MARTINO v COTTMAN TRANSMISSION SYSTEMS, INC; METRO DISTRIBUTING, INC v COTTMAN TRANSMISSION SYSTEMS, INC
Docket Nos. 167208, 170567
Michigan Court of Appeals
July 30, 1996
218 MICH APP 54
Submitted May 17, 1996. Decided July 30, 1996, at 9:10 A.M.
The Court of Appeals held:
1. A default judgment entered against franchisor Martino in an action in Pennsylvania by Cottman for breach of the franchise agreement is not entitled to full faith and credit and has no res judicata effect on Martino‘s action in Michigan against Cottman. Res judicata does not bar the Michigan action because that action and the prior Pennsylvania action involve different subject matter and require different sets of proof. The Pennsylvania judgment is not entitled to full faith and credit because to give it preclusive effect would be to contravene the public policy of Michigan with respect to the disclosures required by § 8(3) of the Franchise Investment Law.
2. A balancing of the parties’ expectations and the interests of Michigan and Pennsylvania indicates that it would be contrary to the fundamental policy of Michigan, as reflеcted by the protections provided to franchisees by the Franchise Investment Law, to give effect to the parties’ choice of Pennsylvania law as the law applicable to the franchise agreements.
4. There were no genuine issues of material fаct that could have been made the grant of partial summary disposition improper.
5. Remand is required for a determination whether Cottman was returned to the status quo ante as ordered by the trial court in granting rescission of the franchise agreements.
Affirmed in part and remanded.
TAYLOR, P.J., dissenting, stated that the Pennsylvania judgment is entitled to full faith and credit and res judicata effect because the Pennsylvania action and the Michigan action both involved the same subject matter, i.e., the validity and enforceability of the franchise agreements, and that the franchisees’ rescission claims are barred by unclean hands because a franchisor can raise unclean hands as a defense to a franchisee‘s claim of rescission under the Franchise Investment Law.
- CONFLICT OF LAWS — CHOICE OF LAW.
The choice made by parties to a contract with respect to which state‘s law is to govern the contract will not be followed if the chosen state has no substantial relationship to the parties or the transaction, there is no reasonable basis for choosing that state‘s law, or the application of the chosen state‘s law would be contrary to the fundamental policy of a state that has a materially greater interest than the chosen state in the determination of the particular issue.
- FRANCHISES — FRANCHISE INVESTMENT LAW — FRANCHISEES’ RIGHT OF RESCISSION.
The Franchise Investment Law affords a franchisee the right to rescind a franchise agreement upon a franchisor‘s violation of the statute, regardless of whether the franchisee had unclean hands (
MCL 445.1531[1] ; MSA 19.854[31][1]).
Rosati Associates, P.C. (by A. D. Rosati), for the plaintiffs.
Dykema Gossett (by Fred L. Woodworth and Thomas M. Pastore), for the defendant.
MARILYN KELLY, J. Defеndant 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
I
Cottman is a Pennsylvania corporation which licenses automotive transmission service centers in various states. Due to financial problems, Cottman and A-1 Transmissions entered into an agreement where Cottman would offer existing A-1 franchisees the opportunity to convert to Cottman Transmission franchises. The converted franchises would operate as A-1/Cottman Transmission Centers. Cottman also agreed to manage all franchise services on behalf of A-1 for franchisees who opted not to convert. Upon signing the agreement with A-1 Transmissions, Cottman held meetings with the A-1 franchisees. Cottman
*In December, 1991, Cottman allegedly discovered that Martino was underreporting his gross sales and defrauding Cottman of licensing and advertising fees. On Marсh 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. He 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
In this case, the trial court granted Martino‘s motion for summary disposition, holding Cottman failed to comply with
II
We review a trial court‘s grant of summary disposition de novo examining the record to determine whether the prevailing party was entitled to judgment as a matter of law. G&A Inc v Nahra, 204 Mich App 329, 330; 514 NW2d 255 (1994).
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,
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),
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 of such State from which they are taken.
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), 210 Mich App 422, 424; 527 NW2d 20 (1995). However, the issue before us today, notwithstanding the Pennsylvania judgment, is whether plaintiffs are nevertheless entitled to rescission.
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 differеntly 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 vоid and unenforceable as between franchisors and franchisees.
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 would be to abrogate plaintiffs’ right to rescind. We find that Pennsylvania law should not be given preclusive effect where it would nullify the law of this state as expressed in the MFIL.
III
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, 448 Mich 113, 125; 528 NW2d 698 (1995). In doing so, the Court adopted, as guidelines, §§ 187 and 188 of the Second Restatement of Conflicts.
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 inter-
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 power. 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 wоuld 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 arе unclean is considered in deciding whether to allow rescission. Moreover, in Interstate Automatic Trans-
The dissent relies on Stanton v Dachille2 for the propositiоn that “absent express legislative instruction to the contrary, a trial court should not grant rescission unless the party requesting it is blameless.” However, Stanton does not stand for that proposition. Stanton involves a generic contract case. It does not mention the absence of legislative instruction. It does not involve a situation, such as is present here, where rescission is a remedy afforded by statute.
V
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 interruption in the operation of the franchise busi-
Here, the evidence showed that the A-1 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 material 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 bеnefits 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.
VII
Finally, Cottman 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 propоsed 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.
Affirmed in part and remanded. We do not retain jurisdiction.
J. R. COOPER, J., concurred.
TAYLOR, P.J. (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 judgmеnt 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, 202 Mich App 393, 406; 509 NW2d 829 (1993). This constitutional provision also requires Michigan courts to give res judicata effect to the judgments of the court of the other state. Id.
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 effect 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;
It is apparent these Pennsylvania claims are founded upon the validity, and alleged breach, of the parties’ franchise contract. Plaintiffs’ Michigan lawsuits were premised on a claim that the franchise contract was invalid for failure to include certain statutorily required warnings, and they sought rescission as allowed by the Michigan Franchise Investment Law (MFIL)
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
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 judgmеnt 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’ rescission claim could have been raised in the Pennsylvania action.1 The majority argues that plaintiffs could not have raised their rescission claim in the Pennsylvania action because the rescission claim is grounded in Michigan‘s franchise statute and Pennsylvania has no analogous provision.
First, it must be noted that the parties’ сontract contains a clause stating that Pennsylvania law would apply. While the MFIL forbids forum selection clauses, it does not forbid choice of law clauses. Banek Inc v Yogurt Ventures USA, Inc, 6 F3d 357, 360 (CA 6, 1993). Thus, it is argued that plaintiffs forfeited their Michigan statutory remedy of rescission when they signed their franchise agreements. This is true, of course, unless application of the foreign state‘s law will violate some fundamental Michigan public policy. Banek, supra; JRT, Inc v TCBY Systems, Inc, 52 F3d 734, 739 (CA 8, 1995). We need not, however, grapple
Second, plaintiffs could have argued that defendant‘s failure to provide notice that certain contract clauses were void and unenforceable under Michigan law constituted fraud or a fraudulent misrepresentation under Pennsylvania law. See Cottman Transmission Systems, Inc v Melody, 869 F Supp 1180 (ED Pa, 1994), where a judge compared a franchisee‘s rights under the California franchise statutes and under Pennsylvania law and concluded application of Pennsylvania law did not cause a substantial erosion of the protections provided by the California franchise statutes because the protections and remedies provided under Pennsylvania law were substantially the same. Further, plaintiffs could have brought a motion to change venue to Michigan under the doctrine of forum non conveniens with relation to the Pennsylvania action. Such a motion is recognized in Pennsylvania. See
In sum, on the basis of the Full Faith and Credit Clause of the federal constitution considered in con-
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 regаrd appears to be supported by some language in Interstate Automatic Transmission Co, Inc v Harvey, 134 Mich App 498; 350 NW2d 907 (1984), I would not follow this part of the Interstate Automatic case because it is not clear that the issue of equitable defenses was raised by the parties or focused upon by the Court. Further, even if I were to assume the case so held, I would not follow it because it would represent bad law that we are not bound to follow as precedent. Administrative Order No. 1996-4.
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 cause us to reach the same misbegotten conclusion again. Indeed, the majority‘s conclusion is directly contrary to Kundel v Portz, 301 Mich 195, 210; 3 NW2d 61 (1942), which unremarkably stated that “rescission, whether legal or equitable, is governed by equitable principles.”
There is no good reason why the venerable rules regarding rescission should nоt 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 material breach affecting a substantial or essential
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 addition to the previously recognized standards of fraud, mistake, and innocent misrepresentation and (2) to cut short any claim that omission of these terms was not a material breach affecting a substantial or essential part of the contract. In no event, however, did the Legislature mean to foreclose recognized defenses to a rescission request. Inclusion of the term “rescission” in the statute does not grant a franchisee an absolute right to rescission without consideration of the franchisee‘s conduct. As in all equitable matters, a trial court should not grant rescission unless the party requesting it is blameless. Stanton v Dachille, 186 Mich App 247, 260; 463 NW2d 479 (1990). A party that has breached a contract (as the trial court found Martino had in the case at bar) is not entitled to rescission. Id. Further, to put an even finer point upon this issue in the context of this case, rescission is not available to a party that has failed to make payments required by a contract. Miller v Smith, 276 Mich 372, 375; 267 NW 862 (1936). If the Legislature wished to foreclosе equitable defenses, it could have stated as much in the MFIL.
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 con-
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.