Hendrix v. Sheridan

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NOT DESIGNATED FOR PUBLICATION

No. 117,112

IN THE COURT OF APPEALS OF THE STATE OF KANSAS

RONALD D. HENDRIX,
BDOE OF CHESTERFIELD, INC.,
BDOE, INC., and
BD75, INC.,
Appellants/Cross-appellees,

V.

JIM SHERIDAN,
UES, LLC,
SFCC-OLATHE, INC., and
SHERIDAN'S FRANCHISE SYSTEMS, INC.,
Appellees/Cross-appellants.


MEMORANDUM OPINION

Appeal from Johnson District Court; GERALD T. ELLIOTT, judge. Opinion filed May 18, 2018.
Affirmed in part and modified in part.

C. Brooks Wood, Stewart Stein, and Courtney J. Harrison, of Stinson Leonard Street LLP, of
Kansas City, Missouri, for appellants/cross-appellees.

Allan V. Hallquist, of Hallquist Law Firm, LLC, of Kansas City, Missouri, and Christina M. Pyle,
of Husch Blackwell LLP, of Kansas City, Missouri, for appellees/cross-appellants.

Before SCHROEDER, P.J., GREEN, J., and STUTZMAN, S.J.

PER CURIAM: Ronald D. Hendrix appeals the district court's grant of summary
judgment to Jim Sheridan (Sheridan) and Sheridan's Franchise Systems, Inc. (SFS)
because he failed to establish how he was damaged by any misuse of the advertising fund
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operated by SFS and contributed to by the franchises pursuant to the franchise agreement
(Agreement). SFS also counterclaimed for loss of revenue because Hendrix purchased
supplies from a nonapproved vendor which denied SFS its right to a rebate on custard
case products pursuant to the Agreement and other noncustard items. The district court
granted SFS judgment for $3,115. As more fully set out below, we find the judgment for
$3,115 is not supported by the Agreement and reduce the judgment to $2,108.

In addition, as the case developed, Hendrix chose not to renew his franchise.
Pursuant to Paragraph 16D of the Agreement, SFS amended its counterclaim to allege it
was entitled to purchase the property (the retail store) at book value. We find the district
court correctly applied the Agreement when it granted SFS's request for specific
performance. Finally, SFS sought damages for lost profits based on the denial of
immediate possession of the retail store. The district court found SFS's claim for lost
profits was speculative and denied the claim. We agree. We affirm in part and modify in
part.

FACTS

In 2013, Hendrix; BDOE, Inc.; and Hendrix's two other franchises (collectively
Hendrix) filed suit against Sheridan; UES, LLC, the company that owned Unforked; and
SFCC-Olathe, Inc. alleging fraud, breach of contract, and violations of the Kansas
Consumer Protection Act. He later amended the petition to include SFS. Hendrix sought
damages in excess of $75,000 and a declaration that he did not have any further
obligations under the Agreement. SFS denied Hendrix's allegations and counterclaimed,
alleging breach of contract and violations of the Lanham Act (protects trademarks and
service marks).

Hendrix owns BDOE, Inc. (BDOE), which operated a Sheridan's Frozen Custard
franchise at a location leased by EKH, LLC (EKH). Hendrix also owns EKH. Jim
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Sheridan is the president and sole owner of SFS, the franchisor for Hendrix's Sheridan's
Frozen Custard franchise.

On January 30, 2001, Hendrix and SFS entered into an Agreement for a restaurant
on Barry Road in Kansas City, Missouri (the Barry Road location). SFS granted Hendrix
a 15-year franchise term with the right to renew the Agreement for an additional 15-year
term. When the franchise expired or terminated, SFS had the right to purchase the
restaurant pursuant to Paragraph 16D of the Agreement, which stated:

"If this Agreement expires (without renewal) or is terminated by Franchisor in
accordance with its provisions or by Franchisee without cause, then Franchisor has the
option, exercisable by giving written notice within thirty (30) days from the date of
expiration or termination, to purchase from Franchisee all the tangible assets (including
inventory of salable products, materials, supplies, and any and all signs, equipment,
leasehold improvements and fixtures owned by Franchisee, but excluding any
unamortized portion of the initial franchise fee, cash, short-term investments and
accounts receivable) of the Restaurant (collectively, the 'Purchased Assets') and to an
assignment of Franchisee's lease for (1) the premises of the Restaurant (or, if an
assignment is prohibited, a sublease for the full remaining term and on the same terms
and conditions as Franchisee's lease) and (2) any other tangible assets used in connection
with the Restaurant. Franchisor has the unrestricted right to assign this option to purchase
and assignment of leases separate and apart from the remainder of this Agreement."

The Agreement required Hendrix to pay 1% of his gross monthly sales into an
advertising fund. The Agreement also indicated the advertising fund would be accounted
for separately, SFS would prepare yearly reports on the advertising fund's operations, and
that SFS would not use it

"to defray any of Franchisor's general operating expenses, except for reasonable salaries,
administrative costs and overhead as Franchisor incurs in activities reasonably related to
the administration of the Fund and in the preparation of advertising and marketing
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materials and its programs (including conducting market research, preparing advertising
materials and collecting and accounting for contributions to the Fund)."

The Uniform Franchise Offering Circular (UFOC) indicated SFS received a rebate
of $.80 per gallon for all frozen custard and could also receive a rebate for dry goods—
syrups, sauces, fruits, nuts, and coffee products—of up to 10% of the franchisee's
purchase price of these products.

In 2009, SFS switched suppliers from Pacific Valley Dairy to Prairie Farms Dairy
(PFD). PFD agreed to pay SFS a rebate of $4 per case of custard ($.80 per gallon of
custard) and 7% on all non-custard (or dry goods) purchases. PFD calculated the 7% of
non-custard (dry goods) purchase rebate as equal to $2.98 per case of custard, its
historical ratio, to avoid costly programming work in figuring the exact amount. PFD
rounded it up to $3 per case of custard.

In 2009, Sheridan began to address the declining sales at another store by hiring
vendors to renovate the location. He ultimately closed the location and replaced it with
Unforked, a new restaurant that was not part of the SFS system. Between 2009 and 2014,
SFS spent $405,749 from the advertising fund to develop Unforked. From 2009 to 2014,
SFS also paid $63,620 from the advertising fund for SFCC-Olathe's operational expenses
and $65,675 to Sheridan's of Omaha "outside of ordinary franchisee disbursements."
Between 2003 and 2014, SFS and SFCC-Olathe also deposited funds in the amount of
$807,476, generated by the two entities and not through the 1% advertising assessment
contributed by franchises.

UES, LLC, filed a motion for summary judgment, which the district court granted.
In April 2015, Sheridan, SFS, and SFCC-Olathe filed a motion for summary judgment. It
alleged, in part, BDOE lacked standing since it was not a party to the Agreement. The
motion for summary judgment also alleged Hendrix had not been damaged by any
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alleged breach. At argument on the motion for summary judgment, the district court
questioned Hendrix's counsel at length regarding how Hendrix was damaged by any
alleged breaches involving the advertising fund.

The district court ultimately adopted Sheridan and SFS's proposed uncontroverted
facts as its own and granted Sheridan, SFS, and SFCC-Olathe summary judgment on all
of Hendrix's claims. Hendrix moved to alter or amend the judgment and the district court
denied the motion.

On February 5, 2016—after Hendrix allowed his franchise to expire—SFS filed an
amended counterclaim. In addition to its breach of contract and Lanham Act violation
claims, SFS sought specific performance of Paragraph 16D of the Agreement. The bench
trial occurred June 20-22, 2016, to address SFS's counterclaims:

 Specific performance of Paragraph 16D;
 Lost profits because Hendrix's store was not timely delivered to SFS;
 Lost money on items Hendrix bought from unapproved suppliers and, thus,
no rebate was paid to SFS; and
 A Lanham Act violation.

In addition to three days of evidence, the parties admitted voluminous exhibits. At
closing arguments, Hendrix argued SFS was not entitled to specific performance of
Paragraph 16D of the Agreement because SFS had unclean hands. He also contended
BDOE was the franchisee, and if SFS was entitled to specific performance, it should be
required to assume BDOE's sublease with EKH. The district court took the case under
advisement.

On November 13, 2016, the district court found SFS was not entitled to lost profits
damages, but it found SFS was entitled to $3,115 in damages for lost rebates based on
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Hendrix's purchases of custard and dry goods from unapproved suppliers. The district
court also found SFS was entitled to specific performance of Paragraph 16D of the
Agreement and was not obligated to assume the sublease between EKH and BDOE
because BDOE was not a party to the Agreement. The district court also denied
application of the clean hands doctrine because there was no evidence supporting it. The
district court found SFS failed to present any evidence supporting its Lanham Act claims
and entered judgment in Hendrix's favor on those claims.

Hendrix appealed and SFS cross-appealed.

ANALYSIS

There was no error to grant SFS summary judgment.

"'Summary judgment is appropriate when the pleadings, depositions, answers to
interrogatories, and admissions on file, together with the affidavits, show that there is no
genuine issue as to any material fact and that the moving party is entitled to judgment as
a matter of law. The trial court is required to resolve all facts and inferences which may
reasonably be drawn from the evidence in favor of the party against whom the ruling is
sought. When opposing a motion for summary judgment, an adverse party must come
forward with evidence to establish a dispute as to a material fact. In order to preclude
summary judgment, the facts subject to the dispute must be material to the conclusive
issues in the case. On appeal, we apply the same rules and when we find reasonable
minds could differ as to the conclusions drawn from the evidence, summary judgment
must be denied.' [Citations omitted.]" Armstrong v. Bromley Quarry & Asphalt, Inc., 305
Kan. 16, 24, 378 P.3d 1090 (2016).

An issue of fact is not genuine unless it has legal controlling force as to the
controlling issue. A disputed question of fact which is immaterial to the issue does not
preclude summary judgment. In other words, if the disputed fact, however resolved,
could not affect the judgment, it does not present a "genuine issue" for purposes of
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summary judgment. Northern Natural Gas Co. v. ONEOK Field Services Co., 296 Kan.
906, 934, 296 P.3d 1106, cert. denied 571 U.S. 826 (2013). A party cannot avoid
summary judgment on the mere hope that something may develop later during discovery
or at trial. Likewise, mere speculation is insufficient to avoid summary judgment.
Kincaid v. Dess, 48 Kan. App. 2d 640, 656, 298 P.3d 358 (2013).

BDOE has no standing.

SFS asserts BDOE lacked standing to assert a claim for breach of contract because
it is not a party to the Agreement. It contends Hendrix is the franchisee and, despite his
assertions otherwise, Hendrix did not assign the Agreement to BDOE. Hendrix argues
SFS's standing argument is unsupported by the evidence. He contends the evidence
clearly establishes he assigned the Agreement to BDOE and SFS can only maintain its
argument "by ignoring its own designation of BDOE as a franchisee."

Standing is a jurisdictional question in which courts determine whether a party has
alleged a sufficient stake in the controversy to warrant invocation of jurisdiction and to
justify the exercise of the court's remedial powers on that party's behalf. Board of
Johnson County Comm'rs v. Jordan, 303 Kan. 844, 854, 370 P.3d 1170 (2016). Whether
jurisdiction exists is a question of law over which this court's scope of review is
unlimited. Fuller v. State, 303 Kan. 478, 492, 363 P.3d 373 (2015).

To establish standing, a litigant must show he or she has suffered a cognizable
injury and that there is a causal connection between the injury and the challenged
conduct. Peterson v. Ferrell, 302 Kan. 99, 103, 349 P.3d 1269 (2015) (quoting Gannon v.
State, 298 Kan. 1107, 1123, 319 P.3d 1196 [2014]). To be cognizable, an injury must be
particularlized; it must affect the plaintiff in a personal and individual way. Peterson, 302
Kan. at 103. "A party generally must assert its own legal rights and interests and may not
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base its claim to relief on the legal rights or interests of third parties." Ternes v. Galichia,
297 Kan. 918, 922, 305 P.3d 617 (2013).

On appeal, Hendrix claims SFS's argument ignores "its own designation of BDOE
as a franchisee in the UFOC." Hendrix's biography contained in the UFOC stated: "From
2000 to present, Mr. Hendrix has been a partner with BDOE, Inc., which is a franchisee
of SFS operating two Sheridan's Frozen Custard Restaurants, with one in Kansas City,
Missouri and the other in Chesterfield, Missouri."

However, as SFS indicates—and Hendrix ignores on appeal—Hendrix admitted he
was the franchisee in his responses to SFS's statement of uncontroverted facts. Further, in
response to a subsequent statement of uncontroverted fact, Hendrix admitted BDOE has
not executed a written agreement with SFS or Hendrix making it a franchisee of
Sheridan's Frozen Custard.

In addition, in response to one of Hendrix's statements of facts, SFS distinguished
between operating Hendrix's franchises—which it acknowledged BDOE did— with
owning franchise locations. It contended BDOE was not a Sheridan's Frozen Custard
franchisee.

Based on the uncontroverted statements of fact, BDOE was not a franchisee of
Sheridan's Frozen Custard. As such, since it was not a party to the Agreement, it did not
have standing to assert a claim for breach of contract against SFS.






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No Genuine Issues of Material Fact Reflecting SFS Breached the Agreement.

Material Breach of Advertising Fund Provisions

Hendrix argues the district court erred when it granted summary judgment because
genuine questions of material fact existed with regard to whether SFS materially
breached the advertising fund provisions of the Agreement. He contends he presented
substantial evidence showing SFS violated the Agreement's advertising funds covenants
by failing to provide annual reports of the advertising fund's operation and accounting for
the fund separately. He contends these breaches were material, and he further argues that,
if not material as a matter of law, the materiality of the breaches was a jury question.

SFS contends Hendrix raises these issues for the first time on appeal. In Hendrix's
reply brief, he argues he "raised on numerous occasions the allegations SFS had failed to
separately account for the ad fund and had failed to make annual reports for the fund
available to franchisees." He cites to various portions of the record to support this
argument. However, these citations fail to support his argument.

Contrary to what Hendrix argues on appeal, he did not raise these arguments in his
opposition to SFS's motion for summary judgment or at argument on the motion for
summary judgment. Instead, Hendrix explained there were two alleged breaches of
contract: excessive rebates and improper use of advertising fund money. He briefly
raised these issues during his argument to alter or amend the judgment. In a 50-page
transcript, he devoted half a sentence to the argument:

"'Now, what else do the Franchise Agreements say? They say that it would be
separately accounted for, and it will not be treated or used as the general operating fund.
"'Well, that's exactly how Mr. Sheridan used it.'"

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Hendrix also raised these issues at closing arguments at the trial and in his posttrial
proposed findings of facts and conclusions of law. However, the trial only concerned
SFS's counterclaims; the district court had already granted summary judgment in favor of
SFS on Hendrix's breach of contract claims, so the arguments during the trial were too
late and irrelevant.

Hendrix failed to properly raise these issues before the trial court. Issues not raised
before the trial court cannot be raised on appeal. Wolfe Electric, Inc. v. Duckworth, 293
Kan. 375, 403, 266 P.3d 516 (2011). Kansas Supreme Court Rule 6.02(a)(5) (2018 Kan.
S. Ct. R. 34) requires an appellant to explain why an issue not raised below should be
considered for the first time on appeal. In State v. Williams, 298 Kan. 1075, 1085, 319
P.3d 528 (2014), the Supreme Court held litigants who fail to comply with this rule risk a
ruling the issue is improperly briefed, and the issue will be deemed waived or abandoned.
Thereafter, the Supreme Court held Rule 6.02(a)(5) would be strictly enforced. State v.
Godfrey, 301 Kan. 1041, 1044, 350 P.3d 1068 (2015). Hendrix did not explain why he
did not raise these arguments before the district court at summary judgment. He cannot
raise them now and has abandoned these arguments.

Misappropriation of the advertising fund

Hendrix contends summary judgment on his breach of contract claims was
inappropriate because there were genuine issues of material fact concerning whether SFS
misappropriated franchisee money from the advertising fund. He contends SFS's expert
report was based, in part, on Sheridan's credibility, an issue that cannot be resolved at
summary judgment. Hendrix also asserts SFS's expert relied on an overbroad definition
of "permitted use" and improperly credited SFS with $103,000 allegedly spent directly by
SFS and SFCC-Olathe for advertising.

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SFS contends Hendrix does not have standing to argue SFS improperly used
advertising fund money. SFS also argues it spent almost $1.4 million on advertising,
which is approximately the same amount all the franchisees contributed to the advertising
fund pursuant to the Agreement. SFS asserts it did not improperly transfer money
contributed by Hendrix or other franchisees out of the advertising fund. Finally, it argues
Hendrix did not dispute the advertising fund analysis its expert conducted.

At summary judgment, Hendrix did not argue SFS's expert report was based, even
in part, on Sheridan's credibility. Similarly, Hendrix neither argued SFS's expert relied on
an overbroad definition of "permitted use," nor argued SFS's expert improperly credited
SFS with funds spent by it and SFCC-Olathe for advertising. Hendrix did not raise these
issues below and, pursuant to Rule 6.02(a)(5), has not explained why he failed to do so.
He cannot raise the issues now and has abandoned this argument.

Excessive rebates

In adopting the defendant's findings of uncontroverted facts, the district court
found the 2009 rebate was a 7% rebate for dry goods. However, to avoid an accounting
issue and based on Sheridan's historical ratio of custard to dry goods purchases, PFD
chose to calculate the dry goods rebate as equal to $3 per case of custard.

Without explicitly stating so, Hendrix argues there are genuine issues of material
fact regarding whether the 2009 rebate was a rebate on dry goods or an additional,
excessive rebate on custard. Hendrix argues summary judgment was inappropriate
because SFS breached the Agreement by receiving and concealing excessive rebates. He
contends the 2009 rebate on "dry goods" was actually an additional rebate on custard.
SFS argues the $3 per case rebate was for dry goods. It contends Hendrix's failure to
come forward with any evidence showing the $3 rebate was actually an additional rebate
for custard is fatal to his claim.
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Contrary to SFS's argument, Hendrix presented evidence to establish a genuine
issue of material fact. PFD's corporate representative testified the $3 rebate was for non-
custard goods. The rebate began in 2009. However, it was uncontroverted SFS's general
ledger did not indicate "dry goods rebate" income until October 2012, about the time
Hendrix began questioning the rebate. Similarly, none of PFD's records designate any
portion of the rebate as a dry goods rebate. Since neither SFS nor PFD recorded the
rebate as a rebate for dry goods for more than three years, it is reasonable to infer the $3
rebate was not actually a rebate for dry goods. Resolving these facts and inferences in
favor of Hendrix, the party against whom summary judgment was sought, there is a
genuine issue of material fact regarding whether the $3 rebate was a rebate on dry goods
or custard.

Hendrix failed to show damages.

At summary judgment, SFS argued Hendrix could not prevail on his breach of
contract claims because he failed to show any damages caused by the alleged breaches.
The district court agreed. On appeal, SFS contends summary judgment was proper
because Hendrix failed to show damages. In his reply brief, Hendrix argues he put forth
sufficient evidence of damages to controvert SFS's request for summary judgment.

If there is no evidence supporting an essential element of the plaintiff's claims,
defendants are entitled to summary judgment. Hall v. Kansas Farm Bureau, 274 Kan.
263, 278, 50 P.3d 495 (2002). Damages to the plaintiff caused by the breach of contract is
an essential element of breach of contract claims. Stechschulte v. Jennings, 297 Kan. 2,
23, 298 P.3d 1083 (2013).

Here, Hendrix failed to present any evidence he was damaged by SFS's alleged
breach on the rebate amount. He was unable to personally attribute any damages to his
franchises caused by SFS. Hendrix could not say whether his franchises lost revenue as a
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result of SFS transferring money out of the advertising fund. Similarly, Hendrix's expert
witness did not offer an opinion on whether SFS's administration of the advertising fund
damaged Hendrix's franchises and was unwilling or unable to testify as to whether the
franchises received the benefit they expected to from the advertising fund. Hendrix's
expert witness was also unable to say whether Hendrix was damaged by the $3 rebate
SFS claimed was for dry goods, and he did not calculate the amount of damages, if any,
resulting from the rebates. Hendrix's expert was unable to say that, even if the $3 rebate
was excessive, it resulted in $3 damages to Hendrix.

Hendrix contends the fact he did not state a dollar figure for damages and his
expert had not been asked to render an opinion on damages does not foreclose the
possibility of damages. He argues the rebate increased the price of the dry goods he
purchased. Hendrix points out the supplier indicated he would have paid the $3 per case
rebate on dry goods to the franchisees if Sheridan had asked. He contends a jury would
be entitled to conclude the supplier "would also be willing to sell the product for that
much less." However, this is pure speculation. There is no evidence to support Hendrix's
conclusion because, in the portion of the transcript attached to his response to summary
judgment, Hendrix did not ask the supplier if he would be willing to sell the product for
less. Speculation is insufficient to avoid summary judgment. Kincaid, 48 Kan. App. 2d at
656.

Clearly, damages are an essential element for a breach of contract claim and
Hendrix failed to point to any evidence alleging how he was specifically damaged by the
breach. The district court did not err when it granted summary judgment.

Paragraph 16D of the Agreement is enforceable.

Hendrix argues the district court erred when it found SFS was entitled to take over
the Barry Road location after the expiration of the Agreement. He contends he
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sufficiently established equitable defenses that, as a matter of law, barred SFS from
exercising its option to purchase the Barry Road location. He also asserts the Agreement
prevents the franchisor from exercising its rights under Paragraph 16D of the Agreement
if the franchisee had cause to terminate the Agreement. Finally, Hendrix argues SFS
waived its right to purchase the Barry Road location when it refused to assume the
sublease between BDOE and EKH.

No Relief Under the Clean Hands Doctrine

Hendrix contends he raised two equitable defenses that, as a matter of law,
prevented SFS from exercising its rights to purchase the Barry Road location. He
contends the district court incorrectly applied the clean hands doctrine when it concluded
evidence of SFS's unclean hands was not sufficiently related to its right to purchase under
the Agreement. Hendrix also contends the district court failed to consider a breach of the
covenant of good faith and fair dealing which should have precluded SFS from
demanding specific performance of the Agreement. These arguments will be addressed in
turn.

"The clean hands doctrine is based upon the maxim of equity that he who comes into
equity must come with clean hands. The clean hands doctrine in substance provides that
no person can obtain affirmative relief in equity with respect to a transaction in which he
has, himself, been guilty of inequitable conduct. It is difficult to formulate a general
statement as to what will amount to unclean hands other than to state it is conduct which
the court regards as inequitable. Like other doctrines of equity, the clean hands maxim is
not a binding rule, but is to be applied in the sound discretion of the court. The clean
hands doctrine has been recognized in many Kansas cases. The application of the clean
hands doctrine is subject to certain limitations. Conduct which will render a party's hands
unclean so as to deny him access to a court of equity must be willful conduct which is
fraudulent, illegal or unconscionable. Furthermore the objectionable misconduct must
bear an immediate relation to the subject-matter of the suit and in some measure affect
the equitable relations subsisting between the parties to the litigation and arising out of
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the transaction. Stated in another way the misconduct which may justify a denial of
equitable relief must be related misconduct rather than collateral misconduct arising
outside the specific transaction which is the subject-matter of the litigation before the
court.
"It should also be emphasized that in applying the clean hands maxim, courts are
concerned primarily with their own integrity. The doctrine of unclean hands is derived
from the unwillingness of a court to give its peculiar relief to a suitor who in the very
controversy has so conducted himself as to shock the moral sensibilities of the judge. It
has nothing to do with the rights or liabilities of the parties. In applying the unclean hands
doctrine, courts act for their own protection, and not as a matter of 'defense' to the
defendant. [Citations omitted.]" Green v. Higgins, 217 Kan. 217, 220-21, 535 P.2d 446
(1975).

We review for an abuse of discretion. See Green, 217 Kan. at 220. A judicial
action constitutes an abuse of discretion if (1) no reasonable person would take the view
adopted by the trial court; (2) the action is based on an error of law; or (3) the action is
based on an error of fact. Wiles v. American Family Life Assurance Co., 302 Kan. 66, 74,
350 P.3d 1071 (2015).

The district court held there was no evidence supporting the application of the
clean hands doctrine. It found SFS's actions relating to the advertising fund and rebates
were "incidental and subordinate to the purpose of the franchise relationship." It further
found "Hendrix received the benefit of the Barry Road Franchise Agreement for the full
term, as he operated a restaurant with steady sales and profits during this period, and
therefore it would be inequitable to allow him to retain this consideration and avoid his
obligations."

Hendrix argues SFS's conduct goes directly to the subject matter of the suit. He
contends the full term of the Agreement was 30 years, since he had the right to renew the
Agreement for a second 15-year term. He asserts the only reason he did not renew the
Agreement is SFS's misuse of the advertising fund and receipt of improper rebates. In
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contrast, SFS argues Hendrix asserted "a litany of unrelated grievances" to defeat his
contractual obligations under Paragraph 16D of the Agreement. It contends Hendrix
successfully operated the Barry Road location for the full 15-year term of the Agreement
and its actions did not defeat the object of the Agreement.

SFS's argument is more persuasive. The Agreement granted Hendrix the right to
operate the restaurant for a 15-year term. While Hendrix had the sole right to renew the
Agreement for an additional 15-year term, he was not obligated to do so. However, upon
nonrenewal, termination, or expiration of the Agreement, the Agreement provided SFS
with the exclusive right to purchase the restaurant pursuant to Paragraph 16D.

Nothing prevented Hendrix from renewing the Agreement while maintaining a
cause of action against SFS for misuse of the advertising fund and improper rebates.
Indeed, Hendrix filed his lawsuit before the expiration of his Agreement. Although there
is undisputed evidence Hendrix chose not to renew the Agreement based on SFS's alleged
bad faith, there is no evidence SFS interfered with his ability to renew the Agreement.
Instead, Hendrix knowingly allowed the Agreement to expire upon the completion of the
Agreement's first 15-year term.

At issue was SFS's request for specific performance of Paragraph16D of the
Agreement. Any misconduct by SFS was collateral to the issue and does not support
Hendrix's clean hands claim. Further, Hendrix received the benefit he bargained for—a
15-year franchise term with the option to renew for another 15-year term. It would be
inequitable to allow him to receive the benefit of his bargain, without also holding him to
his obligations. As such, the district court did not abuse its discretion in refusing to apply
the clean hands doctrine to bar specific performance of Paragraph 16D of the Agreement.



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The Covenant of Good Faith and Fair Dealing provides no relief.

Hendrix also argues the district court failed to consider the breach of the covenant
of good faith and fair dealing; he contends the district court should have found SFS's
breach of the covenant of good faith and fair dealing precluded it from demanding
specific performance. Hendrix cited breach of the covenant of good faith and fair dealing
as an affirmative defense. However, at trial, he failed to raise and argue that SFS's breach
of this covenant precluded SFS from demanding performance under Paragraph 16D of
the Agreement.

Issues not raised before the trial court cannot be raised on appeal. Wolfe Electric,
Inc., 293 Kan. at 403. Kansas Supreme Court Rule 6.02(a)(5) (2018 Kan. S. Ct. R. 34)
requires an appellant to explain why an issue that was not raised below should be
considered for the first time on appeal. Rule 6.02(a)(5) is strictly enforced. Godfrey, 301
Kan. at 1044. Hendrix did not argue SFS breached the covenant of good faith and fair
dealing before the district court. Likewise, Hendrix has not complied with Rule
6.02(a)(5) by explaining why this court should consider the argument for the first time on
appeal. We deem Hendrix's argument abandoned.

Termination for cause

Next, Hendrix argues "[t]he franchise agreement recognizes that the franchisor
should not be able to exercise the right under [Paragraph] 16D if it has given the
franchisee 'cause' to terminate the agreement." Since this argument requires interpretation
of the Agreement, this court has unlimited review. See Born v. Born, 304 Kan. 542, 554,
374 P.3d 624 (2016).

When interpreting written contracts, the primary rule of construction is to ascertain
the parties' intent. If the terms of the contract are unambiguous, the parties' intent is to be
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ascertained from the contract language without applying rules of construction. Prairie
Land Elec. Co-op v. Kansas Elec. Power Co-op, 299 Kan. 360, 366, 323 P.3d 1270
(2014); Waste Connections of Kansas, Inc. v. Ritchie Corp., 296 Kan. 943, 963, 298 P.3d
250 (2013).

Paragraph 15B of the Agreement discusses the right of the franchisor to terminate
the Agreement. It states, in relevant part:

"Franchisor has the right to terminate this Agreement by providing Franchisee
thirty (30) days' prior written notice of the termination, said notice stating the reason or
reasons for the termination constituting good cause. For purposes of this Agreement,
good cause includes any one of the breaches set forth below and any other material
breach of the Franchise Agreement or Franchisee's failure to comply substantially with
essential and reasonable requirements imposed upon Franchisee by Franchisor. The
notice of termination shall give Franchisee thirty (30) days in which to cure the matters
giving rise to the good cause, which is the basis of the termination. The termination of the
Franchise Agreement is effective upon the expiration of the thirty (30) day notice period
and Franchisee's failure to cure any breach or Franchisee's failure to comply substantially
with the essential and reasonable requirements imposed upon Franchisee by Franchisor,
in accordance with the provisions set forth below during this thirty (30) day notice
period. It is a material breach of the Franchise Agreement and constitutes good cause for
termination of the Franchise Agreement if Franchisee (or its owners, shareholders,
partners or members, if Franchisee is a corporation, partnership or limited liability
company) and/or the managers and/or the Restaurant:
. . . .
"(17) Violates any of the covenants contained in the Franchise Agreement;
"(18) Fails to comply with any other provision of this Agreement or any
mandatory specification, standard or operating procedure prescribed by Franchisor,
including any procedure or requirement set forth in the Operations Manual or any
standard relating to uniformity and quality of products, image or customer service or
treatment."

19

Hendrix argues the corollary to Paragraph 15(B) is "the franchisor may not
exercise the option if the franchisee terminates the agreement for cause." He contends he
clearly had cause to terminate the Agreement since SFS violated numerous provisions
and he should not be penalized for seeking a declaratory judgment terminating the
Agreement instead of unilaterally terminating the Agreement.

Hendrix's argument is unpersuasive. The language of Paragraph 15B clearly
allows a franchisor to terminate a franchisee for cause. There is nothing in Paragraph 15B
of the Agreement stating the franchisee has the right to terminate the Agreement for
cause. Since the Agreement does not grant the franchisee a right to terminate the
Agreement for cause, we find nothing in the Agreement preventing the franchisor, SFS,
from exercising its right under Paragraph 16D. This is especially true when, instead of
attempting to terminate the Agreement for cause, Hendrix, on his own accord during the
litigation, allowed the Agreement to expire.

BDOE's sublease with EKH is not enforceable.

The district court held SFS was not obligated to assume the sublease between
EKH and BDOE. It found Paragraph 16D of the Agreement applied solely to the ground
lease, not the sublease. It found Hendrix's sublease between BDOE and EKH was an
attempt to contravene the provisions of the Agreement. The district court also found there
was no value attributed to the assignment of a lease between BDOE and EKH. As such,
the court found that requiring SFS to assume the sublease would defeat the provisions of
Paragraph 16D. Finally, the district court found BDOE did not regularly make the
$15,000 sublease payment to EKH.

The district court found Hendrix never expressly or impliedly assigned the Barry
Road location Agreement to BDOE. Since Hendrix asserted he assigned the Agreement
to BDOE, he had the burden of proof. "The burden of proof is always upon the party
20

asserting an affirmative of an issue and remains with him throughout the trial." Jensen v.
Jensen, 205 Kan. 465, 467, 470 P.2d 870 (1970). A finding that a party did not meet its
burden of proof is a negative factual finding. In reviewing a negative factual finding, the
appellate court must consider whether the district court arbitrarily disregarded undisputed
evidence or relied upon some extrinsic consideration such as bias, passion, or prejudice to
reach its decision. Cresto v. Cresto, 302 Kan. 820, 845, 358 P.3d 831 (2015).

Hendrix incorrectly asserts a substantial competent evidence standard of review
applies. However, since the district court made a negative factual finding—Hendrix did
not establish he expressly or impliedly assigned the Barry Road location Agreement—
this court's review is limited to whether the district court arbitrarily disregarded
undisputed evidence or relied upon some extrinsic consideration. We find no indication,
and Hendrix does not argue, the district court based its decision on bias, passion, or
prejudice. Thus, the only question is whether the district court arbitrarily disregarded
undisputed evidence. It did not.

Hendrix argues the district court erred when it found SFS was not required to
assume BDOE's sublease. Hendrix asserts an assignment of the Agreement from himself
to BDOE is "easily implied" because BDOE operated the franchise from day one. He also
contends even though no formal notice of assignment exists, SFS treated BDOE as the
franchisee and did not object to BDOE as franchisee. Therefore, BDOE is the franchisee,
and not Hendrix. Hendrix also argues the district court disregarded rent BDOE paid to
EKH from the beginning of the business "in an amount significantly greater than the
ground lease."

However, Sheridan testified Hendrix never requested approval to assign the Barry
Road location Agreement to BDOE. He indicated SFS never relieved Hendrix of his
obligation to obtain written approval before assigning the Agreement. Sheridan suggested
he did not realize BDOE operated the store until sometime between 2013 and 2015.
21

Similarly, despite visiting the store and performing audits many times, Sheridan testified
he never saw the sign in the window indicating the franchise was owned and operated by
BDOE. In addition, Sheridan explained Hendrix supplied the biography used in the
UFOC and that he must not have seen the references to BDOE as franchisee.

While Sheridan's testimony sometimes strained credulity, this court does not pass
on the credibility of witnesses. See Drach v. Bruce, 281 Kan. 1058, 1067, 136 P.3d 390
(2006). The district court did not arbitrarily disregard undisputed evidence; Sheridan
disputed the evidence implying an assignment of the franchise.

Since the district court did not err when it found Hendrix neither expressly nor
impliedly assigned the Agreement to BDOE, there was no relationship between BDOE
and SFS. Thus, SFS was not required to assume BDOE's sublease with EKH in order to
take possession of the Barry Road location; it merely had to assume the ground lease with
the shopping center owner.

The $3,115 judgment is reduced to $2,108.

A district court's findings of fact are reviewed to determine whether the findings
are supported by substantial competent evidence and are sufficient to support the district
court's legal conclusions. Substantial competent evidence is legal and relevant evidence a
reasonable person might regard as sufficient to support a conclusion. Hodges v. Johnson,
288 Kan. 56, 65, 199 P.3d 1251 (2009). Furthermore, when evaluating the evidence
supporting a district court's factual findings, this court does not weigh conflicting
evidence, evaluate witnesses' credibility, or redetermine questions of fact. Wolfe Electric,
Inc., 293 Kan. at 407. Finally, this court presumes that the district court found all the
facts necessary to support its judgment. Hodges, 288 Kan. at 65.

22

The district court granted judgment for $3,115 on Count I of the amended
counterclaim. It found SFS sustained damages totaling $3,115 for lost supplier rebates
resulting from Hendrix's purchases from unapproved suppliers. Hendrix argues the
district court's judgment is unsound.

Hendrix contends there is no evidence there was an approved supplier, much less
one who would have paid SFS a rebate, for many of the purchases. Here, the record
reflects most of the non-custard goods purchased from Reinhart Foodservice L.L.C., the
unapproved supplier, were for making sandwiches and other meals rather than custard
desserts. As Hendrix argues, SFS presented no evidence suggesting an approved
distributor sold these items. Additionally, SFS failed to show how, under the Agreement,
it would be entitled to a rebate on items not listed in the Agreement. As such, there is not
substantial competent evidence supporting the district court's findings with respect to dry
goods. However, there is substantial competent evidence supporting the district court's
findings regarding custard rebates. Hendrix admitted to purchasing custard from
unapproved vendors and the rate is easily calculable based on the cases of custard he
purchased. Due to Hendrix's use of unapproved vendors for custard, the calculation
reflects SFS lost $2,108 in rebates. The $3,115 judgment is reduced to $2,108.

Hendrix also contends SFS cannot claim a breach because it failed to respond to
Hendrix's request to sell sandwiches and related items at his Sheridan's location in
Chesterfield. In addition, he argues SFS cannot claim a breach because Hendrix
purchased custard from Reinhardt when SFS failed to provide an acceptable supplier.
However, Hendrix does not actually argue these points. A point raised incidentally in a
brief and not argued therein is deemed abandoned. Friedman v. Kansas State Bd. of
Healing Arts, 296 Kan. 636, 645, 294 P.3d 287 (2013). Once again, we find Hendrix has
abandoned these points.

23

Finally, Hendrix argues the statute of limitations applies because he last purchased
custard for the Barry Road location from an unapproved supplier in July 2008 and SFS
first asserted this claim in August 2013. Hendrix acknowledged this issue was not raised
during trial, though he asserts it was raised in the answer to the counterclaim. Issues not
raised before the trial court cannot be raised on appeal. Wolfe Electric, Inc., 293 Kan. at
403. Kansas Supreme Court Rule 6.02(a)(5) requires an appellant to explain why an issue
that was not raised below should be considered for the first time on appeal. The Supreme
Court has held that Rule 6.02(a)(5) will be strictly enforced. Godfrey, 301 Kan. at 1044.
Although Hendrix included a statute of limitations affirmative defense before the district
court, he never argued the statute of limitations applied. Likewise, although Hendrix
acknowledged he did not raise the issue below, Hendrix failed to comply with Rule
6.02(a)(5) and explain why this court should consider the argument for the first time on
appeal. Hendrix abandoned his statute of limitations argument.

SFS was not entitled to lost profits.

The district court denied SFS's lost profits claim. The district court found the
evidence was insufficient and was not reasonably certain to support breach of contract
damages in the amount of $93,383.84. SFS argues the district court disregarded
undisputed evidence of the breach. It also contends it established lost profits with
reasonable certainty and the district court ignored this evidence.

When the district court finds a party did not meet its burden of proof, it is a
negative factual finding. In reviewing a negative factual finding, the appellate court must
consider whether the district court arbitrarily disregarded undisputed evidence or relied
upon some extrinsic consideration such as bias, passion, or prejudice to reach its decision.
Cresto, 302 Kan. at 845. Here, SFS only argues the district court ignored undisputed
evidence; it does not argue the district court's decision was based on bias, passion, or
prejudice.
24

SFS argues Hendrix "refus[ed] to allow SFS to purchase the assets of the Barry
Road Franchise and obtain an assignment of the lease for the restaurant premises upon
the expiration of the franchise agreement." However, Hendrix did not "refuse" to allow
SFS to purchase the Barry Road location assets. Instead, as the district court found,
Hendrix indicated he would allow SFS to take possession of the Barry Road location if
SFS assumed both the ground lease and BDOE's purported sublease. Ultimately, this is a
distinction without a difference. Indisputably, as the district court found, Hendrix
breached Paragraph 16D of the Agreement.

SFS argues it undisputedly established the Barry Road location franchise's history
of profitability and SFS was reasonably certain of continuing those profits. Hendrix
responds that SFS's evidence was insufficient, not reasonably certain, and Sheridan's
testimony was speculative. He also contends SFS was not entitled to possession until
April 3, 2016, further limiting any damages SFS might be entitled to receive.

The district court did not err when it determined SFS was not entitled to lost
profits as a result of Hendrix's failure to comply with the Agreement. Lost profits
resulting from a breach of contract may be recovered as damages. The profits must be
proved with reasonable certainty and must reasonably be considered within the
contemplation of the parties. CoreFirst Bank & Trust v. JHawker Capital, 47 Kan. App.
2d 755, 774, 282 P.3d 618 (2012) (quoting Vickers v. Wichita State University, 213 Kan.
614, 618, 518 P.2d 512 [1974]). Absolute certainty is not required to prove lost profits
but the award for lost profits cannot be based upon speculative or problematic evidence.
CoreFirst, 47 Kan. App. 2d at 774.

Unquestionably, the Barry Road location franchise was profitable. The Barry Road
location averaged sales of approximately $1 million per year from 2013-2015 and each
month had little variation from year to year. Sheridan testified he expected the net profit
from February through June to be approximately 19% of sales, or $93,383.84.
25

However, Sheridan's testimony regarding lost profits was speculative. Sheridan
testified he had not decided whether he would franchise the Barry Road location or if it
would remain a company store. He could have put a franchisee in the location in
February or March. If SFS installed a franchisee in the Barry Road location, it would not
have received 19% as the store's profits; instead, SFS would only receive 4% of the
store's gross sales in royalties, approximately $19,660. Furthermore, Sheridan indicated
he "backed out" expenses he did not believe he would have if he operated the Barry Road
location before determining the 19% profit rate. Sheridan testified he would have only
spent half as much—$60,000—on management. He also indicated he would not have to
pay the property or health insurance, franchise fee, auto expense, legal expense,
entertainment expense, or officers' salaries. However, Sheridan also admitted SFS had
many similar expenses: automobile, insurance, legal fees, meals and entertainment, and
auto travel. Despite SFS's argument to the contrary, the district court did not arbitrarily
disregard undisputed evidence when it determined SFS was not entitled to damages for
lost profits. SFS failed to elect how it would operate the Barry Road location and it was
not the district court's job to make the election as it considered SFS's burden to establish
lost profits with reasonable certainty.

SFS specifically asked the district court for lost profits on operating the store as a
SFS-owned facility and not as a franchisee store. At oral argument, SFS raised the
contention if it was not entitled to lost profits based on 19%, it was entitled to them at 4%
as if the property had been franchised. That is an issue not argued before the district court
and cannot be raised for the first time on appeal. See Wolfe Electric, Inc., 293 Kan. at
403. We will not consider SFS's request.

Hendrix also argues SFS was not entitled to possession until April 3, 2016, which
would have further limited the amount of profits SFS lost. Similarly, he contends SFS's
actions after the district court granted specific performance show the Barry Road location
"would not have been operating during the alleged damage period." Hendrix did not raise
26

either of these arguments before the district court. Issues not raised before the trial court
cannot be raised on appeal. Wolfe Electric, Inc., 293 Kan. at 403. Kansas Supreme Court
Rule 6.02(a)(5) requires an appellant to explain why an issue that was not raised below
should be considered for the first time on appeal. In Williams, 298 Kan. at 1085, the
Supreme Court held litigants who fail to comply with this rule risk a ruling the issue is
improperly briefed. Thereafter, the Supreme Court held Rule 6.02(a)(5) would be strictly
enforced. Godfrey, 301 Kan. at 1044. Hendrix did not raise these arguments before the
district court or comply with Kansas Supreme Court Rule 6.02(a)(5). These arguments
are abandoned.

Affirmed in part and modified in part.