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03/19/87 Geri's West, Inc., v. George R. Ferrall

March 19, 1987

GERI'S WEST, INC., PLAINTIFF-APPELLANT

v.

GEORGE R. FERRALL, DEFENDANT-APPELLEE



APPELLATE COURT OF ILLINOIS, SECOND DISTRICT

505 N.E.2d 1348, 153 Ill. App. 3d 579, 106 Ill. Dec. 557 1987.IL.343

Appeal from the Circuit Court of Winnebago County; the Hon. Robert C. Gill, Judge, presiding.

APPELLATE Judges:

Justice Woodward delivered the opinion of the court. Lindberg, P.J., and Inglis, J., concur.

DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE WOODWARD

Plaintiff, Geri's West, Inc., brought suit against Geri Corporation and its corporate director, the defendant, George R. Ferrall, for failure to comply with the Franchise Disclosure Act (hereinafter Act) (Ill. Rev. Stat. 1985, ch. 121 1/2, par. 701 et seq.) in the sale of a franchise restaurant to the plaintiff. The action against Geri Corporation is stayed because that corporation has filed for bankruptcy. In its complaint, plaintiff alleged that the defendant Ferrall violated the Act by failing to register and to provide proper disclosure pursuant to section 4 of the Act. Count IV of plaintiff's complaint sought damages for this failure to comply with the Act, while plaintiff's count V, and pursuant to subsection 2 of section 21 of the Act, sought rescission of the franchise agreement. The trial court granted summary judgment to the defendant as to plaintiff's counts IV and V and judgment on the pleadings as to count V. In its motion for summary judgment, the defendant stated that as president of the defendant, Geri Corporation, the defendant, Ferrall, was insulated from personal liability under Illinois law. The judgment on the pleadings as to count V was founded upon the failure of the plaintiff in its complaint to allege compliance with the notice requirements of the Act.

Plaintiff asserts several bases for holding defendant personally liable under the Act. We will restrict our analysis to the express provisions of section 21 of the Act, which provides for private civil suits, particularly since section 23 mandates that "[e]xcept as explicitly provided in this Act, no civil liability in favor of any person shall arise against any person by implication from . . . any provision of this Act." (Ill. Rev. Stat. 1985, ch. 121 1/2, par. 723.) Plaintiff's attempted reliance upon the wording and intent of sections 19 and 20 is misplaced, for civil penalties under section 19 can be brought only by the Illinois Attorney General's office and section 20 deals with criminal prosecutions under that Act., Plaintiff contends that subsection 1 of section 21 allows for direct recourse against the defendant, individually. Subsection 1 reads in pertinent part:

"Any franchisee or subfranchisor may bring an action for violation of this Act to recover damages sustained by reason of such violation against the franchisor, subfranchisor, franchise broker or salesperson or other person by or on behalf of whom such sale was made or who shall have participated or aided in any way in making such sale." (Ill. Rev. Stat. 1985, ch. 121 1/2, par. 721(1).)

Plaintiff interprets this provision to define defendant's role in the franchise agreement as falling within the category of "franchise broker," "salesperson," or "other person" as set forth in the Act.

As previously stated, the defendant's motion for summary judgment was based on the premise that his corporation was the sole entity to grant a franchise, i.e., was the franchisor, and that the corporate existence insulated him from personal liability because it is a separate legal entity. Under the Act, there are separate types of franchise sellers, namely, "franchisors" as defined in section 3(3) of the Act (Ill. Rev. Stat. 1985, ch. 121 1/2, par. 703(3)) and "franchise brokers" as defined in section 3(22) of the Act (Ill. Rev. Stat. 1985, ch. 121 1/2, par. 703(22); People v. Carter (1981), 102 Ill. App. 3d 796, 801, rev'd (1982), 97 Ill. 2d 133, reversed and remanded (1985), 135 Ill. App. 3d 997). There can be no question that the defendant represented his corporation; at his deposition testimony, he admitted that he alone handled the franchise negotiations in this matter on behalf of the corporation. Under the Act, a franchise broker is defined as "any person engaged in the business of representing a franchisor or subfranchisor in offering for sale or selling a franchise and is not a franchisor or subfranchisor with respect to such franchise." (Ill. Rev. Stat. 1985, ch. 121 1/2, par. 703(22).) In light of the foregoing, the defendant acted as a franchise broker for his corporation as the franchisor.

Salesperson, under the Act, includes "any person, other than a franchise broker, representing a franchise broker, franchisor, or subfranchisor, whether as an employee, agent or independent contractor, in effecting or attempting to effect the offer or sale of a franchise." (Ill. Rev. Stat. 1985, ch. 121 1/2, par. 703(23).) Coupled with the residual category in section 21 of "other person by or on behalf of whom such sale was made or who shall have participated or aided in any way in making such sale" (Ill. Rev. Stat. 1985, ch. 121 1/2, par. 721(1)), the classifications of franchise broker, salesperson, and "other person" evidence a clear, comprehensive strategy of individual liability for all those acting for a franchisor and guilty of some wrongdoing under the Act.

There is no indication in the Act, or in any authority cited by the defendant, that a corporation acting as a franchisor is without the purview of this provision of the statute. In fact, in the statement of purpose of this Act, it is stated:

"Illinois residents have suffered substantial losses where the franchisor or his representative has not provided full and complete information regarding the franchisor-franchisee relationship, the details of the contract between the franchisor and franchisee, the prior business experience of the franchisor and other factors relevant to the franchise offered for sale." (Ill. Rev. Stat. 1985, ch. 121 1/2, par. 702(1).)

The specified purpose of this statute is to hold both the franchisor, here the corporation, and its representative liable for nondisclosure. The franchisee is the intended beneficiary of this Act. The preamble to, as well as the text of, an act is useful in determining the scope of the act. (People ex rel. Morrison v. Sielaff (1974), 58 Ill. 2d 91; Radford v. Cosmopolitan National Bank (1964), 52 Ill. App. 2d 240.) The same section 2 of the Act also reads "[t]he General Assembly finds and declares that the widespread sale of franchises is a relatively new business phenomenon which has created numerous problems in Illinois" (Ill. Rev. Stat. 1985, ch. 121 1/2, par. 702(1)), necessitating the enactment of mandatory disclosures regarding a franchise operation under the Act. Where a statute has been passed to meet a perceived need of the people of remedying a certain evil, it must be liberally construed to carry out legislative intent. (Safeway Insurance Co. v. ...


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