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HOME REPAIR INC. v. UNIVERSAL RESTORATION SERVICES

March 27, 2003

HOME REPAIR, INC., A DELAWARE CORPORATION, PLAINTIFF,
v.
UNIVERSAL RESTORATION SERVICES, INC., AN ILLINOIS CORPORATION, DEFENDANTS.



The opinion of the court was delivered by: Rebecca R. Pallmeyer, Unites States District Judge

MEMORANDUM OPINION AND ORDER

Plaintiff Home Repair and Defendant Universal Restoration Services ("Universal") were franchisees in the Paul W. Davis System, ("PWDS"), a general contracting and cleaning business. This litigation arises from a failed attempt by Home Repair to purchase the PWDS franchise area assigned to Universal. On September 14, 2001, Home Repair filed its initial complaint, alleging that Universal breached express and implied terms within an October 22, 1997 letter agreement between the parties regarding the transfer of Universal's franchise territory. On December 12, 2001, Plaintiff filed an amended complaint alleging additional facts, but did not alter the original claims. On June 5, 2002, in Home Repair, Inc. v. Universal Restoration Services, Inc., No. 01 C 7141, 2002 WL 1263992 (N.D. Ill. June 5, 2002), the court dismissed Home Repairs amended complaint without prejudice because it failed to allege that Universal breached the terms of the letter agreement. Following the court's decision, on June 24, 2002, Home Repair filed a second amended complaint. ("SAC"), in which it now asserts additional facts related to its breach of contract claim and an additional claim of common law fraud.

Universal again moves to dismiss both counts contained in the SAC for failure to state a claim for relief. For the foregoing reasons, the motion is granted.

FACTUAL BACKGROUND

For purposes of this decision, the court accepts Plaintiff's allegation as true. Many of these alleged facts are described in the court's June 2002 opinion. For clarity, this decision repeats the factual background with specific reference to the additional allegations in Plaintiff's Second Amended Complaint.

Plaintiff Home Repair and Defendant Universal were both franchisees in the PWDS franchise network, which operates a general contracting and cleaning business that services both the general public and the insurance restoration markets. (SAC ¶ 10(a).) Home Repair operated its PWDS franchise in the Little Rock, Arkansas area, while Universal, which was known as Paul W. Davis Systems of Northern Illinois, until it withdrew from the PWDS network in January 1998. operated the franchise area comprising the greater Chicago metropolitan area. (Id. ¶¶ 7-9.)

Franchisees in the PWDS network were required to enter a franchise agreement with PWDS, which included: (1) a non-compete clause; and (2) a prohibition on the transfer of a franchise without the prior written consent of the franchisor, PWDS.*fn1 (Id. ¶ 10(c)-(d).) By September 1997, Phil Goldstein, Universal's principal officer, had became dissatisfied with his PWDS franchise and sought to run an independent insurance restoration business in the greater Chicago metropolitan area, similar to the business Universal had operated as a PWDS franchisee. (Id. ¶ 13.) Throughout September and October 1997. Goldstein unsuccessfully petitioned PWDS to waive the non-compete provision of the PWDS franchise agreement, thus allowing him to run his independent business without running afoul of that provision. (Id. ¶ 13-14.)

On an undetermined date in October 1997, Goldstein contacted Eric Tucker, the sole officer and shareholder of Home Repair, and told Tucker that he wanted to sell his PWDS territory to Home Repair, but remain a competitor in the territory. (Id. ¶ 17-19.) Tucker responded to this overture by pointing out that PWDS would seek to enforce the non-compete provision of the franchise agreement, but Goldstein allegedly assured Tucker that he was prepared to litigate the issue with PWDS and that he "would not let the prospects of such litigation with PWDS deter him from transferring the territories to Home Repair." (Id. ¶ 19(c)-(d).)

During October 1997, Tucker and Goldstein continued to discuss the prospect of Universal's transferring its PWDS territory to Home Repair. (Id. ¶ 18-19.) At some point during these negotiations, Plaintiff alleges. Tucker and Goldstein reached an oral agreement that included the price term for the transfer and three conditions: (1) Home Repair agreed not to enforce the PWDS non-compete provision against Universal after the transfer, (2) Universal was responsible for obtaining the approval of the franchisor, PWDS, to the transfer, and (3) "if necessary, Universal would accept the risk of litigation with PWDS, after the sale, if PWDS attempted to enforce the non-compete clauses in Universal's franchise agreements."*fn2 (Id. ¶ 20(a)-(c).)

To memorialize this oral agreement, Goldstein and Tucker executed a letter agreement (hereinafter, "Letter Agreement") on October 22, 1997. (Id. ¶ 21.) Notably, the second and third conditions in the parties' alleged oral agreement are not mentioned in the Letter Agreement. The Letter Agreement provides for a purchase price of $450,000, a price Plaintiff characterizes as "substantially less than the fair market value of the Universal territories." (Id. ¶ 24.) In exchange for this price concession, Home Repair agreed not to enforce PWDS's non-competition provisions against Universal. (Id. ¶ 24-26.) Plaintiff alleges that the parties understood that the Letter Agreement was not a final contract, but that they nevertheless "intended and agreed that the Letter Agreement confirmed the binding agreement that Tucker and Goldstein had reached in their conversations." (Id. ¶ 29.) The Letter Agreement was expressly conditioned on the approval of PWDS and "the execution of a "mutually acceptable purchase agreement." (Id. ¶ 27, 29.) Specifically, the Letter Agreement stated:

The Transaction is conditional upon satisfactory completion of the following:

(A) Purchase Agreement. Execution of a mutually acceptable purchase agreement embodying the terms of this letter ("Purchase Agreement").
(B) Approval. Receipt of all approvals and consents from third parties which are necessary to consummate the transaction contemplated herein, including but not limited to the consent of Paul W. Davis Systems Inc. (the "Franchisor") and the waiver by the Franchisor of its rights of first refusal pursuant to Section 20.2 of the Franchise Agreement.
(Letter Agreement, Exhibit A to Plaintiff's SAC.)

Plaintiff claims that "[o]nly Universal had standing under its PWDS franchise agreement to seek and obtain the approval of PWDS as required under Universal's applicable franchise agreements." (Id. ¶ 28.) As a result, the parties understood, at the time the Letter Agreement was executed, that Universal would be responsible for seeking the approval of PWDS to the territory transfer. (Id.)

On October 27, 1997, Universal submitted the Letter Agreement to PWDS for approval, but, in a November 24, 1997 letter, Scott Baker, president of PWDS, refused to approve the transfer. (Id. ¶¶ 33-34(a).) Baker's letter stated, "PWDS cannot consent to a proposed transfer unless the transferring franchisee agrees to continue to comply with the non-compete provisions contained in the franchise agreement." (Id ¶ 34(b).) Baker stated, further, that it was standard procedure for PWDS to require "transferring franchisees . . . to execute a standard Voluntary Termination Agreement and Release, which provides, in relevant part, that the covenant against competition survives termination of the franchise agreement." (Id.) Lastly. Baker stated that "if you elect to ...


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