’s pro forma, the
record establishes the following facts.
The UFOC states: “We do not
furnish or authorize our salespersons to furnish to prospective franchisees in
connection with the offer of franchises any oral or written information from
which a specific level or range of actual or potential sales, costs, income or
profits of a Big O store or franchise, may be ascertained, except [the general
sales data specified in an appendix to the UFOC].†Furthermore, in executing the franchise
agreement, Hailemariam expressly acknowledged that he had received no such
assurances from any Big O employee.
Hailemariam, in creating his pro
forma, performed his own calculations, and also used the services of an
accountant. The pro forma projected
first-year sales of approximately $1.4 million and a gross profit of 62
percent. Hailemariam submitted the draft
pro forma to Anderson, who questioned whether Hailemariam’s estimate of his
market share was sufficiently conservative, and suggested that he lower his
sales projections for the store’s start-up period. In response, Hailemariam adjusted his
estimate of the store’s performance for the initial months of the start-up
period.
After
Hailemariam submitted his pro forma, Anderson independently prepared a pro
forma “‘for internal use only’†regarding appellants’ store. The pro forma projected lower sales and gross
profits for the store than Hailemariam’s pro forma. In submitting appellants’ application for a
franchise to Big O, Anderson provided only his own pro forma to the approval
committee, which awarded a franchise to appellants. Regarding this conduct, Anderson testified in
his deposition that he did not disclose his pro forma to appellants because he
believed that it constituted an “earnings claim.â€
Relying
on Hailemariam’s declaration, appellants argue that Anderson was obliged to
disclose the existence of Big O’s pro forma, and that they reasonably took Anderson’s
silence regarding it to be an assurance that Hailemariam’s pro forma was
“realistic.†Regarding these matters,
Hailemariam stated that if he had been aware of Big O’s pro forma, he never
would have submitted his own pro forma to lenders to obtain the financing that
Big O encouraged him to seek.
In
our view, there are no triable issues regarding whether Big O’s pro forma
constituted a fact “basic to the
transaction,†for purposes of triggering a duty to disclose. (Rest.2d Torts, § 551, com. j, p.
123.) To begin, because the UFOC stated
that no Big O employee was authorized to disclose “any oral or written information from which a specific level or range of
actual or potential sales, costs, income or profits of a Big O store or
franchise,†the UFOC “expressly . . . place[d] the risk
as to the existence of [such] fact[s]†on appellants (Rest.2d Torts, § 551,
com. j, p. 123). In view of the UFOC’s disclaimer, Big O had no
duty to disclose its internal pro forma or its contents.
There is also no evidence that the
existence of Big O’s pro forma went “to the basis, or essence, of the
transaction†for purposes of a duty to disclose, notwithstanding Hailemariam’s
declaration. (Rest.2d Torts, § 551, com.
j, p. 123.) To establish a duty to
disclose under section 551(2)(e) of the Restatement Second of Torts, the
plaintiff must show that the defendant knew that the plaintiff reasonably
expected the pertinent disclosure. (
1991) 821 P.2d 913, 918 (Burman).) Here, both pro formas portrayed appellants’
store as viable, but projected different levels of sales and profits. Nothing before us suggests that Hailemariam
told Anderson that achieving the specific high sales and profits in
Hailemariam’s pro forma was critical to his decision to go forward with the
transaction, or that a particular level of profit was “an important part of the
substance of what [he] bargained for.â€
(Rest.2d Torts, § 551, com. j, p. 123.) On the contrary, when Anderson questioned Hailemariam’s draft pro forma, Hailemariam adjusted
his pro forma, without suggesting that his previous figures were critical to
his decision to go forward.
We also
conclude there are no triable issues regarding whether Hailemariam reasonably
relied on Anderson’s conduct as an assurance that he need not prepare a more
conservative estimate of the store’s prospects.
Under the “inquiry notice†doctrine, appellants are properly charged
with the information they could have discovered upon proper notice. (Burman,
supra, 821 P.2d at p. 919.) Here, Anderson’s skepticism regarding
Hailemariam’s projected market share placed him on notice that it was
appropriate to explore more conservative financial assumptions. The record discloses no evidence of any obstacle
that would have prevented Hailemariam from developing less optimistic estimates
akin to those found in Big O’s pro forma.
In sum, appellants’ claim that Big O fraudulently concealed its pro
forma fails for want of a triable issue.
c. Excluded
Portions of Hailemariam’s Declaration
Appellants
argue that the trial court incorrectly excluded key portions of Hailemariam’s
declaration on the ground that his statements contradicted his deposition
testimony or other discovery responses.
As explained below, we find no reversible error.
i.
Governing Principles
Our review of
the rulings is governed by “the well settled rule that “‘[a] party cannot
create an issue of fact by a declaration which contradicts his prior [discovery
responses]. [Citation.] In determining whether any triable issue of
material fact exists, the trial court may, in its discretion, give great weight
to admissions made in deposition and disregard contradictory and self-serving
affidavits of the party.’†(
(1999) 71 Cal.App.4th 853, 860, quoting Preach v. Monter Rainbow (1993)
12 Cal.App.4th 1441, 1451.) This rule is
traceable to D’Amico v. Board of Medical
Examiners (1974) 11 Cal.3d 1, 22, which explained that for purposes of the
summary judgment statute, “admissions against interest†have an especially high
credibility value when they are obtained “in the context of an established
pretrial procedure whose purpose is to elicit facts.â€
ii. Ketchem’s
Remarks
Appellants contend the trial
court improperly excluded evidence that Ketchem advised Hailemariam not to read
the UFOC. Regarding this matter, the
trial court sustained Big O’s objection to Hailemariam’s statement that after
he received the UFOC, Ketchem told him that the UFOC “was simply a formality,â€
and that “he would tell [Hailemariam] about the business.†Hailemariam’s declaration further stated that
he paid little attention to the UFOC in light of these remarks. Big O argued that Hailemariam’s description
of Ketchem’s remarks contradicted Hailemariam’s deposition testimony. The trial court agreed.
Pointing to
court erred. As explained in
should not be excluded when the party made only “‘tacit admissions or
fragmentary and equivocal concessions’†in discovery, or when there is “other
credible evidence that contradicts or explains that party’s [discovery
responses] or otherwise demonstrates there are genuine issues of factual
dispute.†(128 Cal.App.4th at
pp. 1523-1525, quoting Price v.
Wells Fargo Bank (1989) 213 Cal.App.3d 465, 482, overruled on another
ground in Riverisland Cold Storage, Inc.
v. Fresno-Madera Production Credit Assn., supra, 55 Cal.4th at p. 1182.)
Here, appellants argue that the portions of Hailemariam’s deposition
that Big O cited in connection with its objection have little bearing on
Hailemariam’s declaration statements.
Although
we agree that the cited portions of the deposition (as found in the record) do
not support the exclusion of Hailemariam’s declaration statements, we
nonetheless reject appellants’ contention, as we may affirm the trial court’s
ruling on any grounds properly supported by the record. (Philip
Chang & Sons Associates v. La Casa Novato (1986) 177 Cal.App.3d 159,
172-173). In excluding the declaration
statements, the trial court appears to have considered portions of
Hailemariam’s deposition other than those cited by Big O cited in support of
its objection. In those portions of the
deposition, Hailemariam testified that he never discussed the UFOC with any Big
O representative at any time prior to executing the franchise agreement, and
otherwise paid little attention to the UFOC.
We therefore see no basis to reverse the trial court’s ruling.
iii. Reduction
in Big O’s Tire Lines and Failure to Develop
New Products
Appellants
contend the court improperly barred Hailemariam’s declaration statement that
despite Big O’s assurances that it was developing new products, no one told him
that Big O had in fact reduced the number of its proprietary tire lines during
the period from 2000 to 2008. In our
view, the court did not err, as Hailemariam testified in his deposition that he
recalled no specific pre-agreement assurances from Big O regarding “anything
new,†and his declaration offered no explanation for the departure from prior
testimony.
Nor would we
regard the ruling as prejudicial if it were incorrect. The franchise agreement and UFOC set forth Big
O’s obligations to appellants in detail; furthermore, it is undisputed that
Hailemariam, in executing the franchise agreement, signed a separate closing
acknowledgment that stated: “I am not
relying on any promises of Big O which are not contained in the Big O franchise
agreement.†Because the franchise
agreement contains no term obliging Big O to develop new products or services,
appellants could not have reasonably relied on assurances or omissions
regarding new products. In addition,
appellants cannot show reasonable reliance with respect to Big O’s purported
concealment of the number of its tire lines, as the record establishes that
Hailemariam visited Big O Stores during the three-year negotiation period, and
was thus well-positioned to discover that number.
iv. Remaining
Rulings
For
the reasons discussed below, it is unnecessary for us to examine whether the
trial court properly excluded Hailemariam’s other declaration statements, as
those statements raise no triable issues regarding appellants’ fraud
claim. In the excluded portions of the
declaration, Hailemariam stated (1) that he “had to rely solely on Big O in
choosing a [store] location†because he “had no idea how to pick a suitable
locationâ€; (2) that he relied “totally†on Big O to choose his store’s
equipment because he “had no idea what type of equipment†to choose; (3) that
after Big O told Hailemariam that he “[had] to have an experienced manager for
18 months†and promise to hire one, it chose a “good manager†who quit before
the 18-month period ended; and (4) that no one told him that a large franchisee
with 28 years in Big O’s system had terminated his business due to Big O’s
inability to supply tires.
Regarding
item (1), the UFOC identified “site selection and acquisition/lease†as among
the franchisee’s obligations, and further stated: “[T]he final decision about whether to
acquire a given approved site . . . shall be your sole decision.
. . . Our approval of a site
. . . does not constitute a representation or warranty of any
kind as to the suitability of the site for a Big O
store . . . . It only indicates that we believe that
the site falls within the acceptable criteria established by us.†This language in the UFOC precludes
reasonable reliance on any oral representations that Big O’s would choose a
successful store location. (
Regarding
items (2) and (3), the UFOC and franchise
agreement impose limited duties on Big O regarding the selection of
equipment for new stores and the hiring of managers. Big O’s sole duty regarding the selection of
equipment for a new store was to provide a “prototype
. . . equipment layoutâ€; furthermore, the UFOC and agreement
permit the franchisee to delegate store operations only to “a [m]anager
employed by the [f]ranchisee . . . subject to approval by Big
O.â€
With
respect to the former duty, the record discloses that after Big O proposed
three equipment packages for the store, Hailemariam selected one of them. Although neither the UFOC nor the agreement
specifically disclaim Big O’s liability for equipment packages that it
proposed, the UFOC states that Big O did not guarantee “in any manner†that
Hailemariam’s store would be successful; moreover, as noted above, in executing
the agreement, Hailemariam acknowledged that he relied on no promises not
contained in it. Accordingly, appellants
could not have reasonably relied on any oral representation that Big O would
propose equipment that assured the success of their store. (Universal
Drilling, supra, 737 F.2d at pp.
872-873.)
The purported
promise regarding the manager also raises no triable issues regarding the
existence of fraud in the inducement.
The promise itself cannot be regarded as a tortious misrepresentation
under Colorado law. As explained in Nelson v. Gas Research Inst. (Colo.App. 2005) 121 P.3d 340, 343,
“[f]raud requires more than the mere nonperformance of a
to fulfill an agreement to do something at a future
. . . Such promises are actionable only
where there is proof that the defendant had the present intention not to
fulfill the promise. [Citation.]â€
According to Hailemariam’s declaration, Big O selected a “good managerâ€
who left appellants’ employment only after
they executed the agreement and opened their store. There is thus no evidence that Big O lacked
the intention to fulfill the promise when it was made. In addition, for the reasons explained above,
appellants could not have reasonably relied on the promise, in view of the
limited obligations imposed upon Big O in the UFOC and franchise agreement.
Finally,
regarding item (4), the UFOC enumerated franchises that had been transferred,
cancelled, or terminated prior to appellants’ execution of the franchise
agreement, and provided contact information for franchisees who had “[l]eft the
[s]ystem.†These disclosures appear to
have included the specific former franchisee that Big O purportedly concealed.
Accordingly, nothing before us suggests that Big O failed to disclose
information regarding failed or terminated franchises material to Hailemariam’s
decision to go forward. In sum,
appellant’s fraud claim fails for want of triable issues of fact.
F.
We turn to appellants’ challenges to the grant of summary
judgment on the breach of contract claim.
They argue (1) that for purposes of the application of the parol
evidence rule, the integration clause in the franchise agreement does not
incorporate the UFOC into the agreement, and (2) that there are triable issues
regarding their claim. As explained
below, we disagree.
1. Scope of
the Integration Clause
Appellants maintain that the UFOC is
not a part of the franchise agreement, notwithstanding the integration
clause. They argue that the definition
of the term “Agreement†contained within the franchise agreement itself does
not refer to the UFOC, as it states only:
“Agreement – This Agreement, the Summary Pages and all Riders and
Schedules hereto.†In addition, they
assert that the integration clause does not encompass any document unsigned by
Hailemariam, including the UFOC. We
reject this contention.
Under Colorado
law, in interpreting a contract provision, courts look first to the “plain and
ordinary meaning†of the provision’s language, viewed in the context of the
entire contract. (Engineered Data Prods., Inc. v. Nova Office Furniture, Inc.
(D.Colo. 1994) 849 F.Supp. 1412, 1417.)
Here, the integration clause states:
“Franchisee acknowledges that this [a]greement, the documents referred to herein, . . . and other
agreements signed concurrently . . . , if any, constitute
This [a]greement terminates and supersedes any prior agreement between
the parties concerning the same subject matter and any oral or written
representations which are inconsistent
with the terms of this instrument and its accompanying Franchise Offering Circular.†(Itali
| Description | In the underlying action, the trial court granted summary judgment against appellants Ayele Hailemariam and Ayu’s Global Tire, LLC, in their action against respondent Big O Tires, LLC (Big O). We affirm. |
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