CASE REPORT – May 2022
Show Me Hosp., LLC v. Tim Hortons USA Inc., 2022 U.S. Dist. LEXIS 73341; 2022 WL 1182896 (Case No. 17-22679-CIV-MARTINEZ/OTAZO-REYES, S. Dist. of Florida) Decided April 21, 2022.
The Court issued its findings of fact and conclusions of law after a nine-day bench trial. Plaintiff and franchisee Show Me Hospitality, LLC (“Show Me”) filed suit against franchisor and defendant Tim Hortons USA, Inc. (“THUSA”) for breach of contract and anticipatory breach of contract, and THUSA filed counterclaims against Show Me and its principal Eric Sigurdson for breach of contract and breach of guarantees. The Court found in favor of the franchisor.
The Development Agreement
In 2014, Show Me and THUSA entered into an Area Development Agreement (“Development Agreement”) and in 2015 and 2016 entered into six Franchise Agreements. Eric Sigurdson, who owned over 50% of the voting stock in Show Me, signed guarantees on the Francise Agreements and the Development Agreement. In addition, the Development Agreement contained a provision that Sigurdson shall not sell or transfer his controlling interest in Show Me without first obtaining THUSA’s consent, which may not be unreasonably withheld. That provision stated THUSA was entering into the Development Agreement in reliance on Sigurdson’s personal trust, confidentiality, skill and qualifications.
The Development Agreement granted Show Me the right to develop forty Tim Hortons restaurants around St. Louis, Missouri during a five-year period, providing for a mix of standard restaurants and kiosks, and an option to develop fifty more restaurants over a subsequent ten-year period. The Development Agreement had a Development Schedule, requiring Show Me to open roughly eight restaurants per year over the initial five-year term.
Over the course of the parties’ relationship, THUSA approved a total of 14 locations, half of which Show Me opened. Show Me failed to meet the Development Schedule each year. In 2015, Show Me opened enough locations overall, but did not open enough standard restaurants. By the end of 2016, Show Me was four restaurants short of the schedule, and in 2017, Show Me did not open any new restaurants. Show Me’s principal Eric Sigurdson underestimated Show Me’s capital needs with his initial $3 million capital raise. According to Sigurdson, construction costs on the standard restaurants were 30-40% higher than anticipated, and in addition, land was more expensive in the St. Louis area than anticipated. Sigurdson also informed his partners that all of this was exacerbated by changes in ownership at THUSA during this period.
As a result of the increases in development costs and of restaurants not meeting their revenue projections, in 2016, Sigurdson sought to raise additional funds. Sigurdson found a willing investor in RSW Group, who pledged to invest $2.43 million in exchange for 26% ownership in Show Me, which would cause Sigurdson’s interest to decrease to 28%.
RBI Acquisition of THUSA
In December 2014, Burger King Worldwide, Inc., a subsidiary of Restaurants Brands International (“RBI”), and 3G Capital acquired THUSA. The new owners appointed a new management team, and in January 2015, Tim Hortons Global—including THUSA—laid off approximately 350 employees, some with whom Show Me had been working. In May 2015, THUSA closed its headquarters in Dublin, Ohio, and relocated operations to Ontario, Canada. This resulted in further loss of employees, including THUSA’s head of Franchising and senior director of US Development. These changes were the result of Tim Horton’s new business model, by which site selection and construction would no longer be performed by the franchisor, and instead would be performed by the franchisees, thus eliminating the need for architects, engineers, contractors, and other of THUSA’s staff historically at the Dublin Office. THUSA’s new owners (RBI) also believed that the Development Schedule (which Show Me was already not meeting) was not aggressive enough for Show Me to achieve significant market penetration.
In April 2015, THUSA’s new management team visited Sigurdson in St. Louis and presented a new, more aggressive development model, referred to as an Area Representative Agreement (“ARA”), which called for more restaurant openings, (105 stores over six years), but provided that Show Me could outsource its development obligations to third-party franchisees that would open their own restaurants with their own capital, under Show Me’s leadership. Sigurdson said he would need to discuss the proposal with his partners.
The June 28, 2016 Meeting and subsequent Closure of Restaurants
On June 28, 2016, Show Me met with THUSA’s executives in Ontario at THUSA’s headquarters to discuss THUSA approving Show Me’s potential new investor (RSW) and the new ARA model. At the time of the meeting (“the Meeting”), Show Me owed THUSA $250,000 and was behind on the Development Schedule. According to Sigurdson, THUSA conditioned approval of Sigurdson selling his shares to RSW on Show Me agreeing to the new, more aggressive development schedule set forth in the ARA. One of THUSA’s investors, Paul Mayer, who was present at this meeting, testified consistent with Sigurdson on this issue. THUSA denied it attempted to condition approval of the new investors on accepting the new development schedule. The Court found Sigurdson’s and Mayer’s testimony on this issue credible.
At the Meeting, Sigurdson also testified that Tim Hortons Global’s president Elias Diaz Sese told him that “if you don’t do that [agree to the ARA model], you’re going to be back here and you’re done.” In other words, Sigurdson maintains that Diaz Sese told him that if he did not enter into an ARA, he would be “done.” The Court noted that Show Me presented no other testimony at trial to confirm that Diaz Sese said this and that several THUSA executives testified that no one from Tim Hortons at the Meeting threatened to terminate the business relationship.
The parties continued to negotiate for months after the Meeting. For instance, a few days after the Meeting, Sigurdson sent a letter to THUSA, expressing Show Me’s desire to discuss in detail the existing and proposed new partners and the development plan going forward. THUSA also met with RSW’s principals in Dallas and St. Louis in 2016. THUSA never outright rejected Show Me’s proposal concerning the RSW investment but never consented to it. In the end, RSW decided not to move forward with the investment in Show Me. After the Meeting, the parties also continued to perform under the Development Agreement and Franchise Agreements. In 2016, Show Me opened two new locations and THUSA continued to provide development assistance.
Between May and December 2017, Show Me closed all of its restaurants. On December 6, 2017, THUSA sent Show Me and Sigurdson a Notice of Default under the Development Agreement, demanding over $284,000 in past due fees and citing Show Me’s failure to adhere to the Development Schedule. The Notice provided that Show Me must cure the defaults in 30 days. On the same date, THUSA sent Show Me a Notice of Incurable Default and Confirmation of Termination for each of the Franchise Agreements. Between the two notices, THUSA demanded that show Me pay it $662,653.
At trial, Show Me asserted claims for: (1) anticipatory breach of the Development Agreement, (2) breach of the Development Agreement, (3) breach of the covenant of good faith and fair dealing, and (4) breach of the franchise agreements. The Court found against Show Me on all four claims.
Show Me’s case hinged on the claim for anticipatory breach of the Development Agreement. Show Me argued that THUSA anticipatorily breached the Development Agreement at the June 28, 2016 Meeting based on Diaz Sese’s statement that “if you don’t do the [ARA] deal, you’re to be back here and you’re done.” The Court, applying Ohio law, found that the statement did not amount to “a clear and unequivocal manifestation of intent to repudiate, or, in other words, of its intention not to perform its obligations in the future.” The Court found that at most, the statement was a request for a modification of the Development Agreement. The Court also relied on the parties’ conduct subsequent to that meeting, wherein both sides continued to perform and to engage in negotiations concerning a potential modification of the Development Agreement.
Show Me claimed that THUSA breached the Development Agreement by: (1) denying Show Me’s request to add RSW as its partner, so as to provide for much needed capital, (2) seeking to coerce Show Me into entering into the ARA, and (3) failing to respond, responding too slowly, or outright rejecting Show Me’s site proposals, and several other bases related to RBI’s acquisition of THUSA and the closure of the Dublin, Ohio office. The claims for breach of the Franchise Agreements were based on THUSA’s lack of support.
The Court found that Show Me failed to establish that THUSA breached any provision of the Development Agreement or acted in bad faith. As for adding RSW as a partner, the Court noted that the Development Agreement specifically provided that THUSA retained the right to withhold consent of an assignment if Sigurdson would not control a majority of Show Me’s shares or otherwise maintain a controlling interest. It was undisputed that if RSW had invested in Show Me, Sigurdson would no longer have a controlling interest. The Court acknowledged that “[g]iven Show Me’s dire financial condition at the time, Show Me needed the investment RSW was willing to make to meet its obligations under the Development Agreement.” The Court nevertheless concluded that, because the Development Agreement spelled out that THUSA was relying on Sigurdsons’s involvement, that THUSA did not act unreasonably in withholding consent or in conditioning consent on Show Me agreeing to the ARA model. The Court also noted that the evidence showed that THUSA made good faith efforts to reach a deal with Sigurdson and RSW, with THUSA executives traveling to the US on multiple occasions to meet with RSW executives.
As for the closing of the Dublin office, the Court noted that THUSA had no contractual duty to maintain its headquarters in Dublin, Ohio or anywhere else in the USA. And the Court found that Show Me failed to establish that THUSA breached the Development Agreement by not sufficiently supporting Show Me. The Court also noted that even if THUSA had acted in bad faith in failing to respond to various site proposals, Show Me failed to establish that such failures were the proximate cause of Show Me’s failure to meet the Development Schedule, given the capital shortfalls that Show Me was experiencing. Show Me’s claims for breach of the Franchise Agreements based on lack of support likewise failed.
Since Show Me had not met the Development Schedule and closed the seven restaurants that it had opened, and since the Court found that THUSA had not breached either the Development Agreement or any of the Franchise Agreements, the Court ruled in THUSA’s favor on its counterclaims for breach of the Development Agreement and Franchise Agreements. The Court awarded THUSA all but $40,000 of the damages it had been seeking; in the default notices, THUSA had been seeking $662,653, and the Court awarded THUSA $622,653. The Court also found Sigurdson liable under the guarantees in the Franchise Agreements and the Development Agreement.
David M. Greeley, Esq. of Greeley Thompson, LLP prepared this Case Report. Mr. Greeley’s practice focuses on representing franchisors and franchisees in disputes. He may be reached at email@example.com.