Full opinion text
MEMORANDUM OPINION ALDON J. ANDERSON, Chief Judge. Non-jury trial of the present action was conducted on September 25 and subsequent dates in September, October, and November of 1978. Final arguments were concluded on November 24, and the court took the entire matter under advisement at that time. JURISDICTION AND VENUE This action was commenced in state court on or about April 30,1976, when Craig Food Industries, Inc. (CFI) filed suit against Taco Time International, Inc. (TTI) for a declaratory judgment as to certain disputed matters arising out of a licensing agreement between the parties. Although the action was at that point removable on the basis of diversity of citizenship, TTI made no effort to remove the action to federal court. On June 28, 1976, TTI filed an answer and counterclaim in state court. On December 7, 1977, TTI filed a motion for leave to amend its counterclaim to allege numerous additional breaches by CFI. On December 23, CFI filed a motion for leave to file an amended complaint in the event that TTI should be allowed to file an amended counterclaim. On January 18, 1978, the state court granted the motions for leave to amend. On January 24, CFI filed a “second amended complaint,” which included an allegation that the Taco Time trademark was “no longer subject to the protection of the Lanham Act.” (Seventh Count.) This allegation had not been made previously in this action (except in the proposed amended complaint filed in connection with the motion for leave to file an amended complaint). On January 31, 1978, TTI filed a petition for removal of the action to this court on the basis of the trademark claim arising under federal law. On February 7, CFI filed an “objection to petition for removal,” but did not file a motion to remand. On February 24, CFI filed a motion to strike from its second amended complaint all allegations relating to its trademark claim. (Seventh Count.) On March 7, the court granted the motion to strike. Throughout most of the litigation of this action in this court, CFI has maintained that the court lacks jurisdiction because removal was not timely. (E.g., Pretrial Order [First Draft], dated July 14, 1978; Pretrial Order [Final] dated August 9, 1978.) In its proposed findings of fact and conclusions of law submitted on or about November 6, CFI took the position that the court has jurisdiction. (¶ 3.) In view of the conflicting positions asserted by CFI as to jurisdiction, the court deems it appropriate to reach an explicit resolution of the jurisdictional issue despite CFI’s apparent waiver of its objections to this court’s jurisdiction. It is undisputed that jurisdiction of this action could properly be based on diversity of citizenship and requisite amount in controversy if removal was timely. Since TTI did not remove within thirty days from the filing of this action, which was removable at the outset, its subsequent removal did not satisfy the literal terms of 28 U.S.C. § 1446(b), requiring removal within thirty days after receipt by the defendant of the initial pleading or service of summons. The courts, however, have expanded removal jurisdiction with the doctrine that if the amendment of the complaint provides a new basis for removal or makes the action a “new suit,” the thirty-day removal period begins to run anew from the date of service of the amended complaint on the defendant. E.g., 14 Wright, Miller & Cooper, Federal Practice & Procedure § 3732, at 728 (1976). In this case, CFI’s second amended complaint (filed on January 24, 1978) stated a claim arising under federal law, thereby providing a new basis for removal. TTI’s petition for removal was filed on January 31, 1978, well within the thirty-day period. Thus, removal of this action was timely and proper. Even though the court later granted CFI’s motion to strike its federal claim, the court was not thereby deprived of jurisdiction of the remaining claims of the parties. E.g., id., § 3739, at 761. The parties agree that venue is properly laid in this court’s Northern Division. HISTORY OF THE DISPUTE The present relationship of CFI and TTI has evolved gradually during a period of nearly fourteen years. In 1965, Ed Craig (now president and chairman of board of CFI) and his wife purchased a Taco Time subfranchise in Spokane, Washington from National Taco Company (“Nataco” — now TTI) and Evan Armstrong for $18,000. (P— 1132.) At that time, the Taco Time business had been in existence for .five years and had about fifteen stores in operation. Also in 1965, Craig entered into a “franchise agreement” with Nataco under which he was obligated to open four Taco Time restaurants in Utah by July 1, 1969. (D-323.) Pursuant thereto, Craig opened at least five stores in Utah by 1969. (D-138.) On March 25, 1968, Ed and Gil Craig entered into an “area license agreement” with Nataco, granting them the exclusive right to procure franchisees in North and South Dakota, Montana, Wyoming, and part of Nevada. (D-322.) This agreement required a minimum of 48 franchise sales within five years. On or about July 17, 1968, Nataco and Taco Time Western States (partnership of Ed and Gil Craig) entered into a similar area license agreement for Colorado, Arizona, and New Mexico. (D-324.) This agreement established a quota of 28 franchise sales within five years. In February of 1969 Taco Time Western States agreed to purchase an existing franchise in Idaho. (P-1133, 1145.) Prior to that time Craigs had apparently obtained licensing rights for the southern portion of Idaho. (P-1145.) By late 1969, the Craigs were in default as to minimum franchise sales obligations under the two 1968 area license agreements. They were also in default on some of their payment obligations under the various agreements. In order to remedy these defaults and to achieve various other objectives, Nataco and Craig’s Taco Industries, Inc. (now CFI) entered into an “area license agreement” on November 14,1969, covering eight entire states and parts of Nevada and Idaho. (D — 1.) This agreement superseded all prior agreements between the parties. Among other changes, it reduced the minimum franchise sales requirements. The 1969 agreement required CFI to remit Na-taco’s share of royalties (llA% of gross receipts of each store) within fifteen days after they were due CFI, whether or not CFI had collected from the store operators. Although Fraedrick (then president of Nataco) testified that CFI was in default by mid-1970 on its minimum sales quota, he was in error because the first quota deadline under the 1969 Agreement was June 30, 1971. It appears, however, that CFI was unable to comply with the royalty payment terms of the 1969 Agreement. For this and other reasons, the parties engaged in negotiations for revision of the 1969 Agreement, the ultimate result of which was the “Amended Area License Agreement” dated May 1, 1971. (D-2.) In addition to other changes, this agreement reduced CFI’s franchise sales quotas and relaxed the royalty payment terms to permit CFI to pay TTI’s share “forthwith” upon collection of any royalties by CFI from franchisees. (Id. ¶¶ 7, 11.) Within a few months after the execution of the 1971 Agreement, a dispute arose as to the division of royalties between the parties. Although they were unable to resolve this dispute definitively, the parties continued to perform under the contract without serious disagreements. In July of 1975, TTI became alarmed about CFI’s practice of opening new franchises without TTI’s prior written approval. At that point TTI requested that CFI immediately comply with the requirement of prior approval and other terms of the 1971 Agreement. (D-39.) At about the same time a dispute arose between the parties as to the scope of the term “franchise fee” as used in the agreement. (D-41, 41A, 41B.) These disputes ultimately resulted in the present litigation, which was precipitated by a letter dated April 9, 1976, from TTI’s counsel to CFI demanding payment of some $40,000 within ten days. (D-51.) On April 30,1976, CFI initiated an action for declaratory judgment in state court. After CFI filed an amended complaint in January of 1978, the action was removed to this court. CFI’s amended complaint included eleven “counts.” Only seven of these claims were included in the Pretrial Order. At trial, TTI moved for dismissal of five of those seven claims after CFI rested its case on November 7, 1978. At that time the court granted, with CFI’s consent, the motion to dismiss these five claims for lack of evidentiary support. Thus, only two claims of CFI remain to be adjudicated. First, it seeks a declaration as to its obligations to TTI under paragraph 12 of the 1971 Agreement, providing for initial franchise fees. Second, CFI seeks a declaration as to the percentage of royalties it is obligated to remit to TTI under paragraph 11 of the 1971 Agreement. In connection with this claim CFI seeks recovery of money paid to TTI under protest since mid-1971. The franchise fee claim of CFI is the obverse of one of the major breaches asserted by TTI as grounds for termination of the agreement. Accordingly, that claim will be discussed in conjunction with TTI’s assertions of breach. TTI, in its amended counterclaim, pleads two counts. First, it seeks a money judgment and termination of the 1971 Agreement on the grounds that CFI has breached that agreement in sixteen respects. Second, it seeks injunctive relief to enforce the trust relationship between itself and CFI. The pretrial order, however, makes no mention of the second count. With regard to the first count, the pretrial order sets forth the following breaches claimed to have been committed by CFI: (1) Failure to pay TTI its share of initial franchise fees and to hold same in trust. (2) Failure to pay TTI its share of royalties forthwith, to hold same in trust, to exert its best efforts to collect same from franchisees, and to honor TTI’s right to collect same from franchisees. (3) Failure to obtain TTI consent and approval prior to transfer or assignment of existing franchises. (4) Failure to perform its obligations to its franchisees. (5) Failure to obtain TTI consent and approval prior to opening new franchises. (6) Failure to submit accurate information to TTI in support of requests for approval for transfer or assignment of existing franchises or opening of new franchises. (7) Failure to submit periodic financial statements to TTI. (8) Failure to exert its best efforts to establish new franchises, and to give training and operating assistance to franchisees. (9) Failure to refrain from any misleading or inaccurate statements to franchisees. (10) Failure to honor and protect the trademark “Taco Time,” and to deal in good faith with TTI in regard thereto. (11) Failure to cooperate with TTI in resisting an alleged challenge to the trademark “Taco Time” by Bowles Packaging. On September 25, 1978, counsel for TTI advised the court that TTI would not pursue the breach numbered (9) above. The claims numbered (3) and (4) above were not addressed during final argument or in TTI’s second proposed findings of fact and conclusions of law. During final argument on November 24, 1978, TTI withdrew its allegations that CFI had failed to submit periodic financial statements (7) and that CFI had failed to give training and operating assistance to franchisees (8). For these reasons and because of the lack of evidentiary support therefor, TTI’s claims numbered (3), (4), (7), and (9) in the pretrial order and its claim that CFI failed to exert its best efforts to train and assist franchisees [part of (8)] are dismissed with prejudice. In addition to its claim for termination, TTI asserts in the pretrial order that it “seeks reformation” of the 1971 Agreement to conform to the intent of the parties as to the percentage of royalties to be paid to TTI. (pp. 4-5.) This claim was not included in TTI’s amended counterclaim but was instead pleaded as an affirmative defense in TTI’s answer. (Fifth Count, ¶ 3E.) Despite TTI’s failure properly to plead a claim for reformation, the court is persuaded that such a claim has been briefed, tried, and argued by express consent of the parties. Accordingly, under Rule 15(b), Federal Rules of Civil Procedure, this claim will be treated as if it had been asserted in TTI’s counterclaim. ROYALTY PERCENTAGE DUE TTI Turning first to the issue as to the percentage of royalties due TTI under paragraph 11 of the 1971 Agreement (D-l), the court notes that CFI’s second claim for declaratory relief (and money damages) and TTI’s claim for reformation hinge on this issue. In addition, TTI relies on certain actions taken by CFI in connection with this issue as a grounds for termination of the agreement. Paragraph 11 provides in pertinent part: It is understood that the franchise agreement with regard to franchised outlets will require the operator to pay as royalties as [sic] sum equal to three and one-half percent (372%) of the monthly gross receipts from such outlets . . . . Forthwith upon the receipt of any such royalties by CTI, it shall remit to Nataco a sum equal to 35.71428 per cent thereof. The foregoing language differed from that used in paragraph 11 of the 1969 Agreement (D-l) in two respects. First, under the 1969 Agreement, TTI’s share of royalties was 174% of the gross receipts. Second, that agreement required CFI to remit TTI’s share within fifteen days after the date the royalties were due CFI, whether or not CFI had actually received such royalties. The 35.71428% used in the 1971 Agreement represents the ratio between VA% and 372%. Under the literal terms of the 1971 Agreement, TTI was entitled to 35.71428% of whatever royalties CFI collected, except where royalties exceeded 372%. If the royalty paid by any franchisee exceeded that rate, CFI was to receive two-thirds and TTI one-third of the excess. The difficulty lies in the fact that of the twelve stores established by CFI prior to May, 1971, ten were paying royalties of less than 372%. (D-138, 321, at 24.) Under the 1969 Agreement TTI had been receiving 174% of the gross receipts of all twelve of those stores. Literal application of the percentage formula stated in the 1971 Agreement would have resulted in a reduction of TTI’s share from the ten stores paying royalties of less than 372%. The evidence is clear that the parties engaged in considerable negotiation as to the provision in the 1971 Agreement allowing CFI to pay TTI’s share “forthwith” upon receipt of the royalties by CFI. (D-6, 6A, 6B [¶ 11], 7B.) The evidence is equally clear that the parties did not negotiate any reduction of the percentage of royalties due TTI. (D-6A, 6B [¶ 11], 7A, 7B, 9, 10, 12, 14.) Of particular significance is the following statement of James Herschner, counsel for TTI, in a letter to Pete Vlahos, counsel for CFI: Unless you can advise me that one or more of the officers of CTI will state that the negotiations with Taco Time’s officers included a reduction of monthly royalties, it is my intent to forward this matter to an attorney in your area to commence litigation within ten days. (D-12.) After receiving the letter containing the foregoing statement, Vlahos met with Ed and Gil Craig and Dorothy Littrell (CFI controller and auditor) to discuss the matter. On November 9, Vlahos wrote to Herschner explaining CFI’s views on the royalty dispute. (D-13.) This letter makes no mention of any negotiations bearing on a reduction of royalties to TTI. The court is persuaded that no negotiations on that point took place prior to the 1971 Agreement. The evidence is clear and convincing that the parties did not intend paragraph 11 of the 1971 Agreement to modify the percentage of royalties to which TTI was entitled. Instead, Herschner drafted the new language to accommodate CFI’s desire to remit TTI’s share of royalties when collected by CFI and to provide a method of allocating partial royalty collections between the parties. (D-9 at 2-3.) Herschner and Vlahos both stated that they had overlooked the fact that most of the CFI outlets were paying less than 3V2% royalties. (D-10, 12.) Persuasive evidence of the intent of the parties is provided by their conduct after execution of the 1971 Agreement. CFI continued to pay royalties to TTI at the rate of 1V4% for several months after the 1971 Agreement was signed. (P-76, 1127.) Although there is evidence that CFI may have mistakenly remitted royalties to TTI on a one-third/two-thirds basis for a short time after the 1971 Agreement was signed, the evidence is persuasive that payments were generally made at the 1V4% rate until September 27, 1971. At that time Dorothy Littrell sent to TTI amended royalty statements for May, June, and July, indicating CFI’s claim that it had overpaid TTI for those months. (P-76.) Littrell testified that she was originally told that the royalty payments were not affected by the 1971 Agreement and that she was the first person to discover that the 35.7% clause appeared to reduce TTI’s share of royalties. She testified that when she explained her discovery to Ed and Gil Craig, they were surprised. Although the evidence on this point is conflicting, the court is persuaded that Littrell’s testimony is credible and that CFI did not intend the 1971 Agreement to modify TTI’s share of royalties. During October and November of 1971, the parties and their counsel corresponded in an effort to resolve the dispute. In December, 1971, Ed Craig wrote a letter to TTI enclosing payment of the disputed amounts and indicating that such payment was made to avoid legal action and to further settlement discussions. (D-17.) The letter stated that CFI would continue to pay at the 1V4% rate “until we believe no further adjustment can be made between us or we have arrived at a mutually acceptable agreement.” Apparently, no further discussion of this dispute took place for six years, after which CFI filed an amended complaint seeking recovery of amounts claimed to have been overpaid. In view of all the circumstances, the court is persuaded that TTI has demonstrated by clear and convincing evidence that paragraph 11 of the 1971 Agreement does not reflect the intent of the parties. Their intent was to modify the timing of royalty payments but to leave the allocation of such payments between themselves unchanged. Herschner drafted the agreement for TTI without being aware of the fact that ten of the twelve CFI stores then in existence were paying royalties of less than 3V2%. The parties carelessly signed the agreement without realizing the effect of the language drafted by Herschner. In short, the written agreement did not reflect the antecedent agreement of the parties. The parties are in agreement that the law of Oregon governs their rights and duties under the agreement by virtue of paragraph 24. Oregon law, consistent with general common law principles, permits reformation of a written instrument to conform to the antecedent agreement of the parties, as evidenced by their intent at the time the instrument was executed. E.g., Interior Elevator Co. v. Limmeroth, 278 Or. 589, 565 P.2d 1074 (1977); Ray v. Ricketts, 235 Or. 243, 383 P.2d 52 (1963). See generally, 66 Am.Jur.2d, Reformation of Instruments § 21 (1973). Paragraph 11 of the 1971 Agreement is therefore reformed to require CFI to remit royalties to TTI at the rate of ll/4% of gross receipts of franchises paying royalties of less than 3V2%. The parties have not sought a declaration as to the appropriate allocation of partial royalty collections from stores paying royalties of less than 3!/2%, and the court expresses no opinion on that point. TTI is accordingly entitled to an accounting and judgment for the amount of royalties withheld by CFI under CFI’s claim that it was required to pay only 35.71428% on stores paying less that 3!/2%. The parties are directed to submit a proposed form of judgment setting forth the amount to which TTI is entitled under this claim, including appropriate interest. TTI apparently does not contend that the mere assertion by CFI of its position as to the royalty percentage dispute constitutes a breach justifying termination of the agreement. TTI does contend, however, that CFI’s failure to make royalty payments following CFI’s decision to assert this claim constitutes a default justifying termination. This issue will be discussed in conjunction with TTI’s general claim that CFI has failed to pay TTI’s share of royalties forthwith. FAILURE TO PAY ROYALTIES FORTHWITH TTI asserts that CFI’s failure to pay royalties forthwith is the “most inescapable” breach by CFI of the 1971 Agreement. Paragraph 11 of that agreement provides in pertinent part: Forthwith upon the receipt of any such royalties by CTI, it shall remit to Nataco a sum equal to 35.71428% thereof. In contrast, the 1969 Agreement had required CFI to remit TTI’s share of royalties within fifteen days after they were due CFI from the franchisees, whether or not CFI received such payments. (D-l, ¶ 11.) CFI failed to comply with that provision of the 1969 Agreement. (D-6.) Despite this and other defaults, TTI refrained from terminating the agreement. Instead, the parties communicated in an effort to negotiate a new agreement. During those negotiations, both sides suggested that CFI should remit TTI’s share of royalties within a ten-day period from the time CFI received payment from the franchisee. (D-6B, ¶ 11; D — 7B, at 4.) The final agreement, however, substituted “forthwith” in place of a fixed period. During the period from mid-1971 through 1975, royalty payments were generally made to TTI within 20 to 60 days following the month in which CFI received royalties from franchisees. (P-1102.) During that period, payment was made on nine occasions within less than 20 days and on seven occasions beyond 60 days. (Id.) Nearly all of these payments were accepted by TTI without threat of termination. No letters demanding payment under threat of termination were sent during this four-year period. (P-1102.) A ten-day letter dated November 22, 1971 (D-15) was issued concerning the royalty percentage dispute, but it did not mention timeliness of payments. Exhibit P — 1102 indicates that a ten-day letter was issued in January of 1975, but the letter was not adduced at trial. That date, however, coincides with periods of 80 and 74 days from collection to remittance. In short, it appears that from 1971 through mid-1975, TTI acquiesced in CFI’s general pattern of paying royalties within 20 to 60 days after the month of collection and issued a ten-day letter only when payment was protracted for 70 to 80 days for several consecutive months. TTI’s general acquiescence in CFI’s pattern of royalty payments is probative of the appropriate construction of the term “forthwith.” The court is thus persuaded that paragraph 11 of the 1971 Agreement imposed an obligation on CFI to remit TTI’s share of royalties within 20 to 60 days after the month in which royalties were received by CFI. Under this construction, CFI failed to make timely payments on about 15 occasions from 1971 through 1977. (P — 1102.) Under the termination provision of the 1971 Agreement, (D-2, ¶ 8) a default is not “considered to have occurred” until TTI provides CFI a written notice specifying the default and granting CFI ten days in which to remedy the default. Such notices were given on some eight occasions prior to 1978 (with regard to timely payment of royalties). (P-1102.) On each of those occasions, CFI either brought its royalty payments current within the ten-day period or TTI waived CFI’s failure to do so. TTI thus relies primarily on CFI’s failure to pay royalties in December, 1977 and thereafter. An agreement was reached between counsel for the parties on or about December 1, 1977, under which CFI was to remit royalties collected during October by December 1, and was thereafter to remit royalty payments by the 22nd of the month following the month of collection. (D-109.) Contrary to the assertion of TTI’s counsel, CFI met the December 1 payment deadline as agreed. (D-195.) During the months of December and January, however, this lawsuit escalated substantially as a result of TTI’s December 7 motion for leave to file an amended counterclaim alleging numerous breaches not theretofore raised. The only breach previously asserted by TTI was the claim that CFI was withholding part of TTI’s share of initial franchise fees. On December 23, CFI filed a motion to amend its complaint to assert numerous additional claims against CFI. One of these claims sought recovery of excess royalty payments to TTI under the theory that paragraph 11 of the, agreement should be literally applied. In an attempt to sequester funds for the satisfaction of an anticipated favorable judgment, counsel for CFI began paying TTI’s share of royalties into state court in December, 1977. After removal of the action to federal court, CFI paid the royalties into court until the court, on June 6, 1978, entered an order denying CFI’s April 6 motion for leave to deposit funds into court. After that order, CFI tendered payment to CFI in July and August in amounts computed according to CFI’s version of paragraph 11. TTI rejected these tenders. On August 21, CFI tendered payment in multiple checks. TTI accepted this tender except for the portion representing royalties from stores paying less than %. (Id.; D-195.) The court is not advised as to the status of payments after August of 1978. In claiming that CFI’s failure to make timely royalty payments is the “most inescapable” breach, TTI relies primarily upon the fact that CFI paid royalties into court for about six months without leave of court. The court held in its order of June 6, 1978, that Rule 67, Federal Rules of Civil Procedure, did not permit CFI to pay the royalties into court. Although such payment might have been permissible under Rule 64, CFI made no attempt to secure authorization of payment thereunder. TTI’s contention that CFI flagrantly breached the contract by paying royalties into court is undermined by three significant factors. First, TTI’s motion to amend its counterclaim to allege a large number of breaches not previously asserted precipitated CFI’s motion to amend its complaint and, in conjunction therewith, its decision to attempt a sequestration of funds in aid of one of its newly asserted claims. Second, CFI’s act of paying royalties into court was not necessarily impermissible, but was evidently a result of the ill-advised reliance of counsel on Rule 67 rather than Rule 64. The court ruled only that such payments were not permissible under Rule 67. Third, and most significant, despite the fact that CFI began paying the funds into court some nine months before trial, TTI did not at any time file a motion for release of the funds CFI had paid into court. In view of this fact the court is not persuaded that the collection of royalty payments is a matter of genuine urgency to TTI. Instead, TTI has acquiesced in the court’s role as a stakeholder in this dispute. As a further consideration, the court notes that payment of the funds into court did not impose a risk of non-collection on TTI. Under the circumstances present in this case, the court is persuaded that CFI has not materially breached the provision requiring it to remit royalties to TTI forthwith upon collection. CFI has complied with all ten-day letters issued by TTI concerning timely payments except in some seven instances. In those cases the funds were paid into court on the advice of counsel. In light of all the circumstances of this case, CFI’s payment of royalties into court is a trivial and technical default that does not warrant the extreme remedy of termination of the agreement. It would be grossly inequitable to declare a forfeiture of CFI’s rights and interests in the 1971 Agreement on the basis of such an insignificant default. FAILURE TO HOLD ROYALTIES IN TRUST TTI asserts that CFI has further breached paragraph 11 of the 1971 Agreement by failing to hold TTI’s share of royalties in trust. Paragraph 11 provides in pertinent part: Nataco’s share of each royalty shall be deemed held in trust for Nataco by CTI until the same is paid over to Nataco. In contrast, paragraph 12 of the agreement provides that whenever CFI collects TTI’s share of initial franchise fees, CFI “shall hold the same in trust” for TTI. The phrase “deemed held in trust” does not necessarily create a trust relationship between the parties. It does not unambiguously require funds to be segregated or given other special treatment by CFI. The phrase “deemed held in trust” may be construed as nothing more than an indication of mutual intent to establish a preference or priority in favor of TTI over other creditors of CFI. The record contains no testimony as to the parties’ intended meaning of the phrase. The correspondence evidencing negotiations between the parties prior to the 1971 Agreement contains no mention of a requirement that royalties be held in trust for TTI. Ed Craig testified that he could recall no mention of the trust language during the negotiations and that TTI made no mention of the trust provision at all until after this suit had been filed. Ron Fraedrlck testified that he never requested that CFI hold the funds in trust. No written ten-day notice of default of the claimed trust relationship was offered as evidence. The evidence shows only that CFI did not maintain a separate account for TTI’s share of royalties and that CFI may have employed funds owed to TTI to pay other creditors. TTI has failed to demonstrate that paragraph 11 of the agreement imposes any fiduciary duties on CFI. Even if it is assumed that CFI has such duties, TTI has plainly failed to establish what those duties are. The allegation that CFI failed to hold royalties in trust appears to have been an afterthought and a makeweight. Under the circumstances of this case, TTI has failed to show a material breach of the contract. Moreover, TTI has failed to establish that it provided the written notice of default that is a condition precedent to termination under paragraph 8 of the agreement. Even if such notice had been given, a technical default of the type claimed by TTI would not justify termination of the agreement in view of compelling equitable considerations to the contrary. FAILURE TO EXERT BEST EFFORTS TO COLLECT ROYALTIES Paragraph 11 of the 1971 Agreement further provides that: CTI shall use its best efforts to collect royalties and shall advise Nataco of all collection activities undertaken by CTI. Paragraph 10 of the standard form franchise agreement (part of D — 2) requires the payment of an “operating charge” of SVz% of gross receipts and further provides: The Operator shall furnish to CTI not later than the 10th day of each calendar month a detailed profit and loss statement prepared upon forms approved or furnished by CTI, and shall at the time of the giving of such profit and loss statement pay to CTI the percentage mentioned above. Both'Fraedrick and Ed Craig testified that this ambiguous provision requires franchisees, by the tenth of each month, to pay CFI 3!/2% of their gross receipts for the preceding month. The evidence fails to establish any definite standard of best efforts by which CFI’s collection procedures can be measured. The evidence does show, however, that several of TTI’s own stores were sometimes six to eight months late in paying royalties and that as of July, 1978, none of TTI’s “newer franchisees” were paying royalties. (P-468, 529, 1058.) Two stores in Washington (not in CFI area) failed to pay royalties for about twelve months. (P-1054.) The evidence also shows that many franchisees in CFI’s area were frequently behind in paying royalties and that some of them were about six months behind in 1977. (D-86, 147, 196.) CFI presented evidence explaining that franchisees often had serious financial difficulties during a large part of the year due to low sales volume, weak market, poor cash flow, and general economic conditions. For these reasons, collection of delinquent royalties from franchisees was a difficult dilemma for CFI. It was often forced to choose between terminating a franchisee for nonpayment and incurring TTI’s displeasure by postponing legal action in the hope that delinquent franchisees would bring their payments current. Obviously, the former choice was often counterproductive for all concerned. In view of the circumstances of this case, the court is persuaded that TTI has failed to meet its burden of establishing that CFI failed to comply with the contract provision requiring CFI to use its best efforts to collect royalties from franchisees. FAILURE TO HONOR TTI’S RIGHT TO COLLECT ROYALTIES Paragraph 11 of the 1971 Agreement provides in part: Nataco shall have the right but not the obligation to proceed directly against any franchised operator for the collection of royalties . . . . Nataco shall not make any such collection activity without first giving CTI ten (10) days’ written notice of Nataco’s intent to do so. In August of 1977, TTI gave CFI notice of its intent to collect royalties directly from some 47 franchisees. (D-90.) In response, CFI filed a motion for a temporary restraining order and preliminary injunction to prevent direct collection by TTI. (P— 147; state court file.) The state court granted the motion for temporary restraining order on August 26, and TTI thereafter abandoned its intention to collect royalties directly. TTI asserts that CFI breached the contract by seeking and obtaining the temporary restraining order. In support of its motion for a temporary restraining order, CFI argued that a condition precedent to TTI’s exercise of its contractual right to collect directly is that CFI must have failed to exert its best efforts to collect the royalties. CFI further argued that it had used its best efforts to collect the royalties and that it had much more at stake than TTI because many franchisees owed CFI substantial sums for building leases, land leases, furniture and equipment leases, advertising, merchandise, and various services. CFI contended that its rights to collect these amounts would be jeopardized by direct collection efforts by TTI. (P-147.) The additional sums owing to CFI were typically a product of CFI’s “turnkey” franchise program, by which CFI had achieved rapid expansion of the Taco Time operation during 1975 through 1977. The court is persuaded that a failure of best efforts by CFI to collect royalties or other substantial justification is a condition precedent to the exercise of TTI’s right to collect royalties directly from franchisees. One of the key aspects of the 1971 Agreement was that CFI would collect royalties and remit TTI’s share. The parties did not contemplate that paragraph 11 would permit TTI to usurp this function arbitrarily. Moreover, the implied contractual obligation of good faith imposes on TTI a duty, absent good cause, to refrain from action that could jeopardize CFI’s right to recover substantial additional debts of franchisees to CFI. TTI has failed to demonstrate that CFI was not employing its best efforts to collect or that TTI had other good cause for attempting to collect directly. Thus, it has failed to establish a breach by CFI of the direct collection provision. Even more importantly, the court concludes that TTI’s claim of breach in this regard should not be countenanced because TTI in essence seeks to enlist the court’s aid in punishing CFI for presenting a colorable claim of right to a court of law. TTI’s claim is particularly repugnant to basic principles of justice in view of the fact that the state court granted the temporary restraining order sought by CFI. FAILURE TO PAY TTI’S SHARE OF FRANCHISE FEES The point of disagreement that inspired this lawsuit is TTI’s claim that CFI failed to pay TTI’s full share of initial franchise fees. TTI seeks a declaration that it is entitled to 10% of an undetermined amount that CFI has collected from franchisees for various goods and services. CFI contends that it has paid TTI its 10% of franchise fees and that it is not obligated to pay TTI 10% of amounts CFI has charged for goods and services in addition to those CFI is obligated to provide under the 1971 Agreement. With respect to franchise fees, paragraph 12 of the agreement provides: Ten per cent (10%) of any initial franchise fee or Five Hundred Dollars ($500), whichever is greater, shall be paid by CTI to Nataco. CTI shall charge an initial franchise fee of not less than Five Thousand Dollars ($5,000) nor more than Ten Thousand Dollars ($10,000) without the prior written consent of Nataco. The latter sentence simply requires and authorizes CFI to charge a franchise fee of five to ten thousand dollars “without the prior written consent” of TTI. Although the parties seem to agree that TTI’s consent must be obtained before CFI can charge more than $10,000, the literal terms of paragraph 12 contain no such requirement. The agreement is even more seriously deficient in that it altogether fails to define “initial franchise fee.” Against this backdrop of ambiguity and careless draftsmanship, the court turns to the morass of confusion generated by the parties’ conduct regarding franchise fees in the course of their relationship. The pre1969 agreements between TTI and the predecessors of CFI included significantly different provisions relating to initial franchise fees. The 1965 agreements for the Spokane store and the Utah area made no provision for an initial franchise fee. (D— 323; P-1132.) The 1968 agreement for Montana, Wyoming, North and South Dakota, and part of Nevada provided that Nataco would receive one-third of the franchise fee. (D-322, ¶4.) The 1968 agreement for Colorado, New Mexico, and Arizona provided for a payment to Nataco of $1,000 for each franchise sold. (D-324.) The Gibbs agreement for southern Idaho (P-1133), assumed by the Craigs in 1969, required a $3,000 franchise fee to be paid Nataco for each store. Correspondence from Fraedrick in 1968 and 1969 indicates that the franchise fee was distinct from equipment costs. (P-1089, 1122.) The 1969 Agreement, (D-l) provided for an initial franchise fee of $4,500, of which $3,000 was to be paid to Nataco. It apparently did not impose on CFI any duties of training and assisting franchisees. (P— 1131.) No stores were opened under the 1969 Agreement. In early 1970 CFI corresponded with TTI about CFI’s proposed “Turn Key Success Package.” (D-4.) CFI estimated that this package would require a total investment of $32,000, of which $10,000 was designated as “total franchise costs.” The $10,000 fee was to include opening inventory, opening and other assistance, prepaid royalties, advertising, promotional material, site analysis and selection, and training. Equipment costs were listed as a separate expense. (Id.) At no time did TTI claim that it would be entitled to two-thirds of the entire $10,000 package or any of the equipment costs. At about the same time TTI offered a similar package with a total cost of $23,-000, of which $3,000 was designated a franchise fee. (P-1130.) The brochure describing this package listed site analysis and location fee, equipment, inventory, and lease deposits as costs distinct from the franchise fee. In early 1971 CFI offered a turnkey package located in St. George, Utah for $18,500. (P-1135.) Although the $18,500 was not fully itemized, the description listed several items, including equipment, inventory ($1,000), and lease deposits ($500) and further stated that one Taco Time franchise was part of the total cost. This package was purchased by Lew Hains for $18,500. (P-1136.) The St. George store was opened pursuant to the terms of the 1971 Agreement, which became effective May 1, 1971. That agreement shifted training and opening assistance responsibilities to CFI and entitled TTI to 10% of an initial franchise fee of $5,000 to $10,000. CFI remitted $500 to TTI as full payment of the franchise fee for the St. George store. (P-1137.) TTI accepted this sum as full payment of the franchise fee with knowledge that the St. George package had been sold for $18,500. TTI did not at any time claim that it was entitled to more than $500 for that store. The turnkey franchise sales technique was apparently not employed by CFI in the opening of further stores until 1975. By late 1972, both TTI and CFI were charging an initial franchise fee of $10,000. (P-1067, 1068.) In January of 1973, both companies increased the franchise fee to $12,500. (P-1068, D — 20.) During 1973, TTI’s conception of the initial franchise fee did not encompass additional charges for real estate lease deposits and insurance, equipment lease deposits, opening advertising and inventory, and other services. (P-1083, 909.) Similarly, CFI viewed the $12,-500 franchise fee as distinct from lease deposits, inventory, advertising, and other costs of establishing a score. (P-35.) During 1973 and 1974 there Was some communication between the parties about increasing the franchise fee to $15,000 or more (D-21, 22), but no agreement was reached on that point. In January and in March of 1975, CFI prepared descriptions of its “Modular Taco Time Success Package” and submitted copies thereof to TTI. (P-61, 62.) These descriptions delineated the $12,500 franchise fee as a cost separate from lease deposits, site analysis and preparation, advertising, extensive training (beyond the minimum training required by TTI), accounting setup, uniforms, opening cash, opening week assistance, and miscellaneous “turnkey start-up costs.” TTI responded favorably to the turnkey program in January and April of 1975. (P-1115, 1116.) In July of 1975, CFI forwarded nine franchise agreements to TTI for approval with a check for $11,250, representing 10% of a $12,500 franchise fee for each store. In those agreements, Gil Craig’s secretary had “mistakenly” inserted the total turnkey package cost in the blank provided for the franchise fee. On July 21, 1975, Fraedrick wrote a letter to CFI claiming that TTI was entitled to 10% of the entire turnkey charge. (D-41.) Ed Craig testified that this claim came as a “total shock” to him, as it was the first time TTI had claimed a right to 10% of the additional turnkey charges. On August 12, 1975, TTI’s attorney, James Herschner, wrote to CFI’s counsel expressing his opinion that TTI was entitled to $23,600 (10% of the full turnkey amount). (D-41A.) In the next paragraph, however, Herschner stated that in his opinion, TTI: is entitled to 10% of any original fee or charge made to a franchisee unless the charge represents actual expenditures by CTI to third persons for tangible items such as physical sight [sic] improvements, uniforms for initial personnel at the franchised outlet and opening cash. Should CTI make any profit in any of these items, it is my opinion that TTI is entitled to 10% of such profit. For a time TTI refused to approve the nine franchise agreements until it received payment for 10% of the entire turnkey package price. The parties reached a stipulation in September, 1975, under which TTI agreed to approve the franchise agreements with full reservation of its claim to the additional sums. (D-41A, 41B.) On April 9, 1976, Mr. Neill (trial counsel for TTI and associate of Herschner) sent a letter to CFI demanding, among other things, payment of $18,360 claimed by TTI as its share of initial franchise fees within ten days. (D-51.) On April 30, CFI responded by filing this action for a declaration as to its obligations regarding the franchise fees. TTI counterclaimed for a declaration of its rights regarding franchise fees and for termination of the agreement. The itemization of the $18,360 demanded by Neill indicated that TTI claimed the initial franchise fee to be $22,700 for each of eighteen stores. (D-51.) This amount was apparently arrived at by adding all goods and services listed in CFI’s turnkey sales brochures (P-61, 62) except opening cash ($300), lease deposits ($5,000), and site preparation ($0 to $2,000). The $22,700 thus included such items as site analysis, “turnkey start-up costs — all expenses and expertise,” pre-opening advertising, personnel training, accounting set-up, initial uniforms, and opening week assistance. (P-61, 62.) On May 6, 1976, Fraedrick met with Ed Craig to discuss their differences. Fraedrick indicated TTI’s position to be that it was entitled to “the full 10%” of the fees charged by CFI. (D-53.) In his deposition, Fraedrick stated that the franchise fee did not include lease deposits, proceeds from the sale of equipment and food, some construction costs, and many other things. On the other hand, he stated that compensation for CFI’s role as a lease guarantor would be part of the franchise fee, as would charges for site analysis and preparation. When asked whether fees for accounting set-up, site analysis and preparation, site plans, advertising, etc. were included in the definition of franchise fee, he responded that he “would have to look at each item specifically and make a determination as to what it was for, how it was do,ne, and so forth.” These statements were made by Fraedrick two months prior to trial. Thus, three years after the franchise fee dispute developed and over two years after the litigation began, Fraedrick was unable to make any clear delineation between charges included in the franchise fee and those not so included. Moreover, he was unable to articulate any rational philosophy as to what charges should be included in the franchise fee. At trial TTI reverted to the position that it was entitled to 10% of CFI’s entire turnkey charge. (D-194.) Yet Fraedrick testified at trial that he did not expect CFI to pay 10% on lease deposits and similar charges in the turnkey package. Counsel for TTI contends that CFI somehow has the burden of establishing what charges should not be included as part of the franchise fee. TTI has totally failed to develop any logical theory for resolving the inconsistent positions it has taken on the franchise fee issue. Fraedrick testified that the 1971 Agreement reduced TTI’s share of the franchise fee from two-thirds of $4,500 to 10% of $5,000 to $10,000 to accommodate CFI’s turnkey program. This testimony is hardly credible in view of the fact that the St. George turnkey package, the first franchise opened under the 1971 Agreement, was sold for $18,500, yet TTI claimed no more than $500 as its share of the franchise fee. The court is persuaded that CFI, in taking the position that TTI is not entitled to 10% of turnkey fees, has not committed a breach of the 1971 Agreement. The agreement fails to define franchise fees. The parties have repeatedly described the franchise fee as an item distinct from charges for numerous goods and services required to establish a Taco Time store. (E.g., P-1135; 1083, 909, 61, 62, 1025, 1086, 64.) Of particular significance is TTI’s unqualified acceptance of $500 as full payment for its share of the St. George franchise fee in June, 1971. In view of these circumstances, CFI had ample justification for taking the position that the initial franchise fee constituted $12,500 of a turnkey package costing $20,000 to $30,000. TTI asserts that it is entitled to terminate the 1971 Agreement because CFI refused to pay TTI whatever it chose to demand under paragraph 12 of the agreement, notwithstanding this uncertain support, and because CFI refused to abandon a colorable claim as to the interpretation of the agreement. The court is unable to comprehend TTI’s position that the drastic remedy of termination is merited punishment for CFI’s claim, particularly where, as here, the agreement fails to establish with any certainty what performance is required with respect to the disputed matter. The court thus concludes that CFI has not committed a breach of the contract by refusing, under a colorable claim, to pay TTI 10% of turnkey fees. TTI is plainly not entitled to terminate the agreement on the basis of the franchise fee dispute. The more difficult question, however, remains to be decided: What was the parties’ intended meaning of “franchise fee” as used in the 1971 Agreement. The best evidence for this determination is the agreement itself and the subsidiary franchise and license agreements. The first paragraph (1) of the “Franchise Agreement” used by the parties in granting individual franchises is a clause granting the franchisee the exclusive right to use the Taco Time trademark, methods, recipes, logo, etc. at a specific address within a protected area. (See Ex. A attached to D-2.) The second paragraph provides for a definite sum as the “consideration of the grant of this right,” and further describes this sum as “the franchise fee.” The agreement requires the franchisee to erect a restaurant and provides that CFI has no obligation to select a location, obtain a lease, or otherwise acquire premises for the franehisee. (Id. ¶ 4.) CFI is obligated to provide a (variable) number of days of training for the franchisee and one employee without charge. (Id. ¶ 6.) CFI is required to provide “opening assistance” to the franchisee. (Id. ¶ 7.) The agreement does not require CFI to provide uniforms, opening cash, lease deposits, inventory items, advertising, accounting systems, site analysis, site preparation, or any other turnkey goods or services. The license agreement (attached to D-2) used for CFI-operated stores provides for an “initial franchise fee” of $500 to TTI. (Id. ¶ 30.) The first paragraph of that agreement grants CFI the exclusive right to employ the Taco Time trademark, recipes, systems, etc. at a specific address within a protected area. The license agreement further provides that TTI is not required to perform the same services to CFI that TTI provides for ordinary franchised outlets in other areas. (Id. ¶ 2.) The agreement requires CFI to provide its own training (Id. ¶ 7) and imposes on TTI no obligation to provide opening assistance or other services to CFI. The only value conferred by TTI under this agreement is the trademark and other intangible rights. Similarly, the only value conferred on franchisees by TTI under the standard franchise agreement is the trademark and other intangible rights. Ninety percent of the initial franchise fee was retained by CFI as compensation for the promotional effort and expense of procuring franchisees and for the additional services of training and opening assistance that CFI was required to perform under the franchise agreement. The parties did not intend the franchise fee to include compensation for any other goods or services provided by CFI. Thus, TTI is not entitled to 10% of any sums paid to CFI for lease deposits, opening cash, uniforms, site analysis, selection, and preparation, equipment deposits, business licenses, down payments on buildings, accounting set-up, advertising, insurance, employee salaries, opening inventory, and similar goods and services. Neither is TTI entitled to 10% of charges for training beyond the minimum training required under the franchise agreement or for opening week assistance beyond that required by the franchise agreement. TTI has failed to meet its burden of proving that, as its share of initial franchise fees, it is entitled to any sum in addition to the amount CFI has already remitted. (Gf1, P-1143.) TTI asserts (intermittently) a patently unreasonable claim to 10% of all turnkey services and contends that CFI should bear the burden of establishing which turnkey charges should not be included as part of the initial franchise fee. On the contrary, the burden properly rests on TTI, and TTI has failed to meet that' burden. Accordingly, the court concludes that CFI has fully complied with paragraph 12 of the agreement with regard to the division of initial franchise fees between the parties. FAILURE TO HOLD TTI’S SHARE OF FRANCHISE FEES IN TRUST TTI claims that CFI has breached paragraph 12 of the agreement by failing to hold TTI’s share of franchise fees in trust. Paragraph 12 provides in pertinent part: Whenever Nataco’s share of such initial franchise fee shall be paid to or come into the possession of CTI, CTI shall hold the same in trust for Nataco and shall remit the same forthwith to Nataco. This language differs from that used in paragraph 11 with regard to royalties (“deemed held in trust”). In all other respects, the proper analysis of this claim parallels that of TTI’s claim that CFI failed to hold royalties in trust. There is no evidence as to the parties’ intent in using this language. TTI never mentioned this language or demanded compliance with it prior to the motion to amend its counterclaim in December, 1977. At that point the claim was apparently an afterthought and a makeweight. TTI has failed to establish what duties the trust language imposed on CFI. The court finds and concludes that TTI has failed to establish a material breach of the agreement in this regard. TTI has also failed to establish that it provided CFI the notice of default that is a condition precedent to termination of the agreement. Finally, even if such notice had been given, the technical and trivial nature of the claimed default would not justify termination of the agreement under applicable law. FAILURE TO OBTAIN APPROVAL PRIOR TO FRANCHISE OPENINGS TTI claims that CFI has breached the 1971 Agreement by failing to obtain TTI’s approval prior to the opening of new franchises. Paragraph 2 of the agreement provides in pertinent part: The operator of each franchised outlet must execute three (3) copies of a franchise agreement with CTI, which will hereinafter be referred to as the franchise agreement. The franchise agreement must be approved thereon in writing by Nataco. No party thereto shall have any rights or obligation thereunder until the franchise agreement is executed by all parties and so approved by Nataco. In addition, paragraph 4 provides: Prior to the execution of any franchise or license agreement, CTI must submit to Nataco such information as it may request with regard to the contemplated outlet, including but not limited to financial statements of the proposed operator, architectural plans, drawings, and specifications for the proposed outlet, the location of the proposed outlet, and such studies or data that are reasonably required to provide background information with regard to the characteristics of the location of the proposed outlet, the lease or proposed lease covering the location for the proposed outlet, and such other information as Nataco may request. . No franchised or licensed outlet shall be opened for business prior to the full execution and approval by Nataco of a franchise or license agreement covering such outlet. These provisions clearly requiré the written execution of a franchise agreement by TTI, CFI, and the franchisee prior to the opening of a Taco Time franchised store in the CFI area. In practice, however, these formalities were frequently disregarded by TTI and CFI. One of the first stores opened under authority of the 1971 Agreement, the St. George store, was opened in May, 1971. (P-20.) The franchise agreement, dated May 1, 1971, was signed by Ed Craig (for CFI) and by the franchisee. Although the date August 15, 1971, was entered as the approval date on the agreement, the agreement was never executed by TTI. The practice of opening stores without regard to the formalities required under the agreement continued through 1973 and 1974. The Fairview store in Boise, Idaho opened in July, 1973 (D-138; P-20), yet no franchise agreement for that store had been signed as of January, 1974. (P-755.) There is doubt as to whether a franchise agreement for the Fairview store had been fully executed as of the time of trial. (P-1108.) On December 2,1974, Dennis Senger of TTI wrote to CFI at Fraedrick’s request, indicating that TTI had no franchise agreements for stores located in Twin Falls, Cedar City, Helena, and Idaho Falls. (P-855.) The Twin Falls store had opened in September or October of 1973. (P-20; D-138.) The Cedar City store opened in October, 1973. (Id.) The Helena store opened in March, 1974 and closed its doors in 1975. (P-20.) It appears that no franchise agreement for that store was ever executed. (P— 1108.) The Idaho Falls store had been opened in May, 1974. (P-20; D-138.) Thus, stores were frequently open for over a year without a fully executed franchise agreement in force. The testimony clearly shows that prior to July, 1975, CFI frequently opened stores without the written approval of TTI. Moreover, Fraedrick frequently signed franchise agreements that were partially blank, giving CFI full discretion to select the franchisee or the location of the store. During that period TTI seldom, if ever, requested detailed information from CFI regarding new franchises, yet all franchises were readily approved. In early 1975 CFI launched an aggressive franchise sales campaign employing the newly developed modular turnkey package described in Exhibits P-61 and 62. On April 1, 1975, CFI issued a newsletter stating, among other things, that: We are currently franchising our modular unit. During the first three months of 1975 we sold eight franchises and expect to sell at least two additional franchises each month for the next nine months. (P-1114 at 2.) A copy of this newsletter was sent to TTI, and Fraedrick responded by letter on April 24. (P-1116.) He congratulated CFI for its sales efforts, commenting that CFI was “really on the move.” He further stated that: I would certainly like a look at your modular building — pictures, plans, etc. I am also interested in where you are expanding your operations, where new franchises will be opened, and a time table for them. (Id.) Fraedrick’s response to CFI’s announcement that it had sold eight franchises contains no hint of anxiety as to the possibility of a store opening without TTI’s approval, no expression of a desire to direct or control the location of stores or the qualifications of franchisees, and no indication of concern as to the judgment used by CFI in selling franchises. On June 30, 1975, Fraedrick again wrote to CFI concerning another matter, indicating that he would be in Utah the following week, and adding: I hope you will have some time to spend with me while I am there looking at your new modular Taco Times. I have perused your plans very carefully and am anxious to see the unit operating. I am looking forward to seeing you next week. (P-1117.) Although this letter demonstrates Fraedrick’s knowledge that new franchises were open or ready to open, it reveals no concern about the lack of written approval thereof by TTI. Fraedrick’s easygoing attitude mysteriously evaporated by the time he arrived in Utah only a week later. He testified that he had heard several stores were open without his approval before he went to Utah. On July 8, he went to a newly opened modular store at 39th South and State Street in Salt Lake City and found Ed Craig there. He told Craig he was upset and demanded a meeting with him. Later that day Craig met with Fraedrick. At the meeting Fraedrick requested “immediate compliance” by CFI with numerous provisions of the agreement. On July 11 Fraedrick wrote to Craig, reiterating his requests, which included payment of royalties twice monthly, submission of quarterly financial statements, TTI approval prior to store openings, the furnishing of detailed information regarding new franchises prior to approval, prompt payment of franchise fees to TTI, approval of advertising by TTI, and discontinuance of CFI’s use of the Taco Time logo on its letterhead (which TTI had condoned for over five years). (P-1128; D-39.) On July 15, CFI forwarded nine franchise agreements to TTI for approval. (D-44, 41.) Fraedrick wrote to CFI on