HONEY DEW ASSOCIATES, INC. vs. CREIGHTON MUSCATO ENTERPRISES, INC., & another. [Note 1]

MILLS, J. The plaintiff, Honey Dew Associates, Inc. (HDA), is a franchisor of Honey Dew donut shops. The defendants are two franchisees of HDA: Creighton Muscato Enterprises, Inc. (CME), a Massachusetts corporation, has operated six Honey Dew shops under license from HDA, and Muscato Development Corporation (MDC), also a Massachusetts corporation, has operated two Honey Dew shops under license from HDA. Each of the eight shops was governed by its own individual franchise agreement. Thus, CME executed six franchise agreements with HDA, and MDC executed two.

HDA brought an action for breach of contract against CME and MDC, alleging that each had failed to make required contributions, on behalf of their respective shops, to a centralized advertising fund administered by HDA. CME and MDC counterclaimed, alleging, inter alia, that HDA had failed to make disclosures required by G. L. c. 93A, § 2(a). The relief requested by the defendants included rescission of the contractual provision allegedly requiring CME and MDC to contribute to the advertising fund. [Note 2] Following a jury trial on the liability of CME and MDC, and a jury-waived determination of damages, judgment entered for HDA in the amount of $487,545, including $115,000 in costs, expenses, and attorney's fees awarded pursuant to contract. [Note 3] Judgment also entered for HDA on each counterclaim.

CME and MDC appeal, asserting error in the denial of their motions for a directed verdict and abuse of discretion in the award of attorney's fees to HDA. They further argue that the improper admission of certain evidence materially prejudiced their G. L. c. 93A counterclaim. We vacate the judgments and remand the matter for further proceedings.

Factual background. At issue is whether a particular contract

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provision (advertising provision) is enforceable and, if so, to whom it applies. The advertising provision appears only in the franchise agreement for MDC's North Plymouth shop (North Plymouth agreement) executed by HDA and MDC effective August 22, 1996. [Note 4] The provision reads, in relevant part:

"You [i.e., MDC] agree to participate in and contribute to all advertising, marketing and promotional programs and other programs of ours [i.e., HDA] which, from time to time, are supported by a majority of full producing Honey Dew Donut Shops . . . . In the event that you or any Control Person owns an existing Honey Dew franchise (an 'other Franchisee'), it is expressly agreed that this provision shall be applicable to such other franchises. The other Franchisee(s), if a different person or entity than you shall acknowledge this provision by evidencing their assent, below."

On March 28, 1998, HDA announced that a majority of full producing shops in the Honey Dew chain supported a new advertising program. The new program required each shop, beginning April 1, 1998, to contribute two percent of its weekly gross sales to a pooled advertising fund, which amount would be matched by HDA. [Note 5] MDC and CME each refused to make contributions to the fund on behalf of their respective shops, and HDA brought suit.

CME and MDC defended on the ground that the advertising provision was unenforceable for failure of a condition precedent. In particular, they maintained that the advertising provision could not be enforced until a majority of Honey Dew shops "voted" to accept HDA's advertising program. CME further argued that it

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had never signed the North Plymouth agreement, and thus had never agreed to be bound by the advertising provision. Each of these arguments was the basis of a motion for a directed verdict, the denial of which is challenged on appeal.

CME and MDC also argued at trial that an admission in HDA's pleadings had to be given conclusive effect and that, in any event, the manner in which HDA introduced evidence to rebut its earlier admission was itself improper. On appeal, CME and MDC contend that the judge committed prejudicial error by (1) refusing to instruct the jury that facts conceded in HDA's pleadings are to be given conclusive effect; (2) refusing to instruct the jury to disregard a portion of HDA's closing argument that pointed jurors' attention to information not in evidence; and (3) repeating and expressly sanctioning consideration of the aforementioned information. We address each of these contentions in turn.

Contract claim: voting as a condition precedent. CME's and MDC's motion for a directed verdict, arguing that a formal vote of shops was a condition precedent to enforcement of the advertising provision, was properly denied. HDA is correct in its contention that majority support of the advertising program by shops (as distinguished from a formal majority vote) is the only condition precedent to enforcement. The relevant portion of the advertising provision reads: "[MDC] agree[s] to participate in and contribute to all advertising, marketing and promotional programs and other programs of [HDA] which, from time to time, are supported by a majority of full producing Honey Dew Donut Shops . . . ." The plain meaning of this language imposes no requirement that the requisite majority support be established by a formal vote rather than, for instance, separate consultations with each owner. See Ober v. National Cas. Co., 318 Mass. 27 , 30 (1945) ("In the construction of contracts in writing words that are plain and free from ambiguity must be construed in their usual and ordinary sense"). The advertising provision says nothing whatsoever about voting, except that "[MDC] agree[s] to vote in favor of any advertising plan [HDA] propose[s] for a vote which would (1) require franchisees to pay 4% of gross sales to a common advertising fund . . . and (2) would lower royalties from 7% to 5%." Courts must interpret contract language "fairly

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and reasonably . . . to ascertain the intention of the parties and to effectuate their purpose." Whittle v. Pagani Bros. Constr. Co., 383 Mass. 796 , 798 (1981). Particularly given its placement in a separate paragraph of the advertising provision, the sentence merely mentioning "a vote" could not reasonably have been intended to restrict the manner in which majority support might be established. Under any plausible reading, the purpose of the sentence is to secure an independent promise from MDC that all MDC-owned franchises would support the specified proposal. Nor are we persuaded that an insufficient number of shops assented to the program. [Note 6]

Contract claim: applicability of the advertising provision to CME franchises. The North Plymouth agreement, containing the advertising provision, was signed by Richard Bowen, in his capacity as president of HDA, and by Creighton Muscato, in his capacity as president of MDC. MDC was plainly obligated, by its assent to the North Plymouth agreement, to contribute to the advertising fund on behalf of all MDC-owned franchises. That obligation arose from the following language in the advertising provision:

"In the event that you [i.e., MDC] or any Control Person owns an existing Honey Dew franchise (an 'other Franchisee'), it is expressly agreed that this provision shall be applicable to such other franchises. The other Franchisee(s), if a different person or entity than you shall acknowledge this provision by evidencing their assent, below."

The more complicated question is whether this language also bound CME to contribute to the advertising fund on behalf of CME-owned franchises. We turn, now, to that matter.

Even if one assumes that CME was a "Control Person" within the meaning of the North Plymouth agreement, the advertising provision still requires "other Franchisee(s), if a different person or entity[,] . . . [to] acknowledge this provision by evidencing their assent, below." The signatories to the North Plymouth

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agreement -- HDA and MDC, by their respective presidents -- were the only entities that in any way evidenced assent to the advertising provision. CME quite simply was not a party to the advertising provision in the North Plymouth agreement. Muscato signed the North Plymouth agreement strictly and unambiguously in his capacity as president of MDC. The text above the signature line reads "Muscato Development Corp. by its President, hereto duly authorized," and the text below the line reads "Creighton Muscato, President." Muscato's signature, moreover, is followed by the word "President" in handwriting. [Note 7] Because only MDC agreed to be bound by the advertising provision, MDC is the only entity with the capacity to commit a breach of that provision. See Situation Mgt. Sys. v. Malouf, Inc., 430 Mass. 875 , 878 (2000). CME and MDC may have shared a common president, but each remained a separate Massachusetts corporation with an entirely distinct legal identity. [Note 8] MDC never had the power unilaterally to bind CME in contract, and vice versa. See Central Bridge Corp. v. Bailey, 62 Mass. 319 , 322 (1851).

HDA next argues that the advertising provision is made applicable to CME franchises by operation of the "Liability and Cross-Default Agreement" (LCD) executed by CME, MDC, and others. [Note 9] For this proposition, HDA relies on the following language in the LCD: "With respect to contractual obligations, it is the intention of [CME and MDC] that each contract executed by [either CME or MDC] and running to HDA be construed as if executed by [both CME and MDC] . . . ." HDA's argument is unavailing. The contract must be construed as a whole. Murray v. Edes Mfg. Co., 309 Mass. 395 , 401 (1941). The manifest

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purpose of the LCD was to make CME and MDC accountable for each other's defaults, not to alter the substance of what acts or omissions by a particular entity were to constitute a default. [Note 10] See Whittle v. Pagani Bros. Constr. Co., 383 Mass. at 798. As the trial court correctly noted, the LCD "did not merge all the terms of every Muscato franchise agreement into every other Muscato franchise agreement." In context, the portion of the LCD quoted above simply elaborates upon the meaning of a phrase ("all obligations") in a preceding clause. [Note 11] The sweeping interpretation urged by HDA cannot be adopted without exalting a rather forced literalism above the clear intentions of the parties at the time of the contract. Ibid.

The judgment entered in the case-in-chief must be vacated, and the contract claims against CME-owned franchises must be dismissed. At a minimum, the amounts due under the contract on behalf of MDC-owned franchises will have to be recalculated, along with interest, costs, and fees. However, the amounts due, if any, will depend on the outcome of the defendants' G. L. c. 93A counterclaim, discussed infra. [Note 12]

General Laws c. 93A counterclaim. The counterclaim in question alleged that HDA, in connection with the North Plymouth agreement, failed to provide MDC with disclosures required by 16 C.F.R. §§ 436 et seq. (2008). [Note 13] In its first [Note 14] reply to CME's and MDC's first amended counterclaims, HDA admitted that it

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had provided "no additional offering circulars or disclosure information" but denied that any such disclosures were required under the circumstances. Whether that reply was amended in later pleadings is of paramount importance, because G. L. c. 231, § 87, provides that pleadings in any civil action "shall not be evidence on the trial, but the allegations therein shall bind the party making them." CME and MDC assert that the judge erred by not giving conclusive effect to HDA's reply. See Meunier's Case, 319 Mass. 421 , 424 (1946). In addition, they point to several serious problems surrounding the introduction of evidence by HDA as to whether it had made all required disclosures. We describe, briefly, the irregularities that arose.

While HDA's president was on the stand, counsel for CME and MDC read in evidence that portion of HDA's reply that admitted its failure to disclose. HDA's president then confirmed, in his testimony, that HDA's reply had included the admission. Following this exchange, counsel for HDA requested a sidebar and indicated that he wished to supplement the material just read into evidence. [Note 15] The judge responded that counsel could do so on redirect.

Significantly, counsel for HDA failed on redirect to address what, if anything, his client's pleadings had admitted regarding disclosure. He instead resurrected the issue very prominently during closing argument. Referring to CME's and MDC's allegation that HDA had not provided offering circulars [Note 16] in connection with MDC's North Plymouth franchise, he said, "I believe [counsel for CME and MDC] told you that [the allegation]

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was admitted but in fact [it] was denied." He then stated that HDA did not know whether it had provided an offering circular, but that it was relying upon MDC's recitation, in the North Plymouth franchise agreement, that it had timely received a circular.

After counsel for HDA was finished, opposing counsel objected. He argued that counsel for HDA had not only strayed beyond the evidence during closing argument, but had done so in an attempt to refute a binding admission and in a manner that made him appear dishonest. Counsel requested that the admission in HDA's initial reply be read to the jury, accompanied by an instruction that any contrary information presented in HDA's closing argument was to be disregarded.

In response, counsel for HDA presented a copy of HDA's purported amended reply, dated January 7, 2001, in which a denial was substituted for the earlier admission. Notably, counsel for CME and MDC did not directly dispute, at trial, the assertion that HDA had amended its reply. [Note 17] He emphasizes on appeal, however, that "[the] alleged pleading, dated January 7, 2001, does not appear in either the docket entries or clerk's record assembly of the case." While counsel's assertion is correct, we note that HDA's initial reply is likewise missing from the docket, though it is present in the record appendix.

The judge, acting on the belief that HDA had amended its reply, refused to grant the curative measures requested by CME and MDC. [Note 18] His understanding was that "two mistakes" had occurred: counsel for CME and MDC had read a superseded pleading in evidence, and counsel for HDA had failed to notice and correct that occurrence. The judge sought to resolve the matter by explaining to the jury that each attorney had made a "good faith" mistake. He then read aloud the portion of HDA's purported amended reply that denied failing to make disclosures.

Regardless of whether HDA had properly amended its reply, the judgment entered on the counterclaim must be vacated, and a retrial of the counterclaim alleging HDA's failure to disclose

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is necessary. HDA did nothing at trial to rebut the evidence -- which included testimony from the cross-examination of its president -- that it had not made certain disclosures. As such, counsel for CME and MDC was induced to believe that the matter had been removed from controversy. We agree that HDA's closing argument, in its untimely attempt to refute allegations of nondisclosure, strayed far from the evidence. We further agree that the nonevidentiary assertions of counsel for HDA were sufficiently prejudicial, in the absence of a strong curative instruction, [Note 19] to warrant a new trial on the c. 93A claim. Leone v. Doran, 363 Mass. 1 , 18 (1973). A potentially dispositive fact, [Note 20] which counsel had been induced to regard as conclusively established, was transformed into a hotly contested, triable question during instruction of the jury and without any opportunity for counsel to make a statement or offer additional evidence on the point. Even if HDA's reply had been amended, it would have remained incumbent upon counsel for HDA to rebut evidence of an admission before closing arguments, in order that opposing counsel could present additional evidence or at the very least explain himself. The unorthodox introduction of evidence in this case may have unfairly vitiated the credibility of counsel for CME and MDC before the judge and jury. Indeed, supposing HDA's reply had not been amended, counsel for CME and MDC was made to appear as if he were misrepresenting the record when, in fact, the situation was exactly the opposite.

The status of the pleadings is an essential question and must be resolved on remand. If HDA did not properly amend its reply dated May 24, 1999, and is not granted leave to do so, then MDC will be entitled to an instruction that HDA's failure to provide "additional offering circulars or disclosure information" has been conclusively established. G. L. c. 231, § 87.

Attorney's fees. The North Plymouth agreement provides that "[HDA] shall be entitled to recover from [MDC] all costs and

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expenses, including reasonable attorneys' fees, incurred by [HDA] in enforcing this Agreement . . . ." We construe this language to mean that HDA is entitled to reimbursement for successful claims only. As such, we do not reach the contention that the judge abused his discretion by awarding $115,000 in costs, expenses, and fees to HDA. As the judgment in the case-in-chief has been vacated, on remand HDA shall be permitted to petition the trial court for an award of the costs, expenses, and fees attributable to the claims, counterclaims, or portions thereof, if any, upon which it ultimately prevails.

Conclusion. The matter is remanded to the trial court for further proceedings consistent with this opinion. [Note 21]

So ordered.