was subsequent non-payment by the Defendants. Instead, they argue that the License Agreement is a franchise agreement, which requires Plaintiff to register the franchise pursuant to California franchise law. Plaintiff has not registered the alleged franchise. Thus the Defendants claim, the Note, signed contemporaneously with the License Agreement, is unlawful, and the guarantors are not liable, because the principal obligor, NSC, is not liable.
Putting aside the determination of whether the agreement is a license or a franchise agreement, and assuming for the moment that the License Agreement is what it says it is -- a license agreement, the Defendants have raised no argument, nor any material fact, that would dispute the validity or enforceability of the Note or Guarantees. (Defs.' 3(g) Stmt. PP 2-3.) Accordingly, on this basis, the Court would have to render summary judgement in Plaintiff's favor.
Assuming arguendo, that the Defendants are correct in their assertion that the License Agreement is a franchise agreement, the proposed link between the unenforceability of the underlying franchise agreement and the Note and Guarantees is a tenuous one. The Defendants argue, citing Village of Upper Nyack v. Christian and Missionary Alliance, 143 Misc. 2d 414, 540 N.Y.S.2d 125 (N.Y. Sup. Ct. 1988), aff'd, 155 A.D.2d 530, 547 N.Y.S.2d 388 (2d Cir. 1989), that any act, promise or agreement intended to accomplish the furtherance of an unlawful purpose is unlawful and thus unenforceable. From this, the Defendants reason that the Note and Guarantees are unlawful and unenforceable because the underlying agreement is unlawful. However, if the License Agreement were found to be a franchise agreement, it does not follow that it has an unlawful purpose -- in fact, contracting a franchise is completely lawful. The alleged unlawfulness is found in the Plaintiff's failure to meet the procedural requirement of franchise registration, not in its purpose. Accordingly, the Defendants' argument fails on its face.
The Defendants also argue that recision of the alleged franchise agreement is warranted and therefore payment on the subsequent Note and Guarantees is not required. (Defs.' 3(g) Stmt. P 2.) However, where a franchisee has gained knowledge that a franchise agreement is potentially unlawful, but does not rescind the agreement at the time of gaining that knowledge and continues with the "franchise" relationship, they are estopped from rescinding the franchise agreement. See Fargo Biltmore Motor Hotel Corp. v. Best Western Int'l, Inc., 742 F.2d 459 (8th Cir. 1984)
(the court found that the plaintiff had taken advantage of the defendant's services for several months, after the plaintiff actively determined that the defendant was infringing the franchise law and thus plaintiff was estopped from rescinding the agreement); Two Men and a Truck/Int'l Inc. v. Two Men and a Truck/Kalamazoo, Inc., 949 F. Supp. 500 (W.D. Mich. 1996). Here, the letter from Robert Reed ("Reed"), Defendants' prior counsel, (Rosen Aff. Ex. Q), as well as Reed's research regarding this matter, (Reed Dep. at 15-16), shows that the Defendants knew of the alleged infringement of California franchise law several months before signing the Forbearance Agreement and the Guarantees. If the Defendants wanted to rescind the License Agreement they should have done so at the time of the discovery of the possible franchise violation, and declined to enter into the Forbearance Agreement and subsequent Guarantees.
Instead the Defendants requested more time from the Plaintiff in order to test their marketing plan and continued to benefit from the information in the Plaintiff's computer database and the Plaintiff's name and network, for eleven months after determining the Plaintiff was possibly in violation of the California franchise laws. Accordingly, the Court finds the Defendants are estopped from any attempt to rescind the alleged franchise agreement. Because the Defendants are estopped from rescinding the underlying agreement, the Note and subsequent Guarantees remain valid and enforceable.
The Guarantees are binding upon the Defendants Lawlor and Anton. Where a contract is unambiguous,
its interpretation can be determined as a matter of law. Seiden Assocs. v. ANC Holdings, Inc., 959 F.2d 425, 426, 429 (2d Cir. 1992); Rothenberg v. Lincoln Farm Camp, Inc., 755 F.2d 1017, 1019 (2d Cir. 1985); Alternative Thinking Sys., Inc. v. Simon & Schuster, Inc., 853 F. Supp. 791, 795 (S.D.N.Y. 1994). Only when the contract is ambiguous, and after considering extrinsic evidence which leads the court to conclude that there is more than one plausible interpretation that can be drawn, does a question of fact exist. Seiden, 959 F.2d at 428; Rothenberg, 755 F.2d at 1019; Alternative Thinking, 853 F. Supp. at 795. "The objective of contract interpretation is to give effect to the expressed intention of the parties." Rothenberg, 755 F.2d at 1019; Seiden, 959 F.2d at 428; Alternative Thinking, 853 F. Supp. at 795. The plain language of the Guarantees support the view that Defendants Lawlor and Anton waived all their defenses -- " . . . the undersigned guarantees without deduction by reason of set-off, defense, or counterclaim of any party . . . the due performance of all of [NSC's] obligations." (Rosen Aff. Ex. K at 1.) Therefore the Guarantees are enforceable against Defendants Lawlor and Anton. See also Citibank, N.A. v. Plapinger, 66 N.Y.2d 90, 495 N.Y.S.2d 309, 485 N.E.2d 974 (N.Y. 1985).
Plaintiff's motion for summary judgment for enforcement of the Note and Guarantees is GRANTED.
Dated: New York, New York
June 27, 1997
Deborah A. Batts