Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

STEPHAN v. ROCKY MT. CHOCOLATE FACTORY

November 27, 1996

LAWRENCE F. STEPHAN, a citizen of Illinois, and PATRICIA L. STEPHAN, a citizen of Illinois, Plaintiffs,
v.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC., a Colorado corporation, Defendant.



The opinion of the court was delivered by: SHADUR

 Lawrence Stephan ("Lawrence") and his wife Patricia ("Patricia"), collectively "Stephans," have sued Rocky Mountain Chocolate Factory ("Rocky Mountain") for a declaration of rights, basing their resort to federal jurisdiction on diversity of citizenship: Stephans are Illinois citizens (Complaint PP1 and 2), while Colorado is the site of both facets of Rocky Mountain's corporate citizenship under 28 U.S.C. § 1332(c)(1) *fn1" (Complaint P3). Rocky Mountain has moved alternatively for dismissal of this action under Fed. R. Civ. P. ("Rule") 12(b)(6) or for summary judgment under Rule 56. Because the parties' submissions in connection with the motion had failed to supply this Court with two documents essential to full analysis, this Court has requested and has now received copies of those missing documents. At this point the motion is fully briefed and ready for decision, and for the reasons explained hereafter both Stephans prevail--in Lawrence's case, almost despite himself.

 Background

 This is the third act of a legal drama that, like most conventional dramas, involves some set changes. Act I was played out in a state court in Colorado (in the "Colorado Action"), then Act II was set in the Circuit Court of Cook County (in the "Illinois Action") and now Act III has found its way to this District Court. In the meantime a continuing entr'acte (referred to later in this opinion) is being played out on the same Circuit Court set as Act II. All of the action revolves around an August 16, 1991 Sublease Agreement ("Sublease") between Rocky Mountain as Sublessor and, depending on whose version is accepted, either Rocky Mountain Chocolate Factory of Illinois, Inc. ("Rocky Mountain-Illinois") or the combination of Rocky Mountain-Illinois and Stephans as Sublessee. *fn2"

 Rocky Mountain is a franchisor of confectionery stores, while Stephans formed Rocky Mountain-Illinois to engage in a franchise operation by under Rocky Mountain's auspices here in Chicago. On that same August 16, 1991 date Rocky Mountain took on the first-line responsibility for the leasing of store premises for the Rocky Mountain-Illinois operation by signing a lease with Equity Property Management Corp. ("Equity") as Lessor, so that the contemporaneously-executed Sublease required the Sublessee's performance of all of the terms of the Equity-to-Rocky-Mountain lease (the "Lease").

 When Rocky Mountain-Illinois' confectionery business went sour, defaults ensued under the Sublease, so that as of May 1995 Rocky Mountain had been forced to pay Equity $ 23,145.38. Rocky Mountain then began Act I by suing Rocky Mountain-Illinois and Lawrence in the Colorado Action, and when no appearance was filed by either defendant there, the case went to a default judgment on August 14, 1995 (that judgment is Ex. 2 to this opinion--another picture, though worth somewhat fewer words than Ex. 1, the picture of the Sublease).

 Rocky Mountain-Illinois and Lawrence continued to ignore the Colorado Action judgment (which thus became final and appealable) until Rocky Mountain filed it in the Circuit Court of Cook County under the Illinois Uniform Enforcement of Foreign Judgments Act (735 ILCS 5/12-651 and -652) and proceeded with post-judgment enforcement efforts in the Illinois Action (Act II of the drama). When Lawrence was unsuccessful there in his attempts to attack the judgment on the theories that it had been fraudulently obtained and that the Colorado court had lacked jurisdiction over him, the Illinois Action was settled: Rocky Mountain-Illinois and Lawrence paid Rocky Mountain $ 55,000, *fn3" and for its part Rocky Mountain released the judgments and judgment liens and covenanted not to sue Patricia. But the Settlement Agreement also included this reservation of rights (Settlement Agreement PD):

 
This Agreement does not relate to, release, waive or settle any claims or defenses among Rocky Mountain, RMCFI ["Rocky Mountain-Illinois"], L. Stephan, and P. Stephan that may arise out of the lawsuit styled Equity Properties And Development, Inc. v. Rocky Mountain Chocolate Factory, Inc. and Rocky Mountain Chocolate Factory of Illinois, Inc., case number 95 M1 726198, currently pending in the Circuit Court of Cook County, Illinois, Municipal Department, First District; and the parties hereto reserve all rights of action, defenses, cross-claims and counterclaims any of them may have as of the execution date of this Agreement against the other with respect to or relating to that certain: 1) Lease Agreement dated August 16, 1991 between Equity Properties and Rocky Mountain, and 2) Sublease Agreement dated August 16, 1991 between Rocky Mountain, and RMCFI . . . .

 In the meantime Equity has continued to pursue its accruing claims against Rocky Mountain under the Lease in the Circuit Court of Cook County in a combined forcible and rent collection action (that is the ongoing entr'acte). Because Stephans fear that they will be pursued individually for the recapture of any payments that Rocky Mountain may have to make as a result of that action (or perhaps for any other claims that Rocky Mountain may assert under the Sublease), Stephans have brought this Act III for a declaration that they have no further financial exposure stemming from the Sublease. In turn Rocky Mountain has responded with the current motion, rather than by way of answer.

 Case or Controversy: Patricia

 To narrow the area of controversy at the outset, Rocky Mountain has acknowledged in its Amended Memorandum ("Am. Mem.") 11 that it can have no further claims against Patricia under the Sublease because of its covenant not to sue her, contained in the Settlement Agreement. Accordingly there is plainly no case or controversy involving Patricia, and Stephans' Mem. 9 n. 7 therefore consents to the dismissal of her claims. Complaint Count III is consequently dismissed in its entirety, as is Count IV to the extent that it seeks to present any claim on Patricia's part.

 Case or Controversy: Lawrence

 Article III case or controversy problems are by definition jurisdictional, so that they must be addressed at the threshold. Yet Rocky Mountain's Am. Mem. 10-11 turns to that subject only as the third of its four challenges to Stephans' lawsuit (and Stephans' Mem. 18-19 essentially follows suit by addressing that subject as the last of its four topics). That sequence in the treatment of issues on Rocky Mountain's part might create some suspicion as to its lack of confidence in the jurisdictional argument--and if so that is entirely understandable, for such lack of confidence is entirely justified.

 For purposes of considering the justiciability of Section 2201 declaratory judgment actions, GNB Battery Techs., Inc. v. Gould, 65 F.3d 615, 620 (7th Cir. 1995), quoting Nuclear Eng'g Co. v. Scott, 660 F.2d 241, 251-52 (7th Cir. 1981) (citations omitted) has defined the Article III requirement in these terms:

 
The test to be applied to determine the existence of an actual controversy in the context of a declaratory judgment action is "whether . . . there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment."

 And Trippe Mfg. Co. v. American Power Conversion Corp., 46 F.3d 624, 627 (7th Cir. 1995), this time quoting International Harvester Co. v. Deere & Co., 623 F.2d 1207 at 1207-1210 (7th Cir. 1980), has framed the concept of "sufficient immediacy and reality" in terms of whether defendant had "engaged in conduct giving rise to a reasonable apprehension on plaintiff's part that it will face suit . . . or the threat of one . . . ."

 That test is plainly met here. Rocky Mountain is actively engaged in litigation with Equity as to its own ongoing liability under the Lease, having made substantial Lease payments the last time around and having then (in the Colorado Action) successfully laid off that liability onto Rocky Mountain-Illinois and Lawrence under the Sublease. If that scenario does not inspire a "reasonable apprehension" by Lawrence that he will confront a like effort by Rocky Mountain this time around, it is difficult to conceive of a situation that would fit that requirement.

 For its part Rocky Mountain's Am. Mem. 10-11 urges that the matter is not ripe because several contingencies stand in the way of Lawrence's exposure to actual liability in favor of Rocky Mountain. That argument is unpersuasive in light of the high degree of probability that each of the claimed contingencies will be met (presenting a sharp contrast to the famous "choke hold" case, City of Los Angeles v. Lyons, 461 U.S. 95, 75 L. Ed. 2d 675, 103 S. Ct. 1660 (1983), where each of several contingencies was viewed as presenting a low level of probability, so that their combination amounted to the multiplication of a number of very small fractions and hence as constituting an impermissibly speculative prospect overall). High probabilities of the occurrence of any preconditions to suit by a declaratory judgment plaintiff, such as those involved here, are after all the reason that the case or controversy test is framed in terms of "reasonable apprehension" rather than requiring a higher level of certainty. In short, Rocky Mountain loses on the jurisdictional component of its attack.

 Rocky Mountain's Am. Mem. 8-9 (its second of four contentions) advances an abstention argument, but it too fails to persuade. This case is plainly not "concurrent" with the Colorado Action. Despite Rocky Mountain's effort to suggest the contrary, the language in the Colorado judgment order about the possibility of additional future damage awards upon further application by Rocky Mountain (something that has not yet been essayed, because Rocky Mountain has not yet been stuck with any further payments to Equity) does not make that lawsuit--one that has already gone to judgment and execution--"concurrent" with today's pending declaratory judgment action. Nor is this case "parallel" to Equity's pending lawsuit against Rocky Mountain within the meaning of Colorado River Water Conservation Dist. v. United States, 424 U.S. 800, 818, 47 L. Ed. 2d 483, 96 S. Ct. 1236 (1976)--in that respect see Caminiti & Iatarola, Ltd. v. Behnke Warehousing, Inc., 962 F.2d 698, 701 (7th Cir. 1992), quoting the relevant Colorado River factors as set out in LaDuke v. Burlington N.R.R., 879 F.2d 1556, 1559 (7th Cir. 1989).

 Rule 12(b)(6)

 With Rocky Mountain thus having failed in its efforts to cut Lawrence off at the pass on case or controversy and abstention theories, it is time to turn to the merits. And here the analysis will begin, as Rocky Mountain has in its motion, with consideration of Rule 12(b)(6).

 For Rocky Mountain thus to style its motion in those terms ("failure to state a claim upon which relief may be granted") is a bit puzzling. Although this may merely be a matter of semantics, the relief that Lawrence seeks is declaratory: He wants a declaration of his obligations (or as he would have it, his lack of obligations) under the Sublease. And in that sense he certainly has a viable claim for relief--it has already been found that he has a real controversy with Rocky Mountain so as to satisfy the Article III requirement, and both he and Rocky Mountain will therefore get the requested declaration of rights and duties (Rocky Mountain really wants that as well, although of course it seeks the opposite result from the one contended for by Lawrence).

 To be sure, Lawrence may well lose on his legal position (that is, the relief that is granted on his claim could be an adverse rather than a favorable declaration), and in that sense it might perhaps be said that he does not "state a claim." But Rocky Mountain plainly does not seek a mere ruling that Lawrence's pleading is insufficient, something that most frequently leads to an opportunity to replead and that in all events is not a final order. Rocky Mountain's goal is rather an ultimate determination in its favor on the merits.

 It thus appears more appropriate to deal with Rocky Mountain's motion in its alternate Rule 56 summary judgment form. If it were really not necessary to go beyond Stephan's Complaint, a Rule 12(c) motion for judgment on the pleadings might do the job (though technically such motions are reserved for cases that are fully at issue "after the pleadings are closed," while here Rocky Mountain has not yet answered). In this instance, though, it would seem to be a stretch to treat the various documentary submissions (including those that this Court has been compelled to request because the parties failed to provide them) as somehow encompassed within the Complaint (an essential condition for a Rule 12(b)(6) determination). In all events, the Rule 56 matrix of considering the evidentiary submissions received from Rocky Mountain, plus the Lease and the Franchise Agreement referred to later, is more reliable.

 Rule 56

 Claim Preclusion

 Lawrence first tries to foreclose Rocky Mountain from going after him for any further liability under the Sublease on claim preclusion grounds, *fn4" asserting that the original Colorado Action judgment bars any further litigation against him under the Sublease. That position, however, is at odds with one of the fundamental principles of claim preclusion.

 For this purpose the rules of decision are provided by Colorado law under Section 1783 ( Marrese v. American Academy of Orthopaedic Surgeons, 470 U.S. 373, 380, 84 L. Ed. 2d 274, 105 S. Ct. 1327 (1985)). To that end Stephans' Mem. 6-9 seeks to invoke the unsurprising pronouncement in City Council of the City and County of Denver v. Block 173 Assocs., 814 P.2d 824, 830 (Colo. 1991) that under the claim preclusion principle:

 
Res judicata operates as a bar to a second action on the same claim as the one litigated in a prior proceeding when there is a final judgment, identity of subject matter, claims for relief, and parties to the action.

 But Lawrence's contention fails in those very terms, for any claim to which he may potentially be subject for any further Sublease liability is plainly not the "same claim" that went to judgment in the Colorado Action.

 It appears that no reported Colorado case has dealt with this specific question, but the universally applicable rule as to leases or other contracts calling for periodically accruing payments is that each nonpayment is treated as a separate breach, so that the injured party may sue from time to time on the breaches that have preceded each lawsuit, without thereby impairing its ability to sue separately for later breaches. Here for example is the statement of that universal proposition in Prime Management Co. v. Steinegger, 904 F.2d 811, 816 (2d Cir. 1990) (some citations omitted):

 
While a previous judgment may preclude litigation of claims that arose "prior to its entry, it cannot be given the effect of extinguishing claims which did not even then exist and which could not possibly have been sued upon in the previous case." Thus, when the parties have entered into a contract to be performed over a period of time and one party has sued for a breach, res judicata will preclude the party's subsequent suit for any claim of breach that had occurred prior to the first suit; it will not, however, bar a subsequent suit for any breach that had not occurred when the first suit was brought. See ten Braak v. Waffle Shops, Inc., 542 F.2d 919, 924 n. 6 (4th Cir. 1976) (dictum) ("an action for rent not due at the commencement of a former action for rent is not barred by the former judgment"); See generally 18 C. Wright, A. Miller & E. Cooper, Federal Practice and Procedure § 4409, at [75] (1981) ("Under a single five year lease providing for sixty monthly installments of rent, for example, a suit could be brought for each unpaid installment as it fell due; a single suit, however, must include all unpaid installments due when it is filed.").

 That principle kills Lawrence's argument. Because the nature and existence of Rocky Mountain's claims that existed at the commencement of the Colorado Action are a function of the contract between the parties, a brief look at the contractual documents demonstrates the applicability of the quoted rule of law.

 Here are the relevant provisions of Sublease PP1 and 4:

 
1. Sublessor shall sublease the Leased Premises to Sublessee on the same terms and conditions of the Lease, a true and correct copy of which is attached hereto and by this reference made a part hereof. References in the Lease to Lessor shall mean Sublessor and to Lessee shall mean Sublessee for the purposes of this Sublease.
 
* * *
 
4. Sublessee assumes and agrees to perform all obligations of Sublessor as set forth in the Master Lease insofar as they relate to the subleased premises as though it were Lessee under that document and as though Rocky Mountain Chocolate Factory, Inc., were Lessor.
 
In any such case and whether or not the Leased Premises or any part thereof be relet, Tenant shall pay to Landlord the Rent and all other sums payable up to the time of such termination of this Lease or Tenant's right to possession under this Lease as aforesaid by landlord, and thereafter, Tenant covenants and agrees to pay Landlord until the end of the Term of this Lease the equivalent of the amount of all the Rent and all other sums reserved herein required to be paid by Tenant less the net avails of such reletting, if any, and the same shall be due and payable by Tenant to Landlord on the dates ("rent days") such Rent and other sums above specified are due under this Lease. Landlord may file a suit or suits to recover any sums falling due under the terms of this Lease, from time to time. Any reletting by Landlord shall not be construed as an election on the part of Landlord to terminate this Lease unless a notice of such intention is given by Landlord to Tenant.

 If it were not for the fact that the next section of this opinion negates all liability on Lawrence's part, the documents in this case would pose an intriguing question in those terms: not as to Rocky Mountain's ability to pursue Sublessee for any further defaults (that unquestionably gets an affirmative answer) but instead as to just what those further defaults would encompass--or to state the flip side of that question, just what rents and other Lease obligations are claim-precluded by the judgment in the Colorado Action. For example, Stephans' Mem. 8 urges that any attempt by Rocky Mountain to collect the sum of $ 21,750 from Lawrence for "tenant chargeables" already owed to Equity, an item that Sublessee had expressly committed to pay under Sublease P4 *fn5" and that was past due and unpaid when the Colorado Action was brought, is barred in all events by claim preclusion because Rocky Mountain could have sued for that past-due amount in 1995 but did not. But on the other hand, Sublease P3 required Sublessee to make all of the Sublease payments (meaning the Lease-required payments) directly to Equity and not to Rocky Mountain, and Rocky Mountain has not yet been compelled to pay that $ 21,750 to Equity.

 So at the time the Colorado Action was brought Sublessee was undeniably in breach of that $ 21,750 payment obligation under the Sublease, and Rocky Mountain was likewise then in breach of that identical obligation to Equity under the Lease. Is Rocky Mountain in a position to say that its actually sustaining an injury--in the form of its having to make payment to Equity--by reason of Sublessee's conceded default is a necessary ingredient of its having a ripe claim against Sublessee for that sum (in which case Rocky Mountain's not having had to lay out that amount to Equity would render claim preclusion inapplicable), or is it enough for such purposes that Sublessee had not then made the payment and that Rocky Mountain therefore had an accrued (although unpaid) $ 21,750 obligation to Equity (which could thus make it necessary for Rocky Mountain to have included that amount in its Colorado Action prayer for relief, on pain of losing that potential recovery via claim preclusion)? ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.