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Kramer v. Mcdonald's System

OPINION FILED JUNE 9, 1978.

ARNOLD I. KRAMER, PLAINTIFF-APPELLEE,

v.

MCDONALD'S SYSTEM, INC., ET AL., DEFENDANTS-APPELLANTS. — (BANK OF RIVER OAKS, DEFENDANT.)



APPEAL from the Circuit Court of Cook County; the Hon. RAYMOND K. BERG, Judge, presiding. MR. JUSTICE MEJDA DELIVERED THE OPINION OF THE COURT:

Plaintiff, Arnold I. Kramer (Kramer), brought an action against defendants, McDonald's System, Inc., McDonald's Corporation, and Franchise Realty Interstate Corporation (hereinafter referred to collectively as McDonald), and the Bank of River Oaks (Bank), alleging that McDonald and the Bank had acted in concert to convert certain restaurant equipment in which Kramer had a perfected security interest. Kramer sought damages for the alleged conversion, and a declaration of the rights of the parties as to the equipment, which was located in a McDonald's franchise restaurant. Following motions for summary judgment by both Kramer and McDonald, the circuit court of Cook County entered judgment against McDonald for $104,784.41, and McDonald appealed. The Bank is not involved in this appeal.

McDonald contends: (1) that the complaint does not state a cause of action and that Kramer has not alleged the elements of conversion; (2) that the trial court did not have jurisdiction; (3) that the granting of Kramer's motion for summary judgment was improper, and that summary judgment should have been entered in favor of McDonald; (4) that Kramer is not the proper party plaintiff to the action; (5) that it was error for the trial court to deny McDonald's requests for discovery; (6) that the trial court wrongfully refused to transfer the case to the law division; (7) that the rulings of the trial court violated McDonald's equal protection rights; and (8) that unrelated attorney's fees, interest and costs were improperly included in the judgment against McDonald and that McDonald's fees and costs should instead be awarded against Kramer. McDonald has also filed a motion with this court to enter an order imposing upon Kramer the costs of reproducing allegedly irrelevant excerpts from the record. The motion was taken with the case.

We affirm in part and reverse in part. The pertinent facts follow.

In July 1974, the Bank, located in River Oaks, Illinois, made a commitment to loan $107,000 to Ralph Baker (Baker), then a resident of Villa Park, Illinois. The loan was for the purpose of financing a McDonald's franchise restaurant in Midland, Texas. On November 30, 1974, Baker signed a note to the Bank for the $107,000 loan, securing the loan with a chattel mortgage which gave the Bank a security interest in the equipment and furnishings in the restaurant. The mortgage was recorded with the Secretary of State of Texas and the county clerk of Midland, Texas. In addition, on November 30, 1974, the Bank entered into a landlord subordination agreement with McDonald. The agreement provided that, in the event of Baker's default on the note to the Bank, McDonald would consent to the removal of the property covered under the terms of the Bank's security agreement. It also provided that if Baker did not cure delinquencies in his payments after receiving notice from the Bank, the Bank would continue the note and security agreement upon receipt of notice from McDonald that it intended to keep the note current. Under the terms of the agreement, the option to maintain the note was "at the sole discretion" of McDonald and was not to be construed as a guarantee of payment by McDonald. McDonald further agreed that any interest which it had in the same equipment pursuant to its leasing agreement would be subordinated to the Bank's interest arising from the note until the loan was paid in full.

On December 9, 1974, McDonald and Baker entered into licensing and leasing agreements for the establishment of the franchise restaurant in Midland, Texas. The licensing agreement provided for Baker's operation of the Midland restaurant for 20 years, during which time Baker would comply with the policies of McDonald as set forth in the licensing agreement, pay licensing and service fees to McDonald, and make regular revenue and statistical reports to McDonald. McDonald, in return, would allow the use of its name and trademarks, provide training facilities for Baker's employees, and perform various consulting services to assist Baker in the operation of the restaurant. In addition, the licensing agreement contained the following relevant provision:

"1.(b) * * * Licensee represents, warrants, and agrees that he actually owns the complete equity interest in this License and the profits from the operation of the Restaurant, and that he shall maintain such interest during the term of this License except only as otherwise permitted pursuant to the terms and conditions of this License. Licensee agrees to furnish Licensor with such evidence as Licensor may request, from time to time, for the purpose of assuring Licensor that Licensee's interest remains as represented herein."

The licensing agreement provided for assignment upon the death or permanent incapacity of Baker, the licensee, and for an assignment to a corporation whose shares are wholly owned and controlled by the licensee. Regarding any other assignments, the leasing agreement provided that the "Licensee shall not sell, transfer or assign this License to any person or persons without Licensor's prior written consent."

The licensing agreement also contained provisions regarding rights and duties upon the material breach of the license, which stated:

"20. Effect of Termination.

(a) In the event of any material breach of this License, Licensor shall have an immediate right to enter and take possession of the Restaurant in order to maintain continuous operation of the Restaurant, to provide for orderly change of management and disposition of personal property, and to otherwise protect Licensor's interest.

(b) Upon termination of this License due to any breach or breaches, Licensee shall not, without prior written consent of Licensor, remove any furniture, fixtures, signs, equipment or other property or leasehold improvements from the premises either prior to or for a period of thirty days following such termination. Licensor shall have the option for thirty (30) days following any such termination to purchase Licensee's furniture, fixtures, signs, equipment, leasehold improvements and other property or any portion thereof for a sum equal to the fair market value of such property. In the event of such termination, there shall be no payment by Licensor for `good will' or other intangible assets of Licensee."

Assignments or transfers of any interest in the license made in violation of the license agreement's provisions and failure to pay service fees due to McDonald were among the events listed as constituting a material breach.

The leasing agreement provided that Baker pay McDonald both a fixed amount and a percentage of the monthly gross sales as rent for the premises in which the restaurant was located. Under the terms of the lease, Baker agreed to purchase and install the signs, trade fixtures and equipment of the restaurant according to McDonald's specifications and also agreed not to encumber McDonald's title in the premises in any way. Baker was not allowed to "assign, convey, mortgage, pledge or encumber this lease or any interest hereunder or permit the use or occupancy of the premises or any part thereof by anyone other than the Lessee" without McDonald's prior written consent. McDonald retained the right of re-entry in case of Baker's default on the lease. The lease provided:

"Lessor shall have and Lessee hereby grants unto Lessor a lien upon all Lessee's property located on the demised premises, from time to time, for all rental and other sums due from time to time from Lessee to Lessor under the provisions of this lease."

In order to obtain additional financing of $90,000, Baker entered into a limited partnership agreement on January 17, 1975, forming the B/K Limited Partnership with Baker and his wife as general partners and Kramer and four others as limited partners. The certificate of limited partnership was signed and recorded with the Secretary of State of Illinois on January 23, 1975.

The purpose of the partnership, as stated in the partnership agreement, was:

"* * * to enter into a venture for financing the acquisition, development and operation of a McDonald's Restaurant and License in Midland, Texas and such future McDonald's Restaurant and Licenses which may in the future become available to the General Partners with a right of first refusal to the Limited Partners hereunder to participate therein on the same basis as the participation herein."

The five limited partners agreed to contribute $90,000, to be placed in a bank in the metropolitan Chicago area, with Kramer designated as a co-signator for the purpose of drawing checks on the account. Partnership funds were to be deposited in one or more partnership bank accounts which the general partners were to establish either in the metropolitan Chicago area or in Midland, Texas. Baker and his wife, as general partners, were given "full authority, rights and powers upon such terms as they deem necessary, desirable or proper" to manage all of the affairs of the partnership.

The partnership agreement contained the following provision regarding the McDonald license and lease:

"The McDonald's License(s) and Lease(s) owned by the General Partner Ralph Baker, shall be held by said General Partner and said General Partner, Ralph Baker, shall own the entire legal, equitable and beneficial interest and power of direction * * * thereunder to said Licenses(s) [sic] and Lease(s). The General Partner, RALPH BAKER, acknowledges that he is the only signator to the McDonald's Agreement(s) and Lease(s) contemplated hereunder and pursuant to the terms of this agreement. The Limited Partners give the General Partners their Power-of-Attorney to act in their behalf with respect to dealings and directions to the Licensor and Lessor contemplated hereunder. The Limited Partners further acknowledge that they have no right to assert any recordable interest in the McDonald's License agreement(s) and Lease(s) which are the business of the partnership without the General Partners first obtaining the express written consent of Texas McDonald's System, Inc. and Franchise Realty Real Estate Corp."

In addition to designating Kramer as co-signator of checks drawn on the partnership accounts, the partnership agreement stated that: "All financial data supplied to McDonald's according to any License Agreement and Lease Agreement shall also be supplied to the Limited Partner, Arnold I. Kramer, who for purposes of the McDonald's Franchise shall be considered co-counsel * * *." The partnership agreement further contained a waiver of liability against Kramer which provided in pertinent part:

"The designated signatory, ARNOLD I. KRAMER, shall have no duties or responsibilities except as expressly provided herein and shall not be obligated by or under any other agreement to which the designated signatory is not a party, even though reference thereto may be made herein."

Additionally, the agreement specifically provided that it shall be construed under Illinois law.

On January 17, 1975, Baker and his wife signed two notes, naming Kramer as payee of both. One note was an unsecured installment note with a principal sum of $90,000. The other was a note and security agreement for the amount of $175,823.80, which reflected a $90,000 principal and a finance charge of $85,823.80, and which showed payments due and interest accruing in amounts identical to those shown on the unsecured note. The security for the second note was in the form of a chattel mortgage, also bearing a date of January 17, 1975, and covering the following:

"Any license(s) granted by McDonald's System, Inc., any lease(s) with Franchise Realty Interstate Corporation, as Lessor. All inventory and accounts receivable of Debtor of every description together with the products and proceeds thereof, whether now or hereafter existing or acquired and all business equipment, machinery, fixtures and furniture of the Debtor of every description used or useful in the conduct of the Debtor's business, whether now or hereafter affixed thereto or used in connection therewith, whether located at 111 Andrews Highway, Midland, Texas, or elsewhere, including but not limited to the attached Schedule A."

The security agreement acknowledged the prior security interest of the Bank in the same property. Kramer's security interest was recorded with the Secretary of State of Texas on February 3, 1975, and with the recorder of deeds of Midland, Texas, on February 14, 1975.

Kramer and McDonald entered into a landlord subordination agreement on January 17, 1975, subordinating McDonald's rights under the lease to Kramer's rights under the note and security agreement, as McDonald had previously done with the Bank. The agreement with Kramer, however, acknowledged the existence of the Bank's prior lien on the property and stated that McDonald's option to maintain the note to Kramer on a current basis, in the event of Baker's default, was "unlikely to be exercised if the loan from the Bank of River Oaks is outstanding, or the extent it is still outstanding, upon default of Kramer's loan." Also on January 17, 1975, Kramer, Baker and McDonald executed a conditional assignment agreement which provided for all of Baker's ...


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