Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—Mich. App.: Muffler dealer’s breach of contract and fraud claims failed, (Apr 11, 2014)

By Peter Reap, J.D., LL.M.

A purchaser of a muffler shop dealership failed to show that he had an enforceable contract with the owners of the dealership or that the owners had committed fraud in connection with his the purchase and the eventual failure of the business, a Michigan appellate court has decided (Scott v. Christensen, April 8, 2014, Per Curiam). Thus, a trial court’s grant of summary judgment for the owners was affirmed.

Background. Sometime late in 2004, Phil Henry and Robert Keasey, who together owned a “Muffler Man” dealership, approached Robert Bernhoft, the president of the Muffler Man Supply Company (“MMS”), and advised him that they wanted to sell their dealership to Kevin Scott and his partner, Aaron Lawrence. Muffler Man Supply Company is a distributor of automotive parts whose corporate stock was owned by defendant Christensen. Henry and Keasey owned the business that comprised their dealership, including its equipment and inventory, and maintained a dealer agreement with MMS. However, they did not own the building in which the business was located. Christensen owned the building, and Henry and Keasey had a lease agreement with Christensen.

When Henry and Keasey approached Bernhoft about selling their dealership, he told them that, although they could sell their business, they had to get permission from Christensen to lease the building to Scott and Lawrence. Christensen stated that he wanted Henry and Keasey to keep their names on the lease, but agreed to let them sublease the building to Scott. A document entitled “Addendum to Lease” was drawn up, and Christensen authorized Bernhoft, as he often did, to use his signature stamp to sign the Addendum.

Scott’s attorney drafted an Asset Purchase Agreement regarding the sale of Henry and Keasey’s business to plaintiff and Lawrence. The Addendum to Lease was attached to that agreement. The Asset Purchase Agreement, which was between the plaintiff and Lawrence (buyer) and Henry and Keasey (seller), was executed and signed by its four named parties. It provided that—in exchange for all the named assets of the business, its goodwill, and a covenant not to compete—Scott and Lawrence would remit $200,000 to Henry and Keasey.

Scott agreed in his deposition that the Asset Purchase Agreement did not mention the words “building” or “real estate.” However, he stated that he believed that he was purchasing the building from Henry and Keasey and that they told him they owned the building. Scott gave Henry and Keasey $100,000 at the closing and signed a promissory note for $100,000. The defendants were not parties to the Asset Purchase Agreement, did not sign it, and were not present at the closing, the court noted.

Although Christensen was not a party to the sublease reflected in the Addendum to Lease, Scott made rent payments by check directly to Christensen. Scott was also required (as a separate Dealer Agreement provided) to make monthly payments to MMS. Although Lawrence and the Scott both the agreement and the addendum, neither Christensen nor Bernhoft signed either document. However, they never questioned whether Scott and Lawrence had a dealer agreement and the parties all agreed Scott had one, the court observed.

Almost immediately, Scott fell behind on his payments. He was eventually evicted from the building.

Scott filed a complaint naming as defendants only Christensen as “Owner” of MMS and Bernhoft as its “President,” alleging breach of contract, fraud, and a violation of restrictive covenants. The trial court granted summary judgment to the defendants on all claims and the plaintiff appealed the trial court’s ruling as to the breach of contract and fraud claims.

Breach of contract claim. Scott first argued that the trial court erred when it found that there was no evidence of any contracts, written or oral, between plaintiff and defendants. The appellate court disagreed.

Scott did not establish that a written contract between himself and the defendants existed. None of the documents on record contain the signature of defendant Bernhoft. The only document signed by defendant Christensen was the Addendum to Lease. There was no evidence that Christensen ever breached any of his obligations under the Addendum to Lease, the court held.

In addition, the dealer agreement clearly provided that the agreement was between MMS and Scott and Lawrence. There was no dealer agreement in the record that was signed by Christensen. Even if he had signed it, it would have been on behalf of MMS, which was the party to the contract. All other contracts relied on by the plaintiff were clearly between the sellers, Henry and Keasey, and Scott and Lawrence, the court explained. Additionally, Scott did not establish the existence of an oral contract between himself and defendants.

Fraud claim. Scott contended that the trial court erred when it found that he could not meet the standard to establish fraud. The appellate court again disagreed.

In his deposition, the plaintiff stated that the “fraud” was that Bernhoft had told him he was buying a “Muffler Man” franchise. However, the plaintiff can produce no writing that reflects that Bernhoft made that statement, and Bernhoft disputed it. The record shows that Scott and Lawrence purchased the business from Henry and Keasey pursuant to an asset purchase agreement, which described exactly what was purchased, and the dealer agreement between Scott and MMS clearly explained all aspects of what it meant to be a “Muffler Man” dealer. In addition, the plaintiff made no showing that he suffered in any way because he purchased a business that comprised a “Muffler Man” dealership instead of a “franchise.”

Scott brought his own attorney into the negotiations to oversee all of the contracts and failed to demonstrate that either defendant made a material misrepresentation concerning what he was purchasing, the court ruled.

Moreover, Scott failed to demonstrate what fraud was perpetrated. The Asset Purchase Agreement did not make the representation that a “Muffler Man Franchise” was being sold, the court noted. Similarly, Scott’s contention that he was fraudulently led to believe that he was purchasing the building was without merit.

Scott further contended that a fraud was committed because he was not told that Henry and Keasey still owed money to MMS when he purchased their business. However, Scott did not demonstrate that the defendants owed him a duty to disclose this or made any material representation that was false. Further, he did not show that he suffered any injury because of the promissory note between Henry and Keasey and MMS.

The trial court correctly concluded that Scott was not able to demonstrate any fraud committed by the defendants, the court determined. The plaintiff failed to prove his claims of fraud by clear, satisfactory, and convincing evidence.

The case is No. 312349.

Attorneys: Ronald L. Haldy (Ronald L. Haldy P.C.) for James Christensen.

Companies: Muffler Man Supply Company

Cases: FranchisingDistribution MichiganNews