MTR Capital, LLC v. Lavida Massage Franchise Development, Inc. et al

Filing 49

ORDER granting 38 Motion Defendants' Motion to Strike Jury Demand. Signed by District Judge Terrence G. Berg. (AChu)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION

MTR CAPITAL, LLC,
Plaintiff,
v.

Case No. 17-13552
Hon. Terrence G. Berg

LAVIDA MASSAGE
FRANCHISE
DEVELOPMENT, INC.,
PEGGY DAVIS, and
DUANE GOODWIN
Defendants.
ORDER GRANTING DEFENDANTS’ MOTION TO
STRIKE JURY DEMAND
Plaintiff MTR Capital seeks to rescind a franchise agreement
with Defendants LaVida Massage and its principals, Peggy Davis
and Duane Goodwin, and also seeks damages, alleging that Defendants fraudulently induced Plaintiff to enter into the agreement, violated federal and state franchise laws, and failed to perform under
the contract. Complaint, ECF No. 1, PageID.3. Plaintiff demanded
a jury trial in its Complaint. Id. at PageID.23. Defendants now
move to strike Plaintiff’s jury demand based on a provision in the
franchise agreement waiving their right to a trial by jury on matters related to enforcement of the agreement. ECF No. 38. The
Court GRANTS Defendants’ motion based on the reasoning below.

I.

Facts

On October 14, 2014, Defendant Goodwin sent a copy of the franchise agreement to Plaintiff’s principal, Joaquin Esquivia. Defendants’ Motion to Strike Jury Demand, ECF No. 38, PageID.403. On
February 2, 2015, Esquivia emailed Defendants’ franchise broker,
Bernardo Yibirin, and stated: “After reading the entire La Vida
Massage Franchise Agreement (FA) document, I have the following
questions. . .” ECF No. 39-1, PageID.465. In this email, Esquivia
listed eighteen questions about different terms in the franchise
agreement. None of these questions relate to the jury waiver provision. In response, Defendant Davis sent a revised franchise agreement in which she “answered most of [Esquivia’s] questions.” ECF
No. 39-2. Plaintiff and Defendant executed the franchise agreement
on February 17, 2015. Executed Agreement, ECF No. 40-1.
The agreement contains the following provision:

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Esquivia initialed the page containing the waiver of jury trial provision. ECF No. 40-1, PageID.546.
Plaintiff’s Complaint specified the following bases for its fraud
allegations:
Specifically, Plaintiff’s principal, Mr. Joaquin Esquivia,
fell prey to a fraudulent scheme orchestrated by Defendants, in which the Defendants touted the alleged extraordinary amount of financial success and growth enjoyed by the LaVida franchise system at locations across
the country, provided financial performance representations in violation of law, and used “time is of the essence,” “bait and switch,” and other high pressure and
deceptive sales tactics to coerce prospective franchisees
into investing substantial sums of money toward the
purchase of a LaVida franchise.
ECF No. 1, PageID.3–4. Importantly, the Complaint does not allege
that there was any fraud that specifically induced Plaintiff to agree
to the provision containing the jury trial waiver.
II.

Analysis

Individuals (or, in this case, LLCs) may waive their Seventh
Amendment right to a trial by jury. K.M.C. Co. v. Irving Trust Co.,
757 F.2d 752, 755 (6th Cir. 1985). Such a waiver is enforceable if it
was “knowing and voluntary.” Id. at 756. The record before the
Court establishes that Plaintiff’s assent to the jury trial waiver was
knowing and voluntary. And in fact, Plaintiff does not dispute the
applicability of the knowing and voluntary test—nor that the test
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is satisfied with respect to the jury trial waiver language in the
franchise agreement. Response to Defendant’s Motion to Strike
Jury Demand, ECF No. 45, PageID.574–75.
Instead, Plaintiff raises two related arguments. First, it points
to the language of the waiver—specifically, the first sentence: “To
the extent either party is permitted to enforce this agreement by judicial process and elects to do so, each of the parties waives its right
to a trial by jury.” (emphasis added). Plaintiff argues that Defendant is not “permitted to enforce this agreement” because it fraudulently procured the agreement. Therefore, the argument goes, the
jury trial waiver does not apply. Plaintiff cites case law to support
the proposition that “[c]ourts must give effect to every word, phrase,
and clause in a contract and avoid an interpretation that would render any part of the contract surplusage or nugatory.” Response,
ECF No. 45, PageID.575 n.7. This is true—which makes it important to turn to the very next sentence of the jury trial waiver
after the portion Plaintiff quotes: “This waiver shall apply to all
causes of action that are or might be included in such action including, but not limited to, claims related with respect to the enforcement or interpretation of this agreement, allegations of . . . fraud,
misrepresentation, or similar causes of action.”
The jury trial waiver specifically includes fraud claims of the
type that Plaintiff argues should be excluded from the waiver.
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Giving effect to each word of the contract thus undercuts Plaintiff’s
position that claims alleging fraud should not be subject to the jury
trial waiver.
Second, Plaintiff contends that even if the plain language of the
jury trial waiver included claims of fraud where one party seeks
rescission, Plaintiff’s allegation that the entire contract is voidable
for fraud also includes the jury trial waiver provision. Plaintiff proposes a bifurcated trial to solve this problem: a jury would determine whether the contract is voidable for fraud; depending on their
conclusion, either the Court or the jury would then resolve the remaining issues. Response, ECF No. 45, PageID.573. But after a review of the authorities, the Court finds that this arrangement
would be inappropriate and unnecessary.
In Prima Paint Corporation v. Flood & Conklin Manufacturing
Company, 388 U.S. 395 (1967), the Supreme Court found that a
claim of contract fraud must be arbitrated where the contract contained an arbitration clause unless “the claim is fraud in the inducement of the arbitration clause itself.” 388 U.S. at 403–04. Several circuit courts of appeals have applied the same rationale to
waivers of jury trials, notwithstanding the fact that, in Prima
Paint, the Supreme Court was interpreting the Federal Arbitration
Act. E.g. Merrill Lynch & Co. v. Allegheny Energy, Inc., 500 F.3d
171, 188 (2d Cir. 2007); Telum, Inc. v. E.F. Hutton Credit Corp., 859
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F.2d 835, 837–38 (10th Cir. 1988). In Telum, the Tenth Circuit
found the Prima Paint analogy “especially appropriate here because submission of a case to arbitration involves a greater compromise of procedural protections than does the waiver of the right to
trial by jury.” 859 F.2d at 838.
The Sixth Circuit has not addressed the specific issue of whether
a general allegation of fraud in the inducement as to the entire contract suspends application of a jury trial waiver in the contract. But
district courts in the Sixth Circuit have found Telum persuasive.
E.g. Chesterfield Exchange, LLC v. Sportsman’s Warehouse, Inc.,
528 F. Supp. 2d 710, 714 (E.D. Mich. 2007); MSCI 2007-IQ16 Retail
9654, LLC v. Dragul, No. 1:14-cv-287, 2014 WL 3342570, at *2 (S.D.
Ohio Jul. 8, 2014); but see L.A. Ins. Agency Franchising, LLC v.
Montes, No. 14-14432, 2015 WL 9314738, at *2 (E.D. Mich. Dec. 23,
2015) (distinguishing Chesterfield on the ground that Chesterfield’s
holding was limited to contracts between business entities of equal
bargaining power).
The reasoning of these courts is persuasive. Because Plaintiff
has not alleged that Defendant fraudulently induced Plaintiff to
agree to waive its right to a trial by jury, Defendants’ Motion to

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Strike Plaintiff’s Jury Demand is GRANTED.

SO ORDERED.
Dated: April 2, 2019

s/Terrence G. Berg
TERRENCE G. BERG
UNITED STATES DISTRICT JUDGE

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