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Kramer v. Mcdonald's System





Appeal from the Appellate Court for the First District; heard in that court on appeal from the Circuit Court of Cook County, the Hon. Raymond K. Berg, Judge, presiding.


Rehearing denied November 30, 1979.

This cause was brought in the circuit court of Cook County by Arnold I. Kramer, plaintiff, as a declaratory judgment action seeking a declaration of the rights of the parties in certain equipment, inventory, accounts receivable, fixtures and furniture incidental to the operation of a McDonald's restaurant in Midland, Texas. Moreover, Kramer sought a determination that the defendants, McDonald's System, Inc., McDonald's Corporation and a subsidiary, Franchise Realty Interstate Corporation (McDonald's), the defendants, had converted property in which Kramer had a security interest when McDonald's permitted the Bank of River Oaks (the bank) to sell the equipment at public sale and when McDonald's leased the premises to a second franchisee.

The circuit court denied McDonald's motions to dismiss and for summary judgment and granted Kramer's motion for summary judgment against McDonald's for $104,784.41. On appeal, the appellate court of Illinois affirmed that part of the lower court's judgment denying McDonald's motion to dismiss the complaint, reversed the order granting Kramer summary judgment, and rendered summary judgment in favor of McDonald's. (61 Ill. App.3d 947.) We thereafter granted Kramer's petition for leave to appeal. We affirm the judgment of the appellate court, though we base our decision on different reasons.

On December 9, 1974, Ralph Baker entered into a franchise license agreement and a lease agreement with McDonald's. Under the terms of the agreements Baker was given a 20-year leasehold interest in a McDonald's hamburger restaurant in Midland, Texas. Prior to commencing operation of the restaurant, Baker obtained a loan from the bank for $107,000. Baker granted a security interest in the restaurant equipment he had purchased to the bank. It was agreed that McDonald's would subordinate its landlord's lien to the bank's security interest. The landlord's subordination agreement also specified that if Baker defaulted under the security agreement with the bank, McDonald's would consent to the removal of the equipment from the restaurant, or else McDonald's, at its option, could assume Baker's payments to the bank. In December 1974 the bank perfected its security interest when it filed financing statements with the Secretary of State of Texas and the appropriate recorder of deeds.

On January 17, 1975, Baker, in order to obtain additional working capital, entered into several agreements with Arnold Kramer. On that day the following documents were executed: (1) a limited partnership agreement creating the B/K Limited Partnership, with Baker and his wife as general partners, and Kramer and four others as limited partners; (2) a landlord subordination agreement, similar to the one entered into with the bank, but with the additional provision that Kramer's security interest would be subordinate to the bank's; (3) a conditional assignment agreement, providing: (a) that in the event of Baker's default, McDonald's would consent to Kramer's removal of the collateral, subject to the bank's prior security interest; (b) that McDonald's had an inferior lien to Kramer's security interest; and (c) that if Baker defaulted, all his right, title and interest in and to the lease and license agreements would be assigned to McDonald's; (4) a chattel mortgage in favor of Kramer; (5) a judgment note in the amount of $90,000 made by Baker and his wife, with Kramer as payee; and (6) a note and security agreement evidencing a principal debt of $90,000 and a finance charge for interest over the life of the note of $85,823.80. The security agreement granted a security interest in the restaurant equipment to Kramer, subject to the prior security interest of the bank in the same collateral. The security agreement also granted a security interest to Kramer in the franchise license and the lease with McDonald's, as well as in the inventory, accounts receivable, proceeds and products therefrom, machinery, fixtures and furniture whether presently owned or after acquired by Baker. The security agreement and financing statement were duly filed in Texas with the Secretary of State and the Midland County recorder of deeds.

On January 22, 1975, the limited partners executed an indemnification agreement which also designated Kramer as their "nominee to appear as `Lender' on all agreements with [McDonald's] and as payee in all notes executed by [the Bakers]." Also contained in this agreement was a provision that the limited partners would "collect interest in their capital contribution only to the extent their capital contribution is not returned to them by payment of the Promissory Note given to guarantee the return of said capital contribution." Additionally the agreement provided that Kramer would act as the representative of all of the limited partners in any litigation.

The certificate of limited partnership filed with the recorder of deeds of Cook County, Illinois, on February 3, 1975, reveals in paragraph 7 that the amount of cash "contributed" by the limited partners totaled $90,000, with Kramer contributing $54,000 and each of the other four limited partners contributing $9,000. Paragraph 8 states: "No additional contributions are to be made by any Limited Partner."

Baker commenced business in March 1975, and closed the business in January 1976. He sent a telegram to McDonald's on January 22, 1976, informing it he would abandon the restaurant January 24, 1976, at 12:01 a.m. On the same day he sent a telegram to Kramer and the other limited partners informing them they had until 11:59 p.m. on January 23, 1976, to take over the restaurant. Kramer did not reply. McDonald's delivered a letter to Baker on January 23, 1976, stating it would take over the restaurant, sell it and distribute the proceeds to Baker and his creditors.

Baker did not turn over the restaurant to McDonald's but did cease to operate it. On January 26, 1976, McDonald's notified Baker he was in default under the license and lease agreements. McDonald's eventually took possession of the restaurant. Kramer then notified McDonald's that Baker was in default and demanded payment of the February installment from McDonald's. McDonald's subsequently entered into a franchise and lease agreement with Victor Moore, who began to operate the restaurant in April 1976.

Kramer filed the instant action in the circuit court of Cook County on April 12, 1976, seeking a declaratory judgment concerning his rights in the property in the restaurant and alleging that the defendant McDonald's unlawfully converted his property.

The bank had notified Baker on February 4, 1976, that he was in default under the security agreement. Thereafter the bank gave public notice that a sale of the equipment in Midland, Texas, would occur on May 20, 1976. Upon receiving his notice of the sale, Kramer amended his complaint on May 18, 1976, adding the bank as a defendant, seeking a temporary restraining order to stop the sale, and asking for other relief. The court issued the temporary restraining order on May 18 and vacated it the next day, upon motion of the bank. The sale occurred as scheduled, with both Baker and Kramer represented. The bank was the only bidder and purchased the equipment for $104,000. The next day, May 21, 1976, McDonald's purchased the equipment from the bank for $113,367.90, the total indebtedness Baker owed the bank.

Kramer filed a second amendment to his complaint on November 3, 1976, alleging that McDonald's and the bank had acted in concert to convert the property in which Kramer had a security interest. Because the orders appealed from involve only ...

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