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Drake v. Maid-Rite Co. - 681 N.E.2d 734 (Ind. Ct. App. 1997)

Rule:

Ind. Code § 23-2-2.5-4 provides for an exemption from the Ind. Code § 23-2-2.5-9 disclosure statement requirement. That exemption provides: The offer of sale of a franchise by a franchisee who is not an affiliate of the franchisor for his own account is exempt from § 9 if the offer or sale is not effected by or through a franchisor. A sale is not effected by or through a franchisor if a franchisor is entitled to approve or disapprove a different franchisee.

Facts:

In 1989, Sam Sweeden (Sweeden) entered into a license agreement with Maid-Rite Co. (Maid-Rite), under which Sweeden was authorized to establish Maid-Rite restaurants. The agreement also authorized Sweeden to sell the second store without seeking Maid-Rite’s consent and approval. Subsequently, Sweeden advertised in the newspaper that the second store was for sale as a Maid-Rite franchise. Shirley Drake (Drake) responded to the advertisement, and Sweeden agreed to sell the store to Drake for $40,000 – this included all equipment and the Maid-Rite franchise. However, Sweeden did not provide Drake with any books or records relating to the restaurant’s operation, but the former indicated that the restaurant generated $300 to $500 per day in gross receipts. On July 2, 1990, a purchase agreement was drafted on Maid-Rite letterhead and signed by Drake and Sweeden. On July 20, 1990, a bill of sale, which was signed by Drake and Sweeden, provided for monthly payments on the remaining $25,000 balance, payable to Sam Sweeden, over a period of 60 months. Subsequently, Drake began operating the restaurant, but it did not produce the revenues that Sweeden had irepresented. Drake did not receive assistance from Sweeden or Maid-Rite as Sweeden had represented. She contacted Maid-Rite for the first time in September 1990, after purchasing and operating the second store. Thereafter, Drake closed the restaurant in March 1991 and subsequently filed an action against Maid-Rite, alleging that Maid-Rite failed to comply with Ind. Code § 23-2-2.5 et seq., commonly referred to as the Indiana Franchise Act. The trial court granted summary judgment in favor of Mid-Rite, holding that Sweeden’s sale to Drake was not effected by or through Maid-Rite, and therefore, Maid-Rite had no duty to comply with the disclosure requirements of the Indiana Franchise Disclosure Act. Consequently, Drake appealed.

Issue:

When Sweeden sold the store to Drake, did Maid-Rite have a duty to comply with the disclosure requirements of the Indiana Franchise Disclosure Act? 

Answer:

No.

Conclusion:

The Court found no genuine issue of material fact regarding the applicability of the Franchise Disclosure Act to the transaction between Sweeden and Drake. According to the Court, Sweeden did not possess actual or apparent authority as an agent of Maid-Rite. Therefore, Sweeden's sale to Drake was "not effected by or through" Maid-Rite, and Maid-Rite did not violate the Franchise Disclosure Act. Accordingly, the Court held that the trial court did not err in determining that Maid-Rite was entitled to judgment as a matter of law because it had no duty to comply with the disclosure requirements of the Franchise Disclosure Act in the transaction between Sweeden and Drake.

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