Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—Ga. App.: Day care franchisor breaks rules, punished with $1.1M judgment, (Jul 22, 2014)

By Greg Hammond, J.D.

A $1.1 million judgment entered against Georgia day care franchisor Legacy Academy, Inc. and its officers was affirmed by the Georgia Court of Appeals. In finding that the trial court did not err in entering judgment on the jury’s verdict, the court determined that the franchisee: (1) sought rescission of the franchise agreement in a timely manner; (2) did not affirm the agreement by pleading a contract-based defense; and (3) did not knowingly agree to the provisions of the agreement (Legacy Academy, Inc. v. Mamilove, LLC, July 16, 2014, Ellington, J.).

Background. Mamilove, LLC entered into discussions with Legacy Academy and its officers, Frank and Melissa Turner, regarding opening a Legacy Academy day care franchise. Legacy Academy provided Mamilove with an earnings claim, stating that the new franchise would have roughly $260,000 in net income after the first year of operation, and $440,000 in net annual income for the second and third years. Relying on the earnings claim, according to the record, Mamilove decided to open the Legacy franchise.

A franchise agreement was consequently signed, but Mamilove’s officers contended they did not have time to read the agreement or consult with an attorney, as the Turners “pressured” them into signing the agreement quickly, threatening that they would otherwise lose their choice location for the day care center. After investing over $2.2 million in the franchise, Mamilove lost over $200,000 in their first year of operation, and reported net earnings of roughly $100,000 in 2004 and $66,000 in 2005. Mamilove subsequently sent a letter to the Turners, notifying them of their intent to terminate the franchise agreement, and later filed suit, alleging—in part—rescission of the franchise agreement.

Legacy Academy appealed the trial court’s judgment, arguing that: (1) the court erred in denying Legacy Academy’s motion for summary judgment on Mamilove’s rescission claim; (2) the court erred in failing to grant Legacy Academy’s motion for a directed verdict for the rescission of contract claim; and (3) Mamilove waived its right to rescind the franchise agreement as a matter of law.

Rescission of franchise agreement. Legacy Academy first argued that Mamilove waived its right to rescind the franchise agreement by failing to seek rescission in a timely manner. However, the court found this issue moot, as there was sufficient evidence presented at trial to support the jury’s finding that Mamilove timely asserted its rescission claim. Consequently, the trial court did not err in denying Legacy’s motion for summary judgment.

The franchisor also argued that Mamilove waived its right to rescission of the franchise agreement as a matter of law, due to its defense to Legacy’s breach of contract counterclaim. Specifically, Legacy contended that Mamilove’s defense—that Legacy breached the franchise agreement, thereby relieving Mamilove of its obligations under the instrument—was an affirmation of the franchise agreement. The court disagreed, noting that, “A defense is not something by means of which the party who interposes it can obtain relief for himself.”

In its third rescission argument, Legacy claimed that the trial court erred in failing to grant the franchisor’s motion for a directed verdict. Specifically, Legacy argued that Mamilove could not prove that the Turners fraudulently induced it to sign the franchising agreement by showing the earnings claims, as the agreement expressly stated that Mamilove did not receive any representations of potential income or earning capabilities prior to signing. In addition, Legacy contended that Mamilove’s officers did not read the agreement and therefore were estopped from asserting their claim for rescission of the agreement based on fraud.

Once again, the court disagreed with Legacy, stating that the jury was authorized to find the Turners intentionally prevented Mamilove’s officers from reading the franchise agreement prior to signing in order to conceal the false earnings provisions contained therein. Given the jury’s finding, the court concluded that Mamilove did not knowingly agree to the earnings provisions and waived its claims as a result. Consequently, Legacy was not entitled to a directed verdict.

The case number is A14A0718.

Attorneys: Charles L. Bachman, Jr. (Gregory, Doyle, Calhoun & Rogers, LLC), and Charles David Joyner (C. David Joyner PC) for Legacy Academy, Inc. Cary Ichter (Ichter Thomas, LLC) for Mamilove, LLC.

Companies: Legacy Academy, Inc.; Mamilove, LLC

Cases: FranchisingDistribution GeorgiaNews