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Syed Ali Husain et al v. Mcdonald's Corporation

April 30, 2012

SYED ALI HUSAIN ET AL., PLAINTIFFS, CROSS-DEFENDANTS AND RESPONDENTS,
v.
MCDONALD'S CORPORATION, ET AL., DEFENDANTS, CROSS-COMPLAINANTS AND APPELLANTS.



Trial Court: Marin County Superior Court Trial Judge: Hon. James R. Ritchie (Marin County Super. Ct. No. CIV 096177)

The opinion of the court was delivered by: Margulies, J.

CERTIFIED FOR PARTIAL PUBLICATION*fn1

McDonald's Corporation (McDonald's) and related parties appeal from orders granting a preliminary injunction to Syed Ali Husain and Khursheed Husain (the Husains) permitting the Husains to continue operating three McDonald's restaurants in Marin County pending completion of a trial in this action. We affirm the orders.

I. FACTUAL AND PROCEDURAL BACKGROUND

A. Factual Background

Husain and his wife have owned McDonald's franchises since the early 1980's. By 2005, they held five McDonald's franchises in San Francisco and Daly City. In June 2005, the Husains entered into an agreement with third parties (the Magruders) to purchase an additional seven McDonald's restaurants in Marin County. The Magruders' franchise agreements with McDonald's required they obtain McDonald's consent to the transfer of ownership. In two separate assignment agreements between the Husains, the Magruders, and McDonald's, McDonald's consented to the Magruders' assignment of their franchise agreements to the Husains.*fn2 The dispute in this case centers on whether McDonald's made an enforceable promise to the Husains to extend or "rewrite" the franchise terms for three of the restaurants--Novato, Fourth Street, and Merrydale--either in the Assignment Agreement or otherwise.

When McDonald's opens a new restaurant or rewrites an existing franchise, it normally grants franchise rights for a 20-year term, absent lease tenure issues. However, the Corte Madera, Northgate, Novato, Fourth Street, Merrydale, and Mill Valley locations all had five years or less remaining in their franchise terms at the time of the Husains' purchase. Only the Hamilton franchise, not due to expire until 2019, had substantially more than five years left to run.*fn3

The Husains assumed considerable financial obligations in connection with the purchase of the new locations. Pursuant to McDonald's borrowing guidelines, the Husains financed the purchase of the Marin franchises with a seven-year, $10.5 million note, refinanced in 2007 by a seven-year, $9.35 million note, which was secured by all of the fixtures and equipment at the Husains' existing and newly acquired restaurants. The loans also financed approximately $800,000 in renovations and other "reinvestment" at the Marin franchises which McDonald's required the Husains to complete by August 16, 2006 under the assignment agreements. The Husains acknowledged in the agreements timely completion of these reinvestments was a material term of the Magruder franchise agreements which they were assuming.

Paragraph 17 of the Assignment Agreement stated in relevant part as follows: "In consideration of McDonald's consent to this Assignment and the issuance of a rewrite to Assignee, Assignor waives, releases, and disclaims any claim for a rewrite of the franchise for the Corte Madera . . . location." (Italics added.) Paragraph 17 goes on to include a general release releasing McDonald's from any possible future claims by the Magruders, including claims arising from the Corte Madera franchise. The Husains contend paragraph 17 constitutes McDonald's promise to the Husains that it would rewrite the franchise agreements for all of the restaurants covered by the Assignment Agreement with the exception of the Hamilton location, which had more than 10 years remaining on its franchise. McDonald's contends the paragraph promises only that it would rewrite the Corte Madera franchise agreement since it had already denied the Magruders a rewrite for that franchise.*fn4

There is no dispute McDonald's did offer the Husains new 20-year franchise terms in January 2006 for the Novato, Fourth Street, and Merrydale franchises under a program known as "Plan to Win." Under the program, after the sale of a franchise between existing McDonald's operators, a new 20-year franchise term would be offered to the purchaser if the remaining term for the acquired restaurant was less than 10 years and certain other criteria were met. The purchaser would have to agree to pay a prorated portion of the $45,000 initial franchise fee McDonald's charged for new 20-year franchise terms. In January 2006, Jodi Breen of McDonald's sent Husain three offer letters offering, respectively, to extend the terms on the Husains' Novato, Fourth Street, and Merrydale franchises to 2025. The offers required Husain to pay prorated initial franchise fees totaling approximately $119,000 for the three locations.

McDonald's denied receiving any response from Husain to the offers. Breen testified she left a voicemail message for Husain after the deadline for responding to the offers had passed, but got no response. In March 2006, Breen sent Husain a letter confirming she had received no response to the offers and advising him the offers were no longer on the table. Husain denied receiving the March letter.

Husain contended he did timely accept the offers by mailing his signed acceptance from the Capuchino Station Post Office in Burlingame on January 21, 2006, and he submitted a copy of a post office "CERTIFICATE OF MAILING" to substantiate that contention. McDonald's presented evidence the Capuchino post office branch was closed on January 21, 2006 and called an expert to establish Husain could have easily fabricated the certificate of mailing.

As of the summer of 2006, the Husains had not begun the vast majority of the reinvestment work they were supposed to have completed by that time. However, according to a business review McDonald's completed in August 2006, the Husains' restaurants "[met] all of the National Franchising Standards and [were] eligible for growth and rewrite."

In 2006 and 2007, the Husains suffered business setbacks, including financial losses caused at least in part by a store manager's embezzlement from one of the San Francisco stores, which was not discovered until April 2008. According to the manager's confession to police, his embezzlement began in the fall of 2006 and was ongoing until he was tripped up after the installation of a new computer software program in 2008. The Husains began falling consistently behind in their payment of fees and rent to McDonald's beginning in December 2006, and also missed payments to the regional operators' cooperative (for coordinated advertising) and their primary food distributor. By the summer of 2007, the Husains owed McDonald's over $540,000 and the cooperative over $200,000. McDonald's threatened to terminate the Husains' franchises if these arrearages were not paid in full. In July 2007, Husain borrowed $450,000 on his home and brought himself current with McDonald's and the advertising cooperative. There were no further arrearages after that point.

Husain contended the 2007 financial issues took him by surprise and he attributed them primarily to the employee embezzlement that was discovered later.*fn5 He testified he believed at the time someone had hacked into his bank accounts. McDonald's offered evidence Husain was fully informed all along about the growing arrearages, and he was less than candid with McDonald's about the causes of the problem, telling the company falsely the bank was investigating the possible hacking of his McDonald's accounts. By all accounts, the parties' business relationship soured in 2007, and McDonald's began warning Husain it was not going to approve future rewrites of his franchises, pointing to his substantial arrearages in 2006 and his continued failure to complete agreed reinvestment work on his restaurants.

Unless rewritten by McDonald's, the franchise term for the Novato restaurant was due to expire on December 26, 2009. In 2008, the Husains had still not completed the agreed-upon reinvestment work on the Novato restaurant, including the enclosure of its restrooms. The McDonald's Rewrite Committee (Rewrite Committee) met on December 15, 2008 and voted not to offer the Husains a new franchise term for the Novato restaurant, citing the Husains' financial condition as reflected in their past failure to timely pay their debts to McDonald's, and their continuing failure to live up to their contractual reinvestment obligations, which McDonald's believed was having a negative impact on its brand image. A month before the final decision, McDonald's invited the Husains to submit any relevant information they wished to offer on the issue of the rewrite for the three franchises in issue. In response, Husain submitted a written narrative and a large packet of documents, and spoke at length with a McDonald's representative about the issue. He did not mention in any of his submissions or conversations either that he believed McDonald's had promised him new 20-year franchise agreements for the Marin restaurants as part of the Magruder transaction, or that he had signed and returned the Breen "Plan to Win" offer letters in January 2006.

Following the Rewrite Committee's decision, McDonald's urged the Husains to sell the three Marin franchises prior to their expiration dates. To facilitate the sale, McDonald's offered to grant new franchise terms for the restaurants to any approved purchasers. McDonald's contends this was consistent with the policy assertedly reflected in paragraph 17 of its two assignment agreements with the Husains that after denying an operator a rewrite for a franchise it would assist the operator in selling the franchise by agreeing to rewrite it for an approved purchaser.

B. Injunction Proceedings

The Husains advised McDonald's they did not intend to sell the stores, and filed this lawsuit in December 2009. The Husains sought injunctive relief to prevent McDonald's from removing them from the Novato restaurant on December 26, 2009, when their franchise expired. McDonald's cross-complained, and applied ...


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