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ALL EMS, INC. v. 7-ELEVEN

January 3, 2005.

ALL EMS, INC., an Illinois corporation, MAGDY WAGDY and SUSAN WAGDY, Plaintiffs,
v.
7-ELEVEN, INC., a foreign corporation, d/b/a 7-Eleven FOOD STORES, Defendants.



The opinion of the court was delivered by: WAYNE ANDERSEN, District Judge

MEMORANDUM, OPINION AND ORDER

Plaintiffs/Counter-Defendants ALL EMS, Inc. and Magdy and Susan Wagdy are franchisees of a 7-Eleven store located in Chicago, Illinois. Plaintiffs have sued Defendant/Counter-Plaintiff 7-Eleven Corporation for breach of the Franchise Agreement. 7-Eleven has filed a third amended counterclaim alleging that Plaintiffs have breached the Franchise Agreement and seeking possession of the store. A jury trial in June 2000 resulted in a hung jury. This case was retried as a bench trial before the Court.

After considering all of the evidence, we hereby award possession of the store to the Defendant/Counter-Plaintiff 7-Eleven. We find that 7-Eleven is entitled to monetary damages in the amount of $2,731.54 and that each party is to bear its own attorney's fees. The following constitutes the Court's findings of fact and conclusions of law pursuant to Fed.R.Civ.P. 52(a). FINDINGS OF FACT AND CONCLUSIONS OF LAW

  I. Evidence Presented At Trial

  This is a dispute between 7-Eleven and one of its franchisees in which each asserts that the other did not comply with the Store Franchise Agreement (the "Agreement"). 7-Eleven seeks to terminate the franchise because it claims that ALL EMS has failed to maintain the minimum Net Worth required of all franchisees. 7-Eleven seeks to regain possession of the convenience store, to recover the draws taken by the Wagdys since their franchise was terminated in February, 2000, and to recover the amount shown by the evidence to be in deficit. 7-Eleven seeks the monetary damages from ALL EMS and the Wagdys, who personally guaranteed the corporation's debts, attorneys fees and costs.

  ALL EMS and the Wagdys claim that 7-Eleven has tried to wrongfully terminate their franchise by purposefully engaging in conduct to decrease their profits and ultimately diminish their net worth. ALL EMS and the Wagdys seek monetary damages they claim resulted from 7-Eleven's wrongful conduct.

  The evidence presented showed that on April 14, 1987, 7-Eleven executed a Store Franchise Agreement (the "Agreement") with the Wagdys. Under the Agreement, 7-Eleven franchised the 7-Eleven Store located at 5355 West Diversey Avenue, Chicago, Illinois (the "Store") to the Wagdys. The Agreement sets out the duties and obligations between the parties. Beginning in April, 1987, the Wagdys assigned their rights and obligations under the Agreement to their corporation, ALL EMS. At the time ALL EMS assumed the rights and obligations under the Agreement, the Wagdys executed a Guaranty under which the Wagdys personally guaranteed the "full and prompt performance of all obligations, of every nature and kind, of [ALL EMS] under the Agreement." In July 2000, while this lawsuit was pending, the Agreement was extended for another five years.

  Under the terms of the Agreement, 7-Eleven provided to ALL EMS and the Wagdys a lease of the store, use of 7-Eleven's license and trademark, on-going financing for the franchisee (inventory purchases, payroll, draw, all operating expenses, etc.), on-going accounting and payroll services, and other services. Paragraph 11 of the Agreement states that "[i]f in 7-Eleven's sole opinion, there has been a Material Breach by FRANCHISEE or 7-ELEVEN believes its Security Interest is threatened, 7-Eleven may discontinue the financing, described above, and the unpaid balance in the Open Account shall be immediately due and payable."

  In paragraph 28 of the Agreement, ALL EMS and the Wagdys warranted that the occurrence of certain events, defined as Material Breaches, was good cause to terminate the Agreement and, consequently, their franchise. Among the events considered to be a Material Breach and good cause for termination is the failure to maintain the minimum Net Worth required by the Agreement. Specifically, the Agreement states:
"Material Breach" means any one or more of the following events entitling 7-Eleven to terminate the Agreement as set out in Paragraph 28: (i) Net Worth is less than the minimum determined pursuant to Paragraph 13 of the Agreement.
  Paragraph 13 of the Agreement sets out the minimum Net Worth. In 1987, when the Wagdys signed the Agreement, there was an escalating scale for the Net Worth. In 1988, the Agreement was amended to provide for a flat $10,000 requirement of minimum Net Worth. That is, ALL EMS and the Wagdys had to maintain at least $10,000 in Net Worth.

  The Agreement also provided that ALL EMS and the Wagdys had the right to cure Material Breaches, including the failure to maintain the minimum Net Worth, provided that ALL EMS and the Wagdys had not already committed two Material Breaches within the previous three years. In other words, three Material Breaches within three years meant that 7-Eleven could terminate the Agreement without allowing ALL EMS and the Wagdys the opportunity to cure their last Material Breach.

  Finally, Paragraph 6 of the Agreement provides:
Lease. 7-ELEVEN leases the Store and Equipment to FRANCHISEE for use only in connection with operation of the Store pursuant to this Agreement . . . With respect to the Lease, it is the intention of the parties to create only a landlord-tenant relationship. In the event of a breach of this Agreement by the FRANCHISEE, 7-ELEVEN shall be entitled, in addition to any other rights under this Agreement: to invoke all rights and remedies, judicial and otherwise, available to a landlord, including summary proceedings for possession of leased property, the right to appointment of a receiver or similar remedies; and/or (ii) to terminate, cancel, or declare a forfeiture of the Lease.
  At trial, 7-Eleven presented evidence to establish that ALL EMS and the Wagdy's Net Worth had fallen below the $10,000 mark required in the Agreement. At the end of 2000, ALL EMS and the Wagdy's deficit was $11,286. In September 2001, their deficit had increased to $31,570; in November, 2001, the deficit had grown to $40,824. At the time of trial, the deficit had grown to $86,841.00.

  On April 25, 2002, 7-Eleven filed its Second Amended Counterclaim. This pleading set out the grounds for 7-Eleven's termination of ALL EMS and the Wagdys' franchise. The Second Amended Counterclaim alleges that the Notices of Breach and/or Termination informed ALL EMS and the Wagdys that they had breached the Agreement for failing to maintain the Minimum Net Worth required by the Agreement. The Notices gave ALL EMS and the Wagdys the right to cure these Material Breaches, but ALL EMS and the Wagdys failed to do so. The first notice pertaining to Net Worth that was served on ALL EMS and the Wagdys was on January 24, 2000. This was later supplemented by a January 31, 2000 notice. The January 24, 2000 notice noted that there was a negative $23,859 position in their Net Worth. However, because there was a dispute about $9,000, 7-Eleven gave ALL EMS and the Wagdys credit for this amount, leaving a negative deficit of approximately $14,000. The January 31, 2000 notice made a correction and told ALL EMS and the Wagdys that they needed to pay $24,000 to correct the net worth position. The notice indicated that ALL EMS and the Wagdys had three days in which to pay the money.

  On January 27, 2000, ALL EMS and the Wagdys made a $14,210 payment. This brought their Net Worth position up to $5,811. On February 3, 2000, they made a second payment of $301.28, bringing their Net Worth position to $6,012.88. The Agreement provides that there is a time period of 72 hours within which to cure a breach. Thus, ALL EMS and the Wagdys had until February 4, 2000 to bring their Net Worth position up to $10,000.

  ALL EMS and the Wadgys did not make any other payments until February 21, 2000. At that time, they made a $2,730 payment which brought their balance to $8,842.

  The next notice that 7-Eleven served on ALL EMS and the Wagdys was the December 3, 2001 Notice of Breach and/or Termination. This Notice informed ALL EMS and the Wagdys that they had a negative Net Worth of $37,154.79. The Notice informed them that to cure the breach, they had to increase their minimum Net Worth by $37,505.87. This figure included a credit for the $9,648.92 that was deducted from their Net Worth as a result of their misreporting of retail prices, which 7-Eleven acknowledged in the Notice was still disputed by ALL EMS and the Wagdys. ALL EMS and the Wagdys failed to cure the deficit in their Net Worth and failed to surrender possession of the store.

  The March 13, 2002 Notice informed ALL EMS and the Wagdys that they had a negative $55,422.79 Net Worth. The March 13, 2002 Notice allowed ALL EMS and the Wagdys the opportunity to cure, but they have failed to do so.

  ALL EMS and the Wagdys do not deny that their Net Worth has plummeted to the depths shown on the financial summaries, but they assert that their reduction in Net Worth was caused by 7-Eleven's misconduct. ALL EMS and the Wagdys argue that 7-Eleven deprived them of revenue which would have allowed them to ...


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