Red Fit LLC v. Red Effect International Franchise LLC ( 2024 )

If this opinion indicates that it is “FOR PUBLICATION,” it is subject to
revision until final publication in the Michigan Appeals Reports.
STATE OF MICHIGAN
COURT OF APPEALS
RED FIT, LLC and CALI RED, LLC, UNPUBLISHED
May 30, 2024
Plaintiffs-Appellants,
v No. 363686
Oakland Circuit Court
RED EFFECT INTERNATIONAL FRANCHISE, LC No. 2021-186383-CB
LLC, RED EFFECT HOLDINGS, LLC, RED
EFFECT LA COUNTY, LLC, RED EFFECT
ORANGE COUNTY, LLC, ALLIE MALLAD,
CARLOS GUZMAN, ERICA MALLAD, ROBERT
VENDITTELLI, and CHELSIE BENDER,
Defendants-Appellees.
Before: FEENEY, P.J., and M. J. KELLY and RICK, JJ.
PER CURIAM.
Plaintiffs, Red Fit, LLC, and Cali Red, LLC, appeal as of right, challenging the trial court’s
final order of involuntary dismissal and many of the court’s earlier orders. We affirm in part,
reverse in part, and remand for further proceedings.
I. BACKGROUND
The underlying facts generally are not in dispute. Brothers Hayden Epstein and Joshua
Epstein are the members of plaintiffs Red Fit, LLC and Cali Red, LLC. On September 26, 2017,
Hayden and Joshua entered into agreements with defendant Red Effect International Franchise,
LLC.1 These agreements allowed the Epstein brothers to own and operate three separate franchise
locations in the San Diego area (the San Diego Franchise Agreements). That same day, the
1
The agreement was actually with Zifit International Franchise, LLC, but Zifit later changed its
name to Red Effect International Franchise, LLC. For ease of reference and consistency, we will
refer to any agreements made with Zifit as having been made with Red Effect International.
-1-
Epsteins executed with Red Effect International an Area Development Agreement (ADA) for the
San Diego County territory.2 The San Diego Franchise Agreements and the San Diego ADA all
contain the same arbitration provision, which provided:
17.1 Binding Arbitration
Except for actions described in Section 17.6, all controversies, disputes or
claims between: (i) Franchisor and/or its Affiliates and their respective owners,
officers, directors, members, managers, employees, agents or representatives; and
(ii) Franchisee, and/or its Affiliates and their respective owners, officers, directors,
members, managers, employees, agents or representative; arising out of or related
to (1) this Agreement or any other agreement between Franchisor and Franchisee
or any provision of such agreement; (2) Franchisor’s relationship with Franchisee;
or (3) the scope and validity of this Agreement or any other agreement between
Franchisee and Franchisor or any provisions or such agreements (including the
validity and scope of the arbitration obligations under this Article, which the parties
acknowledge is to be determined by an arbitrator and not a court); must be
submitted for binding arbitration in accordance with the provisions of this Article
17 on the demand of either party. . . .
Also on September 26, 2017, Hayden entered into three other franchise agreements to own
and operate three franchise locations in Illinois (the Illinois Franchise Agreements). Hayden also
executed a contemporaneous ADA associated with the Illinois locations.
The Epstein brothers wanted to acquire area development and franchise rights to Orange
County, California. At their request, Red Effect agreed to swap the Illinois ADA and Illinois
Franchise Agreements with area development and franchise rights to Orange County. As a result,
on July 10, 2018, Hayden signed a Franchise Termination Agreement terminating the Illinois
Franchise Agreements. On that same date, Red Fit and Red Effect International entered into ADAs
for Orange County and Los Angeles County and three franchise agreements for franchises to be
operated in each county. On May 30, 2019, Red Fit assigned its rights in the San Diego ADA to
plaintiff Cali Red.
Red Fit sold its rights to the Orange County ADA and its rights to the Los Angeles County
ADA to defendant Red Effect Orange County and defendant Red Effect LA County, respectively,
in repurchase agreements dated November 5, 2019. On November 12, 2019, Red Effect
International and Red Fit executed Franchise Termination and Mutual Release Agreements (the
2019 TRAs) for the Los Angeles County and Orange County ADAs. The TRAs contained a
release provision, in which both sides released the other side “from all liability, right, claim, debt
and cause of action whatsoever, known or unknown, suspected or unsuspected . . . arising under
or related to the [ADA] or any other agreement entered into between the parties on or before the
date of this Agreement.”
2
Hayden and Joshua later assigned their rights in the San Diego Franchise Agreements and the
San Diego ADA to their company, Red Fit, LLC.
-2-
Red Effect International and Red Fit then entered into three franchise agreements for
Orange County (the 2019 Orange County Franchise Agreements) and three franchise agreements
for Los Angeles County (the 2019 LA County Franchise Agreements). These agreements do not
contain arbitration provisions and instead state:
Franchisee and Franchisor have negotiated regarding a forum in which to
resolve any disputes which may arise between them and have agreed to select a
forum in order to promote stability in their relationship. Therefore, unless expressly
provided for otherwise in this Agreement, if a claim is asserted in any legal
proceeding involving Franchisee (or its owners, officers, directors, or Affiliates)
and Franchisor (or its officers, directors, members, Affiliates, or sales employees)
both parties agree that the exclusive jurisdiction for disputes between them shall be
the U.S. Federal Courts for the Eastern District of Michigan or the State Courts for
Oakland County, Michigan and each waive any objection either may have to the
personal jurisdiction of or venue in the State of Michigan.
A dispute arose regarding franchise royalties owed on the San Diego Franchise
Agreements. Red Effect International filed a demand for arbitration against plaintiffs, and Red Fit
objected, arguing that the matter was not subject to arbitration. Red Fit maintained that the 19
subsequent agreements it executed with Red Effect International provide that “any” claims are to
be resolved in Michigan court. The arbitrator ruled that the arbitration clauses in the San Diego
Franchise Agreements controlled because “each of the several agreements here is a discrete
agreement, and disputes arising under each agreement are to be resolved within the four corners
of the particular agreement involved, including their respective dispute resolution clauses.”
On February 12, 2021, plaintiffs filed the instant complaint in the Oakland Circuit Court,
alleging the following counts: Count I (breach of contract based on Red Effect International’s
arbitration demand), Count II (breach of contract based on the 2019 Repurchase Agreements),
Count III (violation of Michigan’s Franchise Investment Law (MFIL), MCL 445.1501 et seq.,
regarding the November 2019 Agreements), Count IV (violation of California’s Franchise
Investment Law (CFIL), Cal Corp Code 31000 et seq., regarding the November 2019 Agreements),
Count V (reformation of the Orange County and LA County Agreements), Count VI (violation of
the CFIL regarding the San Diego Agreements), Count VII (violation of the MFIL regarding the
San Diego Agreements), Count VIII (violation of the CFIL regarding the San Diego Agreements),
Count IX (violation of the MFIL as to the San Diego Agreements), Count X (violation of the CFIL
as to the San Diego Agreements), Count XI (violation of the MFIL as to the Orange County and
LA County Agreements), Count XII (discharge of the San Diego ADA and San Diego Franchise
Agreement by frustration of purpose), Count XIII (discharge of the San Diego ADA and San Diego
Franchise Agreements by impracticability), Count XIV (declaratory judgment—modification and
waiver of two of the San Diego Franchise Agreements), Count XV (breach of contract and
covenant of good faith and fair dealing regarding the San Diego ADA), Count XVI (unjust
enrichment), Count XVII (breach of contract and covenant of good faith and fair dealing regarding
the San Diego Franchise Agreements), and Count XVIII (breach of contract regarding the San
Diego ADA commissions.
In lieu of filing an answer, defendants moved for partial summary disposition under MCR
2.116(C)(7) and argued that all of the counts except for Count II were subject to mandatory
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arbitration or barred by release. Defendant alternatively argued that Counts III and IV failed to
state a claim for relief, warranting summary disposition under MCR 2.116(C)(8) on those counts.
In response, plaintiffs argued, among other things, that defendants ignored the 19 subsequent
agreements between Red Fit and Red Effect International that supersede the arbitration agreements
and that provide for resolution in the Oakland Circuit Court.
On June 11, 2021, the trial court entered an amended scheduling order that provided, in
pertinent part, that lists of witnesses and proposed exhibits were to be submitted to opposing
counsel and the court by December 15, 2021 and disclosure of expert witnesses were due by
November 30, 2021.
On August 26, 2021, the trial court granted in part and denied in part defendants’ motion.
The court ruled that because Counts I, VI-X, and XII-XVIII all related to the San Diego
Agreements, which were subject to binding arbitration, those claims should be dismissed in favor
of arbitration. The court rejected plaintiffs’ argument that the subsequent agreements superseded
the San Diego Agreements. The court noted that because the agreements were “separate and
distinct,” the earlier agreements were not superseded. The trial court also ruled that Counts V and
XI were barred because of release. To the extent that Counts III and IV, which sought rescission,
related to the 2019 ADA Repurchase Agreements and TRAs, those claims were barred by release.
But to the extent that Counts III and IV pertained to the 2019 Franchise Agreements, they were
not barred by release. The trial court denied defendants’ motion with respect to MCR 2.116(C)(8).3
Consequently, only Count II and certain aspects of Counts III and IV remained.
Defendants filed their expert-witness list on November 30, 2021, and their lay-witness and
proposed-exhibit list on December 15, 2021. Both filings stated that they were being made
pursuant to the court’s “Amended Scheduling Order Dated June 11, 2021.” Plaintiffs, as of those
dates, had not filed any witness or exhibit lists.
On January 31, 2022, defendants filed another motion for summary disposition. This
motion sought summary disposition under MCR 2.16(C)(8) and (10). Defendants argued that
under MCR 2.116(C)(8), the remaining Counts II, III, and IV against the individual defendants
should be dismissed because they are not individually liable and are not individual parties to the
contracts at issue. Defendants further argued that those counts should be dismissed in their entirety
under MCR 2.116(C)(10) because, with plaintiffs having failed to file witness lists, they were
unable to substantiate their claims.
On February 2, 2022, plaintiffs filed a motion to extend dates, stay proceedings, and stay
arbitration pending appeal.4 In the motion, plaintiffs’ counsel acknowledged that he “dropped the
3
Plaintiff filed with this Court an application for leave to appeal the trial court’s decision, which
this Court denied “for failure to persuade the Court of the need for immediate appellate review.”
Red Fit LLC v Red Effect Int’l Franchise LLC, unpublished order of the Court of Appeals, entered
February 10, 2022 (Docket No. 358561).
4
Defendant Red Effect International had filed a new arbitration case, alleging additional violations
of the San Diego Franchise Agreements.
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ball” by failing to recognize that the court had entered the June 11, 2021 scheduling order and
failing to file any witness list. Plaintiffs argued that judicial economy favored a stay and that
defendants would not be prejudiced if one were granted. Regarding this latter argument, plaintiffs
averred that “[d]efendants are not without fault” and have “unclean hands” because they failed to
file an answer.
The trial court denied plaintiffs’ motion. The court found that there was no good cause
asserted, that there were no unforeseen or exceptional circumstances present, and that the motion
did not comply with MCR 2.503(B)(2) or (3) because the motion failed to specify how many
adjournments have already been granted or how many adjournment requests have been made. The
court noted that “[s]elf-inflicted wounds do not void the Court’s scheduling order.” The court also
sanctioned plaintiffs because the section in their brief starting with “Defendants are not without
fault” was “completely devoid of factual and legal merit.” Plaintiffs were to pay defendants their
reasonable attorney fees and costs for having to respond to that argument.5
The day after the trial court entered its order denying plaintiffs’ motion to extend dates,
plaintiffs filed with the trial court their witness and exhibit lists. Plaintiffs also filed with the court
clerk notices of default against defendants. Defendants immediately filed a motion to strike and
for involuntary dismissal pursuant to MCR 2.504(B). Defendants sought to strike the notices of
default and the witness and expert lists. Defendants also argued that plaintiffs’ complaint should
be involuntarily dismissed because of plaintiffs’ failure to abide by two court orders: the June 11,
2021 scheduling order and the court’s recent order denying plaintiffs’ motion to extend dates.
The trial court issued an opinion and order granting in part and denying in part defendants’
motion. The court noted that because the underlying notices of default were never accepted for
filing, the issue regarding them was moot. The trial court granted defendants’ motion to strike
plaintiffs’ witness lists and ruled that meeting the deadline was entirely within plaintiffs’ control
and that negligence or carelessness does not constitute good cause. The court, however, denied
defendants’ request for involuntary dismissal under MCR 2.504(B), reasoning that any issues with
regard to the defaults were moot and the striking of the untimely witness lists was an appropriate
and proportional lesser remedy.
The remaining claims had proceeded to case evaluation. The case evaluation panel
unanimously determined that plaintiffs’ action (the remaining portions of Counts II, III, and IV)
was frivolous. Defendants accepted the award, while plaintiffs rejected it. Plaintiffs never sought
review of the frivolous determination. See MCR 2.403(N)(2) (allowing a party to have a court
review a case evaluation panel’s frivolous finding). Plaintiffs also never posted any bond. See
MCR 2.403(N)(3) (“[I]f a party’s claim or defense was found to be frivolous under subrule (K)(4),
that party shall post a cash or surety bond . . . .”). Defendants subsequently moved for the
dismissal of plaintiffs’ remaining claims with prejudice. Defendants argued that plaintiffs’ failure
to post the required bond required dismissal under MCR 2.403(N)(3)(c). 6 Plaintiffs asserted that
5
The parties later stipulated to an amount of reasonable attorney fees and costs.
6
MCR 2.403(N)(3)(c) provides:
-5-
the court rule pertaining to frivolous claims only applies to tort claims and that while Counts II,
III, and IV were submitted to case evaluation, none of the claims was a tort claim.
The trial court granted in part and denied in part defendants’ motion to dismiss. The court
noted that “[t]he lynchpin of the Motion is whether any of the Plaintiff’s [sic] various Counts
actually constitute torts.” The court ruled that Count II “obviously” is a breach-of-contract claim
and that because piercing the corporate veil is a theory of recovery and not a separate cause of
action, the motion was denied “with regard to those claims and the Defendants named therein.”
However, the trial court granted the motion with respect to Counts III and IV. The court ruled that
the claims against the individual defendants sounded in tort. The court also noted that the
Michigan Supreme Court has previously held that any civil wrong that is not based on contract
sounds in tort. The court therefore granted the motion “as to individual Defendants Allie Mallad
(“Mallad”), Carlos Guzman, Erica Mallad, Robert Vendittelli, and Chelsie Bender.”
On August 30, 2022, the trial court denied defendants’ January 31, 2022 motion for
summary disposition. The court acknowledged that because of the intervening partial grant of
defendants’ motion to dismiss, there was only a single count, Count II, that was up for
consideration. The court denied defendants’ motion because it concluded that defendants did not
adequately argue or cite any authority that there was no genuine issue of material fact for trial.
Trial on the remaining Count II commenced on October 11, 2022. In his opening statement,
counsel for plaintiffs reiterated his point from his trial brief that because defendants never filed an
answer to the complaint, the allegations in the complaint are deemed admitted. In defense
counsel’s opening statement, he moved for involuntary dismissal under MCR 2.504(B)(2),
maintaining that because plaintiffs were precluded from presenting any witnesses or exhibits, they
could not meet their burden to prove a prima facie case of breach of contract. With regard to
failing to file an answer, defense counsel averred that it was irrelevant because he received an
“indefinite extension” from plaintiffs in December 2021. Moreover, defense counsel argued that,
assuming the failure to file an answer had a consequence, that consequence would be liability, but
damages would still need to be proven, which plaintiffs could not do without any witnesses. The
trial court recognized that both sides argued that trial was not warranted for differing reasons. The
court took the matter under advisement and stated it would issue a written opinion.
The trial court issued an opinion and order on October 14, 2022. The court framed the
issues as follows:
In their Opening Statements, the parties, who disagree on just about everything,
agreed on one thing—the case should not go to trial. This tortuous journey presents
a couple of civil procedure questions that would be excellent for a final exam in
law school. What happens when a party never files an answer, but no default is
ever entered? Or what occurs when a party’s witness list is struck, can they still
If the bond is not posted as required by this rule, the court shall dismiss a
claim found to have been frivolous . . . . The action shall proceed to trial as to the
remaining claims and parties . . . .
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present witnesses at trial? This Opinion and Order unravels these and a few more
mysteries.
Regarding the first issue, the trial court ruled that defendants’ failure to file an answer
resulted in them admitting liability in connection with Count II. This was the case despite no
default having ever been entered. But the court ruled that this admission did not extend to “the
amount of damage or the nature of the relief demanded.”
Related to the second issue, the trial court held that plaintiffs’ failure to follow the
scheduling order did not constitute good cause to reopen discovery and adjourn trial. The court
also ruled that plaintiffs’ request to allow them to present witnesses is an untimely motion for
reconsideration of the court’s February 25, 2022 order and should be denied for that independent
reason. The court further ruled that, assuming the request was timely, plaintiffs abandoned the
argument by failing to address the pertinent factors from Dean v Tucker, 182 Mich App 27, 32-
33; 451 NW2d 571 (1990), and instead “cursorily declar[ing] that the Defendants knew who the
witnesses were and that to bar the Plaintiffs’ witnesses is too harsh a remedy equivalent to
dismissing the case.” Moreover, the trial court determined that assuming the issue was not
abandoned, after analyzing many facts, it would exercise its discretion to not allow plaintiffs to
present witnesses. Consequently, with plaintiffs unable to prove any damages, the trial court
dismissed the sole remaining Count II.
This appeal followed.
II. FIRST MOTION FOR SUMMARY DISPOSITION
Plaintiffs challenge the trial court’s grant of summary disposition under MCR 2.116(C)(7)
on the basis of an agreement to arbitrate and release. We find no error.
This Court reviews a trial court’s decision to grant or deny a motion for summary
disposition de novo. PNC Nat’l Bank Ass’n v Dep’t of Treasury, 285 Mich App 504, 505; 778
NW2d 282 (2009). Likewise, the proper interpretation of a contract and whether a particular issue
is subject to arbitration are issues that this Court reviews de novo. Altobelli v Hartmann, 499 Mich
284, 295; 884 NW2d 537 (2016).
“Under MCR 2.116(C)(7), summary disposition is appropriate if a claim is barred because
of ‘an agreement to arbitrate.’ Id. Summary disposition also is warranted under that subrule if a
claim is barred “because of release.” MCR 2.116(C)(7). “A movant under MCR 2.116(C)(7) is
not required to file supportive material, and the opposing party need not reply with supportive
material. Moreover, the contents of the complaint are accepted as true unless contradicted by
documentation submitted by the movant.” Fisher Sand & Gravel Co v Neal A Sweebe, Inc, 494
Mich 543, 553; 837 NW2d 244 (2013).
The trial court granted summary disposition in favor of defendants on plaintiffs’ Counts I,
VI-X, and XII-XVIII because those claims involved disputes related to the San Diego Agreements,
which contained arbitration clauses. There is no dispute that these counts pertained to the San
Diego Agreements and that those agreements contained arbitration clauses. Despite this clear
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language, plaintiffs maintain that the arbitration clauses were superseded by the parties’ later
agreements, which contain the following language:
Franchisee and Franchisor have negotiated regarding a forum in which to
resolve any disputes which may arise between them and have agreed to select a
forum in order to promote stability in their relationship. Therefore, unless expressly
provided for otherwise in this Agreement, if a claim is asserted in any legal
proceeding involving Franchisee (or its owners, officers, directors, or Affiliates)
and Franchisor (or its officers, directors, members, Affiliates, or sales employees)
both parties agree that the exclusive jurisdiction for disputes between them shall be
the U.S. Federal Courts for the Eastern District of Michigan or the State Courts for
Oakland County, Michigan and each waive any objection either may have to the
personal jurisdiction of or venue in the State of Michigan.
Plaintiffs contend that the fact that the parties unambiguously agreed to resolve “any” dispute in
the above manner indicates that this agreement superseded the prior agreement to arbitrate.
The Court’s primary task in construing contracts is to give effect to the intent of the parties
at the time they entered into the contract. Beck v Park West Galleries, Inc, 499 Mich 40, 45-46;
878 NW2d 804 (2016). In Beck, the plaintiffs purchased art from the defendant on multiple
occasions over the course of several years. Id. at 42. However, at one point, the parties’
agreements started to contain an arbitration clause; which provided that “[a]ny disputes or claims
of any kind” were to be resolved through arbitration. Id. at 43. Thus, while the earlier invoices
did not contain such an agreement, the later ones did. The Supreme Court unanimously ruled that
despite the broad language of the later arbitration agreement, it nonetheless did not apply to any
disputes related to the earlier contracts. Id. at 50-51. The Court noted that under Michigan law,
“separate contracts [are] to be treated separately.” Id. at 46. The Court ruled that there was no
basis to conclude that the parties had intended for the later arbitration clauses to apply retroactively.
Id. at 47. The Court relied on the fact that despite the broad language in the arbitration clause,
there was no reference to the previous transactions to suggest that the clause was to apply to those
transactions. Id. at 48.
The same rationale applies to this case. The earlier San Diego Agreements solely involve
franchise locations in the San Diego area. The other agreements addressed franchise locations in
other locations, including Orange County, California; Los Angeles County, California; and
Illinois. Because each contract is considered a “separate contract” and because there is no
indication that the parties contemplated that the forum clauses in the later contracts would apply
to disputes arising from the earlier San Diego contracts, the trial court did not err by concluding
that the arbitration provisions in the San Diego Agreements were not superseded. We therefore
affirm the grant of summary disposition under MCR 2.116(C)(7) to defendants on plaintiffs’
Counts I, VI-X, and XII-XVIII.
We next address the trial court’s grant of summary disposition with respect to the entirety
of Counts V and XI and partial aspects of Counts III and IV on account of release. Defendants’
motion was premised on the releases in the November 12, 2019 TRAs, which provided:
-8-
Area Developer and the affiliates, representatives, owners, employees,
officers, guarantors, agents and assigns of Area Developer (the “Area Developer
Parties”) hereby release and forever discharge Franchisor and its affiliates and the
representatives, owners, employees, officers, agents and assigns of Franchisor and
its affiliates (the “Franchisor Parties”) from all liability, right, claim, debt and cause
of action whatsoever, known or unknown, suspected or unsuspected, which the
Area Developer Parties ever had, now have or may have at any time based on,
arising under or relating to the Area Development Agreement or any other
agreement entered into between the parties on or before the date of this Agreement
or the relationship between the parties involving the Area Development Agreement
or any other agreement or any acts or omissions of the Franchisor Parties occurring
before the date of this Agreement: provided that, this release will not affect; (a) any
obligations of Franchisor Parties under this Agreement; and (b) any obligations of
the Franchisor Parties required to be performed after the date of this Agreement
under any other agreements between the parties.
In opposing defendants’ motion, plaintiffs did not contest that the scope of the above
release reached the claims at issue. Instead, plaintiffs contended that the TRAs containing the
releases were subject to rescission under Counts III and IV of the complaint, which would then
vitiate the release provisions. Count III alleged a violation of the MFIL and Count IV alleged a
violation of the CFIL. Both counts were premised on the allegation that each respective franchise
law was violated because defendants failed to provide a finance disclosure document before the
execution of the 2019 agreements, as required by those acts. Thus, the parties agree that the
resolution of this issue depends on the validity of Counts III and IV.
Count III alleges a violation of MCL 445.1508(1) of the MFIL, which provides:
A franchise shall not be sold in this state without first providing to the
prospective franchisee, at least 10 business days before the execution by the
prospective franchisee of any binding franchise or other agreement or at least 10
business days before the receipt of any consideration, whichever occurs first, a copy
of the disclosure statement described in [MCL 445.1508(2)], the notice described
in [MCL 445.1508(3)], and a copy of all proposed agreements relating to the sale
of the franchise.
And “[a] person who offers or sells a franchise in violation of [MCL 445.1505 or MCL 445.1508]
is liable to the person purchasing the franchise for damages or rescission.” MCL 445.1531(1).
The California law is similar and provides:
It is unlawful to sell any franchise in this state that is subject to registration
under this law without first providing to the prospective franchisee, at least 14 days
prior to the execution by the prospective franchisee of any binding franchise or
other agreement, or at least 14 days prior to the receipt of any consideration,
whichever occurs first, a copy of the franchise disclosure document, together with
a copy of all proposed agreements relating to the sale of the franchise. [Cal Corp
Code 31119(a).]
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And “[a]ny person who offers or sells a franchise in violation of [list of sections, including Section
31119] . . . shall be liable to the franchisee or subfranchisor, who may sue for damages caused
thereby, and if the violation is willful, the franchisee may also sue for rescission.” Cal Corp Code
31300.
While plaintiffs focus on the “or other agreement” language in MCL 445.1508(1) and Cal
Corp Code 31119(a), the relevant provisions are MCL 445.1531(1) and Cal Corp Code 31300
because those are the provisions that authorize the pertinent rescission remedies. And under those
provisions, rescission is only available when a “person who offers or sells a franchise” is in
violation of the disclosure requirement. MCL 445.1531(1); Cal Corp Code 31300.
The trial court correctly ruled that the 2019 TRAs did not involve the offer or sale of a
“franchise.” A “franchise” under the MCL 445.1502(3) of the MFIL is defined as follows:
[A] contract or agreement, either express or implied, whether oral or written,
between 2 or more persons to which all of the following apply:
(a) A franchisee is granted the right to engage in the business of offering,
selling, or distributing goods or services under a marketing plan or system
prescribed in substantial part by a franchisor.
(b) A franchisee is granted the right to engage in the business of offering,
selling, or distributing goods or services substantially associated with the
franchisor’s trademark, service mark, trade name, logotype, advertising, or other
commercial symbol designating the franchisor or its affiliate.
(c) the franchisee is required to pay, directly or indirectly, a franchise fee.
As the trial court recognized, this definition is substantially the same as California’s definition.
See Cal Corp Code 31005(a).
In the TRAs in this case, the parties agreed to terminate the Orange County and Los
Angeles County ADAs, dated July 10, 2018. There is nothing in the TRAs granting a franchisee
the right to engage in the business of offering, selling, or distributing goods or services. Instead,
the TRAs simply terminate the prior ADAs. Because the TRAs do not involve the offer or sale of
a “franchise,” the TRAs are not subject to rescission under the MFIL and CFIL, and their release
provisions are valid and enforceable. Consequently, any of plaintiffs’ causes of action asserting
claims that pre-dated November 12, 2019, are barred by release and were properly dismissed under
MCR 2.116(C)(7).
Because Counts V and XI pertain to such agreements, the trial court properly dismissed
those claims in their entirety. With regard to Counts III and IV, plaintiff sought rescission of the
ADA Repurchase Agreement, the ADA TRAs, and the November 22, 2019 Franchise Agreements.
Because only the November 22, 2019 Franchise Agreements did not pre-date the November 12,
2019 release, the court correctly denied the motion for summary disposition with respect to that
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aspect of plaintiffs’ claims, but properly granted the motion with respect to the other aspects that
pre-dated the November 12, 2019 release.7
Plaintiffs on appeal argue that the TRAs are “consideration” for the November 22, 2019
Franchise Agreements and therefore should be subject to rescission. We disagree. The TRAs state
that they constitute the entire agreement with respect to the matters covered in them. The stated
purpose of the TRAs is found in ¶ 1, which provides:
Franchisor and Area Develop are parties to an Area Development
Agreement dated July 10, 2018, as amended, for Orange County, California (the
“Area Development Agreement”). Area Developer has entered into an agreement
to sell its rights under the Area Development Agreement to a purchaser acceptable
to Franchisor (the “Purchaser”). Franchisor has waived its right of first refusal and
approved the transfer in accordance with Section 13.3 of the Area Development
Agreement. In accordance with Section 13.3 of the Area Development Agreement,
the Franchisor and Area Developer are terminating the Area Development
Agreement so that Franchisor may enter into a new area development agreement
with the Purchaser.
Section 13.3 of the ADAs that were being terminated provide, in pertinent part:
If Franchisor does not exercise its right of first refusal under Section 13.2,
Area Developer may only engage in the proposed Transfer if Franchisor consents
to the proposed Transfer. Before Franchisor consents to a proposed Transfer, the
conditions listed below, as well as any other reasonable conditions specified by
Franchisor, must be fulfilled. If these conditions are met, Franchisor will not
unreasonable withhold its consent to a proposed Transfer of the type permitted by
this Agreement.
Before Franchisor consents to a proposed Transfer, the following conditions
must be fulfilled:
* * *
(f) Area Developer must sign at the time of sale an agreement terminating
this Agreement (unless this Agreement will be assigned to the transferee . . .) and
must sign an agreement, in the form specified by Franchisor, releasing Franchisor
and its Affiliates, owners, officers, directors, employees and agents from any and
all claims and causes of action and agreeing to abide by the post-termination
restrictions contained in Articles 11 and 12 and all other obligations under this
Agreement that survive termination of this Agreement.
7
The trial court declined to address whether Counts VI-X were also subject to release because of
its earlier ruling that those claims were barred given they were subject to arbitration. We likewise
will not address those claims in the context of release.
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Therefore, it is clear that under § 13.3(f) of the ADAs, the signing of the TRAs was a
contractually required step for plaintiffs to sell their rights under the ADAs to another party. While
this step may have been a condition for them to go forward with a subsequent franchise purchase
agreement, it is not consideration for that completely separate contract. Notably, plaintiffs do not
point to any language in any contract to support their position. Moreover, our review of the
November 22, 2019 Franchise Agreements reveals that there is no express mention that executing
the TRAs is consideration. Instead, the consideration for the Franchise Agreements appears to be
that, in exchange for granting franchise rights in a protected area, the franchisee would be obligated
to pay many fees, including a percentage of its gross sales going forward. Critically, there is no
mention that part of the consideration the franchisee owed would be to have entered into a TRA
for any prior ADA. Therefore, plaintiffs’ position, that the TRAs are consideration and subject to
rescission just as the November 22, 2019 Franchise Agreements are, is not supported by the plain
language of the pertinent contracts.
III. ISSUES RELATED TO WITNESSES AND WITNESS LISTS
Plaintiffs argue that the trial court erred when it denied their motion to extend the deadline
for filing witness lists, struck their late-filed witness lists, and prohibited them from calling
witnesses. We disagree on all points.
We review a trial court’s decision on a motion to extend deadlines for an abuse of
discretion. See Decker v Trux R Us, Inc, 307 Mich App 472, 478; 861 NW2d 59 (2014) (stating
that court’s decision on a motion to extend discovery is reviewed for an abuse of discretion);
Grubor Enterprises, Inc v Kortidis, 201 Mich App 625, 628; 506 NW2d 614 (1993) (stating that
“[w]itness lists are an element of discovery”). We also review a trial court’s decision to strike a
witness list and a decision to bar witness testimony after a party has failed to timely submit a
witness list for an abuse of discretion. See EDI Holdings, LLC v Lear Corp, 469 Mich 1021(2004); Duray Dev, LLC v Perrin, 288 Mich App 143, 162; 792 NW2d 749 (2010); Linsell v
Applied Handling, Inc, 266 Mich App 1, 21; 697 NW2d 913 (2005). A court abuses its discretion
when it selects an outcome that falls outside the range of reasonable and principled outcomes.
Maldonado v Ford Motor Co, 476 Mich 372, 388; 719 NW2d 809 (2006).
The trial court’s decisions to deny plaintiffs’ motion to extend the deadline for filing
witness lists and to strike plaintiffs’ late-filed witness lists do not fall outside the range of
reasonable or principled outcomes. A trial court has the inherent authority to control its own
docket and internal affairs. Baynesan v Wayne State Univ, 316 Mich App 643, 651; 894 NW2d
102 (2016); see also Maldonado, 476 Mich at 376 (stating that courts have the vested power “to
manage their own affairs so as to achieve the orderly and expeditious disposition of cases”). As
our Supreme Court has noted, “The court rules provide for and encourage the use of scheduling
orders to promote the efficient processing of civil and criminal cases.” People v Groves, 455 Mich
439, 465; 566 NW2d 547 (1997). Indeed, decisions made for the enhancement of “docket control”
and the elimination of “unjustifiable expense and delay” are proper considerations of a trial court.
Id.; see also EDI Holdings, 469 Mich at 1021 (stating that a court does not abuse its discretion
when it enforces a summary-disposition scheduling order, even if doing so results in the movant
prevailing because the opposing party failed to timely file a response).
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We do not see how the trial court’s decisions were unprincipled. The court’s scheduling
order clearly provides deadlines for filing the witness lists. Plaintiffs’ counsel admittedly missed
it and did not provide any good explanation except for suggesting that he had transitioned to a new
legal assistant who failed to obtain the scheduling order from the electronic filing system.
Plaintiffs then went on to suggest that defendants bore some blame because, had they filed an
answer, “[p]laintiffs would have promptly discovered their error.” While defendants did fail to
file an answer, that does not provide a strong rationale for plaintiffs’ failure to recognize the
existence of the June 11 scheduling order. Indeed, plaintiffs argued that they were under the
erroneous impression that the court was withholding entering a scheduling order until plaintiffs’
application for leave to appeal in this Court was resolved. It is unclear to us how the filing of an
answer by defendants would have alerted plaintiffs to the existence of the June 11 order if they
truly thought the trial court was waiting to issue its order until after this Court resolved the appeal.
Furthermore, when defendants timely filed their expert-witness list on November 30, 2021, and
their lay-witness list on December 15, 2021, both lists referenced that they were being filed
pursuant to the trial court’s “Amended Scheduling Order Dated June 11, 2021.” Plaintiffs offered
no explanation for why they were not aware as of November 30, 2021, that there was a June 11,
2021 scheduling order.8 Although this notice may have been too late for plaintiffs to comply with
the November 30 deadline for expert witnesses, they could have at least complied with the lay-
witness list deadline. Instead, they did nothing and waited until defendants moved for summary
disposition on the remaining claims. Under these circumstances, the trial court’s decisions to deny
plaintiffs’ motion to extend the deadline dates and to strike the late-filed witness lists did not fall
outside the range of reasonable or principled outcomes.9
Plaintiffs next argue that the trial court erred when it disallowed them from calling any
witnesses because there was no timely filed witness list. “MCR 2.401(I)(1) provides that all parties
must file and serve witness lists within the time allotted by the trial court. MCR 2.401(I)(2)
provides that ‘[t]he trial court may order that any witness not listed in accordance with this rule
will be prohibited from testifying at trial except upon good cause shown.’ ” Duray Dev, 288 Mich
App at 162-163. As this Court explained in Duray Dev:
Once a party has failed to file a witness list in accordance with the
scheduling order, it is within the trial court’s discretion to impose sanctions against
that party. These sanctions may preclude the party from calling witnesses.
Disallowing a party to call witnesses can be a severe punishment, equivalent to a
dismissal. But that proposition does not mean that disallowing witnesses is always
tantamount to a dismissal. Nor does it mean that a trial court cannot impose such
a sanction even if it is the equivalent of dismissal. Because the decision is within
the trial court’s discretion, caselaw mandates that the trial court consider the
circumstances of each case to determine if such a drastic sanction is appropriate.
The record should reflect that the trial court gave careful consideration to the factors
8
Indeed, in the trial court, plaintiffs acknowledged that these lists “should have alerted [counsel]
to the overlooked Amended Scheduling Order dated June 11, 2021.”
9
Because the court’s decision is authorized though its inherent powers, whether the trial court
erroneously relied on MCR 2.503(B) or local administrative order 2004-6(D) is of no consequence.
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involved and considered all of its options in determining what sanction was just and
proper in the context of the case before it. [Id. at 164-165 (quotation marks,
citations, and brackets omitted).]
In Dean, 182 Mich App at 32-33, this Court provided the following nonexhaustive list of factors
a court should consider as relevant:
(1) whether the violation was willful or accidental; (2) the party’s history of
refusing to comply with discovery requests (or refusal to disclose witnesses); (3)
the prejudice to the defendant; (4) actual notice to the defendant of the witness and
the length of time prior to trial that the defendant received such actual notice; (5)
whether there exists a history of plaintiff’s engaging in deliberate delay; (6) the
degree of compliance by the plaintiff with other provisions of the court’s order; (7)
an attempt by the plaintiff to timely cure the defect and (8) whether a lesser sanction
would better serve the interests of justice. [Citations omitted.]
The trial court addressed these eight factors, plus five other ones it deemed relevant. On
appeal, plaintiffs do not directly address the trial court’s analysis of all of these factors. They only
address the first and third factors and then cursorily claim that “[e]ach of the remaining factors,
save for the ‘sanctionable conduct’ factor, discussed below, would have weighed in [plaintiffs’]
favor.” Arguably, by failing to fully address the trial court’s analysis, the issue could be deemed
abandoned. See Prince v MacDonald, 237 Mich App 186, 197; 602 NW2d 834 (1999).
Regardless, we will proceed with the pertinent analysis.
For Factor (1), the court found that the failure to timely file a witness list was “reckless”
with plaintiffs’ “indifference” being “obvious and palpable.” Aside from the issuance of the order
itself, the court noted that it discussed the deadline dates at the case management conference. The
court further recognized that plaintiffs had two separate notices—when defendants filed their
expert-witness list on November 30, 2021, and when defendants filed their lay-witness list on
December 15, 2021—that plaintiffs conceded should have alerted them to the fact that there was
a scheduling order. As the court found, “[t]here is no reasonable explanation of why all of these
opportunities were completely missed by the Plaintiffs.”
For the next factor, the court noted that it was unaware of any refusal to comply with
discovery requests.
For Factor (3), the trial court found that with no witness lists and only corporate defendants
remaining, there is “extreme prejudice” for them.10 The court rejected plaintiffs’ position that
defendants knew who was involved in the case and what their testimony would be. The trial court
noted that not knowing which witnesses plaintiffs intended to call until after discovery was closed
results in “tremendous” prejudice to defendants. Further, the court recognized that without
10
As discussed later, individual defendant Mallad should not have been dismissed under MCR
2.403(N)(3)(c) and should have been a defendant at trial as well. Regardless, the concept that a
defendant would have been prejudiced by the lack of a witness list applies to corporate and
individual defendants alike.
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knowing who plaintiffs intended to call, defendants’ trial strategy could be “completely
flummoxed.”
For Factor (4), the trial court recognized that plaintiffs provided some notice of the
witnesses they intended to call when they filed their late witness list and that some of those
witnesses were on defendants’ own witness list. But the notice was supplied after the close of
discovery. This seems to align with the analysis from Factor (3) above.
For Factor (5), which relates to whether plaintiffs had a history of engaging in “deliberate
delay,” the court found that although plaintiffs may not have engaged in deliberate delay, their
failure to timely file witness lists constituted “reckless indifference.”
Factor (6) addresses plaintiffs’ degree of compliance with other provisions of the court’s
order. The court noted that it was unaware of any additional noncompliance.
Factor (7) addresses whether plaintiffs attempted to timely cure the defect. The court found
that this factor was addressed in Factor (4), where it noted that plaintiffs had not attempted to
timely cure the defect because the attempt occurred after the close of discovery.
For Factor (8), addressing whether a lesser sanction would better serve the interests of
justice, the court noted that the only lesser sanction available would be to allow the untimely
witness list filing, reopen discovery, set a new deadline for motions for summary disposition, and
resubmitting the case to facilitation. The trial court found that this would “eviscerate the authority
of [the court] to control its docket.” Plaintiffs cite the trial court’s ruling but do not explain why
the court was incorrect at the time it made its ruling. Plaintiffs aver that at the time of the final
order, more than half of the one-year-and-nine-months’ delay is attributable to the trial court’s
orders. We find this fact to be irrelevant. As discussed later, plaintiffs’ primary argument seems
to be that the court should have considered these Dean factors at the time it struck plaintiffs’ late-
filed witness list.
In addition to the eight Dean factors, the trial court addressed several other factors it
deemed relevant, stating as follows:
(9) the age of the case. As noted, this case is 1 year and 9 months old. To
allow a lesser sanction would push this well beyond the normal limits of a case.
(10) sanctionable conduct. When the Plaintiffs first sought an
adjournment, they engaged in sanctionable conduct by speciously attempting to
push the blame on the Defendants for the self-inflicted wounds. They continue to
case blame on others, now including the Court Clerk and the Court (they are not
being sanctioned for such deflections).
(11) the number of witnesses. This is not a case in which the Plaintiffs are
asking to present one or two witnesses missed on a witness list. The Plaintiffs
demand that they present 7 witnesses, presumably over a series of days. This
substantially increased the prejudice to the Defendants.
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(12) the type of witnesses. The individual Defendants have been
dismissed. As such, the necessity of identifying who would testify in connection
with entity claims was even more vital.
(13) prior rulings on the merits. Although clearly the Plaintiffs would
have otherwise been entitled to a trial on Count II and perhaps prevailed (all things
being even), 17 of the 18 counts have been dismissed, as have all the individual
Defendants. The entire case was found to be frivolous and the tort claims were
dismissed because of the failure to post a bond.
The court concluded, “Considering the totality of the factors (even excluding factor 13), as well as
the jurisprudence cited above, prohibiting the Plaintiffs from calling witnesses is warranted.”
Plaintiffs challenge the trial court’s findings related to Factors (1) and (3). Plaintiffs
contend that their “prompt action in response to discovering that the deadline for filing witness
lists had passed” demonstrates that there was no reckless indifference. Plaintiffs focus on what
they did after learning that there was a witness-list deadline, however. Their argument does not
address why it took them so long to finally realize that there was a scheduling order with deadlines.
It is this aspect that the court categorized as a reckless indifference. The trial court did not clearly
err. Plaintiffs also contend that defendants would not have been prejudiced because they knew,
from plaintiffs’ late-filed witness lists, who plaintiffs intended to call. Unfortunately, this does not
address the bigger problem—the disclosure came after discovery had closed, meaning that
defendants did not know what plaintiffs’ witnesses would say, which obviously prejudices
defendants. To alleviate this, the trial court noted that the only available remedy would be to afford
more discovery and adjourn the matter a significant amount of time. The court decided this was
too much to ask, given how long the case had been pending at that time (almost two years). The
trial court’s decision is reasonable and principled.
We also note that plaintiffs do not directly address the trial court’s October 2022 analysis
precluding them from calling witnesses at trial. Related to this point, plaintiff primarily argues
that the trial court’s main error was not analyzing the Dean factors at the time it struck plaintiffs’
late witness list in February 2022. We disagree with this argument. The Dean factors are
considered when deciding on a sanction, such as dismissal, for failing to timely file a witness list,
not as a consideration for accepting a late-filed witness list. See Duray Dev, 288 Mich App at 164;
Vicencio v Ramirez, 211 Mich App 501, 507; 536 NW2d 280 (1995) (“This Court has summarized
some of the factors that a court should consider before imposing the sanction of dismissal[.]”),
citing Dean, 182 Mich App at 32-33; Dean, 182 Mich App at 32 (describing the factors as ones
that “should be considered in determining the appropriate sanction”). In other words, the trial
court’s decision to not accept the late-filed witness list was not a sanction for their failure to timely
file a witness list; it was a decision to adhere to the court’s scheduling order. The sanction is not
allowing the witnesses to be called, which was only raised and decided at trial.
IV. SANCTIONS
Plaintiffs next argue that the trial court erred when it sanctioned them for casting blame on
defendants for plaintiffs’ failure to realize the existence of the June 11, 2021 scheduling order.
When a trial court’s decision to sanction a litigant is premised on a finding of frivolousness, such
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a decision is reviewed for clear error. See Kitchen v Kitchen, 465 Mich 654, 661; 641 NW2d 245(2002). “A decision is clearly erroneous where, although there is evidence to support it, the
reviewing court is left with a definite and firm conviction that a mistake has been made.” Id. at
661-662.
The trial court stated that it was sanctioning plaintiffs for the reasons articulated by
defendants. Defendants sought sanctions under MCR 1.109(E), which provides, in pertinent part:
(5) Effect of Signature. The signature of a person filing a document,
whether or not represented by an attorney, constitutes a certification by the signer
that:
(a) he or she has read the document;
(b) to the best of his or her knowledge, information, and belief formed after
reasonable inquiry, the document is well grounded in fact and is warranted by
existing law or a good-faith argument for the extension, modification, or reversal
of existing law; and
(c) the document is not interposed for any improper purpose, such as to
harass or to cause unnecessary delay or needless increase in the cost of litigation.
(6) Sanctions for Violation. If a document is signed in violation of this rule,
the court, on the motion of a party or on its own initiative, shall impose upon the
person who signed it, a represented party, or both, an appropriate sanction, which
may include an order to pay to the other party or parties the amount of the
reasonable expenses incurred because of the filing of the document, including
reasonable attorney fees. The court may not assess punitive damages.
Thus, under MCR 1.109(E)(6), sanctions are appropriate when, among other things, the party had
no reasonable basis to believe that the facts underlying the party’s legal position were true or the
party’s legal position was devoid of arguable legal merit. See also Ford Motor Co v Dep’t of
Treasury, 313 Mich App 572, 589; 884 NW2d 587 (2015).
The portion of plaintiffs’ brief that the trial court found sanctionable started with the
sentence, “Defendants are not without fault.” Plaintiffs went on to aver that defendants were
partially at “fault” because they failed to file an answer to the complaint. Although this statement
is located in a section of plaintiffs’ brief titled “Defendants Will Not Be Prejudiced by a Stay,” the
broad assertion goes beyond that particular concept of prejudice to imply that defendants shared
some “fault” for plaintiffs’ failure to not file their witness lists. Regardless of what defendants did
or did not do, it is a complete stretch to label their action or inaction as “fault” in the context of
plaintiffs not recognizing the existence of the June 11, 2021 scheduling order. Indeed, had
defendants filed an answer, it is not evident why or how that event would have alerted plaintiffs to
the existence of the June 11 order. This lack of causation or fault is even more evident because
plaintiffs also claimed that they were under the impression that there was no scheduling order
because one would be forthcoming only after their interlocutory appeal to this Court was resolved.
Whether an answer was filed would not have changed that erroneous view.
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Plaintiffs in this same section of their trial court brief also averred that defendants had
“unclean hands,” which prevented them from claiming any prejudice.
It is well settled that one who seeks equitable relief must do so with clean hands.
The unclean-hands doctrine is a self-imposed ordinance that closes the doors of a
court of equity to one tainted with inequitableness or bad faith relative to the matter
in which he seeks relief, however improper may have been the behavior of the
opposing party, and is only relevant to equitable actions or defenses. [Varela v
Spanski, 329 Mich App 58, 83; 941 NW2d 60 (2019) (quotation marks, citations,
and brackets omitted).]
On appeal, plaintiffs seem to acknowledge that the unclean-hands doctrine in the context
of their motion in the lower court is inapplicable. Instead, they state on appeal that they were not
invoking the formal doctrine but instead using the term “in [a] rushed fashion (having just
discovered the witness list deadline issue)” to show that defendants also were not following the
court rules. A trial court is not a mind-reader and would have had no way to know that despite
citing “unclean hands,” plaintiffs were not actually invoking the unclean-hands doctrine. A court
should be allowed to presume that an attorney means what he says, and in this instance, plaintiffs’
counsel cited the legal doctrine of unclean hands. See Robinson v Peake, 21 Vet App 545, 554
(2008) (stating that it is proper to presume that an experienced attorney “says what he means and
means what he says” and that “[w]here an attorney uses terms of art that make sense in the context
used, the [court] may reasonably conclude that there is no ambiguity to be resolved”), aff’d 557
F3d 1355 (CA Fed, 2009).
Accordingly, considering the circumstances, we are not left with a definite and firm
conviction that the trial court made a mistake when it sanctioned plaintiffs for violating MCR
1.109(E).
V. DISMISSAL UNDER MCR 2.403(N)(3)(c)
Plaintiffs argue that the trial court erred when it granted defendants’ motion to dismiss with
respect to Counts III and IV. We need not address this issue in light of our conclusion that the trial
court did not err in preluding plaintiffs from calling any witnesses. See Grubor Enterprises v
Kortidis, 201 Mich App 625, 629; 506 NW2d 614 (1993) (where a witness list is stricten or barred,
the trial court may in its discretion allow individual named parties to testify, but not individuals
representing institutional parties).
Without being able to present evidence, plaintiffs cannot prove damages, a necessary
element. See Van Buren Twp v Visteon Corp, 319 Mich App 538, 550; 904 NW2d 192 (2017).
Thus, even assuming that the trial court erred in dismissing some (or even all) of the claims,
plaintiffs inability to prove damages would necessarily result in a judgment for defendants. 11
11
In theory, plaintiffs might be entitled to a judgment in their favor on liability in light of
defendants’ failure to file an answer, but with a damage award of zero. It would, however, be a
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VI. CONCLUSION
Affirmed. Defendants may tax costs.
/s/ Kathleen A. Feeney
/s/ Michael J. Kelly
/s/ Michelle M. Rick
waste of judicial resources to empanel a jury merely to then require it to return a damage award of
zero.
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