L.A. Insurance Agency Franchising, LLC v. Montes et al

Filing 128

OPINION AND ORDER GRANTING DEFENDANTS MOTION FOR LEAVETO FILE SUPPLEMENTAL BRIEF 127 AND DISMISSING DEFENDANTS COUNTERCLAIMS AND DEFENSES BASED ON THEIR ARGUMENT THAT THE FRANCHISE AGREEMENTS INDEMNITY PROVISION RENDERS THEM UNENFORCEABLE DUE TO A LACK OF MUTUALITY. Signed by Magistrate Judge David R. Grand. (EBut)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
L.A. INSURANCE AGENCY
FRANCHISING, LLC,
Plaintiff,

Civil Action No. 14-14432
Magistrate Judge David R. Grand

v.
CLAUDIA MONTES, et al.,
Defendants.
________________________________________/
OPINION AND ORDER GRANTING DEFENDANTS’ MOTION FOR LEAVE
TO FILE SUPPLEMENTAL BRIEF [127] AND DISMISSING DEFENDANTS’
COUNTERCLAIMS AND DEFENSES BASED ON THEIR ARGUMENT THAT
THE FRANCHISE AGREEMENTS’ INDEMNITY PROVISION RENDERS
THEM UNENFORCEABLE DUE TO A LACK OF MUTUALITY
As the growing docket in this case reflects, the Court has written extensively on various
substantive and procedural issues raised by both sides of this franchise dispute. Recent factual
developments in this case, and a legal argument raised by Defendants – that an indemnity
provision in the parties’ franchise agreements renders them unenforceable due to a lack of
mutuality – suggest that at least certain of the Court’s prior rulings merit further consideration.
Defendants aptly describe the franchise agreements’ enforceability as “a determinative
issue in this case,” and recognize that the “consequences of enforcing the Agreements are dire
for Defendants.

If the Agreements are enforced, L.A. Insurance can rely upon the non-

competition clause to bring Defendants’ businesses to a close.” (Doc. #127 at 7-8). While this
somewhat piecemeal Order represents an unusual step, “[g]iven the importance of this issue,”1

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The Court agrees that the franchise agreements’ enforceability is a critical issue to the ultimate
resolution of this action. Accordingly, although Defendants should have presented all of their
arguments in support of their position in their prior filings, it will grant their motion for leave to

(id. at 7), it makes sense for the Court to decide the matter now while it is considering the impact
the recent factual developments may have on prior rulings in this case and on L.A. Insurance’s
pending Motion for Summary Judgment. (Doc. #117).
As more facts have been presented to the Court, and the legal issues have come into
greater focus, it has become increasingly clear that this is not a case of a “modern day Rosa
Parks,” as Defendants’ counsel once characterized it. Rather, it is a fairly straightforward
franchise dispute between a franchisor, Plaintiff L.A. Insurance (“L.A. Insurance”), and its
franchisee, Defendant Claudia Montes (“Montes”) (and her Defendant franchises (collectively,
“Defendants”)), who recently testified during her deposition that she never read many of the key
documents in this case (including the various franchise agreements and many of the affidavits
she submitted to the Court in this litigation) before signing them because she doesn’t “like
reading” and because she is “pretty trusting.” (Doc. #117-4, “Montes Dep.” at 32, 63, 72, 75-76,
98, 180).
Even more concerning to the Court than Montes’ lackadaisical approach to executing
important business and legal documents, are her recent admissions that, in opposing L.A.
Insurance’s prior requests for certain relief, she provided the Court with false information and
testimony. For instance, after having previously unequivocally testified in Court that she “never
received the loan” that was to be part of the underlying transaction for her to acquire one of her
L.A. Insurance franchises (Doc. #117-5 at 4), Montes admitted at her recent deposition that her
prior testimony was untrue. (Doc. #117-4, “Montes Dep.” at 36, 69-70 (“I must have represented

file a supplemental brief. (Doc. #127). For the reasons discussed below, however, Defendants’
supplemental filing only further shows their strained and unsupportable interpretation of the
contractual provisions in question, and that their mutuality argument lacks merit.
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myself wrong in front of the Judge … I got a loan and I made payments …. Q. So when you told
the Judge that you never received a loan, that wasn’t true? A. Correct.”), 161).
Montes also disavowed many of her allegations challenging the very core of the L.A.
Insurance franchise system. In her amended complaint, Montes alleged that L.A. Insurance
“offered no support at all to its franchises, not even offering MONTES a handbook of operating
procedures to review,” that L.A. Insurance “offered nothing of value to its franchisees, but
instead siphoned money off of what were essentially small, independent businesses,” and that
“[e]ven though the Revised Franchise Agreement called for ‘operational assistance,’ ‘training,’
and ‘operations manual,’ and numerous other supposed support, MONTES never received any of
it.” (Doc. #35-1, Amend. Comp., ¶¶13, 41-42). Similarly, in an affidavit Montes supplied to the
Court, she averred, “[L.A. Insurance] offered literally no support to its franchisees,” and that its
“franchise system offer[ed] nothing of substance, no support, no assistance, no procedures, no
training, no advice, no resources, no manuals, no marketing, nothing.” (Doc. #35-1 at ¶¶89-90).
At her deposition, however, Montes admitted to receiving assistance in many of these respects
from L.A. Insurance, and she expressly and unequivocally admitted these averments were untrue.
(Montes Dep. at 158-170, 184-88, 191, 197).2

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Montes attempted to rationalize a statement in one of her prior affidavits that she “received zero
support from [L.A. Insurance]” by claiming that rather than a “lie,” her statement “might be
exaggerated” because she is “pretty dramatic so [she] might exaggerate.” (Montes Dep. at 15859). When pressed, however, Montes admitted that her prior affidavit statement “is not true.”
(Id. at 159). Montes’ cavalier attitude toward the truth, which seems consistent with her
submission of affidavits to this Court that she never read, suggests a lack of respect for the
challenging and voluminous work of the Court and the judicial process, including L.A.
Insurance’s right to have the parties’ dispute decided based on the facts and evidence. While the
Court will always remain objective in its assessment of the relevant law and evidence presented
in this matter, it is Montes who should “take a sober second review” (in her words, Doc. #127-2)
of the manner in which she conducts herself professionally and as a litigant in this Court. While
the Court is still considering the impact on this case of the new evidence discussed herein,
Montes is expressly warned that she may face contempt proceedings or other sanctions if she
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Finally, one of the central themes of Montes’ counterclaims and defenses is that she was
“forced” by L.A. Insurance to execute the various franchise agreements. (See e.g., Doc. #35-1 at
¶26; Doc. #77 at 21-23 (“These contracts were signed under duress … they came to me and they
say, ‘Well, it’s time for you to buy us out. We’re going to give you a loan to buy us out.’ I
never received the loan.3 They just told me I have to give them payment of 9 percent interest and
I had to come to Michigan to sign the contract…. It was either that or I lose my agencies.”)). In
a prior Order, the Court expressed some skepticism about how Montes could have been “forced”
to sign “four different contracts over a five-year period of time.” (Doc. #105 at 14). At least on
the present record, that skepticism appears to have been well-founded. At her deposition,
Montes specifically denied being forced to sign any of the franchise agreements. (Montes Dep.
at 88, 90, 94, 96). Montes also admitted at her deposition that “every time we signed a contract
we went out for – for dancing” (id. at 189-90), which is certainly a strange way to behave after
purportedly having just been “forced” to sign an agreement. And, Montes admitted that she had
been excited about starting the NV26 franchise agency in 2011, and had affixed a sticky-note to
the executed NV26 franchise agreement in which she wrote, “We will celebrate this NV26 in the
next six months.” (Id. at 97-98).
After recently eliciting these admissions from Montes, L.A. Insurance filed a motion for
summary judgment which is pending before the Court. (Doc. #117). However, rather than
responding substantively to L.A. Insurance’s arguments, Defendants simply asked for a wildly
excessive amount of additional time (18 months, see Doc. #123-2 at ¶11) to complete discovery,
and spent the bulk of their response arguing that the franchise agreements “are unenforceable

provides knowingly false information to the Court.
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As noted above, Montes has now admitted that she did, in fact, receive the loan.
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because there is no mutuality of obligation between the parties.” (Doc. #123 at 13). More
specifically, Defendants contend that mutuality is lacking because the indemnity provisions in
the parties’ franchise agreements “completely and unambiguously exempt L.A. Insurance from
liability….” (Id. at 16). From this argument, Defendants conclude that: (1) “L.A. Insurance’s
claims in its Amended Complaint [68] fail as a matter of law”; and (2) “L.A. Insurance will be
unable to rely upon the [franchise agreements] to bar Defendants’ Amended and Supplemental
Counterclaims.” (Id. at 21). For the reasons discussed below, however, Defendants’ mutuality
argument lacks merit.
ANALYSIS
The law is clear that “[a]n indemnity contract is construed in the same manner as other
contracts.” DaimlerChrysler Corp. v. G-Tech Professional Staffing, Inc., 260 Mich. App. 183,
185 (2003). This means that “an unambiguous written indemnity contract must be enforced
according to the plain and ordinary meaning of the words used in the instrument.” Id. Here, the
salient contractual language in the parties’ franchise agreements is clear and unambiguous. Each
of those agreements provides that a “business operated under the [L.A. Insurance] Franchise
System … will be referred to in this Agreement as an ‘Agency.’ The Agency operated by
Franchisee under this Agreement will be referred to in this Agreement as the ‘Business’ or
‘Franchise Business.’” (Docs. # 68-1, §1.1; 68-2, §1.1; 68-3, §1.1; 68-4, §1.1). The franchise
agreements also contain the following “Indemnification” provision:
Franchisee is responsible for all losses or damages from contractual
liabilities to third persons from the possession, ownership and operation of
the Franchise Business and all claims or demands for damages to property
or for injury … of persons, directly or indirectly, arising out of, or in
connection with, possession, ownership or operation of the Franchise
Business or the actions or omissions of Franchisee. Franchisee must
defend, indemnify and hold harmless the Franchisor … against any and all
claims … which arise out of, in connection with, or as a result of
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possession, ownership or operation of the Franchise Business or the acts
or omissions of Franchisee….
(Docs. #68-1, §8.15; 68-2, §8.14; 68-3, §8.14; 68-4, §8.15) (emphasis added) (the
“Indemnification Provision”).
While Defendants urge the Court to focus on aspects of the Indemnification Provision
which are broad, such as “any and all claims,” and “arising out of, in connection with, or as a
result of” (Docs. #123 at 17; 127-2 at 5-6), they fail to conduct a complete analysis of the
Provision. The key question to be answered is: “arising out of, in connection with, or as a result
of” what? The highlighted words above provide the answer to that question, and make clear that
the Indemnification Provision does not “exempt L.A. Insurance from [any and all] liability.”
Defendants must indemnify L.A. Insurance only where a claim arises out of the “possession,
ownership, or operation of the Franchise Business,” and only Defendants “possess,” “own,” and
“operate” the Franchise Business as that term is defined in the franchise agreements.
Defendants essentially ask the Court to construe the Indemnification Provision much
more broadly than it actually reads by asking the Court to ignore the key qualifying language.
Specifically, Defendants argue that a “claim ‘in connection with’ Defendants’ agencies would
include a claim regarding L.A. Insurance’s breach of [] the Agreements.” (Doc. #127-2 at 7)
(emphasis added). But again, the Indemnity Provision does not apply to claims “in connection
with Defendants’ agencies.” Rather, it applies much more narrowly to claims in connection with
the “possession, ownership or operation of [Defendants’ agencies].” Defendants’ need to write
the highlighted language out of the Provision to make their argument proves the correctness of
the Court’s analysis.4

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In their supplemental brief, Defendants ask: in light of the Indemnification Provision, “how
can Defendants seek legal recourse against L.A. Insurance when it … [f]ails to perform material
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The case of Commercial Movie Rental, Inc. v. Larry Eagle, Inc., 738 F.Supp. 227 (W.D.
Mich. 1989), on which Defendants rely, does not change the analysis.

While Defendants

accurately recite the case’s holding – “that Commercial Movie Rental, Inc. was never bound
because it was ‘exempt … for all liability for a breach of its obligations,’” (Doc. #127-2 at 8),
they fail to note that the court so held because the indemnification provision at issue in that case
provided that Commercial Movie Rental “shall not be liable for ... damages of any kind ... on
account of any ... event or cause whatsoever.” Commercial Movie, 738 F.Supp. at 230
(emphasis added). For the reasons stated above, the Indemnification Provision in the L.A.
Insurance franchise agreements is completely different, much more narrow and specific, and
cannot be read as exempting L.A. Insurance from all liability.5
CONCLUSION
For the reasons stated above, the Indemnification Provision does not “exempt[] L.A.
Insurance from all liability for any breach” committed by L.A. Insurance, as Defendants contend.
obligations under the Agreements…”? (Doc. #127-2 at 2-3). Defendants claim that they are
“unable to seek legal recourse” for any violation by L.A. Insurance of its obligations under the
franchise agreements because “L.A. Insurance can rely upon the Indemnification Clause for
impunity.” (Doc. #127-2 at 3). This argument gets Defendants nowhere. As discussed above,
the premise that the indemnification clauses “exempt L.A. Insurance from liability” is fatally
flawed. Alleged wrongful conduct of L.A. Insurance would not arise out of the “possession,
ownership or operation of the Franchise Business.” Rather, it would arise out of the operation
of L.A. Insurance’s own business as franchisor. Moreover, Defendants have brought multiple
claims in which they allege that L.A. Insurance breached its obligations under the franchise
agreements, and nowhere in L.A. Insurance’s affirmative defenses or briefing has it argued that it
is immune from such claims due to the Indemnification Provision. To the contrary, and as
Defendants recognize (Doc. #127-2 at 8), L.A. Insurance admits that it “had several obligations
under the Franchise Agreements…. There is simply no provision that removes [L.A. Insurance]
from all liability.” (Doc. #124 at 8).
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Defendants’ argument that “a contract must be construed against the drafter, which, in this case,
is L.A. Insurance” also lacks merit. (Doc. #127-2 at 7). As noted in DaimlerChrysler, 260
Mich. App. at 187, the “principle of construing an indemnity contract against the drafter, like any
other contract, only applies where (1) an ambiguity exists and (2) all other means of construing
the ambiguity have been exhausted.” No ambiguity exists here.
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(Doc. #127-2 at 6). The Indemnification Provision therefore cannot be a basis for finding the
franchise agreements to be unenforceable due to a lack of mutuality.

Accordingly, all of

Defendants’ counterclaims and defenses based on this argument are DISMISSED.

Dated: August 19, 2016
Ann Arbor, Michigan

s/David R. Grand
DAVID R. GRAND
United States Magistrate Judge

CERTIFICATE OF SERVICE
The undersigned certifies that the foregoing document was served upon counsel of record
and any unrepresented parties via the Court’s ECF System to their respective email or First Class
U.S. mail addresses disclosed on the Notice of Electronic Filing on August 19, 2016.
s/Eddrey O. Butts
EDDREY O. BUTTS
Case Manager

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