Tankersley v. Lynch
| Decision Date | 02 March 2012 |
| Docket Number | CASE NO. 11-12847 |
| Parties | MARIAN TANKERSLEY and RICHARD DIEHL, Plaintiffs, v. JOHN LYNCH, GREGORY A. LONGE, LOUIS MANCINA, JOHN MAIO, and RICHARD BASS, Defendants. |
| Court | U.S. District Court — Eastern District of Michigan |
HON. MARIANNE O. BATTANI
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 DENIED.
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"). (Doc. 26 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. Plaintiffs 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.
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 CoWcommitted 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 was $566,820.21.
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 32imposes 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 diversity grounds. 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 9, 2011.
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.
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.
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 todisclose 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.
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.
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).
The arbitrator...
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