Opinion
No. 00-CV-73104-DT
September 27, 2001
OPINION AND ORDER DENYING DEFENDANTS' MOTION FOR PARTIAL SUMMARY JUDGMENT
I. INTRODUCTION
This breach of contract/trademark infringement action is presently before the Court on Defendants' Motion for Partial Summary Judgment on Count III of Plaintiffs Complaint — Plaintiffs claim for specific performance. Plaintiff has responded to Defendants' Motion to which response Plaintiff has replied. Having reviewed and considered the parties briefs and supporting documents, and having heard the oral arguments of counsel at the hearing held on August 16, 2001, the Court is now prepared to rule on this matter. This Opinion and Order sets forth the Court's ruling.
II. PERTINENT FACTS
Plaintiff Victory Lane Quick Oil Change ("Victory Lane") is in the business of operating and licensing persons to operate retail outlets that specialize in the promotion and sale of oil change services. On June 30, 1989, Victory Lane and Defendant John Hoss, Jr. entered into a Franchise Agreement pursuant to which John Hoss, Jr. was granted the exclusive right to own and operate a Victory Lane Quick Oil Change Center and a license to use Victory Lane's trademarks and service marks at an oil change center located on Pontiac Trail in South Lyon, Michigan. The term of the Franchise Agreement was for a period often years commencing on the date Victory Lane "approve[d] [the South Lyon] location as being ready for business." Although John Hoss, Jr. did not recall the specific date of Victory Lane's approval, the City of South Lyon gave its approval on June 29, 1990 and Defendant Hoss testified that the center opened for business on July 2, 1990. [John Hoss, Jr. Deposition, p. 17, Defendants' Ex. 2.] Therefore, the Franchise Agreement expired at the earliest on June 29, 2000.
It appears that prior to this litigation, Defendants believed that the Franchise Agreement expired on June 30, 1999 (i.e., ten years after the date of execution of the Franchise Agreement) not June 29, 2000 (ten years after the center was approved s ready for business). [See Defendants' Ex. 4, February 16, 2000 letter to Derrick Oxender, President of Victory Lane from Defendants' counsel, Michael Malley ("Please be advised that John Hoss . . . will not be renewing his former Victory Lane . . . Franchise Agreement which expired last year over six months ago on June 30, 1999.")] Although it is not entirely clear, it appears that Plaintiff also may have treated the Agreement as expiring on June 30, 1999. [ See Ex. 3, July 12, 1999 letter to Mr. Hoss from Walter Robertson, Controller of Victory Lane enclosing a new Franchise Agreement for Defendant Hoss to sign to renew his franchise and asking that, once signed, the new Agreement be returned to Victory Lane along with a $1,000.00 renewal fee.]
The Franchise Agreement called for Hoss's payment of an Operating Fee of six percent of the Gross Weekly Sales of the Center. The Agreement further contained the following provisions regarding Victory Lane's rights to repurchase the center or its assets:
18.7 Right of First Refusal of Franchisor. If You or Your Owners propose to sell the Center (or its assets) or, if You are a corporation or partnership, any ownership interest in the corporation or partnership[,] and a bona fide, executed written offer to purchase one or more of these interests is received, You are obligated to deliver a copy of the bona fide offer to Us along with all documents to be executed in connection with the proposed transfer. We will, for a period of thirty (30) days from the date of delivery of this offer to Us, have the right, exercisable by written notice to You, to purchase the Center (or its assets) or such ownership interest for the price and on the terms and conditions contained in the offer. . . . If We do not exercise this right of first refusal, the offer may be accepted by You or the person receiving the offer, subject to Our prior written approval as provided in this Agreement. If the offer is not accepted within sixty (60) days, We will again have the right of first refusal to purchase the Center as described above. This paragraph will not apply to transfers made in accordance with Paragraph 18.3 of this Agreement.
Paragraph 18.3 provides as follows:
18.3 Transfer to Business Entity. For convenience of ownership of the Center, we will allow You to transfer Your interest in this Agreement to a corporation or partnership which is and will continue to be actively managed by You and in which Your ownership interest and right to control exceeds 50%, provided:
(a) You are not then in default under this Agreement or any other Agreement with Us;
(b) the corporation or partnership will conduct no business except the operation of the Center or other related activities authorized by this Agreement;
(c) all shareholders, partners and other investors meet Our requirements as We may from time to time establish and also agree to personally guarantee the performance of the corporation or partnership under this Agreement and to be bound by the terms of this Agreement in a manner prescribed by Us.
These requirements of You, the corporation, and the partnership shall continue throughout the term of this Agreement. The documents organizing, authorizing and empowering the corporation or partnership to do business pursuant to this Agreement, and all evidences of ownership to or an interest in, the corporation or partnership shall contain a legend reciting that transfer is restricted by this Agreement and subject to Our prior rights. You shall provide Us with the documents concerning the formation and existence of the partnership or corporation, the stock certificates and other certificates of ownership, and the documents to be executed in connection with the transfer and We shall have the right to approve or disapprove the transfer conditioned upon Your compliance with the requirements of this Agreement.
19.OPTION TO PURCHASE CENTER
19.1 Option. Upon the termination or expiration of this Agreement, We shall have an exclusive option, but not the obligation, exercisable for thirty (30) days to purchase the assets of the Center. For purposes of this paragraph, the term "assets" shall mean the equipment, inventory, leasehold interests and improvements and favorable rights and covenants of the Center.
19.2 Option Price. The purchase price for the assets shall be the net book value of those assets which are listed on Your books and records or the fair market value of those items, whichever is less, than the fair market value of intangibles and other assets not listed on Your books and records, all of which shall be reduced in value by the liabilities described in this paragraph 19. The purchase price shall be allocated in a manner prescribed by Us. We shall not be obligated to pay any amount for goodwill, nor shall We be obligated to pay any charges for labor or services performed by You or Your family members in connection with the development of the Center . . . .
19.5 Realty. In the event You own the realty on which the Center is located, We will also have the option to purchase the real estate for a period of thirty (30) days following expiration or termination of this Agreement. The purchase price shall be fair market value. . . . If We do not elect to purchase the real property, We or Our designee will have the option to enter into a tease for a term of ten (10) years with an option by the lessee to extend the term of the lease for an additional term of five (5) years . . . .
[Exhibit 1, pp. 24-27.]
An Addendum was also appended to the Victory Lane Franchise Agreement pursuant to the Michigan Franchise Investment Law, M.C.L. § 445.1501 et seq. (the "MFIL Notice"), which provided in pertinent part:
THE STATE OF MICHIGAN PROHIBITS CERTAIN UNFAIR PROVISIONS THAT ARE SOMETIMES IN FRANCHISE DOCUMENTS. IF ANY OF THE FOLLOWING ARE IN THESE FRANCHISE DOCUMENTS, THE PROVISIONS ARE VOID AND CANNOT BE ENFORCED AGAINST YOU.
Each of the following provisions is void and unenforceable if contained in any documents relating to a franchise:
(h) A provision that requires the franchisee to resell to the franchisor items that are not uniquely identified with the franchisor. This subdivision does not prohibit a provision that grants to a franchisor a right of first refusal to purchase the assets of a franchise on the same terms and conditions as a bona fide third party willing and able to purchase those assets, nor does this subdivision prohibit a provision that grants the franchisor the right to acquire the assets of a franchise for the market or appraised value of such assets if the franchisee has breached the lawful provisions of the franchise agreement and has failed to cure the breach in the manner provided in subdivision (c) [i.e., after being given notice of breach, franchisee is afforded a "reasonable opportunity" (up to 30 days) to cure.]
[ See Defendants' Reply Brief Ex. 1. See also, M..C.L. §§ 445.1503(u) and 445.1527(h).]
After operating the South Lyon Victory Lane franchise business for 1 11/2 years, on February 16, 2000, Mr. Hoss, through counsel, notified Victory Lane in writing that he had decided to retire from the quick oil change business and, therefore, would not be renewing his Franchise Agreement. [See Defendants' Ex. 4.] On February 22, 2000, Derrick Oxender, the President of Victory Lane, wrote back to Mr. Hoss acknowledging receipt of his attorney's February 16 letter regarding his intent to retire and notified Hoss of the franchisor's intent to exercise its option to purchase the assets of the business. [ See Defendants' Ex. 5, letter to John Hoss from Derrick Oxender, President of Victory Lane.] Mr. Oxender's letter to Mr. Hoss stated as follows:
Dear Mr. Hoss,
We acknowledge receipt of your attorney's letter informing us that you intend to retire from the quick oil change business.
Pursuant to paragraph 19 Option to Purchase Center of the Standard Franchise Agreement, We have an exclusive option to purchase the assets (that is to say, the equipment, inventory, leasehold interests, improvements and favorable contract rights) of the Center. This letter is to notify you that pursuant to paragraph 19 of the Standard Franchise Agreement, Victory Lane Quick Oil Change, Inc. exercises its option to purchase the assets of the Victory Lane Quick Oil Change Center identified above.
In addition, We understand you also own the realty where the Center is located and pursuant to paragraph 19.5 of the Standard Franchise Agreement, we have the option to purchase the realty on which the center is located. This letter is to notify you that pursuant to paragraph 19.5 of the Standard Franchise Agreement, Victory Lane Quick Oil Change, Inc. 5, exercises its option to purchase the realty on which the center is located.
The purchase price of those assets which are listed on the Franchisee's books shall be the net book value of those assets, or fair market value, whichever is lower, plus the fair market value of certain assets not on Your books, less the liabilities of the Center and the other deductions permitted by the Standard Franchise Agreement. The purchase price for the realty shall be its fair market value. Please refer to paragraph 19 of the Standard Franchise Agreement for a complete statement of the terms of the option and the procedures for exercise of the option.
We also wish to point out the provisions of paragraph 19.8 Operation During Option Period of the Standard Franchise Agreement pursuant to which We have the right to manage the Center during the option period and up until the closing of the sale of the assets to Us. We are also exercising Our right to appoint a manager to operate the Center prior to the closing of the sale to Us. Please see paragraphs 19.8 and 18.6 of the Standard Franchise Agreement for a statement of the terms for Our operation of the Center.
Please contact me upon receipt of this letter at (734) 996-1196 to make arrangements for turning over operation of the Center to Us. We also need to make arrangements for Our inspection of the franchisee's assets and records so that we may establish the option price and proceed with the procedure outlined in paragraph 19 of the Standard Franchise Agreement. As you know, the Standard Franchise Agreement provides for closing within 30 days after We exercise Our Option to purchase and we need to commence our review of the books and records as soon as possible. We can also use this time to accept your return of the Victory Lane manuals and other materials.
We also take this opportunity to remind you of the provisions of paragraph 20.2 of the Standard Franchise Agreement pursuant to which the franchisee has agreed not to be involved in a similar business for a period of three years. Please refer to paragraph 20.2 of the Standard Franchise Agreement for a full statement of the terms of the restrictive covenant.
Thank you for your prompt attention to this very important matter and we expect to be talking with you upon your receipt of this letter.
Sincerely,
Derrick B. Oxender, President [Plaintiffs Ex. 10.]
Apparently unbeknownst to Victory Lane at the time when Oxender wrote the letter in February 2000, Defendant Hoss had already disposed of or transferred a substantial amount of the assets of the South Lyon Victory Lane Center to members of his family. In 1998 or 1999, Hoss transferred the real estate to the John P. and Donna M. Hoss Revocable Living Trust. [See John Hoss, Jr. Dep., p. 56, Plaintiffs Ex. 2.] On June 1, 1999, i.e., prior to the expiration of the Victory Lane Franchise Agreement, Hoss turned over operation of the entire South Lyon franchise to Defendant Lyon Lube, Inc., a corporation wholly owned by Hoss's son, John Hoss, III, and it was "Lyon Lube" that operated the South Lyon Victory Lane Oil Change Center from that date forward. [See Plaintiff's Ex. 5, 1999 U.S. Income Tax Return for the period 6/01/99 through 12/31/99 of "Lyon Lube, Inc. — Formerly Victory Lane of South Lyon, Inc." See also, Plaintiff's Ex. 6, Deposition of John Hoss III, pp. 15, 16, 19.] (John Hoss, Jr. and his son, John Hoss, III then became employees of Lyon Lube. [John Hoss, Jr. Dep. pp. 79-80, Plaintiffs Ex. 2.])
As soon as Mr. Hoss received Mr. Oxender's letter advising him of Victory Lane's decision to exercise its option to purchase, on February 28, 2000, Defendants stopped operating the South Lyon oil change center as a Victory Lane Center. [ See Plaintiffs Ex. 2, John Hoss, Jr. Dep. p. 41.] They have, however, continued since that date to operate a quick oil change center (apparently under the name "Lyon Lube") at the location. At the same time, Mr. Hoss also began giving the assets of the business (except for the real estate) to his son, John Hoss III. [See Plaintiffs Ex. 2, John Hoss, Jr. Dep. pp. 48-50.] Mr. Hoss testified that he decided to "gift" the assets of the business to his son over time to take full advantage of the gift tax exemptions, and that he gave his son $20,000 worth of these assets in 2000. Id at. 48-49. However, he admitted that nothing was put in writing to reflect this:
The telephone book and Yellow Pages, however, continued to list the business's phone number as a "Victory Lane Quick Oil Change Center."
A: I just communicated to him that I was going to — I was going to retain ownership of the real estate, lease it to him, and give the assets of the business, over time, to him.
Q: And by assets of the business, is it fair — that's everything that's there except the real estate? Equipment —
A: Yeah, the equipment and the inventory and such.
Q: Now, when you — you say you gave and are giving the business to your son, did you give it to the corporation, Lyon Lube?
A: I'm giving it to my son.
Q: All right. From your knowledge, has your son given it to Lyon Lube or transferred it to Lyon Lube?
A: No, I don't think so . . . .
Q: As of the first of this year, 2001, I believe you said sir, you had given your son a $20,000 interest in the business?
A: That's correct.
Id at 48-52.
Mr. Hoss explained the "transfer of business" transaction in a response to an Interrogatory asking about the ownership of the South Lyon oil change center. In that Interrogatory Answer, Mr. Hoss stated that he has transferred ownership of the business to his son, John Hoss, III, pursuant to an "oral agreement of partial gift and partial sale, " and that the final consideration which his son will pay him for the partial sale "has not yet been determined" although he will be paid in installments "over time." [ See Plaintiff Answer to Interrogatory No. 9, Plaintiffs Ex. 8.]
Although there is nothing of record to indicate that Mr. Hoss ever notified Victory Lane of his transfer of the business or its assets either before or after receiving Mr. Oxender's February 16, 2000 letter, Victory Lane apparently learned sometime after February 16, 2000 of Mr. Hoss's transfer of the assets of the business to his son and the continued operation of an oil change business on the site of the South Lyon Victory Lane Center. Because Mr. Hoss did not extend to Victory Lane a right of first refusal to purchase the assets of the franchise on the same terms and conditions as John Hoss III and the John P. and Donna M. Hoss Revocable Trust, and refused to allow Victory Lane to exercise its option to purchase, on July 10, 2000, Victory Lane filed the instant lawsuit.
Sections 18.2 — 18.5 of the Franchise Agreement specify the procedures to be followed by the franchisee to transfer the business or the assets of the business. To briefly summarize those procedures, the franchisee is required to notify Victory Lane of a proposed transfer and obtain Victory Lane's approval of the proposed transferee. However, the Agreement specifically prohibits the transfer of ownership of the Center or the assets used in the operation of the Center it such transfer is not in connection with a transfer of the Franchise Agreement approved by Victory Lane. " Any unauthorized attempt to transfer any of these interests shall have no effect and shall be a material breach of this Agreement." [ See Section 18.2 of the Franchise Agreement, Defendant's Ex. 1, pp. 2 1-22.]
In its three-count Complaint against John Hoss, Jr., John Hoss, III, and Lyon Lube, Inc., Victory Lane alleges claims of trademark infringement and dilution and unfair competition (Count I), breach of post-termination obligations under the Franchise Agreement (Count II), and specific performance (Count III).
Defendants now have moved for partial summary judgment seeking dismissal of Plaintiffs Count III for specific performance contending that the right of first refusal and option purchase provisions in Sections 18.7 and Section 19 of the Franchise Agreement are void and unenforceable under the Michigan Franchise Investment Law Addendum to the Agreement and are also contrary to Michigan public policy as evidenced by the MFIL. Defendants also assert that under the "clean hands" doctrine, Victory Lane is not entitled to the equitable relief of specific performance that it seeks.
A. STANDARDS APPLICABLE TO MOTIONS OF SUMMARY JUDGMENT
Summary judgment is proper "'if the pleadings, depositions, answer to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.'" Fed.R.Civ.P. 56(c).
Three 1986 Supreme Court cases — Matsushita Electrical Industrial Co. v. Zenith Radio Corp., 475 U.S. 574 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986); and Celotex Corp. v. Catrett, 477 U.S. 317 (1986) — ushered in a "new era" in the standards of review for a summary judgment motion. These cases, in the aggregate, lowered the movant's burden on a summary judgment motion. According to the Celotex Court,
"Taken together the three cases signal to the lower courts that summary judgment can be relied upon more so than in the past to weed out frivolous lawsuits and avoid wasteful trials." 1OA C. Wright, A. Miller, M. Kane, Federal Practice Procedure, § 2727, at 35 (1996 Supp).
In our view, the plain language of Rule 56(c) mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof.Celotex, 477 U.S. at 322.
After reviewing the above trilogy, the Sixth Circuit established a series of principles to be applied to motions for summary judgment. They are summarized as follows:
* Cases involving state of mind issues are not necessarily inappropriate for summary judgment.
* The movant must meet the initial burden of showing "the absence of a genuine issue of material fact" as to an essential element of the non-movant's case. This burden may be met by pointing out to the court that the respondent, having had sufficient opportunity for discovery, has no evidence to support an essential element of his or her case.
* The respondent cannot rely on the hope that the trier of fact will disbelieve the movant's denial of a disputed fact, but must "present affirmative evidence in order to defeat a properly supported motion for summary judgment."
* The trial court no longer has the duty to search the entire record to establish that it is bereft of a genuine issue of material fact.
* The trial court has more discretion than in the "old era" in evaluating the respondent's evidence. The respondent must "do more than simply show that there is some metaphysical doubt as to the material facts." Further, "[wihere the record taken as a whole could not lead a rational trier of fact to find" for the respondent, the motion should be granted. The trial court has at least some discretion to determine whether the respondent's claim is plausible.Betkerur v. Aultman Hospital Association, 78 F.3d 1070, 1087 (6th Cir. 1996). See also, Street v. JC. Bradford Co., 886 F.2d 1472, 1479-80 (6th Cir. 1989). The Court will apply the foregoing standards in deciding Defendants' Motion for Partial Summary Judgment in this case.
B. THE MFIL DOES NOT RENDER SECTIONS 18.7 AND 19 OF THE PARTIES' FRANCHISE AGREEMENT VOID AND UNENFORCEABLE.
The primary basis for Defendants' Motion for Partial Summary Judgment on Plaintiffs claim for Specific Performance (Count III of Plaintiffs Complaint) is Defendants' contention that, by application of the Michigan Franchise Investment Law, Sections 18.7 and 19 of the Franchise Agreement are void and unenforceable. These sections provide, in pertinent part:
18.7 Right to First Refusal of Franchisor. If You or Your Owners propose to sell the Center (or its assets) . . . and a bona fide, executed written offer to purchase one or more of these interests is received, You are obligated to deliver a copy of the bona fide offer to Us along with all documents to be executed in connection with the proposed transfer. We will, for a period of thirty (30) days from the date of delivery of this offer to Us, have the right, exercisable by written notice to You, to purchase the Center (or its assets) or such ownership interest for the price and on the terms and conditions contained in the offer. . . . This paragraph will not apply to transfers made in accordance with Paragraph 18.3 of this Agreement [i.e., transfers to a corporation or partnership actively managed by the franchisee and in which the franchisee's ownership interest and right to control exceeds 50%].
19. OPTION TO PURCHASE CENTER
19.1 Option. Upon the termination or expiration of this Agreement, We shall have an exclusive option, but not the obligation, exercisable for thirty (30) days to purchase the assets of the Center. For purposes of this paragraph, the term "assets" shall mean the equipment, inventory, leasehold interests and improvements and favorable rights and covenants of the Center.
19.5 Realty. In the event You own the realty on which the Center is located, We will also have the option to purchase the real estate for a period of thirty (30) days following expiration or termination of this Agreement. The purchase price shall be fair market value. . . . If We do not elect to purchase the real property, We or Our designee will have the option to enter into a lease for a term of ten (10) years with an option by the lessee to extend the term of the lease for an additional term of five (5) years.
[Exhibit 1, pp. 24-27.]
Defendants contend that these provisions are rendered void and unenforceable under the Michigan Franchise Investment Law; M.C.L. § 445.1501 et seq., Specifically, Defendants argue that the Paragraph (h) of the MFIL Notice appended to the Franchise Agreement voided Sections 18.7 and 19.
Paragraph (h) of the MFIL Notice provided as follows:
Each of the following provisions is void and unenforceable if contained in any documents relating to a franchise:
(h) A provision that requires the franchisee to resell to the franchisor items that are not uniquely identified with the franchisor. This subdivision does not prohibit a provision that grants to a franchisor a fight of first refusal to purchase the assets of a franchise on the same terms and conditions as a bona fide third party willing and able to purchase those assets, nor does this subdivision prohibit a provision that grants the franchisor the right to acquire the assets of a franchise for the market or appraised value of such assets if the franchisee has breached the lawful provisions of the franchise agreement and has failed to cure the breach in the manner provided in subdivision (c) [i.e., after being given notice of breach, franchisee is afforded a "reasonable opportunity" (up to 30 days) to cure.]
[ See Defendants' Reply Briet Ex. 1. See also, M..C.L. §§ 445.1508 (3)(ii) and 445.1527(h).]
Defendants argument is that since the assets at issue here were not "items uniquely identified with the franchisor, " i.e., trademarks, logos, signage, catalogs, manuals, etc., it is only if Sections 18.7 and 19 fit squarely within one of the two stated "exceptions" in Paragraph (h) of the MFIL Notice that Plaintiff would be entitled to lawfully exercise its option to purchase. Defendants' position is that neither of the exceptions applies in this case.
See Candleman Corporation v. Richard Farrow, No. C8-95-2453 (9th Jud. Dist. Minn., June 9, 1999), Franchise Guide (CCH) ¶ 11.730, Defendants' Ex. 6. (trademarks, trade dress, catalogs, manuals and newsletters found to be uniquely identified with the plaintiff-franchisor).
The two exceptions to the MFIL's prohibition against contractual provisions which require a franchisee to sell the assets of the franchise business not uniquely identified with the franchisor back to the franchisor are:
(1) a provision that grants to a franchisor a right of first refusal to purchase the assets of a franchise on the same terms and conditions as a bona fide third party willing and able to purchase those assets, and
(2) a provision that grants the franchisor the right to acquire the assets of a franchise for the market or appraised value of such assets if the franchisee has breached the lawful provisions of the franchise agreement and has failed to cure the breach within a reasonable time after being given notice of the breach.
M.C.L. § 445.1527(h); MFIL Notice ¶ (h), Defendants' Reply Brief Ex. 1.
Defendants contend that the first exception which allows a franchisor a right of first refusal to purchase the assets "on the same terms and conditions as a bona fide third party willing and able to purchase those assets, " does not apply because they claim that none of the franchise assets have been sold to a bona fide third party willing and able to purchase the assets." [Defendants' Brief p. 8.] Stated otherwise, the Defendants' position is that a right of first refusal must first be triggered by an offer to purchase the property by a bona fide purchase or by its sale to a bona fide purchaser. As explained by the Michigan Court of Appeals in LaRose Market, Inc. v. Sylvan Center, Inc., 530 N.W.2d 505 (Mich.App. 1995):
[For] purposes of a right of first refusal, a "sale" occurs upon the transfer (a) for value (b) of a significant interest in the subject property (c) to a stranger to the lease, (d) who thereby gains substantial control over the leased premises.Id at 509, quoting Prince v. Elm Investment Co., Inc., 649 P.2d 820, 823 (Utah 1982).
Defendants argue that here Defendant John Hoss, Jr., the franchisor, never received any "offer to purchase" nor has he "sold" the business or its assets to anyone; rather he has "gifted" the assets to his son, John Hoss, III. Defendants' argument is not borne out by the record of this case. As indicated above, Mr. Hoss stated in his sworn interrogatory answers that he transferred ownership of the business to his son, John Hoss, III, pursuant to an "oral agreement of partial gift and partial sale, " and that the final consideration which his son will pay him for the partial sale "has not yet been determined" although he will be paid in installments "over time." [ See Plaintiff Answer to Interrogatory No. 9, Plaintiffs Ex. 8.]
That the transfer was only a "partial" sale does not permit Defendant Hoss to escape from the contract. As the court in Prince v. Elm Investment Co., supra, found:
The holder of a right of first refusal has negotiated for a right to purchase ahead of any other buyer if the promisor-owner decides to sell. We see no reason to limit the application of that right to a sale of the promisor-owner' s entire interest. The more reasonable approach is to allow the holder to exercise its right of first refusal to the extent of any significant transfer of ownership or control to an unrelated third party.649 P.2d at 821.
Furthermore, Defendants attempt to rely on the "no sale, just a gift" argument is a particularly procrustean one in light of the fact that by transferring the assets of the business to John Hoss, III and/or Lyon Lube — regardless of the mechanism used to effectuate that transfer — Mr. Hoss directly violated Section 18.2 of the Franchise Agreement, which provides:
This Agreement is personal to You and to Your Owners and, as a result, neither You nor any of Your Owners may transfer any interest in this Agreement . . . except as specifically authorized by this Agreement. During the term of this Agreement, You are not permitted to transfer ownership of the Center or the assets used in the operation of the Center except in connection with a transfer of this Agreement which we have approved. Neither You nor any of Your Owners are permitted to pledge, assign, or encumber this Agreement of Your interest in the corporation if you are corporation or a partnership. Any unauthorized attempt to transfer any of these interests shall have no effect and shall be a material breach of this Agreement.
Franchise Agreement, § 18.2, Ex. 1, pp. 21-22 (emphasis added).
Plaintiff in fact, has enumerated at least ten provisions in the Franchise Agreement which Defendants have breached and continue to breach. These include the cited unauthorized transfer of assets provision and the right of first refusal provision, as well as the unauthorized use of Plaintiffs marks [§§ 2.2 and 17.2] and the violation of the covenant not to compete [§ 20.0]. See pp. 9-10 of Plaintiffs Brief Plaintiff points to all of these material breaches of the Agreement in arguing that the second exception in the MFIL Notice also applies. Defendants argue that these breaches should be disregarded because they were never provided notice of these breaches. Plaintiff cannot be held responsible for not giving Defendants notice of the breaches when it was unaware of the unauthorized transfer of the assets, violation of the covenant not to compete and continued use of Plaintiffs marks until after Defendants refused to honor Plaintiffs notification of its exercise of option rights.
Moreover, the Michigan Court of Appeals, in discussing the Prince case in LaRose Market, supra, recognized that bad faith and wrong doing could trigger a right of first refusal. As the Prince court observed, a seller whose property is burdened by a right of first refusal has a duty to deal in good faith with the holder of the right. The court explained:
[I]n order to meet the . . . requirement of good faith, a seller desiring to sell property burdened by a right of first refusal must (1) give the promisee of the right of first refusal notice of the third party's offer and his intention to accept that offer; (2) allow the promisee to submit a competing offer; and (3) reject the promisee's offer only on the basis of a reasoned explanation of why that offer is materially inferior to the third party's offer.649 P.2d at 826.
Defendant Hoss has clearly failed his requirement of dealing in good faith with Plaintiff.
As for the real estate on which the Victory Lane business is located, while Defendants do not dispute that at the time the Franchise Agreement was still in effect, Mr. Hoss transferred title to the property to a revocable living trust (without notification to, or the consent of Victory Lane), they argue that the option to purchase The real estate is not enforceable because his wife, Donna Hoss, was not a party to the Franchise Agreement in which the option to purchase the real estate was created. Hoss does not assert that the property on which he maintained the Victory Lane franchise was held in the entireties or jointly with his wife. Rather, he appears to take the position that because he is married, his wife has a dower interest in the property which cannot be conveyed without her consent. Therefore, Defendants reason that the option to purchase provisions in the Franchise Agreement are unenforceable.
In support of this argument, Defendants cite Slater Management Corp. v. Nash, 212 Mich. App. 30, 32, 536 N.W.2d 843, 845 (1995) and Berg-Powell Steel Co. v. Hartman Group, Inc., 89 Mich. App. 423, 427-428, 280 N.W.2d 557, 559 (1979). Neither of these cases, however, involved the validity of a right of first refusal or an option to purchase. Rather, both cases had to do with the validity of real estate purchase agreements signed only by one spouse. The purchasers were allowed to withdraw from the purchase agreements because their wives' signatures were not on the agreements. Here, we are dealing only with the validity of a right of first refusal and an option to purchase, not the final closing sale documents. Mrs. Hoss's dower interest in the property does not render the right of first refusal or option to purchase void.
Plaintiff has argued to the Court that it might be interested in proceeding on an option to purchase the business only, pursuant to Section 19.1 of the Agreement, and not exercise the option to purchase the realty as provided in Section 19.5. It is clear to the Court, however, that these two provisions were intended to be read in pan materia. The plain language of Section 19.5 clearly contemplates the non-severability of this provision from Section 19.1, in the event that the franchisor elects to exercise its right to purchase the business pursuant to Section 19.1. ("In the event You own the realty on which the Center is located, We will also have the option to purchase the real estate . . . .") Such a construction is consistent with the MFIL's purpose of addressing inequality of bargaining power among parties to a franchise agreement by providing franchisees with protection from abuse by the franchisor. See Geib v. Amoco Oil Co., 29 F.3d 1050, 1056 (6th Cir. 1994). It would hardly be in keeping with the spirit of the MilL to permit Plaintiff to take Defendants' business and then leave them with a facility that is not adaptable to another use without Defendant having to incur substantial expense. Therefore, a fragmented approach to exercising an option to purchase will not be permitted here.
For all of the foregoing reasons, the Court finds no basis for holding the right of first refusal and option to purchase provisions in the Franchise Agreement void and unenforceable under the Michigan Franchise Investment Law.
C. DEFENDANTS' "UNCLEAN HANDS" ARGUMENT 15 WITHOUT MERIT
Defendants' final argument is that the Court should dismiss Plaintiffs Count III for specific performance because they claim that Plaintiff is guilty of "unclean hands." The sole basis for this argument is that Plaintiff did not attach a copy of the MFIL Notice to the copy of the Franchise Agreement it appended to its Complaint. As indicated above, however, the MFIL notice is merely a statement of what is provided in Section 27 of the Franchise Investment Law. The Court is well-aware of the law governing franchises in the State of Michigan. Furthermore, to the extent that the Court might find the Plaintiff should be "penalized" for not attaching a copy of the Notice to its Complaint, such a penalty would come in the form of Rule 11 sanctions. Plaintiffs failure to attach the Notice to The Complaint is not the kind of conduct which would constitute "unclean hands" to deny Plaintiff the right to pursue equitable remedies.
CONCLUSION
For all of the foregoing reasons, the Court finds Defendants' Motion for Partial Summary Judgment to be without merit. Therefore,
IT IS HEREBY ORDERED that Defendants' Motion for Partial Summary Judgment be, and hereby is, DENIED.