Lead Opinion
Defendant Cottman Transmission Systems, Inc. appeals from grants of partial summary disposition for plaintiffs in two cases, consolidated on appeal. Cottman asserts that plaintiff Leonardo Martino’s action for rescission is barred by res judicata, because a prior Pennsylvania judgment should be given full faith and credit by Michigan courts. It argues that plaintiffs Martino and Trans One II, Inc., failed to state a cause of action for rescission under MCL 445.1531; MSA 19.854(31), becаuse Pennsylvania rather than Michigan law controls the franchise agreement. Cottman asserts that plaintiffs have unclean hands which bar their claim for rescission. Finally, it alleges that issues of material fact remain unresolved, precluding summary disposition. We affirm in part and remand for further findings.
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Cottman is a Pennsylvania corporation which licenses automotive transmission service centers in various states. Due to financial problems, Cottman and A-l Transmissions entered into an agreement where Cottman would offer existing A-l franchisees the opportunity to convert to Cottman Transmission franchises. The converted franchises would operate as A-l/Cottman Transmission Centers. Cottman also agreed to manage all franchise services on behalf of A-l for
In December, 1991, Cottman allegedly discovered that Martino was underreporting his gross sales and defrauding Cottman of licensing and advertising fees. On March 3, 1992, Cottman filed a lawsuit against Martino in Pennsylvania for breach of the franchise contract. Instead of responding to the complaint, Martino filed this action for rescission. Hе claimed that Cottman failed to provide proper notice that certain of its contract’s provisions are void and unenforceable under Michigan law, as required by MCL 445.1508(3); MSA 19.854(8)(3). Meanwhile, a default judgment was entered against Martino in the Pennsylvania action.
In this case, the trial court granted Martino’s motion for summary disposition, holding Cottman failed to comply with MCL 445.1508(3); MSA 19.854(8)(3) and MCL 445.1531(2); MSA 19.854(31)(2). It granted plaintiffs’ request for a rescission.
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We review a trial court’s grant of summary disposition de novo examining the
Defendant argues that res judicata bars Martino’s action for rescission. The doctrine of res judicata is applied broadly. It includes issues which the parties sought to have adjudicated as well as “every point which properly belonged to the subject of litigation, and which the parties, exercising reasonable diligence, might have brought forward at that time.” Van Pembrook v Zero Mfg Co,
Cottman instituted the Pennsylvania action for breach of the franchise contract. It alleged that Martino was systematically underreporting his gross sales and defrauding Cottman. The cause of action in Michigan seeks rescission of the franchise agreement for Cottman’s failure to provide proper notice as required by the Michigan Franchise Investment Law (MFIL), MCL 445.1501 et seq.) MSA 19.854(1) et seq. A different set of proofs is required for eaсh of the two causes. Moreover, the subject matter is different. As a consequence, res judicata does not bar plaintiffs’ claim for rescission. Van Pembrook, supra at 101.
Nor does plaintiffs’ failure to raise rescission as a counterclaim to the Pennsylvania complaint bar this action. The full faith and credit clause of the federal Constitution requires that judgments be given the same full faith and credit in every court within the United States as they have by law or usage in the courts оf such State from which they are taken. US Const, art IV, § 1. Its purpose is to prevent the litigation of issues in one state that have already been decided in another. Van Pembrook, supra at 104.
Were the issue before us the enforcement of the Pennsylvania judgment, we would conclude that the judgment must be enforced. Int’l Recovery Systems, Inc v Gabler (On Rehearing'),
We find that the full faith and credit clause in conjunction with res judicata does not preclude plaintiffs’ action for rescission. Plaintiffs’ rescission claim is grounded in Michigan’s franchise statute. Pennsylvania’s laws contain no analogous right. Therefore, because the Pennsylvania court did not apply Michigan law in deciding the breach of contract action, plaintiffs could not have raised Michigan’s statutory remedy of rescission. In effect, plaintiffs would have to forfeit the claim. The full faith and сredit clause does not compel such a result. See Van Pembrook, supra at 104-105.
The dissent argues that plaintiffs could have brought a fraud claim in Pennsylvania or attempted to change venue to Michigan. However, the issue before us today is not what could have been done differently in Pennsylvania, but rather, whether plaintiffs’ rescission claim is barred. The hypotheticals posed by the dissent are irrelevant to the issue before us.
Finally, we must determine whether Pennsylvania’s, rather than Michigan’s, franchise laws should be given effect out of comity.
We are hesitant to overrule Michigan law where the laws of another state would contravene Michigan’s public policy. The public policy of this state is fixed by its constitution, its statutes and the decisions of its courts. Van Pembrook, supra at 105.
The mfil has deemed that certain contractual provisions are void and unenforceable as between franchisors and franchisees. MCL 445.1508(1) and (3); MSA 19.854(8)(1) and (3). The provisions аre found in MCL 445.1527; MSA 19.854(27). Included is the requirement that, at least ten business days before executing a franchise agreement, the franchisor must notify the prospective franchisee of contractual provisions which the statute renders unenforceable.
Pennsylvania law contains no such requirement. If we were to apply Pennsylvania’s law in ruling on this Michigan case, we would effectively override Michigan’s law. The effect
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Alternatively, defendant argues that Pennsylvania law must be followed, because the franchise agreement stated that Pennsylvania law controlled the franchise agreement.
In a similar situation, the Michigan Supreme Court ruled that, when determining the applicable law, we are required to balance the expectations of the parties with the interests of the States. Chrysler Corp v Skyline Industrial Services, Inc,
Section 187(1) permits the application of the parties’ choice of law if the issue is one the parties could have resolved by an express contractual provision. However, there are two exceptions. The parties’ choice of law will not be followed if (1) the chosen state has no substantial relationship to the parties or the transaction, or (2) there is no reasonable basis for choosing that state’s law. Section 187(2)(a). Also, § 187(2)(b) bars the application of the chosen state’s law when it “would be contrary to the fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue, and which, under the rule of § 188, would be the state of the aрplicable law in the absence of an effective choice of law by the parties.”
Here, we find compelling evidence that, in this state, Michigan has a materially greater interest than Pennsylvania in applying its franchise laws. A fundamental policy may be embodied in a statute which (1) makes one or more kinds of contracts illegal or (2) which is designed to protect a person against the oppressive use of superior bargaining рower. Comment g to § 187 of the Restatement 2d, p 568. As gleaned from the mfil, Michigan’s notice requirements are designed to make certain contract provisions illegal and to protect potential franchisees from the superior bargaining power of franchisors.
Applying Pennsylvania, rather than Michigan, law would result in a substantial loss of protection provided by the mfil. As franchisors under Pennsylvania law do not have to provide the notice required by the MFIL, Pennsylvania’s franchise law violates the fundamental public policy of Michigan. Therefore, Michigan law, not Pennsylvania law, applies.
IV
Cottman asserts that, if Michigan law applies, plaintiffs’ claim for rescission is foreclosed by their own unclean hands and material breach of the franchise agreement. We find that no language in the statute suggests that the fact a franchisee’s hands are unclean is considered in deciding whether to allow rescission. Moreover, in Interstate Automatic Transmission Co, Inc v Harvey
The dissent relies on Stanton v Dachille
Even so, Cottman argues that there are genuine issues of material fact as to whether plaintiffs have established a claim for rescission, precluding summary disposition. Cottman argues that a factual question exists concerning whether this was a sale or the voluntary transfer of a franchise. The mfil provides an exemption from its notice requirements where “(t)here is an extension or renewal of an existing franchise or the exchange or substitution of a modified or amended franchise agreement where there is no interruptiоn in the operation of the franchise business of the franchisee, and no material change in the franchise relationship.” MCL 445.1506(l)(e); MSA 19.854(6)(l)(e).
Here, the evidence showed that the A-l franchise was terminated, and a new agreement was negotiated and signed. The identity of the franchisor changed. We find that no reasonable person could conclude that a material change did not occur in the relationship.
VI
Next, defendant argues that a mаterial question of fact existed as to whether plaintiffs waited unduly before seeking rescission. In Interstate, supra, we allowed rescission, even though two years had passed. We ruled that the franchisor was entitled to recover the fair value of benefits provided to the franchisee during the time the agreement was in place. In this case, we find that any delay on plaintiffs’ part in seeking rescission did not create a genuine issue of material fact.
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Finally, Cottmаn argues that a question of fact exists as to whether Cottman was returned to the status quo ante. Following the trial court’s grant of summary disposition for plaintiffs on the issue of rescission, it ordered that Cottman be returned to its existing state before the contract. At the August 14, 1992 hearing, the trial court directed the parties to submit proposed orders detailing the amounts owed to Cottman by plaintiffs, in order to properly effectuate the pre-contract status quo. Although orders were submitted, the final disposition of the issue is unclear. Therefore, we remand this matter to the trial court with the direction that it return Cottman to the status quo ante. Interstate Automatic Transmission Co, supra at 502-503.
Affirmed in part and remanded. We do not retain jurisdiction.
Notes
Dissenting Opinion
(dissenting). I respectfully dissent.
While the majority pays lip service to the fact that the Pennsylvania judgment is entitled to full faith and credit under the federal constitution, its holding deprives the Pennsylvania judgment of the full faith and credit to which it is entitled. Under the Full Faith and Credit Clause, Michigan courts are barred from considering matters previously determined in a court of another state. Jones v State Farm Mutual Automobile Ins Co,
After correctly recognizing that Michigan applies the doctrine of res judicata broadly, the majority declines to do so and holds that the Pennsylvania judgment is not entitled to res judicata effeсt with respect to plaintiffs’ rescission actions. The reason advanced for this by the majority is that the Pennsylvania lawsuit and the Michigan lawsuits involve different subject matters and different sets of proof. I disagree.
With regard to this distinction between the Pennsylvania action and the Michigan actions that the majority urges, it is well to recall that defendant’s five-count Pennsylvania complaint alleged: (1) fraud; (2) breach of contract — failure to deal fairly and hоnestly; (3) breach of contract — unauthorized advertising; (4) breach of contract — license fees owed; and (5) entitlement to attorney fees and collection expenses under the franchise contract.
Further, even if there were elements in the Michigan lawsuits that were not found in the Pennsylvania lawsuit’s pleadings, this would not prevent the finding of res judicata. The United States Supreme Court stated as follows in Federated Dep’t Stores, Inc v Moitie,
A final judgment on the merits of an action precludes the parties or their privies from relitigating issues that were or could have been raised in that action. Commissioner v Sunnen,333 US 591 , 597,68 S Ct 715 , 719,92 L Ed 898 (1948); Cromwell v County of Sac,94 US 351 , 352-353,24 L Ed 195 (1877). Nor are the res judicata consequences of a final, unappealed judgment on the merits altered by the fact that the judgment may have been wrong or rested on a legal principle subsequently overruled in another case. [Emphasis added.]
The question, then, becomes whether plaintiffs’ resсission claim could have been raised in the Pennsylvania action.
First, it must be noted that the parties’ contract contains a clause stating that Pennsylvania law would apply. While the MUL forbids forum selection clauses, it does nоt forbid choice of law clauses. Banek Inc v Yogurt Ventures USA, Inc,
Second, plaintiffs could have argued that defendant’s failure to provide notice that certain contract clauses were void and unenforceable under Michigаn law constituted fraud or a fraudulent misrepresentation under Pennsylvania law. See Cottman Transmission Systems, Inc v Melody,
In sum, on the basis of the Full Faith and Credit Clause of the federal constitution considered in conjunction with the doctrine of res judicata, I would reverse the trial court’s granting of rescission in plaintiffs’ favor and remand for entry of a judgment in defendant’s favor. I therefore believe it is not necessary to reach the other issues discussed by the majority. However, because the majority has discussed them, I offer the following additional comments.
The majority also states that the mfil gives a franchisee an unqualified right to rescission upon a franchisor’s violation of the mfil even if the franchisee has unclean hands or has materially breached the franchisee agreement. I disagree.
While the majority’s conclusion in this regard appears to be supported by some language in Interstate Automatic Transmission Co, Inc v Harvey,
The idea that rescission can be awarded to those with unclean hands, which is what the majority has decided, is a novel and disturbing notion, and the fact one panel of this Court may have implied as much, should not causе us to reach the same misbegotten conclusion again. Indeed, the majority’s conclusion is directly contrary to Kundel v Portz,
Moreover, the majority’s conclusion is not mandated by the language of the mfil. At issue here is the portion of the MFIL that states that a person who sells a franchise in violation of certain sections of the mfil is liable to the person purchasing the franchise for damages or rescission. MCL 445.1531(1); MSA 19.854(31)(1). The majority states that it can find no language in the statute suggesting that a franchisee’s unclean hands are a factor in deciding whether to grant rescission. While the statute does not expressly mention defenses, this is not only not unusual, but the reverse would be. Repeatedly in our statutes equitable remedies are referred to without recitation of allowable defenses. It is assumed, and always hаs been, that the statutes will be applied in accord with common-law understandings and case law explanations that those familiar with these terms of art are held to understand. Indeed, the majority itself proves the pervasiveness of this understanding by utilizing this approach when it requires the return to the status quo ante notwithstanding the fact that the statute omits any reference to such an equitable requisite. Under the majority’s logic, the statute’s omission of the need to return the parties to the status quo ante should foreclose such a requirement.
There is no good reason why the venerable rules regarding rescission should not apply here. As a general matter, a party may seek to rescind a contract, on the basis of fraud, mistake, or innocent misrepresentation. 5A Callaghan’s Civil Jurisprudence, Contracts, § 255, Right to Renounce or Rescind, pp 348-349. In order to warrant rescission, there must be a materiаl breach affecting a substantial or essential part of a contract. Holtzlander v Brownell,
I would hold that the Legislature’s statement that rescission may be had if a franchisor violates certain sections of the MFIL was intended (1) to inform the courts that failure to have the required language would be a suitable new reason for granting rescission in
Therefore, even if the Pennsylvania judgment was not entitled to full faith and credit and res judicata effect (which it is), I would find, on the basis of plaintiff’s unclean hands and material breach of the contract, that the trial court erred in granting rescission to plaintiffs.
I would reverse the orders of the trial court and remand for entry of summary dispositions in defendant’s favor and for consideration of defendant’s request for injunctive relief enforcing the post-termination provisions of the franchise contract.
Thus, the majority’s assertion that the issue is not what could have been done differently in Pennsylvania is patently erroneous.