Tankersley et al v. Lynch et al
OPINION AND ORDER denying 24 Motion for Summary Judgment; denying 26 Motion for Summary Judgment. Signed by District Judge Marianne O. Battani. (BThe)
UNTIED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
MARIAN TANKERSLEY and RICHARD
CASE NO. 11-12847
HON. MARIANNE O. BATTANI
JOHN LYNCH, GREGORY A. LONGE,
LOUIS MANCINA, JOHN MAIO, and
OPINION AND ORDER DENYING DEFENDANTS’ MOTION FOR SUMMARY
JUDGMENT AND DENYING PLAINTIFFS’ MOTION FOR SUMMARY JUDGMENT
This matter is before the Court on Defendants’ Motion for Summary Judgment
Pursuant to Rule 56 (Doc. 24) and Plaintiffs’ Motion for Summary Judgment, or in the
alternative, Partial Summary Judgment Against Individual Defendants (Doc. 26). In this
case arising under Section 32 of the Michigan Franchise Investment Law (“MFIL”),
Plaintiffs Marian Tankersley and Richard Diehl, former franchisees of Collision on
Wheels International, L.L.C. (“CoW”), seek to hold CoW’s former officers, Defendants
John Lynch, Gregory Longe, Louis Mancina, John Maio, and Richard Bass, jointly and
severally liable for a $566,820 arbitration award they obtained against CoW for its
multiple MFIL violations. For the reasons that follow, the parties’ motions are both
STATEMENT OF FACTS
Plaintiffs’ Franchise Agreement with CoW
In April 2007, Plaintiffs Marian Tankersley and Richard Diehl entered into a
franchise agreement with CoW, a mobile auto body repair business operating out of
specially equipped vans. Prior to the parties executing this agreement, CoW provided
Plaintiffs with a 276-page Uniform Franchise Offering Circular (“UFOC”).
Ex. I). The UFOC contained information concerning the nature of the business offered
by CoW. For about a year and a half, Plaintiffs operated their mobile repair business in
and around San Jose, California.
By December 2008, Plaintiffs’ relationship with CoW had soured.
believed that CoW had misled them concerning certain aspects of the franchise
business. They specifically claimed that CoW failed to disclose material differences
between the predecessor business and franchised business, failed to disclose
restrictive environmental regulations, and maintained that CoW’s use of a spreadsheet
to show future earnings was misleading. As a result, Plaintiffs informed CoW they were
rescinding the franchise agreement and would seek damages through arbitration.
The Arbitration Between Plaintiffs and CoW
On January 22, 2009. Plaintiffs served CoW with an arbitration demand pursuant
to the arbitration clause in the franchise agreement. (Doc. 24 Ex. 1). Plaintiffs alleged,
inter alia, that CoW violated Sections 5(b)1 and 8 of the MFIL. Section 5(b) prohibits a
franchisor from misstating material facts in a UFOC or omitting material facts necessary
to make the statements accurate. Section 8 regulates the form in which a franchisor
may provide information to a prospective franchisee. Plaintiffs further alleged CoW
For ease of reading, citations to sections of the MFIL refer to their internal section
numbers, i.e., MFIL section 5 refers to Mich. Comp. Law § 445.1505.
committed common law fraud and misrepresentation. CoW filed a counterclaim for
breach of the franchise agreement.
Plaintiffs and CoW participated in a ten-day arbitration in Detroit, Michigan during
January 2010. (Doc. 24 Ex. 2). Six months later, in a twenty-five page, single-spaced
“interim” award setting forth detailed findings of fact and conclusions of law regarding
the substantive issues, the arbitrator found that CoW violated Sections 5(b) and 8 of the
MFIL and awarded Plaintiff $71,181.31 in damages. (Id. at 24). The parties stipulated
beforehand that the arbitrator would enter an “interim” award on the merits and reserve
issuance of a “final” award until after the parties briefed and argued the issues of
attorney fees and costs that were to be awarded to the prevailing party.
After Plaintiffs submitted their opening brief on these issues, CoW filed for
bankruptcy in the Eastern District of Michigan. (Doc. 26 at 3). Plaintiffs successfully
obtained relief from the automatic stay to complete the arbitration. The arbitrator then
issued a “final” award granting Plaintiffs $33,579.00 in interest, $83,986.92 in costs, and
$378,072.98 in attorney fees. (Doc. 24 Ex. 3). Plaintiffs confirmed both awards in the
Eastern District of Michigan on June 6, 2011. See Tankersley et al. v. Collision on
Wheels International, L.L.C., Case No. 11-cv-10901. Plaintiffs’ total award against CoW
The Instant Lawsuit
In their arbitration demand directed to CoW in January 2009, Plaintiffs requested
that Defendants John Lynch, Gregory Longe, Louis Mancina, John Maio, and Richard
Bass, the executive officers of CoW, voluntarily join the arbitration so that Plaintiffs
could pursue Section 32 claims against these individuals. (Doc. 28 at ¶ 2). Section 32
imposes joint and several liability on persons who control a franchisor that violates the
MFIL, as well as employees who materially aid in the transaction constituting the
violation. Defendants refused to be named as parties in the arbitration. The Court
notes Defendants were under no duty to arbitrate because they were not parties to the
franchise agreement which contained the operative arbitration clause. Since they did
not agree to arbitrate Plaintiffs Section 32 claims, Plaintiffs filed the instant action
against Defendants in the California Superior Court on October 30, 2009, while
simultaneously pursuing their claims against CoW in arbitration. (Doc. 1). Defendants
timely removed to the U.S. District Court for the Northern District of California on
The parties thereafter agreed to a stay of the action pending
resolution of the arbitration.
Once Plaintiffs confirmed their $566,820.21 award against CoW, they returned to
the Northern District of California and resumed their Section 32 litigation against
Defendants. The parties’ motion practice ultimately resulted in that court transferring
the case to the Eastern District of Michigan. Two months after it was docketed here,
without having conducted any discovery, the parties filed cross-motions for summary
judgment. (Doc. 24; Doc. 25; Doc. 26). The Court heard oral argument on December
The “Interim” Award
The Court reviews the “interim” award in further detail because the arbitrator’s
findings regarding each MFIL violation, and the evidence set forth to establish those
violations, are relevant to the issues raised in the parties’ motions.
MFIL Section 8 and the Spreadsheets
The applicable disclosure rules2 prohibited CoW from providing Plaintiffs with
financial information and future earnings predictions outside of their UFOC.
Notwithstanding these prohibitions, CoW provided Plaintiffs with spreadsheets designed
to predict future earnings wholly separate from their UFOC. The arbitrator found that
these spreadsheets violated Section 8 because they contained information regarding
earnings claims outside of the UFOC. (Doc. 24 Ex. 2 at 5-6). The arbitrator also found
that CoW and an unidentified number of its “agents” had violated Section 8 by
improperly assisting Plaintiffs in filling out the spreadsheets. (Id. at 6). The Arbitrator
further found that the context in which CoW gave Plaintiffs the spreadsheets, even had
they been blank, violated the UFOC disclosure guidelines and created yet another
violation of Section 8.
(Id. at 7).
In sum, the arbitrator found that COW's use of
spreadsheets designed to project future earnings constituted three independent
violations of Section 8.
MFIL Section 8 and the Non-Disclosure of the Differences
Between the Predecessor Business and the Franchise
The arbitrator also found CoW liable under Section 8 for not disclosing material
differences between the franchise being offered and the predecessor business, which
Defendants Maio and Mancina founded some time ago. (Id. at 8-11). Since the UFOC
contained financial information relating to the predecessor business, CoW was required
to disclose any material differences between the franchise being offered and
predecessor business upon which it was based. The arbitrator found that CoW failed to
The North American Securities Administrators Association disclosure rules governed
the format and content of the UFOC in this case.
disclose that the vans used in the franchised business, which utilize a battery inverter
system to power their tools, were not substantially similar to the predecessor business
which used vans equipped with gas-powered generators. The battery inverter system
was apparently underpowered for the repair work and created numerous problems for
Plaintiffs. The arbitrator specifically noted that CoW “was simply wrong in its belief, and
thus its assertion that the franchise’s power systems were comparable and substantially
similar to the predecessor and company-owned operations.” (Id. at 15). As a result, the
arbitrator found CoW liable under Section 8 for not disclosing material differences
between the two businesses.
MFIL Section 8 and the Non-Disclosure of Environmental
As for another basis of relief under Section 8, the arbitrator found CoW liable for
not disclosing certain industry-specific environmental regulations that applied to the
franchise. (Id. at 11-14). The arbitrator determined that Plaintiffs' franchise was subject
to certain California industry-specific environmental regulations. CoW did not disclose
these regulations. Instead, it included a statement in the UFOC that CoW was “not
aware” of any regulations that specifically apply to the franchise. The arbitrator found
that CoW was required to disclose all applicable regulations that exist, not merely
whether it knew or did not know of such regulations. The arbitrator further determined
that a local air quality regulation directly applied to franchise because of the chemicals
used in automotive paint. Since CoW failed to disclose the applicable regulations in the
UFOC, the arbitrator found CoW liable under Section 8.
MFIL Section 5(b)
The arbitrator further determined that CoW's failure to disclose the material
differences between the predecessor business and the franchise business provided
additional grounds for relief Section 5(b). (Id. at 14-15).
Common Law Fraud and Misrepresentation Claims
The arbitrator did not grant Plaintiffs relief on their common law fraud and
misrepresentation claims. (Id. at 20). Although he found that CoW made inaccurate
statements, the arbitrator stated CoW did not know they were false or misleading and,
in any event, Plaintiffs’ damages causation proofs were lacking. (Id.). As for the nondisclosed differences between the predecessor business and the franchise business,
the arbitrator stated: “the record does not support a finding that [CoW] knew of the
inadequacies of the vans' battery/inverter power supply systems at the time of its
preparation of its UFOC or at the time the UFOC was given to the Claimants, so the
findings herein are not of fraud, but of misrepresentation.” (Id.). The arbitrator also
found that the statement in the UFOC that CoW was “not aware” of any applicable
regulations was an accurate and true assertion because at that time, CoW had no
knowledge of any such regulations.
STANDARD OF REVIEW
Summary judgment is appropriate only when there is “no genuine dispute as to
any material fact and the movant is entitled to judgment as a matter of law.” Fed. R.
Civ. Pro. 56(a). The central inquiry is “whether the evidence presents a sufficient
disagreement to require submission to a jury or whether it is so one-sided that one party
must prevail as a matter of law.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52
(1986). Rule 56 mandates summary judgment against a party who fails to establish the
existence of an element essential to the party's case and on which that party bears the
burden of proof at trial. Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986).
The moving party bears the initial burden of showing the absence of a genuine
issue of material fact. Celotex, 477 U.S. at 323. Once the moving party meets this
burden, the non-movant must come forward with specific facts showing that there is a
genuine issue for trial. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574,
In evaluating a motion for summary judgment, the evidence must be
viewed in the light most favorable to the non-moving party. Adickes v. S.H. Kress &
Co., 398 U.S. 144, 157 (1970). The Court “must lend credence” to the non-moving
party’s interpretation of the disputed facts. Marvin v. City of Taylor, 509 F.3d 234, 238
(6th Cir. 2007) (citing Scott v. Harris, 127 S.Ct. 1769, 1775 (2007)). The non-moving
party may not rest upon its mere allegations, but rather must set out specific facts
showing a genuine issue for trial. Fed. R. Civ. P. 56(c)(1). The mere existence of a
scintilla of evidence in support of the non-moving party's position will not suffice.
Rather, there must be evidence on which the jury could reasonably find for the nonmoving party. Hopson v.DaimlerChrysler Corp., 306 F.3d 427, 432 (6th Cir. 2002).
MFIL – Section 32
In this case, Plaintiffs seek to hold Defendants jointly and severally liable under
Section 32 of the MFIL for the arbitration award they obtained against CoW. Section 32
A person who directly or indirectly controls a person liable under this act, a
partner in a firm so liable, a principal executive officer or director of a
corporation so liable, a person occupying a similar status or performing
similar functions, an employee of a person so liable who materially aids in
the act or transaction constituting the violation, is also liable jointly and
severally with and to the same extent as the person, unless the other
person who is so liable had no knowledge of or reasonable grounds to
believe in the existence of the facts by reason of which the liability is
alleged to exist.
MICH. COMP. LAWS § 445.1532.
Section 32 creates a rebuttable presumption of joint and several liability for
officers, directors, partners, certain employees, and for others who “control” a franchisor
found liable under the MFIL. See Kohr v. Gropp & Lehman Enters., 718 F.2d 1099 (6th
Cir. 1983) (Table) (explaining that Section 32 “clearly indicates” the franchisor control
persons are to be held jointly and severally liable with the franchisor unless they had no
knowledge of the relevant facts); see also Banek Inc. v. Yogurt Ventures U.S.A., Inc., 6
F.3d 357, 362 n.3 (6th Cir. 1993) (recognizing that Section 32 imposes joint and several
liability on the owners, directors, officers, and employees for the franchisor’s MFIL
violations). The statute provides an affirmative defense for individuals saddled with
potential liability: an officer is not liable for the franchisor’s violation if he or she “had no
knowledge of or reasonable grounds to believe in the existence of the facts by reason of
which the liability is alleged to exist.” MICH. COMP. LAWS § 445.1532.
The Court agrees with the Sixth Circuit’s observation that Section 32 “is not a
model of clarity.” Kohr, 718 F.2d at 1099. The statute does not define the phrase
“directly or indirectly controls a person liable” nor describes the level of involvement an
employee must have in a franchisor's statutory violations to be “materially aid[ing]” the
Relatedly, the decision law interpreting Section 32 is almost nonexistent.
Although this section presents certain statutory construction issues, the Court is not
Michigan courts have acknowledged that the MFIL is to be “‘broadly construed to
effectuate its purpose of providing protection to the public.’” Little Caesar Enters. v.
Dep’t of Treasury, 575 N.W.2d 562, 564 (Mich. Ct. App. 1997) (quoting MICH COMP.
LAWS § 445.1501). Indeed, courts interpreting other MFIL sections have observed “the
general purpose of the MFIL is to protect the rights of franchisees.” Franchise Mgmt
Unlimited, Inc. v. America's Favorite Chicken, 561 N.W.2d 123, 127 (Mich. Ct. App.
1997) (citations omitted).
The Sixth Circuit has described the MFIL as a
“comprehensive and paternalistic” law reflecting the public policy of Michigan. Banek, 6
F.3d at 247.
Accordingly, the Court answers interpretive questions with a liberal
construction to effectuate the legislative intent behind the MFIL. Lorencz v. Ford Motor
Co., 483 N.W.2d 844, 848 (Mich. 1992) (“[T]he primary objective in statutory
interpretation and construction to effectuate legislative intent without harming the plain
wording of the act.”).
Plaintiffs’ Section 32 Claim
Plaintiffs carry the burden of establishing their Section 32 claim against
Defendants with proof that: (1) CoW violated the MFIL; (2) CoW is liable to Plaintiffs for
its violation of the MFIL; and (3) Defendants are individuals who directly or indirectly
“controlled” CoW, are principal executive officers or directors of CoW (or persons
occupying a similar position), or employees of CoW who “materially aided” in the acts
constituting the MFIL violations.
If Plaintiffs can establish the prima facie case, Defendants can rebut the
presumption of liability with proof that they had no knowledge of or reasonable grounds
to believe in the existence of the facts that created COW's liability. With the contours of
Plaintiffs’ claim defined, the Court separately analyzes each of the parties’ motions.
See Krygoski Const. Co., Inc. v. City of Menominee, 431 F.Supp.2d 755, 761 (W.D.
Mich. 2006) (“[T]he court must consider each motion [for summary judgment] separately
on its own merits to determine whether either of the parties deserves judgment as a
matter of law.”).
Defendants’ Motion for Summary Judgment
Advancing a defensive, non-mutual use of the collateral estoppel3 doctrine,
Defendants argue they are entitled to summary judgment because the arbitration
findings made in connection with Plaintiffs’ common law claims conclusively establish
the “no knowledge” affirmative defense of Section 32.
Plaintiffs maintain collateral
estoppel is inapplicable because the issues actually litigated and determined in the
arbitration, and the burdens of proof associated with those issues, are separate and
distinct from the burdens and issues raised in this litigation. Before reviewing the merits
of these positions, the Court notes a choice of law question alluded to in the briefs,
though not directly argued by either side.
Choice of Law
The parties have not squarely addressed the complex choice of law question as
to whether state or federal law on issue preclusion applies in determining the preclusive
effect of an arbitration award that resolved state-law issues but that was confirmed by a
The term Acollateral estoppel” is synonymous with the Aissue preclusion@.
federal court judgment. See 18 CHARLES A. WRIGHT, ARTHUR R. MILLER & EDWARD H.
COOPER, FEDERAL PRACTICE AND PROCEDURE 2d § 4475.1 (Supp. 2011) (“The source of
the law that governs the preclusion consequences of an arbitration award has not been
Defendants claim Michigan preclusion law applies because the franchise
agreement between Plaintiffs and CoW calls for the application of Michigan law. See
(Doc. 24 Ex. 1 at 17-18).
Plaintiffs did not address this contractual choice of law
Their response brief simply assumes without analysis that federal law
applies. At the hearing, Plaintiffs did not argue for an exclusive application of federal
law, nor did they concede that Michigan law applied. Instead, they explained their
response to Defendants collateral estoppel argument applies with equal force under
either source of law.
Notwithstanding Plaintiffs’ acquiesce in the application of Michigan law, the Court
doubts whether the franchise agreement controls the choice of law. First, Defendants
admit they were not parties to that agreement and CoW is not a Defendant here.
Second, Plaintiffs’ Section 32 claim does not involve interpretation or enforcement of the
franchise agreement. Third, although Plaintiffs failed to identify the controlling authority
that calls for the application of federal preclusion law, in the Sixth Circuit, “a federal
court sitting in diversity looks to federal law on collateral estoppel to determine the
preclusive effect of a prior federal judgment.”
Logan Farms v. HBH, Inc. DE, 282
F.Supp.2d 776, 787 (S.D. Ohio 2003) (citing JZG Resources, Inc. v. Shelby Ins. Co., 84
F.3d 211, 213-14 (6th Cir. 1996)).4 Given the lack of precise briefing on the choice of
law issue, it is unclear which body of collateral estoppel law applies in this matter.
Fortunately, the Court need not conclusively resolve this question because there is little
difference between the Michigan and federal formulations of the collateral estoppel
doctrine. Citations to both federal and Michigan collateral estoppel law are provided to
demonstrate the similarities between the two sources of law.
Collateral estoppel generally “refers to the effect of a judgment in foreclosing
relitigation of a matter that has been litigated and decided.” Bilali v. Gonzales, 502 F.3d
470, 474 (6th Cir. 2007) (internal quotation omitted). Under federal law, there are four
elements for the defensive use of collateral estoppel: “(1) the precise issue raised in the
present case must have been raised and actually litigated in the prior proceeding; (2)
determination of the issue must have been necessary to the outcome of the prior
proceeding; (3) the prior proceeding must have resulted in a final judgment on the
merits; (4) the party against whom [collateral] estoppel is sought must have had a full
and fair opportunity to litigate the issue in the prior proceeding.” Bills v. Aseltine, 52
F.3d 596, 604 (6th Cir. 1995). A court may properly give collateral estoppel effect to
“issues actually litigated in an arbitration proceeding between the same parties unless
the procedures were unfair.” Id. Further, defensive collateral estoppel does not require
mutuality of the parties. See NAACP, Detroit Branch v. Detroit Police Officers Assoc.,
Under the Federal Arbitration Act, a judgment that results from court confirmation of an
arbitration award has “the same force and effect” as any other final judgment on the
merits. 9 U.S.C. § 13. Plaintiffs obtained an Order confirming their arbitration award in
the Eastern District of Michigan on June 6, 2011. Accordingly, the Order confirming the
award is a “prior federal judgment” for collateral estoppel purposes.
821 F.2d 328, 330 (6th Cir. 1987) (requiring only that the party against whom “estoppel
is sought must have had a full and fair opportunity to litigate the issue in the prior
The law of issue preclusion in Michigan is nearly identical.
A court applies
collateral estoppel under Michigan law when “(1) the parties in both proceedings are the
same or in privity, (2) there was a valid, final judgment in the first proceeding, (3) the
same issue was actually litigated in the first proceeding, (4) that issue was necessary to
the judgment, and (5) the party against whom preclusion is asserted (or its privy) had a
full and fair opportunity to litigate the issue.” United States v. Dominguez, 359 F.3d 839,
842 (6th Cir. 2004) (citing People v. Gates, 452 N.W.2d 627, 630-31 (Mich. 1990)).
This principle applies to factual determinations made during arbitration proceedings.
Porter v. Royal Oak, 542 N.W.2d 905, 908 (Mich. Ct. App. 1995). Although Gates
requires the parties to be the same or in privity, the Michigan Supreme Court has since
rejected the mutuality requirement for the defensive use of collateral estoppel. Monat v.
State Farm Ins. Co., 677 N.W.2d 843, 852 (Mich. 2004); see also Moses v. Dep’t of
Corr., 736 N.W.2d 269, 283 (Mich. Ct. App. 2007) (acknowledging that Monat dissolved
the mutuality requirement for defensive collateral estoppel).
Defendants’ Collateral Estoppel Argument
The disposition of this motion turns on a question of law: whether Defendants
can use collateral estoppel to establish the “no knowledge” affirmative defense under
Section 32. Because this appeal to a statutory exclusion is an affirmative defense as to
which Defendants carry the burden of proof, they are entitled to summary judgment only
upon a showing “sufficient for the court to hold that no reasonable trier of fact could find
other than for the moving party.” Calderone v. United States, 799 F.2d 254, 259 (6th
Cir. 1986) (internal quotation marks, citation, and emphasis omitted); see also Warner v.
DSM Pharma Chemicals North America, Inc., Nos. 07-302; 07-312, 2010 WL 298307,*
1 (W.D. Mich. January 19, 2010) (“[W]here the party moving for summary judgment has
the burden of proof at trial-the plaintiff on a claim for relief or the defendant on an
affirmative defense-the movant faces a substantially higher hurdle.” (citing Arnett v.
Myers, 281 F.3d 552, 561 (6th Cir. 2002); Cockrel v. Shelby Cty. Sch. Dist., 270 F.3d
1036, 1056 (6th Cir. 2001))).
Section 32 provides that Defendants are not liable for CoW’s MFIL violations if
they had “no knowledge of or reasonable grounds to believe in the existence of the facts
by reason of which the liability is alleged to exist.” MICH. COMP. LAWS § 445.1532. The
statute necessarily requires the Court to identify “the facts by reason of which the
liability is alleged to exist” before it evaluates whether Defendants had “no knowledge of
or reasonable grounds to believe” in those facts. Given the procedural history of this
matter, the Court extracts the operative facts from the “interim” award.
In that confirmed award, the arbitrator found CoW liable for three violations of
Section 8 and one violation of Section 5(b). The facts giving rise to the Section 8
violations are: (1) CoW’s use a separate future earnings spreadsheet that was not
otherwise incorporated into the earnings claim in the UFOC; (2) the non-disclosure in
the UFOC of the differences between the predecessor business and the franchise
business, and (3) the non-disclosure in the UFOC of certain environmental regulations.
As the arbitrator noted, the fact supporting the Section 5(b) is duplicative of a fact used
to establish a Section 8 violation: the non-disclosure of the differences between the
predecessor business and the franchise business
Defendants claim Plaintiffs are collateral estopped from litigating Defendants’
knowledge of the above facts because the arbitrator already found that none of the
Defendants had any knowledge of these facts. Defendants’ base this position on their
interpretation of the arbitrator’s findings made in connection with Plaintiffs’ common law
fraud and misrepresentation claims.
They maintain these findings conclusively
establish that none of the individual Defendants had any knowledge of the facts which
gave rise to CoW’s liability under Sections 8 and 5(b). The Court disagrees.
Collateral estoppel on the affirmative defense issue is unavailable to Defendants
because the “same issue,” “actually litigated,” and “necessary to the outcome” elements
of the doctrine are not satisfied. The parties do not dispute that the dispositive issue
raised in the subject motion, Defendants knowledge of the facts for Section 32
purposes, was not expressly submitted for decision in the arbitration. As a matter of
equity and common sense, the doctrine of collateral estoppel does not prevent Plaintiffs
from litigating an issue that was not raised in the prior arbitration. See Wolf v. Gruntal &
Co., Inc., 45 F.3d 524, 528 (1st Cir. 1995) (“The authority of an arbitrator to decide a
controversy is derived entirely from the consent of the parties.”). Neither party to the
arbitration had any reason to actually litigate the “no knowledge” defense of Section 32,
nor could they have because Defendants refused to be named as parties in that
proceeding. Consequently, a determination of Defendants knowledge of the facts for
Section 32 purposes was not necessary for the issuance of the “interim” award. Since
Defendants’ knowledge of the relevant facts was never at issue in the arbitration,
collateral estoppel on this matter is inappropriate.
To avoid this inescapable conclusion, Defendants recast the issue addressed in
the arbitrator’s common law fraud and misrepresentation findings and assign a
preclusive scope to these findings far beyond what is actually stated. A plain reading of
those findings undermines Defendants’ position.
The arbitrator did not find that
Defendants had “no knowledge” of the facts giving rise to CoW’s MFIL liability. The
arbitrator merely found that CoW did not know the complained of inaccuracies were
false or misleading, a predicate element for common law claims of fraud and
Defendants cannot expand this narrow finding into the broad
assertion that the arbitrator categorically stated that no Defendant had any knowledge
of any facts which gave rise to CoW’s MFIL liability.
Whether CoW knew certain statements were false or misleading is irrelevant in
resolving the question of whether Defendants knew the facts which gave to a MFIL
violation. For example, knowledge of falsity has nothing do with which Defendant knew
that CoW sent future earning spreadsheets separate from the UFOC and that the UFOC
did not otherwise incorporate these spreadsheets as part of the earnings claims, the
factual predicates of one Section 8 violation.
Section 32 carries a rebuttable
presumption that Defendants knew of the facts, or had reason to know of the facts. As
such, Defendants carry the burden of proving they did not know the same facts that
created CoW's liability, and it was reasonable for them not to know. The arbitrator’s
findings on the common law claims simply do not carry this burden.
Taken to its logical conclusion, Defendants position strangely suggests that while
the arbitrator found facts that gave rise to four seperate MFIL violations, he also found
that CoW’s officers and directors had no knowledge of these facts.
almost certainly would not have made such an inconsistent finding. CoW acts only
through its control persons, i.e., Defendants. Someone in CoW’s organizational chart
likely knew or should have known the facts that gave rise to the MFIL violations
because without Defendants’ actions, there would be no MFIL liability. Throughout his
decision, the arbitrator describes the interactions between CoW’s officers and Plaintiffs
which gave rise to the MFIL violations. These individuals arguably knew the facts that
gave rise to the MFIL violations, though the arbitrator does not make clear who knew
what. Accordingly, the record contains evidence that prevents the Court from holding
that “no reasonable trier of fact could find other than for the moving party.” Calderone,
799 F.2d at 259.
In sum, Defendants cannot use the arbitrator’s findings on Plaintiffs’ common
law claims to establish their “no knowledge” affirmative defense because the “same
issue,” “actually litigated,” and “necessary to the outcome” elements of the collateral
estoppel doctrine are lacking. Therefore, Defendants’ motion is denied.
Plaintiffs’ Motion for Summary Judgment
Plaintiffs seek summary judgment on their Section 32 claims based on the
evidence adduced in the arbitration. They maintain this evidence shows that (1) CoW
violated the MFIL; (2) that Defendants are persons who either controlled COW, were its
principal executive officers, or its employees who “materially aided” in the acts or
transactions constituting COW's violations; and (3) that Defendants cannot carry their
burden with respect to the “no knowledge” affirmative defense of Section 32.
Defendants offer a three-fold response. First, they are entitled to relitigate the
predicate issue of whether CoW is liable for MFIL violations because they were not
parties to the arbitration. Second, reading the “materially aided” clause of Section 32
into all categories of potentially liable individuals, they claim Plaintiffs have not shown
how each Defendant “materially aided” any acts or transactions which gave rise to MFIL
Third, they assert there is a genuine issue of material fact on the “no
knowledge” affirmative defense.
The Court addresses these issues in the ordered
CoW’s MFIL Liability
Plaintiffs need not reestablish that CoW violated the MFIL.
voluminous pre-hearing briefs, conducting a ten-day hearing with live testimony, and
considering post-hearing briefs, the arbitrator made the factual determination that CoW
violated the MFIL in four separate respects. Plaintiffs have confirmed the arbitration
awards finding CoW liable for these multiple violations with a federal court judgment.
The Court would be doing the parties a great disservice in terms of time and cost by
allowing them to relitigate the question of CoW’s liability after they have already
conducted a lengthy arbitration on this matter. Accordingly, CoW’s MFIL violations are
The parties tasked the Court with deciding whether the “materially aids” clause
applies to all categories of franchisor control persons or just employees. The relevant
part of the statute reads, “A person who directly or indirectly controls a person liable
under this act, a partner in a firm so liable, a principal executive officer or director of a
corporation so liable, a person occupying a similar status or performing similar
functions, an employee of a person so liable who materially aids in the act or transaction
constituting the violation, is also liable . . . .” MICH. COMP. LAWS § 445.1532. There is no
comma separating the phrases “an employee of a person so liable” and “who materially
aids in the act or transaction.”
The proper grammatical reading is that the clause
"materially aids in the act or transaction constituting the violation" modifies only the last
antecedent, "an employee of a person so liable". Therefore, Plaintiffs need not allege or
prove that CoW’s control persons materially aided the transactions giving rise to MFIL
liability. The Court notes this interpretation is consistent with at least on other district
court who interpreted a similarly worded statute. See Shipman v. Case Handyman
Servs., L.L.C., 446 F.Supp.2d 812, 814 (N.D. Ill. 2006) (“[T]he [Illinois Franchise
Disclosure Act] draws a distinction between control persons, who, because they are in a
position to prevent a violation, are liable unless they “had no knowledge or reasonable
basis to have knowledge of the facts, acts or transactions constituting the alleged
violation,” and employees of such persons, who are liable only if they materially aided in
the act or transaction constituting the violation.”).
Having resolved the interpretive question, the Court looks to whether Defendants
are individuals subject to liability under Section 32. CoW disclosed in the UFOC that
Defendant John Lynch is C.E.O. and C.F.O.; Defendant Gregory Longe is President
and C.O.O.; Defendant Louis Mancina is Vice President; Defendant John Maio is Vice
President; and Defendant Richard Bass is Co-Director of Franchise Development.
(Doc. 26 Ex. I, Item 2 at 3-4). Defendants’ actions are consistent with their titles. Longe
and Bass participated in Conference calls with the Plaintiffs during the sales process.
(Doc. 26 Ex. G at 1779, 1783-1784, 1883). Longe managed the franchise development
and support process, co-managed the franchisee training process with Lynch, and
acknowledged he was personally involved in the franchise relationship with Plaintiffs.
(Doc. 26 Ex. G at 1879, 1919-1920). Lynch acknowledged he is responsible for all the
franchisor’s books and records and also for the business and financial business training
of franchisees. (Doc. 26 Ex. F at 1664). Defendants all participated in a meet-andgreet dinner and Discovery Day with Plaintiffs. As a practical matter, all Defendants
were involved in the sales process of the franchise to Plaintiffs. (Doc. 26 Ex. F at 15961598, 1599-1602, 1672 1673; Ex. G at 1749-1750, 1799, 1879-1886).
supports the conclusion that Defendants were CoW’s principal executive officers who
controlled the franchisor’s affairs or its employees who materially aided the transactions
which gave rise to MFIL liability. As such, they are jointly and severally liable for the
arbitration award unless they can prove they had “no knowledge of or reasonable
grounds to believe in the existence of the facts by reason of which the liability is alleged
The “No Knowledge” Affirmative Defense
As discussed above, the affirmative defense in Section 32 requires the Court to
identify the facts which established CoW’s MFIL liability before it evaluates whether
Defendants had “no knowledge of or reasonable grounds to believe” in those facts. The
Court previously outlined the relevant facts in its review of Defendants’ motion. See
supra Part III.C.3.
Before reviewing the parties’ positions regarding Defendants
knowledge, the Court addresses Defendants claim these facts are not alleged as a
basis of liability in Plaintiffs’ complaint.
Upon a comparison of Plaintiffs complaint and the bases of liability advanced in
the subject motion, Defendants conclude Plaintiffs are seeking summary judgment on
claims that were never pled.
The Court disagrees with Defendants’ myopic
interpretation of Plaintiffs’ complaint. This case was originally pled in California state
court. California state courts use “fact pleading,” whereas Federal courts use “notice
pleading”. Diodes, Inc. v. Franzen, 67 Cal.Rptr. 19, 22 (Cal. Ct. App. 1968). Plaintiffs
included specific factual allegations in accordance with state court pleading
requirements. They expressly noted these allegations were simply a part of the factual
basis of their claims against Defendants. See (Doc. 1 Ex. A, ¶18, ¶24). Although the
arbitrator rejected a number of the specific allegations, the purpose of their complaint is
clear: to give Defendants notice that Plaintiffs are seeking to hold them jointly and
severally liable under Section 32 for any violation of Sections 5(b) and/or 8 Plaintiffs
establish against CoW in arbitration.
Notice pleading does not require Plaintiffs to
immediately amend their complaint upon conclusion of a successful arbitration to
delineate the precise operative facts of their Section 32 claims. Defendants undeniably
understood the nature of Plaintiffs claims given their positions taken in the briefs.
The Court arrives again at the “no knowledge” issue, this time in the context of
Plaintiffs’ motion. Plaintiffs are entitled to summary judgment on Defendants’ affirmative
defense by showing “an absence of evidence to support an essential element of the
non-moving party's case.” Cardinal Health 414, Inc. v. Adams, 582 F.Supp.2d 967, 986
(M.D. Tenn. 2008) (internal quotation marks omitted) (quoting FDIC v. Giammettei, 34
F.3d 51, 54 (2nd Cir. 1994). Defendants survive Plaintiffs’ motion upon production of
sufficient evidence from which a reasonable jury could conclude that they did not have
knowledge of the facts that gave rise to CoW’s liability or it was reasonable for them not
to know the facts. See Lawyers Title Ins. Corp. v. United Am. Bank, 21 F.Supp.2d 785,
790 (W.D. Tenn. 1998) (explaining that “[w]hen relying on an affirmative defense, a
defendant who is faced with a summary judgment motion has the same burden as a
plaintiff against whom a defendant seeks summary judgment. That burden requires that
the non-moving party with the burden of proof on the issue in question produce
sufficient evidence upon which a jury could return a verdict favorable to the nonmoving
Taking the evidence of record in a light most favorable to Defendants, the Court
finds a genuine issue of material fact as to whether they knew or had reason to know of
the facts which gave rise to the MFIL violations. Defendants Maio, Bass, and Longe
offer affidavits regarding their lack of knowledge of the operative facts. (Doc. 30 Ex. E;
Ex. F; Ex. H). Defendant Mancina testified in a deposition and at the arbitration that he
never discussed any spreadsheets, financial projections, or environmental regulations
with Plaintiffs. (Doc. 30 Ex. C 1602-1604; Ex. D 44-45). Defendant Lynch convincingly
distinguishes the portions of the arbitration record that Plaintiffs offer in support of their
argument that Lynch cannot establish the “no knowledge” defense. See (Doc. 31 at 79). Lynch also offers a declaration in which he attests he did not know the relevant
facts. (Doc. 31 Ex. 5). On the record presented, which has not been supplemented
with any discovery, Plaintiffs have failed to persuade the Court that there exists an
“absence of evidence” on Defendants’ affirmative defense.
motion is denied.
For the reasons stated above, the parties’ motions are both DENIED.
IT IS SO ORDERED.
s/Marianne O. Battani
MARIANNE O. BATTANI
UNITED STATES DISTRICT JUDGE
DATE: March 2, 2012
CERTIFICATE OF SERVICE
I hereby certify that on the above date a copy of this Order was served upon all
counsel of record, electronically.
s/Bernadette M. Thebolt
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