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Keg Restaurants Arizona Inc. v. Jones

Court of Appeals of Arizona, First Division

June 2, 2016

KEG RESTAURANTS ARIZONA, INC., et al., Plaintiffs/Appellants,

         Appeal from the Superior Court in Maricopa County No. CV2011-004502 The Honorable Sally Schneider Duncan, Judge

          Quarles & Brady LLP, Phoenix By Jeffrey H. Wolf, Lauren Elliott Stine, D. Cody Huffaker.

          Strasburger & Price, LLP, Dallas By Jadd F. Masso, Scott A. Shanes (attorneys admitted pro hac vice) Counsel for Plaintiffs/Appellants.

          Snell & Wilmer LLP, Phoenix By Robert A. Henry, Kelly A. Kszywienski Counsel for Defendants/Appellees.

          Judge Randall M. Howe delivered the opinion of the Court, in which Presiding Judge Kent E. Cattani and Judge Kenton D. Jones joined.


          HOWE, JUDGE.

         ¶1 Keg Restaurants Ltd. ("Keg Limited"), Keg Restaurants U.S., Inc. ("Keg U.S."), Keg Franchise U.S., Inc. ("Keg Franchise"), and Keg Restaurants Arizona, Inc. ("Keg Arizona") (collectively, "Keg") appeal the trial court's denial of their motion for judgment as a matter of law ("JMOL") and for a new trial and the court's award of $5, 913, 301.40 to William and Fabienne Jones, Tucson Oro Valley Keg, LLC, and OVM Keg Land, LLC (collectively, "TOVK"). For the following reasons, we affirm.


         ¶2 In March 2011, Keg sued TOVK for compensatory and punitive damages from acts that arose from the parties' agreements to build a Keg-brand restaurant in Tucson, Arizona. As amended, Keg alleged claims of breach of three agreements and anticipatory breach of two agreements. Keg also alleged tort claims of negligent misrepresentation and fraudulent inducement and promissory fraud. TOVK counterclaimed, alleging claims of breach of four agreements, the covenant of good faith and fair dealing, and fiduciary duty. TOVK also alleged alter-ego liability and tort claims of negligent misrepresentation, fraud, fraudulent concealment, fraudulent inducement, and unjust enrichment. Before trial, the court dismissed all the parties' tort claims on summary judgment, and at trial, the jury found Keg Limited liable for the acts of its subsidiaries in breaching the parties' agreements. Keg renewed its JMOL motion and alternatively moved for a new trial, and the trial court denied both motions. The sequence of events between Keg and TOVK explains the jury's verdicts in finding Keg Limited liable for the acts of its subsidiaries and the trial court's decision to enter judgment in favor of TOVK.

         1. The Keg Entities

         ¶3 "The Keg Steakhouse Bar" is a casual steakhouse restaurant chain in Canada. Keg Rights Limited Partnership, a Canadian limited partnership, owns the trademarks and trade names and proprietary rights associated with the Keg restaurant system. Keg Rights licensed Keg Limited, a separate Canadian company, to use and sublicense other entities' use of the trademarks, trade names, and proprietary rights in connection with the Keg restaurant system. Keg Limited sells "The Keg Steakhouse Bar" franchises in Canada.

         ¶4 Keg U.S., a Delaware corporation, is a wholly-owned subsidiary of Keg Limited and is sublicensed to use and to sub-sublicense the trademarks. In that regard, Keg U.S. sub-sublicensed its subsidiary, Keg Franchise, to use and to sub-sublicense to its franchisees the rights to use the trademarks. Keg Franchise sells "The Keg Steakhouse Bar" franchises in the United States. In addition to the independent franchises, Keg U.S. owns and operates subsidiaries in the United States, including Keg Arizona, which owns and operates several Keg restaurants in Arizona. Keg Limited, Keg U.S., Keg Franchise, and Keg Arizona-all separate business entities-have the same business address in British Columbia, Canada.

         ¶5 As far as the record reveals, the individuals employed by Keg have the following titles. David Aisenstat is Keg Limited's and Keg Franchise's President, Chief Executive Officer ("CEO"), and Director, but also signed documents as Keg U.S.'s and Keg Arizona's President and CEO. James Henderson is Keg Limited's Vice President of Business Development, but also signed documents as Keg U.S.'s Executive Vice President of Business Development and Keg Franchise's Vice President of Business Development. Andrea Janzen is employed by Keg Limited as its Director of Real Estate Development, but "do[es] work on behalf of those other entities." Neil MacLean is Keg Limited's Chief Financial Officer and all four entities' Secretary. Catherine Chow is Keg Limited's Director of Legal Services. Bruce Sanford "assume[s]" that he was employed by Keg Limited and works as a project manager for corporate stores and merely assists "franchisee[s] to do their project management."

         2. The Agreement to Build a Keg Restaurant and the Subsequent Construction Process

         ¶6 In 2005, Jones and Michael Ratz, a general manager at Keg Limited, talked about establishing a Keg franchise in the United States. They then met with Aisenstat and Henderson to discuss the opportunity. In August 2005, Aisenstat, Henderson, and Janzen flew from Canada to Tucson, Arizona, to meet with their real estate agent and Ratz and Jones in exploring potential locations for a restaurant.

         ¶7 After the trip, Janzen sent a memorandum to Jones and Ratz, copying Aisenstat and Henderson, summarizing the locations they were shown, but stating that "[w]e wholeheartedly agree" with selecting a Vestar development, Oro Valley Marketplace, as the location. Janzen also stated that "[w]e believe the quality of Vestar's developments, as well as our strong relationship, makes this an obvious long-term location in this market." Janzen concluded by stating that "we have already had discussions with Vestar and will work with them to secure the prime restaurant site in their development."

         ¶8 In December 2006, Vestar and Keg Arizona entered into a Ground Lease for a pad in the Oro Valley Marketplace; Aisenstat signed the lease as President and CEO of Keg Arizona. Keg U.S. guaranteed the lease, while Keg Limited guaranteed completion of its terms. Both guarantees were signed by Aisenstat as the entities' President and CEO and MacLean as the entities' Secretary and notarized by Chow. The Ground Lease required that Keg Arizona open the restaurant within one year of Vestar's completion of certain work. Once that work was completed, Vestar would turn the pad over to Keg Arizona.

         ¶9 In January 2008, TOVK entered into a "Restaurant Development Agreement" with Keg Franchise to develop and operate a Keg franchise on the land leased from Vestar. The agreement required TOVK to pay $50, 000 to Keg Franchise, which Keg Franchise would refund, less expenses, up to $25, 000, if the parties did not enter into a franchise agreement by January 15, 2010. Keg Arizona then subleased the existing Ground Lease between Keg Arizona and Vestar to TOVK. That same day, TOVK agreed to indemnify Keg Limited, which was not a party to the Ground Lease or Sublease, for any losses Vestar might incur for any breach of the Sublease. Both the Sublease and Indemnity Agreement were signed by MacLean as Secretary.

         ¶10 In April 2008, Vestar notified Janzen that the pad had been turned over to "The Keg"[1] for it to begin construction. Therefore, pursuant to the Ground Lease, Keg Arizona had a year from that date to finish construction. Chow then emailed Jones and Ratz an agency agreement to be returned to Keg Limited, appointing employees of "Keg Restaurants Ltd. and/or Keg Franchise U.S., Inc." as Jones' and Ratz's agents for the restaurant's construction ("2008 Agency Agreement"). The agreement provided Keg Limited and/or Keg Franchise "with full and absolute power and authority" to execute all acts necessary to construct the restaurant and "to transact any and all business for the development and construction of the Restaurant." It further stated that "[s]uch business may include without limitation, entering into contracts for goods and services for the development, construction and maintenance of the Restaurant, amending construction and design plans, directing suppliers and contractors, and performance of such other services as [TOVK] may request from time to time."

         ¶11 Before construction could begin, however, "The Keg" had to acquire building and grading permits from the City of Oro Valley. In November 2008, seven months after the pad had been turned over to "The Keg, " the parties amended the Development Agreement to require that TOVK put in escrow $500, 000 for construction costs and provide an additional fund of at least $1.5 million and to submit a commitment letter from a qualified lender for a loan of at least $3.25 million. The amendment also stated that if TOVK defaulted, under the terms of the Development Agreement or the amendment, Keg U.S. would refund TOVK's financial investment, less set-offs and deduction for losses, expenses, or costs arising from the default.

         ¶12 In late November 2008, Karson Builders, the construction manager Keg Limited hired, obtained the building permit-which TOVK paid for-but not the grading permit-which was the responsibility of Sanford, Keg Limited's project manager. Without the grading permit, Karson could not begin work and further grading work was required on the pad before the City would issue the permit. Vestar consequently extended the proposed opening date to November 2009.

         ¶13 In February 2009, Oro Valley notified Sanford that it would put the project on hold because "The Keg" still needed a grading permit and to have its civil construction plans approved. The City explained that "[w]hile your building plans have been approved and you've been issued a building permit; you still did not have approved site civil construction documents nor an issued grading permit." The City further explained that the civil construction plans, which "modify the already approved generic site civil plans for this pad to match the current building plans, " still had some outstanding issues and therefore could not be approved. In April 2009, "The Keg" still did not have a grading permit.

         ¶14 Keg U.S. thereafter amended the Development Agreement again for TOVK and its affiliate, OVM Keg Land, LLC, to purchase the property, instead of renting the property. The amendment was written on Keg Limited letterhead and signed by Henderson as Keg U.S.'s Executive VP-Business Development and MacLean as Keg Limited's Secretary. OVM subsequently defaulted, however, and Keg U.S. and TOVK amended the Development Agreement once again, agreeing to proceed under their previous agreement where the Sublease governed and TOVK would construct and operate the restaurant. The amendment required that TOVK escrow $1.44 million to be used for construction. The amendment was written on Keg Limited letterhead and signed by MacLean as Secretary.

         ¶15 In September 2009, a month before the then-current construction completion deadline, Jones requested an extension. Janzen told him that the deadline could not be extended, however, because Vestar had established the deadline and she did not "want to go back to Vestar until we start construction and show some level of good faith." Jones responded that he was "comfortable proceeding on the good faith of The Keg." TOVK and Keg Franchise thereafter entered into an Escrow Agreement, signed by MacLean, and TOVK escrowed $1.5 million.

         ¶16 After Jones escrowed the money, Janzen emailed him a copy of "the standard agency letter and letter of intent used by franchisees in Canada." She stated that to proceed with the project, "Keg need[ed] to be appointed as [TOVK's] agent, and [Karson Builders] need[ed] a letter of intent" to allow it "to issue [purchase orders] to the sub-trades before the construction contract is finalized." TOVK signed and returned the letters, appointing Keg U.S. as its agent for the construction ("2009 Agency Agreement"). Both the Escrow Agreement and 2009 Agency Agreement authorized payments to Karson. Keg Limited then authorized advance payments to Karson in October 2009, even though "The Keg" still had not received the grading permit.

         ¶17 In November 2009, still without a grading permit, Jones advised Karson of the need for a performance bond to guarantee Oro Valley that Karson would begin construction. After Karson was unable to obtain the bond, Jones did so, even though he was not responsible for acquiring it; that was the duty of Brunson, Keg Limited's project manager. By this point, Keg Limited had extended the completion deadline to August 2010.

         ¶18 Once "The Keg" finally secured the grading permit, Oro Valley certified the pad in December 2009, which should have allowed Karson to begin construction. But construction was again stalled when the City required additional site work, which took place in January 2010. Construction was again delayed the next month, and by March 2010, Karson stopped construction, claiming it had no funds.

         ¶19 Meanwhile, Jones' assistant was actively pursuing capital to fund TOVK's project. His daily duties included locating possible lenders and capital providers, putting together loan submission packages, following up with lenders, providing them with additional information, and clarifying project details. Jones' assistant contacted 85 lenders. In April 2010, Jones' assistant approached Security National Company ...

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