Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—TexCtApp: Franchisee Owners Failed to Conclusively Establish that Signatures on Guaranties Were Forged, (Apr 24, 2013)

By Peter Reap, J.D., LL.M.

Jerry T. Brewer ("Brewer") and the Jerry and Kay Brewer Revocable Trust (the "Trust") failed to conclusively establish that signatures by them or on their behalf on two guaranty agreements with health club franchisor Gold’s Gym Franchising, LLC were forged, a Texas appellate court has decided (Gold’s Gym Franchising LLC v. Brewer, April 22, 2013, Richter, M.). Thus, a trial court’s grant of summary judgment to Brewer and the Trust on the franchisor’s claim for breach of the guaranties was reversed. However, the trial court did not err in concluding that Gold’s Gym failed to show that Brewer and the Trust ratified the underlying franchise agreements and guaranties.

In 2005, Brewer, his son Chad Brewer ("Chad"), and Dennis Tan formed a corporation named GGNYC 2, Inc. Later that year, GGNYC 2, Inc. entered into a franchise agreement with Gold’s Gym (the "2005 Franchise Agreement").Attached to that agreement was a guaranty, in which guarantors agreed to be personally liable for any breach by the franchisee of the 2005 Franchise Agreement (the "2005 Guaranty"). The 2005 Guaranty bears signature lines for Brewer, Chad, and Tan, and each of the three names is signed on its signature line. Brewer contends, however, that his signature on the 2005 Guaranty was forged.

In late 2007, the parties entered into a new franchise agreement for the same gym, (the "2008 Franchise Agreement"). It also had an attached guaranty (the "2008 Guaranty"). The 2008 Guaranty contained four signature lines, each bearing the name of one of GGNYC 2, Inc.’s shareholders at that time: Tan, Chad, Max Pierre, and the Trust. Again, names are signed on each signature line; the name Jerry Brewer is signed as trustee for the Trust. Brewer contends he did not sign the 2008 Guaranty either for himself or for the Trust. He contends his name was forged on this document as well.

In May 2009, Gold’s Gym terminated the 2008 Franchise Agreement, claiming a failure to comply with the terms of that agreement. Brewer and the Trust answered the lawsuit together.

Gold’s Gym pleaded its own affirmative defense to Brewer’s and the Trust’s forgery defense: it claimed that Brewer—individually and on behalf of the Trust—and Chad had ratified the franchise agreements.

Breach of the guaranties. On appeal, Gold’s Gym contends the trial court erred in granting summary judgment on its beach-of-guaranty claims. To recover on each of its breach-of-guaranty claims, Gold’s Gym had to prove (1) the existence and ownership of the guaranty contract, (2) the terms of the underlying contract by the holder, (3) the occurrence of the conditions upon which liability is based, and (4) the failure or refusal to perform the promise by the guarantor.

Brewer and the Trust presented summary judgment evidence that no guaranty contract existed between them and Gold’s Gym, the court noted. In his affidavit, Brewer denied that he signed the 2005 Guaranty or the 2008 Guaranty or that he authorized anyone else to sign either guaranty on behalf of himself or the Trust. Brewer claimed that the signatures on both guaranties were forged. Brewer presented his own affidavit and an expert witness, Foley, to that effect.

Gold’s Gym’s summary judgment evidence included the 2005 and 2008 Guaranties that bear Brewer’s name, purportedly signed on behalf of himself on the 2005 document and for the Trust on the 2008 document. Gold’s Gym also offered the expert testimony of a forensic document examiner, Linda James. James challenged the correctness of Foley’s analysis. She also concluded the signature on the 2005 Guaranty was Brewer’s, although her findings as to the 2008 Guaranty were inconclusive, the court observed.

The summary judgment evidence raised a fact issue as to whether the signatures on both guaranties were authentic, the appellate court ruled. Brewer and the Trust did not conclusively establish that the signatures were forged.

Brewer and the Trust raised a second ground as to the 2005 Guaranty. They contend that when the parties agreed to terminate the 2005 Franchise Agreement, they terminated the principal obligation which was guaranteed by the 2005 Guaranty.

However, Brewer and the Trust did not establish as a matter of law that the 2005 Guaranty terminated when the 2005 Franchise Agreement terminated, according to the appellate court. The 2005 Guaranty’s provision concerning continued applicability was part of Brewer’s agreement when he signed that document.

Ratification of the contracts. Gold’s Gym pleaded that if in fact there had been a forgery of any of the contracts, then Brewer and the Trust had ratified the contracts by their conduct.

To prevail on a breach-of-contract claim, it must be proven that (1) a valid contract between plaintiff and defendant existed, (2) the plaintiff performed or tendered performance, (3) the defendant breached the contract, and (4) the plaintiff sustained damages as a result of the breach.

The record showed that Gold’s Gym produced no evidence that the franchise agreements were valid contracts between it and Brewer or the Trust, the court determined. Indeed, the undisputed evidence in the summary judgment record established that Gold’s Gym entered into the franchise agreements with GGNYC 2, Inc. as franchisee. Thus, neither Brewer nor the Trust could have breached either franchise agreement.

Similarly, there can be no ratification of a contract by one who is not a party to it unless the original contract purported to be in the name of, or for, the person alleged to have ratified it. Although Gold’s Gym pointed to conduct by Brewer in compliance with the duties of the franchisee, those acts were merely the acts of an agent. Gold’s Gym did not plead or prove the ability to pierce the corporate veil in this case, so those agents’ acts could not be attributed to individual parties.

Similarly, Gold’s Gym produced no evidence that appellees ratified the guaranties by performing under them. Nor did Gold’s Gym produce evidence that appellees knowingly remained silent about forgeries of the guaranties to their benefit and Gold’s Gym’s detriment. Instead, the summary judgment record indicates that when presented with a claim under the guaranty, appellees stated they had not signed the guaranty and refused to pay.

Thus, the trial court’s grant of summary judgment on the Gold’s Gym’s defenses of ratification of the franchise agreements and guaranties were affirmed. Because the trial court’s summary judgment on the forgery defense was reversed, the dispute was remanded for further proceedings.

The case is No. 05-11-00699-CV.

Attorneys: Eric D. Fein for Gold's Gym Franchising, LLC. Joseph M. Cox (Bracewell & Giuliani LLP) for Jerry Brewer & The Jerry & Kay Brewer Revocable Trust.

Companies: for Gold's Gym Franchising, LLC.

Cases: FranchisingDistribution TexasNews