October 10, 2025|Franchise Frontlines
October 10, 2025 | Michigan Court of Appeals | Unpublished Opinion
Executive Summary
In an unpublished opinion by a three-judge panel, the Michigan Court of Appeals addressed a dispute arising from the parties’ effort to convert Lefty’s Cheesesteaks into a nationwide franchise system. Plaintiff Allie Mallad argued that a forum-selection clause in the parties’ master agreement required all litigation to proceed only in Wayne County courts. Defendants relied on the operating agreement’s arbitration clause, asserting that the claims arose from the operating agreement and were therefore subject to mandatory arbitration. The appellate court concluded that the two provisions could be read harmoniously and that most of the claims must be arbitrated. However, one tortious-interference claim against a non-signatory could proceed in court. The panel further held that the trial court erred by dismissing the case outright rather than staying it pending arbitration, and it declined to disturb the trial court’s refusal to decide a premature motion for rescission.
Relevant Background
The opinion recounts a business relationship formed in April 2020, when the parties were working to transition Lefty’s Cheesesteaks from a group of company-owned restaurants into a franchise system capable of national growth. According to the allegations, defendant Nayfe Berry owned eleven Lefty’s Cheesesteaks restaurants in Michigan but had not yet established a formal franchise structure. The complaint states that she had limited involvement in the day-to-day operations of those restaurants and relied heavily on her son, Sam Hussein Berry, who was authorized to negotiate on her behalf during the transition.
Plaintiff, who controlled Red Effect Holdings, alleged that Berry sought his assistance to complete the conversion of Lefty’s from a local concept into a franchisor-franchisee model. To document their relationship, the parties executed two agreements on the same day. The master agreement addressed an exchange of ownership interests and certain financial arrangements, including commissions and the allocation of credit-card processing rebates. That agreement contained a forum-selection clause requiring litigation relating to the master agreement to be brought in state or federal court in Wayne County. The operating agreement, by contrast, governed Lefty’s internal management and included a mandatory arbitration clause for disputes arising out of or relating to the operating agreement. The operating agreement also incorporated the master agreement “as applicable” and stated that in the event of a conflict, the master agreement would control.
The parties’ relationship later deteriorated, and plaintiff filed a multi-count complaint alleging member oppression, breach of contract, unjust enrichment, an accounting, statutory conversion, breach of fiduciary duty, civil conspiracy, and tortious interference. Defendants moved to compel arbitration under the operating agreement. They also filed a separate motion seeking rescission of the agreements, asserting fraud in the inducement and failure of consideration. The trial court granted the motion to compel arbitration, denied rescission without prejudice, stayed enforcement of its arbitration order for twenty-one days, and stated that the order was “final” and “closes the case.” Both sides appealed.
Decision
The appellate court began by addressing whether the trial court should have stayed—rather than dismissed—the matter once it compelled arbitration. The panel held that the Michigan Uniform Arbitration Act required a stay of judicial proceedings involving arbitrable claims and did not authorize dismissal. Because the trial court compelled arbitration, it was obligated to stay the case pending completion of those proceedings. The court therefore reversed the dismissal and remanded for entry of a proper stay.
The heart of the opinion concerns the interaction between the master agreement’s forum-selection clause and the operating agreement’s arbitration clause. The plaintiff maintained that the master agreement’s forum-selection provision overrode the operating agreement’s arbitration clause and therefore required the entire dispute to be litigated in court. The appellate court rejected that interpretation. Relying on principles emphasizing the need to give effect to all contractual provisions, the panel explained that the agreements could be harmonized. In the court’s view, the forum-selection clause governed judicial actions relating to the master agreement, while the arbitration clause governed disputes arising out of or relating to the operating agreement. Because most of the claims concerned the internal management of Lefty’s and the parties’ rights under the operating agreement, the court held that the arbitration clause controlled.
The court then turned to whether certain individual defendants could be compelled to arbitrate. Sam Berry had signed the operating agreement in a limited capacity, and defendant Shady Abulhassan had not signed it at all. The panel held that agency principles allowed the arbitration clause to apply to claims alleging that those individuals acted as agents of Lefty’s, a signatory entity. The plaintiff’s complaint repeatedly alleged that Sam and Abulhassan acted on behalf of Lefty’s, placing those claims within the scope of the arbitration clause. However, one claim for tortious interference was pleaded in the alternative precisely on the theory that Abulhassan was not acting as an agent. Because the arbitration clause could not be imposed on him in his individual capacity for conduct outside the agency relationship, that single claim was not arbitrable and could proceed in court.
Finally, the appellate court declined to fault the trial court for denying the defendants’ rescission motion without prejudice. The opinion describes that motion as procedurally deficient and premature, and the panel noted that nothing in the arbitration statutes required the trial court to resolve rescission before compelling arbitration.
Looking Forward
This decision provides important guidance for franchisors and emerging franchise systems that rely on multiple agreements when transitioning from local operations to a structured franchise model. The opinion illustrates how courts analyze overlapping forum-selection and arbitration provisions and underscores the importance of drafting those provisions to operate consistently rather than at cross-purposes. The panel’s conclusion that both clauses could be enforced according to their terms reflects a fact-specific reading of the agreements and does not suggest any broader shift in how courts treat arbitration clauses in complex franchise-related transactions. The ruling also highlights how arbitration clauses may reach individual actors when their alleged conduct is undertaken on behalf of a signatory entity, while claims predicated on conduct outside an agency relationship may fall outside the arbitration framework.
For franchisors, the case reinforces the value of reviewing all agreements used during system development to ensure consistency in dispute-resolution provisions. When multiple contracts address related aspects of ownership, management, or brand development, clarity regarding which disputes must be arbitrated and which must proceed in court may reduce later challenges and prevent parallel proceedings. The decision also serves as a reminder that trial courts should stay, rather than dismiss, actions when compelling arbitration, ensuring a cleaner procedural posture if additional claims remain pending. Most importantly, the case illustrates the need for emerging franchisors to coordinate counsel across transactional and dispute-resolution planning, particularly when allocating roles among principals, agents, and entities during the formation of a brand.
This article is based solely on the opinion of the Court in this matter. The author has not conducted any independent investigation into the facts. For the avoidance of doubt, each statement related to the law and facts in this article is drawn from the Court’s opinion in this case.
Thomas O’Connell is a Shareholder at Buchalter APC and Chair of the firm’s Franchise Practice Group. For questions about this article or media inquiries, you can contact Tom at toconnell@buchalter.com.
This communication is not intended to create, and does not create, an attorney-client relationship or any other legal relationship. No statement herein constitutes legal advice, nor should it be relied upon or interpreted as such. This communication is for general informational purposes only and is not a substitute for legal counsel. Readers should not act or refrain from acting based on any information provided without seeking appropriate legal advice specific to their situation. For more information, visit www.buchalter.com.
