UNITED STATES DISTRICT COURT 

EASTERN DISTRICT OF MICHIGAN 

SOUTHERN DIVISION 

L.A. INSURANCE AGENCY 

FRANCHISING, LLC, 

 

Plaintiff, Civil Action No. 14-14432 

 Magistrate Judge David R. Grand 

v. 

 

CLAUDIA MONTES, et al., 

 

 Defendants. 

________________________________________/ 

OPINION AND ORDER GRANTING IN PART AND DENYING IN PART 

DEFENDANTS’ MOTION FOR LEAVE TO AMEND COUNTERCLAIMS [35]; 

AND MOTION FOR LEAVE TO SUPPLEMENT COUNTERCLAIMS [36] 

 Before the Court in this franchise dispute are motions for leave to amend and supplement 

counterclaims filed by franchisees/defendants L.A. Insurance Agencies NV 12, LLC, NV 15, 

LLC, NV 17, LLC, and NV 26 LLC and their owner, defendant Claudia Montes (collectively 

“defendants”). [35, 36]. Plaintiff/franchisor L.A. Insurance Agency Franchising, LLC (“L.A. 

Insurance”) filed a consolidated response to both of the motions. [47]. Defendants filed a reply. 

[50]. The Court held a hearing regarding the above motions on November 3, 2015 [77], after 

which L.A. Insurance filed a supplemental brief [78] and defendants filed a response. [93]. 

 The parties consented to this Court conducting all proceedings in this action, including 

the entry of a final judgment, pursuant to 28 U.S.C. § 636(c) and Fed. R. Civ. P. 73. [29]. 

I. BACKGROUND 

According to L.A. Insurance, this case stems from Montes’s decision, in August 2014, to 

unilaterally terminate at least one of her L.A. Insurance franchises located in the Las Vegas, 

Nevada area and open a competing insurance agency within the geographic area prohibited by 

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her franchise agreements. [68 at ¶¶ 18-19]. Montes has a different view of the dispute’s origin; 

she alleges that L.A. Insurance fraudulently and/or through duress, induced her into signing the 

parties’ various franchise agreements, and that L.A. Insurance breached its obligations under 

those agreements long before Montes engaged in the breach alleged by L.A. Insurance. A brief 

discussion of the factual background of the parties’ relationship is helpful to understanding the 

dispute and the Court’s resolution of the instant motions. 

 Montes alleges that she first “originated” an insurance agency as a franchise of L.A. 

Insurance in 2006, entering into a franchise agreement with L.A. Insurance and opening her 

NV12 franchise. [35-1 at ¶¶ 4, 14-15]. She claims that L.A. Insurance made a number of 

misrepresentations to her at the time to induce her to open that franchise, including that: (1) 

“[L.A. Insurance] had negotiated better than market commission rates with the carriers that [L.A. 

Insurance] worked with, thereby enabling franchisee’s [sic] to make more money as a franchisee 

of [L.A. Insurance] then as an independent insurance agency”; (2) “while [L.A. Insurance’s] 

franchise agreement only permitted franchisees to write policies for ‘authorized carriers,’ [] 

[L.A. Insurance] had dozens of authorized carriers and would be adding over one hundred 

authorized carriers to its approved list”; (3) “[L.A. Insurance had an aggressive marketing and 

advertising arm that would provide comprehensive marketing support in the Southern Nevada 

market...”; and (4) “L.A. Insurance’s] franchise system offered a comprehensive system of 

support and assistance that made operating its franchises relatively easy, straightforward, simple, 

and vastly superior and more successful than owning and operating an independent insurance 

agency.” [Id. at ¶¶ 6, 8, 10, 12]. Montes claims that she later learned that each of these 

representations was false when made. [Id. at ¶¶ 7, 9, 11, 13]. More specifically, she claims that: 

(1) “the commission rates offered by [L.A. Insurance] were significantly worse than the rates that 

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one would earn as an independent insurance agency”; (2) “[L.A. Insurance’s] list of ‘authorized’ 

carriers was actually limited to only a small, handful of insurance providers”; (3) “[L.A. 

Insurance] had failed to allocate any material resources to marketing or otherwise advertising its 

franchised businesses within the Southern Nevada market”; and (4) “[L.A. Insurance] offered no 

support at all to its franchises, not even offering [Montes] a handbook of operating procedures to 

review.” [Id. at ¶¶ 7, 9, 11, 13]. 

 In 2007, Montes organized a second L.A. Insurance franchise (by purchasing an existing 

franchise) – NV15. [Id. at ¶ 18]. In 2009, Montes founded a third L.A. Insurance franchise – 

LA Insurance NV20, LLC (“NV20”). [Id. at ¶ 20].1

 

 Montes alleges that in 2010, L.A. Insurance “sought to force [her] [] to execute a new, 

revised franchise agreement (hereafter referred to as the ‘Revised Franchise Agreement’)” for 

her existing franchises. [Id. at ¶ 26].2

 Montes claims the Revised Franchise Agreement was 

“longer and considerably more onerous than the agreement that [she] had originally agreed to.” 

[Id. at ¶ 27]. More importantly, Montes alleges that “[L.A. Insurance] offered no consideration 

for the substantially altered terms presented in the Revised Franchise Agreement, instead merely 

threatening that [it] would somehow take away all of [Montes’] existing businesses if she failed 

to sign the Revised Franchise Agreement.” [Id. at ¶ 28]. Montes characterizes the Revised 

Franchise Agreement as “a ‘take it or leave it’ contracts [sic] of adhesion with several 

procedurally and substantively unconscionable provisions, including, but not limited to (1) 

 

1

 Montes alleges that L.A. Insurance asked her to rebrand NV20 as it was too close to another 

L.A. Insurance franchisee. [Id. at ¶¶ 21-22]. Montes rebranded NV20 as Montes Services LLC, 

and claims that L.A. Insurance still receives residual commissions from carriers that wrote 

business under NV20. [Id. at ¶ 25]. 

2

 According to documentation provided by L.A. Insurance, this seems to have occurred in 2009, 

not 2010. [78 at 3]. 

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lopsided non-compete provisions; (2) unfair choice of law and jurisdiction provisions stating that 

any issues arising out of the Franchise Agreements contract are governed by Michigan law; and 

(3) multiple grounds allowing [L.A. Insurance] to declare [defendants] in default without a right 

to cure, while [L.A. Insurance] has the right to cure in all scenarios.” [Id. at ¶ 29]. 

 In 2011, Montes purchased another franchise from L.A. Insurance, placing the business 

under NV17, and also originated yet another L.A. Insurance franchise – NV26. [Id. at ¶¶ 30, 

32]. 

 Montes alleges that on August 10, 2011, L.A. Insurance, without her permission, forged 

her signature to an agency agreement and a producer agreement with Primero Insurance 

Company, purportedly entered into on behalf of NV26. [Id. at ¶¶ 33-34]. Montes alleges that 

but for the forgery, she could have negotiated better terms with Primero. [Id. at ¶ 35]. Montes 

also alleges that L.A. Insurance forged her signature on other documents. [Id. at ¶ 36]. 

 Montes claims that in 2013, she “became increasingly aware of the fact that the franchise 

system offered by [L.A. Insurance] was nothing more than a hoax. L.A Insurance offered 

nothing of value to its franchisees, but instead siphoned money off of what were essentially 

small, independent businesses.” [Id. at ¶¶ 40-41]. 

 Montes alleges that in October 2013, L.A Insurance opened eight insurance agencies – 

Toro Insurance Agency NV1-NV8 – with Toro NV6 opening “just across the street from 

NV26...]” [Id. at ¶¶ 43, 45]. Montes complained to L.A. Insurance about this alleged “direct 

competition” by it against its own franchise, but to no avail. [Id. at ¶¶47-48]. 

 Montes claims that by opening these competing insurance agencies, L.A. Insurance 

frustrated the purposes of the original and Revised Franchise Agreements with Montes and her 

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L.A. Insurance franchises. [Id. at ¶ 53]. Montes claims that L.A. Insurance’s opening of Toro 

NV6 caused her to close her NV26 agency. [Id. at ¶ 55]. 

Montes’ closing of NV26 and opening of a new insurance agency within the geographic 

area proscribed by the franchise agreement’s non-compete provision led L.A. Insurance to file its 

initial complaint in this action against defendants in November 2014. [1]. L.A Insurance has 

since amended its complaint to allege causes of action against Montes and her franchises for, 

among other things, breach of contract, federal and common law trademark infringement, and 

federal and common law unfair competition. [68]. In the interim, defendants filed their answer 

on March 17, 2015, along with counterclaims for breach of the covenant of good faith and fair 

dealing, violations of Nevada Revised Statutes 598.0915 (3), (15), and a request for injunctive 

relief. [22]. Defendants filed the instant motions for leave to amend and leave to supplement 

their counterclaims on August 17, 2015. [35, 36]. 

 In their proposed amended countercomplaint, defendants essentially allege that their 

franchise agreements with L.A. Insurance are void and/or unenforceable due to the alleged fraud 

and/or duress described above, and because the Revised Franchise Agreement is an 

unconscionable adhesion contract. Defendants also claim that L.A. Insurance breached those 

agreements throughout their duration, and that L.A. Insurance violated various laws and rights of 

the defendants along the way. Defendants also assert a claim of “fraud in the factum” related to 

their allegations that L.A. Insurance’s representatives forged Montes’s signature on various 

corporate documents. Specifically, defendants seek leave to add counterclaims for: breach of 

contract (Count I); breach of the covenant of good faith and fair dealing (Count II); fraud in the 

factum (Count III); fraud via intentional misrepresentation (Count IV); deceptive trade practices 

under both Nevada Revised Statute 598.091 (Count V) and Mich. Comp. Laws § 445.903 (Count 

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VI); breach of fiduciary duty (Count VII); constructive fraud (Count VIII), and unspecified 

“injunctive relief” (Count XI).3

 [35, Ex. A at ¶¶ 62-68, 74-94, 102-25]. 

 The same day that defendants moved to amend their counterclaims they also filed a 

motion to supplement those counterclaims. [36]. In that latter motion, defendants allege that 

L.A. Insurance sent letters to several third-party insurance carriers requesting that they forward 

all of defendants’ commissions to L.A. Insurance’s corporate headquarters and cancel 

defendants’ “agent producer codes.” [36-1 at ¶¶ 10-22]. Defendants seek to supplement the 

foregoing proposed counterclaims with additional causes of action for tortious interference with 

business relations (First Supplemental Counterclaim) and contractual relations (Second 

Supplemental Counterclaim), and to expand their deceptive trade practices counterclaims under 

NRS 598.0915 (Third Supplemental Counterclaim) and MCL 445.903 (Fourth Supplemental 

Counterclaim). [Id. at ¶¶ 27-52]. 

 L.A. Insurance counters that it would be futile to allow defendants to either amend or 

supplement their counterclaims under Fed. R. Civ. P. 15 because: (1) Michigan law does not 

recognize an independent claim for breach of the covenant of good faith and fair dealing; (2) the 

counterclaims under NRS 598.0915 are barred by the choice-of-law provision in the franchise 

agreements; (3) MCL 445.903 does not apply to the purchase or sale of franchises; (4) the fraud 

and constructive fraud counterclaims are barred by the integration clause in the franchise 

agreements; (5) the fraud and constructive fraud counterclaims are barred by Michigan’s 

economic loss doctrine; (6) any counterclaims for breach of the original franchise agreements 

should be dismissed because those agreements were superseded by the 2010 Revised Franchise 

Agreements; (7) the counterclaims alleging tortious interference with business relations and 

 

3

 Defendants’ proposed amended counter complaint omits Counts IX and X. 

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tortious interference with contractual relations lack merit because the underlying allegedly 

tortious conduct is permitted under the franchise agreements; (8) the counterclaims alleging 

breach of contract and breach of fiduciary duty are barred under the one-year statute of 

limitations set forth in the franchise agreements; and (9) the breach of fiduciary duty claim must 

fail because there is no fiduciary relationship between a franchisor and franchisee, the franchise 

agreements explicitly disclaimed any fiduciary relationship between L.A. Insurance and 

defendants, and the alleged tortious conduct is, in fact, permitted under the franchise agreements. 

 The Court conducted a hearing on the instant motions on November 3, 2015, where the 

issue of whether L.A. Insurance had provided Montes with copies of the franchise agreements at 

least 14 days before she signed them as required by law was raised. The Court also asked L.A. 

Insurance if it had any case law (it had provided none in its initial response brief) regarding its 

argument that the integration clause in each of the franchise agreements barred defendants’ fraud 

claims related to oral representations which predated the agreements’ execution. [47 at 17-19]. 

After oral argument, L.A. Insurance submitted a supplemental brief addressing these issues and 

additionally arguing that: the franchise agreements are not adhesion contracts; the principle of 

mutuality of obligation need not apply to every distinct provision in the franchise agreements; 

and defendants cannot challenge the non-exclusivity clause in each of the franchise agreements 

(which L.A Insurance contends permits it to open competing insurance agencies anywhere – 

even next to its own franchises – notwithstanding that franchisees may not open a competing 

business within a defined geographic area) on the ground that those provisions violate the 

covenant of good faith and fair dealing. L.A. Insurance also appended four signed “receipts” to 

the supplemental brief, along with the dated signature pages for each of the franchise 

agreements, which purportedly show that Montes signed the agreements at least 14 days prior to 

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their execution, and therefore must also have received them at least 14 days prior to their 

execution (the “FDD receipts”). [78, Exs. B-E]. 

 Defendants filed a response to L.A. Insurance’s supplemental brief [93], arguing that: (1) 

Montes actually signed the FDD receipts at the same time she signed the franchise agreements 

and that L.A. Insurance essentially back-dated her signature to reflect compliance with the 

applicable 14-day statutory waiting period; and (2) none of the provisions in the franchise 

agreements may bar defendants’ counterclaims because the validity of those agreements are still 

at issue in this litigation. Defendants also reiterate that Montes allegedly signed at least some of 

the franchise agreements under duress and that the agreements are unenforceable because there is 

no mutuality of obligation between the parties.4

 

II. LEGAL STANDARD 

Courts should freely grant leave to amend a complaint when justice so requires. See Fed. 

R. Civ. P. 15(a)(2). As the United States Supreme Court has held: 

In the absence of any apparent or declared reason – such as undue delay, 

bad faith or dilatory motive on the part of the movant, repeated failure to 

cure deficiencies by amendments previously allowed, undue prejudice to 

the opposing party by virtue of allowance of the amendment, futility of the 

amendment, etc. – the leave sought should, as the rules require, be “freely 

given.” 

 

4

 In their response to L.A. Insurance’s supplemental brief which clearly argued that “Michigan 

does not recognize a breach of an implied covenant of good faith...” [78 at 11], defendants 

wrote: “Defendants have not made any argument [as to the obligation of good faith and fair 

dealing], and, therefore, do not wish to make any response at this time.” [93 at 7]. This 

representation flatly undermines defendants’ second counterclaim entitled “Breach of Covenant 

of Good Faith and Fair Dealing.” [35, Ex. 1 at ¶¶ 69-73]. Since defendants have apparently 

abandoned this claim for relief, the Court considers it waived. See Howe v. City of Akron, 801 

F.3d 718, 743 (6th Cir. 2015) (stating that waiver occurs when a party makes a “conscious 

choice to abandon a position”). Accordingly, to the extent defendants’ motion sought permission 

to bring a claim for breach of covenant of good faith and fair dealing, it is denied. 

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Foman v. Davis, 371 U.S. 178, 182 (1962). However, Foman “makes clear there are certain 

situations in which it is appropriate to deny leave to amend,” including circumstances where 

amendment would be futile. Harrison v. Burt, No. 07-11412, 2008 U.S. Dist. LEXIS 66586, at 

*4 (E.D. Mich. Aug. 28, 2008). An amendment is futile if it fails to state a claim upon which 

relief can be granted and would, thus, be subject to dismissal under Fed. R. Civ. P. 12(b)(6). Id. 

“Motions to amend should not be denied as futile when there are underlying, disputed issues of 

material fact because the court must accept the movant's allegations as true.” Khoury v. Ford 

Motor Credit Co., LLC, 2013 WL 6631471, at *6 (E.D. Mich. Dec. 17, 2013) (citing Thiokol 

Corp. v. Dep't of Treasury, State of Mich., Revenue Div., 987 F.2d 376, 382–83 (6th Cir.1993). 

 The federal rules further provide that, “[o]n motion and reasonable notice, the court may, 

on just terms, permit a party to serve a supplemental pleading setting out any transaction, 

occurrence, or event that happened after the date of the pleading to be supplemented.” Fed. R. 

Civ. P. 15(d). As the plain language of the rule indicates, “supplemental pleadings, not amended 

pleadings, are intended to cover matters occurring after the original complaint was filed.” 

Harrison, 2008 U.S. Dist. LEXIS 66586, at *2 (internal citations omitted). The same standard of 

review that applies to amending a claim under Rule 15(a) also applies to supplementing a claim 

under Rule 15(d). See Pasley v. Caruso, No. 10-11805, 2012 U.S. Dist. LEXIS 38815, at *32-33 

(E.D. Mich. Feb. 10, 2012) (stating that courts may deny a motion for leave to supplement that 

“would result in undue prejudice to the opposing party or if the supplemental complaint would 

be futile” or where the moving party exhibits undue delay, bad faith, dilative motive, or 

repeatedly fails to cure deficiencies that have been previously allowed by amendment). 

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III. ANALYSIS 

A. Validity of the Franchise Agreements and Their Choice-of-Law Provisions 

 L.A. Insurance advances a number of arguments in opposition to defendants’ motions to 

amend and supplement that presuppose the validity of the franchise agreements and each of their 

provisions. [See e.g., 47 at 8, 14-15 (“Defendants [breach of contract and fiduciary duty 

counterclaims] are barred by the one-year statute of limitations in the franchise agreements”; 

“[Defendants’ tortious interference counterclaims challenge] conduct that is expressly authorized 

by the franchise agreements”; “Defendants’ proposed amended counterclaims (ECF #35-1) arise 

under the franchise agreements between the parties, which are governed by Michigan law”; and 

“Defendants’ proposed Fifth Counterclaim [] and Third Supplemental Counterclaim [] for 

‘Deceptive Trade Practices under Nevada Revised Statute 598.0915 fail because these are claims 

brought under Nevada law, which is barred by the Michigan choice of law provision in the 

franchise agreements.”)]. 

These arguments fail because they ignore defendants’ allegations that: (1) the Revised 

Franchise Agreements were “adhesion contracts” which L.A. Insurance “foisted upon” them 

after placing them in duress; (2) L.A. Insurance fraudulently induced Montes into signing the 

various franchise agreements; (3) Montes was not provided the requisite 14-day notice period to 

review the franchise agreements prior to their execution; and (4) the Revised Franchise 

Agreements are unenforceable because they were not supported by consideration. Should 

defendants eventually prove some or all of these contentions (whether under the laws of 

Michigan or Nevada, depending upon which one applies), the applicable franchise agreements 

could be rendered entirely unenforceable. See e.g., Llewellyn-Jones v. Metro Property Group, 

LLC, 22 F.Supp.3d 760, 786 (E.D. Mich. 2014) (“A party induced by fraud to enter into a 

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contract may elect to void the contract.”) (citing Samuel D. Begola Servs., Inc. v. Wild Bros., 210 

Mich.App. 636, 639 (1995)); Allard v. Allard, 308 Mich. App. 536, 551-552 (2014) (“A contract 

may be deemed unenforceable if it was executed under duress.”); Buettner v. Buettner, 89 Nev. 

39, 45 (1973) (“as with all contracts, courts of this state shall retain power to refuse to enforce a 

particular antenuptial contract if it is found that it is unconscionable, obtained through fraud, 

misrepresentation, material nondisclosure or duress.”). Therefore, until L.A. Insurance 

establishes that defendants’ allegations fail to state claims as a matter of law, it may not resort to 

the franchise agreements, or their choice-of-law provisions, as a basis for asserting that 

defendants’ counterclaims are futile. 

1. Adhesion Contracts, Duress, Lack of Consideration, and Compliance 

with 14-Day Notice Requirement 

In its supplemental brief [78 at 5-7], L.A. Insurance addresses defendants’ allegations 

that the Revised Franchise Agreements are unenforceable “contracts of adhesion” that L.A. 

Insurance “foisted upon” them without offering any consideration, and after placing them in 

duress. [35-1 at ¶¶ 29, 65; 77 at 21]. However, L.A. Insurance fails to adequately explain why 

these allegations cannot succeed as a matter of law. Instead, L.A. Insurance simply asserts: (1) 

that defendants “fail to explain how any of the franchise agreements were “foisted upon” them; 

(2) Montes lied about only having 10 minutes to review and sign the contracts in question; and 

(3) defendants signed contracts for four different contracts over a five-year period of time. 

While defendants may face a significant uphill battle in terms of establishing the contracts’ 

unenforceability due to these allegations, L.A. Insurance failed to establish that they cannot do so 

as a matter of law. 

First, while the details at present are sparse, defendants did not “fail to explain” their 

assertion that at least certain of the agreements were “foisted upon them” or that were signed by 

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Montes “under duress.” To the contrary, defendants allege that L.A. Insurance “forced” Montes 

to sign the Revised Franchise Agreements by “threatening ... [to] take away all of [her] existing 

businesses” if she refused. [35-1 at ¶ 26]. The also allege that “[e]ven though the existing 

franchise agreement had yet to expire, [L.A. Insurance] offered no consideration for the 

substantially altered terms presented in the Revised Franchise Agreement.” [Id. at ¶ 28]. And, at 

the hearing on this matter, Montes provided further clarifying details of her allegations: 

These contracts were signed under duress. They gave us ten minutes to sign 

[200-page contracts] or we would lose the agencies...Well, after about a 

year, about two years, don't quote me on the time frame, Your Honor, but a 

couple of years after I got the first agency and I build the business, they 

came to me and they say, “Well, it's time for you to buy us out. We're going 

to give you a loan to buy us out.” I never received the loan. They just told 

me I have to give them payment of 9 percent interest and I had to come to 

Michigan to sign the contract. So I flew to Michigan, and within an hour 

they had me sign a bunch of pages. I didn't know what I was signing. There 

was a lot of stress. It was either that or I lose my agencies...It was exactly 

for me to buy them out. They were going to give me a loan of 9 percent, 

and if I bought them out, then I get to keep my agencies, and if I didn't, then 

I have to sell them to somebody else or -- or get out. 

[77 at 21-23]. 

L.A. Insurance’s second argument merely raises a factual question that the Court cannot 

decide at this stage of the litigation. L.A. Insurance insists that it provided Montes with a draft 

of each franchise agreement at least 14 days prior to her signing it, as required by law, and that 

“Montes lied to this Court [at the hearing] about only having ‘10 minutes’ to sign the Franchise 

Agreements.” [78 at 2]. At the hearing, the Court questioned L.A. Insurance’s counsel about 

this matter: 

THE COURT [to L.A. Insurance’s counsel]: either you have an e-mail that's 

dated 14 days before the meeting that shows that, “Here, ma'am, we're 

providing you with this document” [thus satisfying the 14-day 

requirement]5

...But if she's right and -- and she was called there in violation 

 

5 Given the voluminous nature of the franchise agreements, the Court simply assumed, for the 

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of the statute and presented with a document in violation of the 14 days, 

then maybe she has an argument [as to the agreements’ enforceability]. 

MR. FUHS: Your Honor, with all due respect, she signed the original 

agreements, was never an issue with that. She signed the second round of 

agreements. She signed the acknowledgements that she read and 

understood. 

 * * * 

 

THE COURT: And that might be enough for you to win, but if your client 

did not comply with the 14-day notice – 

MR. FUHS: There's no evidence that we did not, Your Honor. 

THE COURT: I understand, but there's -- there's no evidence that you did 

either at this point. And -- and as I was saying, I just think that if -- if you 

were asking me to shut down her -- her business and her life essentially -- 

which I will do if that's what I'm required to do. If that's what the facts and 

the law shows is the right answer, then, you know, so be it, I don't have a 

problem with that. But, you know, you're -- you're not listening to my 

question. I -- I understand she signed it and I understand she's a business 

person. That to me isn't the issue...what I'm saying is that if it turns out that 

your client violated a 14-day [] advance notice period, [] I don't know what 

the law says about how that interacts with somebody that, yes, [] signed it 

[but claims the failure to provide the 14 days’ notice invalidates the 

agreement] 

MR. FUHS: ... I just don't understand how we can prove a negative 

essentially. 

THE COURT: By showing me an e-mail dated 14 days before the meeting 

that shows that she was sent the document [in compliance with the law]. 

[77 at 26-28]. 

In the supplemental brief it filed after the hearing, L.A. Insurance points the Court to the 

signature pages of the various Financial Disclosure Document “Receipts,” each of which 

purports to be signed by Montes approximately two weeks before she signed the respective 

 

sake of discussion, that it might have satisfied the 14-day notice requirement by e-mailing 

Montes a copy of the draft documents she was to sign. At this point, however, the Court is 

unaware of how L.A. Insurance claims to have provided the drafts to Montes. 

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franchise agreements. [78, Exs. B-E]. L.A. Insurance thus contends that the Receipts prove that 

Montes “received a copy of the [] relevant Franchise Agreement [she was being asked to sign], 

well before [she] signed the agreements themselves,” and that she lied to the Court about not 

receiving them in advance. [Id. at 3]. While the inference L.A. Insurance asks the Court to draw 

from the exhibits is a reasonable one – indeed the most reasonable one – the problem is that 

Montes unequivocally asserts that she “did not receive the Franchise Disclosure Documents 

fourteen (14) days before [she] signed the Franchise Agreements,” apparently implying that the 

signature pages were backdated. [80 at ¶ 40; id., at ¶¶ 39, 41-43]. 

Because the Court is merely considering whether defendants’ proposed amendments 

would be futile, it must accept their factual averments as true. Accordingly, at least at the 

present time, it cannot find, as L.A. Insurance asks it to do, that Montes has lied about these 

matters. Consequently, the Court also cannot say whether L.A. Insurance complied with the 14-

day requirement, and the parties did not brief the issue of the agreements’ enforceability if in fact 

L.A. Insurance did not comply with that requirement. In short, L.A. Insurance’s assertion that 

Montes lied about not receiving the draft agreements in advance is not a basis for denying her 

instant motions. 

Finally, while L.A. Insurance’s argument that defendants signed contracts for four 

different contracts over a five-year period of time would seem to go a long way toward 

disproving many of Montes’ factual assertions and theories, this is simply some of the relevant 

evidence that will need to be sorted out through discovery before the Court can determine 

whether any material questions of fact exist that would make a trial necessary. 

Accordingly, at least at this stage of the litigation, the Court must reject L.A. Insurance’s 

argument that defendants’ proposed counterclaims for fraud, constructive fraud, breach of 

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contract, tortious interference with business relations, tortious interference with contractual 

relations, and violations of Nevada Revised Statutes 598.0915, all fail pursuant to the terms of 

various franchise agreements. 

 2. Fraud 

Because defendants’ fraud claims (Counts IV and XIII) are fairly central to its case, the 

Court also addresses here L.A. Insurance’s argument that these claims “would not survive a 

motion to dismiss because [they] are barred by the integration clauses of the parties’ franchise 

agreements.” [47 at 17]. While L.A. Insurance quoted the franchise agreements’ integration 

clause in its initial response brief, it did not cite a single case which actually analyzed how such a 

clause impacts an opposing party’s claim that it was fraudulently induced to execute the 

underlying agreement; indeed, L.A. Insurance did not cite any case law whatsoever in support of 

its argument. [Id. at 17-19]. Accordingly, at the hearing, the Court asked L.A. Insurance 

whether it could point the Court to any case law that supported its position on this issue. 

L.A. Insurance then filed its supplemental brief, writing: 

An integration or merger clause may nullify antecedent claims, including 

claims relating to formation problems. Dedvukaj v. Equilon Enters, LLC, 

301 F. Supp. 2d 664, 670 (E.D. Mich. 2004), aff’d, No 04-1284, 2005 U.S. 

App. LEXIS 8408 (6th Cir. May 11, 2005). Indeed, Michigan courts have 

interpreted integration clauses to be an effective defense against claims of 

fraud. See UAW-GM Human Res Ctr v. KSL Recreation Corp, 228 Mich. 

App. 486, 579 N.W.2d 411 (1998). If a contract contains a merger clause, it 

may still be avoided based on fraud, but only where the fraud related to the 

merger clause or invalidated the entire agreement, including the merger 

clause. Id.

[78 at 4]. 

These three sentences only scratch the surface of this area of the law, and fail to 

demonstrate that Montes’ fraud claims are futile as a matter of law. The case of Llewellyn-Jones, 

22 F.Supp.3d at 784-85, while not involving a franchise dispute, illuminates why this is so. In 

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Llewellyn-Jones, the plaintiffs were real estate investors who alleged that they were fraudulently 

induced into investing in certain rental properties about which the owner had made various false 

representations, including that the units had been refurbished, were tenanted, and had received a 

federal housing program approval. After the investments went bad, the plaintiffs sued, alleging, 

among other claims, that they had been fraudulently induced into making the investments. The 

defendants moved to dismiss, arguing that the purchase agreement’s merger clause stated that 

“This Agreement sets forth the entire agreement between the parties...” The purchase agreement 

also indicated that the real estate in question was being sold “in As Is Condition.” In rejecting 

the defendants’ argument that these contractual provisions doomed the investors’ fraud claims, 

the district court explained: 

There is some support for the idea that a merger and integration clause 

renders reliance on pre-contract representations unreasonable per se [thus 

dooming a fraud claim based on those representations]... In Watkins & Son 

Pet Supplies v. Iams Co., 254 F.3d 607, 612 (6th Cir.2001), the court read 

Ohio law to hold that “[i]f a written contract is completely integrated, it is 

unreasonable as a matter of law to rely on parol representations or promises 

within the scope of the contract made prior to its execution.” But Michigan 

courts do not take the point so far. For instance, in Archambo v. Lawyers 

Title Ins. Corp., 466 Mich. 402, 646 N.W.2d 170 (2002), the Michigan 

Supreme Court held that although “an integration clause nullifies all 

antecedent agreements,” that rule is “[s]ubject ... to evidence of certain kinds 

of fraud (or other grounds sufficient to set aside a contract) and for the rare 

situation when the written document is obviously incomplete on its face.” 

Id. at 413, 414 n. 15, 646 N.W.2d at 177 & n. 15 (internal quotations and 

citations omitted); see also UAW–GM Human Resource Center v. KSL 

Recreation Corp., 228 Mich.App. 486, 503, 579 N.W.2d 411, 419 (1998) 

(holding that “the only fraud that could vitiate the contract is fraud that 

would invalidate the merger clause itself, i.e., fraud relating to the merger 

clause or fraud that invalidates the entire contract including the merger 

clause” (quoting 3 Corbin, Contracts, § 578)). 

This case, then, is governed by the rule that the presence of a merger clause 

in a written contract will not preclude a claim for fraud in the inducement 

where the plaintiff can show that it would have avoided the agreement 

entirely had it known that the defendant's fraudulent representations in fact 

were false. Custom Data Solutions, Inc. v. Preferred Capital, *785 Inc., 274 

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Mich.App. 239, 243, 733 N.W.2d 102, 105 (2006) (observing that “[d]espite 

the existence of a merger clause, parol evidence is admissible for purposes 

of demonstrating that the agreement is void or voidable or for proving an 

action for deceit. Fraus omnia corrumpit: fraud vitiates everything it 

touches” (quoting Calamari & Perillo, The Law of Contracts § 9.21, at 340–

41 (4th ed.))). As the Sixth Circuit has explained: 

[T]here is an important distinction between (a) representations of 

fact made by one party to another to induce that party to enter 

into a contract, and (b) collateral agreements or understandings 

between two parties that are not expressed in a written contract. 

It is only the latter that are eviscerated by a merger clause, even 

if such were the product of misrepresentation. It stretches the 

[KSL Recreation] holding too far to say that any pre-contractual 

factual misrepresentations made by a party to a contract are 

wiped away by simply including a merger clause in the final 

contract. 

LIAC, Inc. v. Founders Ins. Co., 222 Fed.Appx. 488, 493 (6th Cir.2007) 

(quoting Star Ins. Co. v. United Commercial Ins. Agency, Inc., 392 

F.Supp.2d 927, 929–30 (E.D. Mich. 2005)) (alterations in original). 

Star Ins. Co., 392 F.Supp.2d at 929-30 (emphasis added), in turn, held that: 

The key element in cases involving a merger clause is whether one 

justifiably relied on the representations of another when the parties' written 

agreement clearly stated that by signing the document they were agreeing 

that the document made up the parties' entire agreement regarding the terms 

of the contract and its performance standards. The Michigan courts have 

said that, as it pertains to representations regarding additional agreements or 

contractual terms, a party would not be justified in relying on them where 

there is a merger clause. The reasoning behind this is clear, one should not 

be heard to complain that they relied on oral promises regarding additional 

or contrary contract terms when there is written proof, signed by both 

parties, to the contrary. Yet, a party could still justifiably rely upon 

representations made by another party regarding things outside the scope of 

the contractual terms, such as the other party's solvency, indebtedness, 

experience, clientele, client retention rate, business structure, etc. If these 

representations are false when they are made, not merely opinion and not 

future promises, they could constitute fraud in the inducement. 

 Here, while L.A. Insurance is right to question how Montes could have justifiably relied 

on at least some of the alleged fraudulent misrepresentations with respect to her execution of the 

later franchise agreements, this is a factual matter that the Court cannot conclusively determine 

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at this stage of the litigation. What is relevant at this stage is that defendants allege that L.A. 

Insurance fraudulently induced Montes to execute the franchise agreements by falsely asserting 

that it “had negotiated better than market commission rates with insurance carriers,” “had dozens 

of authorized carriers,” and had “an aggressive marketing and advertising arm” and “a 

comprehensive system of support and assistance,” knowing these assertions were untrue. [35-1 

at ¶ 82].6

 These alleged fraudulent misrepresentations are not ones which attempt to alter the 

franchise agreements’ terms, but rather are allegedly false “representations of fact made by [L.A. 

Insurance] to [Montes] to induce [her] to enter into a contract,” which could conceivably 

“invalidate[] the entire contract.” LIAC, 222 F. App'x at 493. Thus, the mere fact that the 

franchise agreements contain a merger clause does not necessarily doom defendants’ fraud 

claims. 

B. Mich. Comp. Laws § 445.903 

 L.A Insurance is correct that even if Michigan law is controlling in this case, defendants’ 

counterclaim under Mich. Comp. Laws § 445.903 lacks merit and must be dismissed. Section 

445.903(1) prohibits “[u]nfair, unconscionable, or deceptive methods, acts, or practices in the 

conduct of trade or commerce” and provides a laundry list of examples. See Mich. Comp. Laws 

§ 445.903 (a) - (kk). Specifically exempted from the term “trade or commerce” is “the purchase 

 

6

 To the extent defendants allege that L.A. Insurance falsely represented that it “would be adding 

over a hundred authorized carriers to its approved list,” and “would provide comprehensive 

marketing support in the Southern Nevada market” going forward, [id. at ¶¶ 84, 86], such 

forward-looking statements cannot support their fraud claim. Cook v. Little Caeser Enterprises, 

Inc., 210 F.3d 653, 658 (6th Cir. 2000) (“To establish fraud, the allegedly false statements must 

relate to past or existing facts, not to future promises or expectations.”); Hi-Way Motor Co. v. 

Int'l Harvester Co., 398 Mich. 330, 336 (1976) (“an action for fraudulent misrepresentation must 

be predicated upon a statement relating to a past or an existing fact. Future promises are 

contractual and do not constitute fraud.”). 

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or sale of a franchise,” so long as the franchisor is not engaged in “pyramid and chain 

promotions . . . as defined in the franchise investment law.” Mich. Comp. Laws § 445.902(g). 

 Under the Franchise Investment Law, a pyramid or chain promotion is defined as: 

any plan or scheme or device by which (a) a participant gives a valuable 

consideration for the opportunity to receive compensation or things of 

value in return for inducing other persons to become participants in the 

program or (b) a participant is to receive compensation when a person 

introduced by the participant introduces one or more additional persons 

into participation in the plan, each of whom receives the same or similar 

right, privilege, license, chance, or opportunity. 

Mich. Comp. Laws § 445.1528. Based on a review of defendants’ proposed first amended 

counterclaims and first supplement to its counterclaims [35, Ex. A; 36 Ex. A], L.A. Insurance is 

clearly exempt from liability under Mich. Comp. Laws § 445.903 because its alleged conduct 

does not remotely resemble a “pyramid or chain promotion” as those terms are defined in the 

Franchise Investment Law. Moreover, defendants’ cursory assertion that “[p]laintiff can be held 

liable under the MCPA if its franchise includes a pyramid or chain promotion” is so devoid of 

any meaningful analysis that it cannot possibly salvage this counterclaim. [50 at 9]. Thus, 

defendants’ are not entitled to relief under Mich. Comp. Laws § 445.903, and defendants’ instant 

motions are denied to the extent they attempt to plead claims for relief under this statute. 

C. Fiduciary Duty 

 L.A. Insurance contends that, as a matter of law, “franchise agreements do not give rise 

to fiduciary or confidential relationships between the parties.” [47 at 25]. This argument fails 

regardless of whether Michigan or Nevada governs this litigation.7

 

 

7

 L.A. Insurance also contends that defendants’ counterclaim for breach of fiduciary duty is futile 

in view of the franchise agreements’ provisions disclaiming such a relationship, and those which 

supposedly permit the very conduct defendants maintain is a breach of L.A. Insurance’s 

fiduciary obligations. As discussed above, however, at least at this time, when the agreements’ 

validity remains an open issue in the case, L.A. Insurance may not rely upon the agreements’ 

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 Under Michigan law, a “fiduciary relationship is used to broadly describe relationships of 

inequality.” In re Estate of Ostrowski, 2010 WL 5373828, at *4 (Mich. Ct. App. Dec. 28, 2010). 

Such relationships arise “when one reposes faith, confidence, and trust in another’s judgment and 

advice.” Fassihi v. Sommers, Schwartz, Silver, Schwartz & Tyler, P.C., 107 Mich. App. 509, 

515 (1981). “Thus, a fiduciary relationship may exist where one party exercises complete 

dominion over the other party or where one party has placed complete trust in the other party 

who has the requisite knowledge, resources, power, or moral authority to control the subject 

matter at issue.” Estate of Ostrowski, 2010 WL 5373828, at *4. An entity that is “in a fiduciary 

relation to another is under a duty to act for the benefit of the other as to matters within the scope 

of the relation.” Bero Motors v. GMC, No. 224190, 2001 Mich. App. LEXIS 2029, at *12 

(Mich. Ct. App. Oct. 2, 2001). While Michigan courts are usually “reluctant to extend the cause 

of action for breach of fiduciary relationship beyond the traditional context,” id., they 

acknowledge that deciding whether such a relationship exists is a fact specific determination that 

depends upon the nature of the relationship in any given context. Id. at *11; see also Muglia v. 

Kaumagraph Corp., Nos. 93-1986, 94-1156, 1995 U.S. App. LEXIS 24400, at *14 (6th Cir. 

Aug. 16, 1995) (“[e]xcept for certain per se fiduciary relationships, such as that between an 

attorney and client, fiduciary relationships arise from the facts and circumstances surrounding 

the relationship between the parties.”). Ultimately, “[w]here a confidence has been betrayed by 

the party in the position of influence, this betrayal is actionable, and the origin of the confidence 

is immaterial.” Fassihi, 107 Mich. App. at 515 (citing Smith v. Saginaw Savings & Loan Ass’n, 

94 Mich. App. 263, 274 (1979). 

 

terms to defeat defendants’ counterclaims. 

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 For instance, in AKB Wireless, Inc. v. Wireless Toyz Franchise, LLC, No. 14-13424, 2015 

U.S. Dist. LEXIS 167194 (E.D. Mich. Dec. 15, 2015), the district court rejected an argument 

much like the one urged by L.A. Insurance in the instant case. There, the franchisor argued “as a 

matter of law, that relationships between franchisees and franchisors do not give rise to fiduciary 

or confidential relationships between the parties.” Id. at *19. But the district court disagreed, and 

held that the franchisee adequately pled a breach of fiduciary duty claim because it alleged that 

the franchisor had obtained commissions from third-party carriers and held them in a trust 

account on behalf of the franchisee. Id. at *20. 

 Another example (albeit in the context of a non-franchise business dispute) is Riverside 

Auto Sales, Inc. v. GE Capital Warranty Corp., No. 03-55, 2004 U.S. Dist. LEXIS 18965 (W.D. 

Mich. Mar. 30, 2004). In Riverside, a group of automobile dealerships executed an agreement 

with an extended warranty administrator to “sell [e]xtended [w]arranties to customers in 

conjunction with automobile sales.” Id. at *2. As a part of their arrangement, the administrator 

assisted the dealerships in forming a reinsurance company with the intention that it would 

provide the dealerships with additional revenue. Id. at *2-3. Eventually the dealerships sued the 

administrator for, among other things, breach of fiduciary duty because it allegedly 

“misrepresented the amount of money that would reach [the dealerships] through the reinsurance 

agreement.” Id. at *4. According to the dealerships, the administrator assumed a fiduciary duty 

because: 

it acted in the capacity of promoter, director, and manager in setting up 

and facilitating the incorporation of [the reinsurance company] and 

managing its relationship with [a third-party insurance carrier]. The 

[dealerships further] allege[d] that as automobile dealers without any 

experience in the insurance business, they personally took on risks and 

committed their assets to the reinsurance program based on promises of a 

steady stream of profits that could be used to fund, for example, retirement 

or college education . . . Meanwhile, [the administrator] allegedly handled 

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all aspects of the formation and subsequent operations of [the reinsurance 

company], to include incorporating it in the Turks and Caicos Islands; 

making all necessary regulatory filings and communications; getting 

licenses; handling tax matters; and distributing shares of stock. Also, [the 

dealerships] contend[ed] that [the administrator] maintained a fiduciary 

relationship with [them] regarding the Extended Warranty arrangement by 

managing the sales business; providing all forms, brochures, and supplies; 

keeping records of all sales; administering the handling of claims; 

authorizing the performance of covered repairs; reimbursing the dealer for 

repairs; offering consulting services; and conducting training for dealer 

sales personnel. 

Id. at *21-22. The administrator moved to dismiss the breach of fiduciary duty claim on the 

ground that it had merely shared an arms-length business relation with the dealerships and 

nothing more. The district court concluded otherwise. Acknowledging numerous authorities 

that “make clear that in most circumstances, business entities dealing with one another in a 

commercial setting do not incur fiduciary duties, even when their relationships involve a measure 

of trust or confidence,” id. at 30, the court nevertheless ruled that the dealerships sufficiently 

alleged “substantial imbalances of knowledge, power, and capability between themselves and 

[the administrator].” Id. at *31. As a result, the court held that it was “unable to decide at this 

stage whether the relationship between [the dealerships] and [the administrator] took on a 

fiduciary character.” Id. at *20. 

 Although AKB and Riverside are somewhat factually distinguishable from the present 

case, their principal holdings apply with equal force here. Defendants allege that “the 

extraordinary lopsided nature of the Revised Franchise Agreement[s], coupled with the Plaintiffs 

ongoing promises of support, guidance and fair treatment, gave rise to a clear fiduciary duty.” 

[35, Ex. A at ¶ 112]. Defendants maintain that this disproportionate power is evidenced, for 

example, by L.A. Insurance allegedly invoking the terms of the Revised Franchise Agreements 

to justify placing Toro NV6 “just across the street from NV26 insurance,” which significantly 

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diminished NV26’s sales revenue. [35-1 at ¶¶ 45-46]. Similarly, defendants point to L.A. 

Insurance’s asserted right under the Revised Franchise Agreements to instruct third-party 

insurance carriers to forward defendants’ commissions to L.A. Insurance’s corporate office. [36-

1 at ¶ 25]. Taken together, these allegations at least plausibly show that L.A. Insurance 

completely dominated the business relationship between it and the defendants, and could 

essentially unilaterally control defendants’ ability not just to succeed in business, but to succeed 

as one of its franchisees. 

 Again, at least at this stage of the litigation, where discovery has yet to commence, and in 

view of all of the foregoing, it would be premature for the Court to decide that, as a matter of law 

L.A. Insurance and the defendants were not in a fiduciary relationship. See Riverside, 2004 U.S. 

Dist. LEXIS 18965, at *31 (finding no “authority requiring a fact-finder to conclude from 

Plaintiffs’ allegations that no fiduciary relationship existed.”); Bero Motors, 2001 Mich. App. 

LEXIS 2029, at *11 (“whether a fiduciary relation exists is a question of fact.”); Fassihi, 107 

Mich. App. at 515 (“Based upon the pleadings, we cannot say that plaintiff’s [breach of fiduciary 

duty] claim is clearly unenforceable as a matter of law.”).8

 

IV. CONCLUSION 

For the foregoing reasons, defendants’ motion for leave to amend counterclaims [35] is 

GRANTED IN PART and DENIED IN PART and defendants’ motion for leave to supplement 

counterclaims [36] is GRANTED IN PART and DENIED IN PART. Defendants’ may 

proceed with all of their amended and supplemental counterclaims other than those seeking relief 

under the covenant of good faith and fair dealing and Mich. Comp. Laws § 445.903. 

 

8

 The same may also be said under Nevada law, which (if it were to apply) recognizes that 

franchise agreements can and do give rise to “a special element of reliance or fiduciary duty.” 

Great Am. Ins. Co. v. General Builders, Inc., 113 Nev. 346, 354 (1997). 

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Dated: March 11, 2016 s/David R. Grand 

Ann Arbor, Michigan DAVID R. GRAND 

 United States Magistrate Judge 

CERTIFICATE OF SERVICE

 The undersigned certifies that the foregoing document was served upon counsel of record 

and any unrepresented parties via the Court’s ECF System to their respective email or First Class 

U.S. mail addresses disclosed on the Notice of Electronic Filing on March 11, 2016. 

 s/Eddrey O. Butts 

 EDDREY O. BUTTS 

 Case Manager

2:14-cv-14432-DRG Doc # 105 Filed 03/11/16 Pg 24 of 24 Pg ID 3629