Kostopoulos Rodriguez, PLLC v. Green DryClean L3, Inc.

• Decision Date: 06 November 2020
• Docket Number: Case No. 20-12191
• Parties: KOSTOPOULOS RODRIGUEZ, PLLC, Plaintiff, v. GREEN DRYCLEAN L3, INC and ARTHUR BUCKLAND, Defendants.
• Court: U.S. District Court — Eastern District of Michigan

KOSTOPOULOS RODRIGUEZ, PLLC, Plaintiff, v. GREEN DRYCLEAN L3, INC and ARTHUR BUCKLAND, Defendants.

Case No. 20-12191

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION

November 6, 2020

OPINION AND ORDER DENYING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT, DENYING PLAINTIFF'S MOTION TO REMAND, DENYING DEFENDANTS' MOTION TO DISMISS AND DENYING DEFENDANTS' MOTION FOR SUMMARY JUDGMENT

I. INTRODUCTION

Plaintiff Kostopoulos Rodriguez, PLLC ("Law Firm") is a business law firm which filed the present action in Oakland County Circuit Court seeking a declaration that claims filed in an arbitration proceeding initiated by Defendants Arthur Buckland and Green DryClean, LLC are not arbitrable. It instead argues that Defendants must pursue their claims in court. The dispute flows from three dry cleaning store franchise agreements between Defendants and Plaintiff Law Firm's client, Non-Party Martinizing International, LLC ("Martinizing"). Defendants sought to include Plaintiff Law Firm as a respondent in an arbitration proceeding between Defendants and Martinizing. Defendants alleged that Plaintiff Law Firm prepared due diligence disclosures for Martinizing that contained knowingly inaccurate, false, and misleading language. Plaintiff Law Firm brought the present action in state court, and Defendants removed the proceeding to federal court.

Although formal discovery has not yet occurred in the case, the court is presented with four different motions. Plaintiff Law Firm seeks to remand the case to state court, or in the alternative, requests an award of summary judgment in its favor. Defendants have filed both a motion to dismiss and a motion for summary judgment. For the reasons stated below, the court denies all four pending motions.

II. BACKGROUND

In March 2018, Defendants entered into three franchise agreements with Martinizing to open Martinizing branded dry cleaning stores in Massachusetts. (ECF No. 1-1, PageID.10.) The three agreements all contain an identical binding arbitration clause stating:

Except to the extent... [otherwise provided by this agreement], all controversies, claims or disputes between Franchisor and Franchisee (and/or any affiliates of Franchisee or Franchisor, and/or any of their respective shareholders, directors, partners, officers, employees, agents, lawyers, accountants, associates or guarantors, and/or any of their successors or assigns) arising out of or relating to (a) this Agreement or any other agreement between Franchisor and Franchisee, (b) the relationship between Franchisee and Franchisor, (c) the validity of this Agreement or any other agreement between Franchisor and Franchisee, or (d) statutory obligations owing by Franchisor or Franchisee, shall be submitted for arbitration to the American Arbitration Association or such other arbitration body designated by Franchisor on demand of either party pursuant to the rules of the of the designated arbitration body. (ECF No. 1-1, PageID.71.) (emphasis added)

The agreements provide that they should be interpreted according to Michigan law. (Id. at 70.) And they contain an "Entire Agreement" clause providing that:

This Agreement is made solely for the benefit of the parties hereto, their permissible successors and assigns. No other person shall have any rights by virtue of this Agreement. Franchisee shall have no rights or remedies against third parties solely by virtue of this Agreement. (Id. at 76.)

Only Defendants and Martinizing are signatories of the franchise agreements. (ECF No. 1-1, PageID.10) Plaintiff Law Firm alleges that it did not directly draft or negotiate these franchise agreements. (Id.) However, Plaintiff Law Firm allegedly provided Martinizing with other legal services involving its franchise agreements, including conducting a yearly review of the agreements and representing Martinizing in litigation. (ECF No. 8, PageID.835.) Plaintiff Law Firm also assisted Martinizing's preparation of a 2017 Franchise Disclosure Document that Defendants contend contains inaccurate, false, and misleading language. (ECF No. 8-1, PageID.856.) Defendants allege that these falsifications induced them to enter the franchising agreements with Martinizing and that Defendants repudiated the franchise agreements when they learned the truth. (Id.)

After Defendants backed out of the franchise agreements, Martinizing commenced arbitration under the agreement in December 2018. (ECF No. 8-2, PageID.991.) In this arbitration proceeding ("Buckland I"), Defendant and Martinizing began discovery which appears to still be ongoing. (Id. at 993.) During this discovery, Defendants claim they uncovered Plaintiff Law Firm's alleged role in preparing the Franchise Disclosures. (Id. at 994.) When Defendants sought to add Plaintiff Law Firm as a new party in Buckland I, however, the arbitrator denied the motion. (Id. at 96.) So, Defendants instead initiated a new, separate arbitration proceeding ("Buckland II") in July 2020 against Plaintiff Law Firm and several other respondents. (See ECF No. 4-3, PageID.404.)

The arbitration demand in Buckland II alleges that Plaintiff Law Firm was bound by the arbitration provision contained in the three franchise agreements and thatDefendants were induced to rely on the fraudulent 2017 Franchise Disclosures. (Id. at 473.)

On July 28, 2020, Plaintiff Law Firm filed the present action in Oakland County Circuit Court seeking a declaratory judgment. (ECF No. 1-1, PageID.8-12.) The complaint alleges that, as a non-signatory, Plaintiff Law Firm was not bound by the franchise agreements' mandatory arbitration provision and cannot be forced to arbitrate. (Id.)

A few days after filing the present declaratory judgment action, Plaintiff Law Firm also filed an answer with affirmative defenses in the Buckland II arbitration proceeding. (ECF No. 8-2, PageID.1389-92.) The answer notes that Plaintiff Law Firm continues to contest arbitrability but also included affirmative defenses based on specific provisions within the franchise agreements. (Id.)

III. DISCUSSION

A. Plaintiff's Claim Satisfies the Amount in Controversy Requirement for Diversity

Jurisdiction

Plaintiff Law Firm first argues the present action should be remanded to Oakland County Circuit Court because it contends a declaratory judgment request under Michigan's arbitration statue, Mich. Comp. Laws Ann. § 691.1687, does not satisfy the amount in controversy requirement for diversity jurisdiction under 28 U.S.C. § 1332. (ECF No. 4, PageID.391-93). However, this view is at odds with precedent. Whenever there is complete diversity of citizenship among the parties, an action may be removed from state court if the amount in controversy exceeds $75,000. 28 U.S.C. § 1441; 28 U.S.C. § 1332. "[W]here a party seeks a declaratory judgment, the amount in controversy is not necessarily the money judgment sought or recovered, but rather thevalue of the consequences which may result from the litigation." Freeland v. Liberty Mut. Fire Ins. Co., 632 F.3d 250, 253 (6th Cir. 2011) (quotations omitted). The court is required to remand a case "if at any time before final judgment is entered it appears that the district court lacks subject matter jurisdiction." 28 U.S.C. § 1447(c).

Plaintiff Law Firm reasons that the "object" of its litigation is not "a ruling on the merits" of the underlying claim but only a determination of arbitrability, and, the value of such litigation it argues is not "sufficiently measurable" to fulfill the amount in controversy requirement. (ECF No. 4, PageID.393.) But in an analogous case, where a franchisee opposed the removal of a state court declaratory judgment action weighing the enforceability of an arbitration provision, the court found it was "appropriate to look through that complaint to the value of the underlying arbitration" to determine the amount in controversy. Hambell v. Alphagraphics Franchising Inc., 779 F. Supp. 910, 912 (E.D. Mich. 1991). Reasoning by analogy, the Hambell court found that the plaintiffs' state court declaratory judgment action (which sought to prevent enforcement of an arbitration agreement) was "most analogous to a motion to compel arbitration," a situation where other jurisdictions found it was appropriate to "look[] through to the amount of the possible award in the underlying arbitration" to determine the amount in controversy. Id. (citing Davenport v. Procter & Gamble Mfg. Co., 241 F.2d 511 (2d Cir.1957); In re Marcy Lee Mfg. Co., 354 F.2d 42 (2d Cir.1965); State Farm Mutual Automobile Ins. Co. v. Schambelan, 738 F.Supp. 926 (E.D.Pa.1990); J.E. Sieben Construction Co., Inc. v. Davenport, 494 F.Supp. 1035 (S.D.Iowa 1980)). The Hambell court's holding was later explicitly endorsed in Webb v. Investacorp, Inc. by the Fifth Circuit. 89 F.3d 252, 256 (5th Cir. 1996) (holding that when considering a suit seeking toenjoin arbitration, it was proper to look at "the underlying arbitration to determine the amount in controversy in this action for declaratory relief"); see also M.C. Const. Corp. v. Gray Co., 17 F. Supp. 2d 541, 545-46 (W.D. Va. 1998) (finding that the "value of the consequences that may result from litigation," in a declaratory judgment action, was the "several million dollars. . . at stake in [the underlying] arbitration").

Plaintiff Law Firm cites no authority disputing these precedents, so the court concludes that the proper way to value the declaratory judgment action is to look at the potential monetary value of the underlying arbitration proceeding Plaintiff Law Firm seeks to forestall. In Buckland I, the previous arbitration proceeding—between the franchisee Defendants and the franchisor Martinizing—it was undisputed that the initial franchising fee at issue was valued at $99,500. (See ECF No. 4-9, PageID.758.) Buckland II, Defendants' present arbitration action, is based on the same transaction and alleges that Plaintiff Law Firm played a role in "inducing" them "into a multi-unit franchise...