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Restored Images Consulting, LLC v. Dr. Vinyl & Associates, Ltd.

United States District Court, W.D. Missouri, Western Division

July 27, 2016

RESTORED IMAGES CONSULTING, LLC, Plaintiff
v.
DR. VINYL & ASSOCIATES, LTD., Defendant,
v.
CHRISTOPHER COLLINS, Third-Party Defendant.

          AMENDED FINDINGS OF FACT AND CONCLUSIONS OF LAW

          GREG KAYS, CHIEF JUDGE UNITED STATES DISTRICT COURT

         This case presents a series of business disputes involving franchises that provide automobile cosmetic repairs. Plaintiff Restored Images Consulting, LLC (“Restored Images”), sued Defendant Dr. Vinyl & Associates, Ltd. (“Dr. Vinyl”), which impleaded Restored Images’s sole member, Third-Party Defendant Christopher Collins (“Collins”). The parties tried eleven claims to the Court on January 12 and 13, 2016. Having considered the trial testimony and exhibits submitted, the Court now finds the facts and states its conclusions of law.

         As explained more fully below, the Court finds that the only party to prove any of its claims is Restored Images against Dr. Vinyl on Count I. The Court awards damages in the amount of $10, 000.00.

         Findings of Fact

         The Court makes the factual findings below by giving substantial weight to Collins’s testimony. Collins was confident and well-poised, and his testimony was inherently believable. Most of his testimony was uncontroverted, including by Richard Reinders (“Reinders”), the other major witness. The Court withholds weight only from his testimony about calculations, where Collins seemed unsure and where the numbers did not add up when the Court tried to verify them.[1]

         The Court gives slightly less weight to Reinders’s testimony. Much of Reinders’s testimony was uncontroversial and uncontroverted, which the Court accepts as true. Where Reinders testified contrary to Collins, the Court generally believed Collins because Reinders did not seem to thoroughly know his company’s operational aspects even though he was the chief executive officer for many years. He aptly summarized this ignorance at trial, “The only thing I was aware of from 2009 with respect to business to my franchise owners [was] that it was a total mess. We lost in eight months about 40 percent of all our sales. And the only thing I was doing here was being motivational, because I really didn’t know what was going on.”

         Several parts of Reinders’s testimony support his statement. Reinders did not know whether Collins visited any franchisees in Texas or Oklahoma. He did not know whether or how all Dr. Vinyl payments were made to Restored Images. Reinders believed that Dr. Vinyl was dramatically overpaying royalties to Restored Images, but could not explain why he had made such a large mistake for nine and a half years. His testimony that he was not receiving daily updates on the company’s finances is contradicted by Garringer, who testified that she spoke with Reinders every day about Dr. Vinyl business. While the downturn in Dr. Vinyl’s business justifies Reinders’s ignorance, it does not change it.

         Further, Reinders impeached himself. He testified that Restored Images was not the procuring cause of the Shawn Morris sale, but changed his testimony on cross-examination and admitted that Restored Images did sell Shawn Morris’s franchise.

         Four depositions are in evidence. The Court gives great weight to the testimony of Jamie Lasher (“Lasher”). Lasher was knowledgeable both as a Dr. Vinyl franchisee and as a Dr. Vinyl corporate officer. His testimony corroborated much of Collins’s, including the testimony regarding Dr. Vinyl’s lack of advertising.

         The Court gives great weight to Sandra Garringer’s testimony, mostly because she no longer works for Dr. Vinyl and seems impartial in this dispute. The Court does discredit her testimony that Dr. Vinyl was performing advertising because it contradicts Collins’s and Lasher’s testimony and because it was less specific than their testimony. Otherwise, the Court finds her testimony to be consistent with the other witnesses’.

         The Court gives moderate weight to the testimony of the remaining deponents, Curtis Pribble, and Janet Pribble. The Court holds against Curtis Pribble his refusal to answer some of opposing counsel’s questions. The Court holds against Janet Pribble her equivocation in answering many key questions, declaring that she could not recall. But mostly, their testimony is not relevant.

         Accordingly, the Court finds the facts to be as follows.

         Dr. Vinyl is a company headquartered in Lee’s Summit, Missouri, that owns and franchises the “Dr. Vinyl” brand. Dr. Vinyl is in the business of repairing vinyl and other materials used in daily life. Despite the name, the services offered by Dr. Vinyl go beyond vinyl. Dr. Vinyl franchises dye leather and carpets, repair headliners, deodorize interiors, and touch up paint chips. Its franchises work in a decentralized fashion, servicing their customers onsite everywhere from car dealerships to massage parlors.

         Dr. Vinyl has structured its franchise model in two ways. It sells franchises directly to individuals and also to master franchises, which sell new franchises and promote existing franchises but do not themselves perform Dr. Vinyl services.

         Chris Collins has served as both a Dr. Vinyl franchisee and a master franchisee. His relationship with Dr. Vinyl began in 1996 when he bought a franchise in Texas. Collins and Dr. Vinyl memorialized the purchase by signing a written franchise agreement (“Franchise Agreement”). Because he has previously gone by Chris Brown, Collins signed many documents relevant to this case, including the Franchise Agreement, with that name.

         The Franchise Agreement gave Collins the right to operate Franchise #162, the territory of which was a swath of the northern Dallas area roughly bounded by three freeways. Dr. Vinyl promised to support this franchise by using a national advertising fund to furnish Collins with marketing plans and materials. (Ex. 1 ¶ 9(A)).

         In exchange, Collins agreed to pay Dr. Vinyl a monthly royalty of 7% of gross sales, or $200, which is greater. (Id. ¶ 6(B)). Collins had to supplement these franchise fees with a monthly advertising fee of 1%, with a penalty of 1.5% assessed on late payments. (Id. ¶ 9(A)).

         Collins received very little training from Dr. Vinyl. It gave him only two weeks of initial training, during which he learned the bare minimum about automobile surface repair. Since then, Dr. Vinyl has provided no training to Collins except for a wheel repair conference in 2014 that he learned nothing from. Although Dr. Vinyl held annual conventions for training purposes, Collins never learned techniques at those conventions.

         Dr. Vinyl provides limited technical support for its franchisees. It maintains a restricted-access website with certain useful information, such as product descriptions, pertinent Environmental Protection Agency rules, and safety information.

         Mostly, Collins learned his craft through self-instruction, for example through internet applications like YouTube. He has learned repair skills from suppliers, who demonstrate how to use their products to franchisees at conventions. Collins’s case was not unique; Jamie Lasher, a franchisee in the Des Moines area and Dr. Vinyl’s former chief operating officer, gained his knowledge the same way. Because of Dr. Vinyl’s laissez-faire attitude toward training, there is little difference between Dr. Vinyl franchises and their competitors in terms of the services they offer.

         Dr. Vinyl recognized how well Collins was doing on his own. It asked Collins to teach seminars so that other franchisees could learn from him, and specifically commended him in one of its training booklets for developing a new way of repairing fabric.

         As with his repair skills, Collins built his customer base from scratch. Franchise #162 had lain dormant for six months before Collins bought it. Once he did, he began going directly to dealerships, offering free demonstrations, maximizing his face time with potential customers, and trying to win their business. Collins quickly developed his book of business, growing Franchise #162 more quickly than any other Dr. Vinyl franchise in the United States.

         Collins found success even though Dr. Vinyl did not advertise for his franchise-either nationally or in the north Dallas/Fort Worth Metroplex-or provide any advertising materials. Dr. Vinyl made no attempts to advertise for Collins. Notwithstanding, through May 2014 Collins paid the monthly royalties and advertising fees that the Franchise Agreement required of him.

         At a Dr. Vinyl convention in early 2004, Collins met Richard Reinders, Dr. Vinyl’s chief executive officer. Reinders is from the Netherlands but lives in Austria, where Dr. Vinyl maintains some corporate operations. At the time, Reinders was looking to sell Dr. Vinyl master franchises. Thinking Collins might be a suitable prospect, Reinders invited him to the Dr. Vinyl center in Austria to discuss further.

         Collins went to Austria that year, where Reinders showed him the company’s books and tried to sell him on becoming a master franchisee. The men reached the outlines of a deal. Reinders would sell Collins a master franchise territory that was larger than his individual franchise territory, comprising all of Texas and Oklahoma. Collins would receive a percentage of the gross sales of the franchisees in that territory. Although Collins had previously sold three franchises to people he knew through his church, Reinders told him that he could sell franchises, but did not have to sell franchises.

         When Collins returned to Texas, he formed a limited liability company called Restored Images Consulting, LLC, with the intent that Restored Images, not him personally, would be the master franchisee. On December 1, 2004, Dr. Vinyl and Restored Images signed a written, multipart Master Franchise Agreement (“MFA”). They supplemented the MFA with an Addendum two months later.

         The MFA requires Restored Images to do two relevant things: (1) sell five franchises per year for five years, for a cumulative total of twenty-five franchises (Ex. 2, Ex. B); and (2) refrain from using “Confidential Information”-defined as knowledge of and experience in master franchise’s operation-“in any other business or capacity.” (Id. ¶ 5(a)).

         Dr. Vinyl, for its part, must do two relevant things. First, it had to pay Restored Images $10, 000.00 for each franchise it sells. (Ex. 3 ¶ 5). Second, it had to furnish Restored Images with a Uniform Franchise Offering Circular (“UFOC”) for the offer of Dr. Vinyl franchises. (Ex. 2 ¶ 2(A)). A UFOC is a disclosure document that sets out the franchisor’s financials so that a prospective franchisee can make an informed decision about whether to buy a franchise.

         Third, Dr. Vinyl had to pay annual royalties to Restored Images. (Id. ¶ 8(B)). The formula for calculating Restored Images’s royalties is confusing at first glance and bears reproducing here:

         B. CONTINUING ROYALTY

         Franchisor shall pay a monthly royalty fee to Master Franchisee which shall be a percentage of the actual royalty fees received by Franchisor from franchisees sold by Master Franchisee in the Exclusive Area pursuant to each Franchise Agreement entered into between Franchisor and a franchisee operating a Dr. Vinyl Franchise in the Exclusive Area, in an amount equal to the following percentage of a franchisee’s annual Gross Sales (as such term is defined in the Franchise Agreement) of the Dr. Vinyl Franchise which is the subject of such Franchise Agreement, during the period for which such fee is payable, as follows:

Annual Royalty Fee Revenue Received by Us

Percentage of Annual Royalty Fee Received By Us and Paid to You

$1 to $125, 000

20%

$125, 001 to $200, 000

35%

$200, 001 to $235, 000

42%

$235, 001 and up

50%

         The MFA contains three relevant housekeeping measures: (1) it says that the MFA constitutes the “entire full, complete agreement” between Dr. Vinyl and Restored Images on the MFA’s subject matter, and that it supersedes all prior agreements (id. ¶ 17(M)); (2) it chooses Missouri law to govern the MFA’s interpretation in the event of litigation (id. ¶ 17(G)); and (3) if Restored Images or Dr. Vinyl sues to enforce the MFA, “the party prevailing in that proceeding is entitled to reimbursement of its costs and expenses incurred, including reasonable accounting and legal fees” (id. ¶ 17(E)).

         Although the MFA was primarily a Dr. Vinyl-Restored Images contract, Collins Dated:e part of it. He personally guarantees any debts owed by Restored Images to Dr. Vinyl. (Id. Ex. C). For two years after the MFA expired, he promised not to divert business from Restored Images customers to any competitors, nor to induce Dr. Vinyl employees to leave Dr. Vinyl. (Id.).

         The MFA was set to last for ten years, until November 30, 2014. Restored Images had the right to unilaterally renew the MFA. (Ex. 3 ¶ 13).

         As soon as Restored Images signed the MFA, it began traveling over Texas and Oklahoma to visit franchise owners and help them develop the quantity and quality of their business. What it has not done is sell franchises. Restored Images has sold only one, to Shawn Morris (“Morris”) in Oklahoma. Dr. Vinyl did not pay Restored Images a commission for that sale.

         As Restored Images has sold only one franchise, it has never met the MFA’s Development Schedule. Dr. Vinyl asked Restored Images about selling franchises, but Restored Images never responded positively. Dr. Vinyl’s lack of response to that inaction indicates that Dr. Vinyl did not care that Restored Images was failing to sell franchises. For example, just two months after Restored Images bought its master franchise, Tom Buckley, Dr. Vinyl’s franchise development director, invited Collins to a meeting where tips for selling franchises would be discussed. Collins did not go, believing he had no obligation to sell franchises. Dr. Vinyl never protested his nonattendance. Its conduct reflected apathy in this regard.

         Similarly, when Restored Images emailed Dr. Vinyl about an unrelated issue, Reinders replied, “did you sell any franchises at all except from the guy in ok??”, referring to the Morris sale. Restored Images responded that it would not be selling any more franchises for Dr. Vinyl because it was not contractually obligated to do so. Reinders did not press the point or otherwise insist on Restored Images complying with the Exhibit B Development Schedule.

         In 2010, Lasher, Dr. Vinyl’s then-chief operating officer, came to Texas to encourage Restored Images to sell more franchises. Restored Images reluctantly agreed to help sell franchises, but told Lasher that it first needed to have UFOCs in hand to offer prospective franchisees. Restored Images claims it never received a UFOC despite asking several Dr. Vinyl personnel. The Court finds that whether or not Restored Images received a UFOC is irrelevant. Restored Images later approached one of Collins’s friends in Oklahoma to sell a franchise, but without a UFOC, Restored Images told the friend that it could not make the sale. Because Collins failed to describe this exchange in any detail, no evidence establishes a real likelihood that he would have made the sale but for lacking a UFOC.

         After Lasher’s visit, no one at Dr. Vinyl ever again asked Restored Images to sell franchises. Dr. Vinyl knew that Restored Images was not selling new franchises. Lasher told Reinders about Restored Images’s noncompliance. Any new franchises would have been paying royalties to Dr. Vinyl. The Development Schedule established annual benchmarks that Restored Images was not meeting. Further, Garringer told Reinders when a master franchisee sold a franchise. Therefore, Dr. Vinyl knew early on that Restored Images was not selling.

         From 2006 to 2014, Dr. Vinyl paid Restored Images what both parties believed were master franchise royalties. Accompanying each payment was a schedule that indicated the annual gross sales of each franchise owner in Texas and Oklahoma and the franchise fees they paid to Dr. Vinyl. The Court finds accurate Exhibits 4 and 517, which detail some of these amounts. Dr. Vinyl paid Restored Images as follows:

Year of Sales

Royalties Paid by Dr. Vinyl to Restored Images

2005

$32, 259.11

2006

$36, 884.35

2007

$42, 568.68

2008

$37, 094.07

2009

$34, 967.07

2010

$35, 763.14

2011

$35, 028.41

2012

$34, 186.46

2013

$28, 300.96

2014

-

2015

-

         Around 2013, Restored Images requested to extend the master franchise. Dr. Vinyl acknowledged the request but never affirmatively responded. Because Restored Images had the unilateral right to renew the MFA, it effectively extended the MFA through November 30, 2024.

         In 2014, Collins attended a wheel training conference and spoke with Reinders. Reinders gave Collins the previous year’s numbers, and projected that Restored Images would receive a considerably lower royalty payment. Collins began to believe that Dr. Vinyl was shortchanging Restored Images’s royalty payments. At the same time, Dr. Vinyl began to suspect that it was overpaying Restored Images on royalties. Dr. Vinyl had never suspected that until 2014, which Reinders and Garringer later called a massive error. Dr. Vinyl made its last payment to Restored Images that year.

         The deteriorating relations between Dr. Vinyl and Restored Images mirrored what was happening between Dr. Vinyl and Collins as an individual franchisee. In January 2015, Collins told Dr. Vinyl that he was terminating the Franchise Agreement retroactively to June 1, 2014, for Dr. Vinyl’s purported breaches of that agreement. Collins made his Franchise #162 fee payment in May 2014. From June 1, 2014, through its expiration on December 31, 2015, the Franchise Agreement called on Collins to pay Dr. Vinyl $121, 293.51, which he did not pay.

         After renouncing the Franchise Agreement, Collins continued providing automobile surface repairs just as he had as a Dr. Vinyl franchisee, but now under the name Restored Images. Restored Images signed a license agreement in November 2014 with Cody Agraz (“Agraz”), a Dr. Vinyl subcontractor with whom Collins had worked when he was still a Dr. Vinyl franchisee. The new contract scrubbed references to Dr. Vinyl and contained only Restored Images’s name. Restored Images signed similar agreements with Shelby Granger (“Granger”) and Scott Barthel (“Barthel”), also former subcontractors who worked with Collins on Franchise #162 but then came aboard Restored Images’s new venture.

         Throughout the time Agraz, Granger, and Barthel worked as Dr. Vinyl subcontractors and then as Restored Images contractors, Collins taught them the repair techniques he had developed over the years. Collins trained them differently than the way Dr. Vinyl trains its employees. Granger alone received some training from Dr. Vinyl, but the training he received was so deficient, Collins had to retrain him.

         This litigation commenced on June 10, 2014, when Restored Images sued Dr. Vinyl. Dr. Vinyl counterclaimed Restored Images and impleaded Collins.

         Conclusions of Law

         Although Restored Images and Dr. Vinyl nominally brought eleven claims to trial, the parties have not been clear about what, exactly, they are suing over. For example, Restored Images pled that its claim for unpaid royalties originated from an oral contract that mirrored the written contract, but its complaint identified only the oral contract as the one that was breached. After trial, Restored Images decided that the nonpayment of royalties was actually a breach of the written contract, and asked the Court for permission to transmogrify the oral contract breach claim into a promissory estoppel claim. Restored Images has also waffled between whether Missouri or Texas law applies.

         But Restored Images is not the only party guilty of confusion. Dr. Vinyl asked for and received dismissal of Count III of its complaint against Collins. But in the proposed conclusions of law Dr. Vinyl submitted after trial, it urged the Court to find for it on Count III. Dr. Vinyl also pled ...


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