Preferred Capital v. Sarasota Kennel ( 2007 )

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
File Name: 07a0196p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
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Plaintiff-Appellant, -
PREFERRED CAPITAL, INC.,
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No. 06-3063
v.
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SARASOTA KENNEL CLUB, INC. and JACK COLLINS, -
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Defendants-Appellees. -
JR.,
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Appeal from the United States District Court
for the Northern District of Ohio at Cleveland.
No. 04-02063—John M. Manos, District Judge.
Argued: April 19, 2007
Decided and Filed: May 29, 2007
Before: MERRITT and MARTIN, Circuit Judges; FORESTER, District Judge.*
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COUNSEL
ARGUED: Tamara A. O’Brien, RODERICK LINTON LLP, Akron, Ohio, for Appellant. Holly
Marie Wilson, REMINGER & REMINGER CO., L.P.A., Cleveland, Ohio, for Appellee.
ON BRIEF: Tamara A. O’Brien, RODERICK LINTON LLP, Akron, Ohio, for Appellant. Holly
Marie Wilson, REMINGER & REMINGER CO., L.P.A., Cleveland, Ohio, for Appellee.
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OPINION
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MERRITT, Circuit Judge. Preferred Capital brought this diversity action to enforce a rental
agreement between Norvergence, Preferred Capital’s assignor, and Sarasota Kennel Club. The
district court dismissed the claim because of a lack of personal jurisdiction over the defendants, and
Preferred Capital appeals, arguing that the district court erred in refusing to enforce the forum
selection clause in the Norvergence contract. Since that decision, a clear distinction has emerged
between the federal and state (Ohio) law concerning the enforcement of such clauses. We are thus
presented with the question of whether federal or state law controls the interpretation of a forum
selection clause when the clause is raised as the sole basis for personal jurisdiction over the
*
The Honorable Karl S. Forester, United States District Judge for the Eastern District of Kentucky, sitting by
designation.
1
No. 06-3063 Preferred Capital v. Sarasota Kennel Club, et al. Page 2
defendant. For the reasons discussed below, we hold that state law applies to this question and
therefore affirm the District Court’s decision to dismiss the case for lack of personal jurisdiction,
albeit on different grounds.
I.
In April 2004, the defendants, a Florida resident and his corporation, executed an Equipment
Rental Agreement with Norvergence, Inc., a New Jersey corporation that is not a party to this case.
The agreement called for Norvergence to supply the Sarasota Kennel Club with telecommunications
equipment and services including land-line and cellular telephone service and high-speed internet
access. Norvergence never actually provided the services.
The rental agreement contained the following forum selection and choice of law provision:
This agreement shall be governed by, construed and enforced in
accordance with the laws of the State in which the Rentor’s principal
offices are located or, if this Lease is assigned by the Rentor, the
State in which the assignee’s principal offices are located, without
regard to such states choice of law considerations and all legal
actions relating to this Lease shall be venued exclusively in a state or
federal court located within that State, such court to be chosen at the
Rentor or Rentor’s assignee’s sole option.
J.A. 16, 266 (emphasis added).
Unbeknownst to the defendants, in September 2003, Norvergence had executed a Master
Program Agreement with the plaintiff, Preferred Capital, Inc., a financial services company located
in Brecksville, Ohio. This agreement established terms under which Norvergence could, and
presumably would, assign the rights to rental payments from future equipment rental agreements to
Preferred Capital.
One day after Sarasota Kennel executed the Equipment Rental Agreement, it received notice
that the agreement had been assigned, and that all future payments should be made to Preferred
Capital. This was the first time the defendants had heard of Preferred Capital. After making the first
few payments, Sarasota Kennel stopped paying because Norvergence had failed to provide the
services promised in the rental agreement. Sarasota Kennel’s experience is not unique; hundreds
of other parties entered into similar agreements with Norvergence, had their contracts assigned to
finance companies, and never received the promised telecommunications services.
Norvergence is now in bankruptcy. Its conduct has spawned a wave of litigation throughout
the country, including suits against it and its finance company assignees. The private actions include
a class action lawsuit in New Jersey and numerous enforcement actions by state attorneys general,
including one in Florida. The Federal Trade Commission has already received a default judgment
in an enforcement action against Norvergence. Federal Trade Commission v. Norvergence, Inc.,
No. Civ.A.04-5414, 2005 WL 3754864 (D.N.J. July 22, 2005). In addition, many of the finance
companies have brought suit against the lessees, as is the case here.
Preferred Capital, as the assignee (claiming to be a good faith, holder in due course of the
promissory agreement), filed this suit in the Court of Common Pleas for Cuyahoga County, Ohio,
seeking the total sum of the rental payments due under the five-year lease. The defendants removed
the case to the Northern District of Ohio and filed a motion to dismiss the case for lack of personal
jurisdiction. Preferred Capital countered by arguing that the forum selection clause in the rental
agreement provided the court with jurisdiction over the defendants. (Preferred Capital concedes that
without the forum selection clause, the defendants do not have sufficient contacts with the State of
No. 06-3063 Preferred Capital v. Sarasota Kennel Club, et al. Page 3
Ohio to be subject to personal jurisdiction there.) The district court held the forum selection clause
unenforceable under both Ohio and federal law (the two were identical at the time) because of fraud
and overreaching by Norvergence, and granted the motion to dismiss.
Since the district court ruled on Sarasota Kennel Club’s motion to dismiss, two cases have
clarified how federal and state law apply to the facts of this case. First, in July 2006, this court held
a forum selection clause identical to the one at issue in this case enforceable under federal and Ohio
law. Preferred Capital, Inc. v. Associates in Urology, 453 F.3d 718, 724 (6th Cir. 2006). Second,
in January 2007, the Ohio Supreme Court held the same forum selection clause invalid under Ohio
law. Preferred Capital, Inc. v. Power Eng’g Group, Inc., 860 N.E.2d 741 (Ohio 2007). The Ohio
court held that the information imbalance regarding the likely assignment of the rental agreement
combined with the presence of a floating forum selection clause violated the state’s public policy,
rendering the clause unenforceable.
II.
The question to be resolved, then, is whether federal or state law controls the interpretation
of a forum selection clause in a diversity case where enforcement of the clause is necessary for the
court to have personal jurisdiction over the defendant. A recent Seventh Circuit case that arose from
a similar Norvergence contract noted that this question has never been answered by the Supreme
Court or any Circuit Court. IFC Credit Corp. v. Aliano Bros. Gen. Contractors, 437 F.3d 606, 609
(7th Cir. 2006). The IFC court was able to interpret the forum selection clause without answering
the question, because it held the clause enforceable under both Illinois and federal law.
When deciding to apply federal or state law to a forum selection clause, the context in which
the clause is asserted can be determinative. For example, when a party moves to transfer a case on
the basis of a forum selection clause, the federal statute governing transfer motions controls the
clause’s interpretation. Stewart Org., Inc. v. Ricoh Corp., 487 U.S. 22, 29-30 (1988). In Stewart,
the Supreme Court rejected the circuit court’s approach of deciding the question based on the
procedural/substantive framework that is usually applied to resolve conflicts between federal and
state law questions in diversity cases. The Court found it unnecessary to ponder “the sticky question
of which law, state or federal,” should govern the interpretation of forum selection clauses in
diversity cases and reoriented the inquiry to the “immediate issue before the District Court,” the
defendant’s motion to transfer venue. Id. at 25-28.
The Court next concluded that the federal statute governing motions to transfer, 28 U.S.C.
§ 1404(a), was broad enough to resolve the forum selection clause issue and the statute represented
a constitutional exercise of Congressional authority before remanding the case with instructions that
the forum selection clause be considered as one of the factors in the motion to transfer test. Id. at
29-30. In IFC, the Seventh Circuit suggested that this approach supports applying state law in the
context of a motion to dismiss 1for lack of personal jurisdictions, since diversity courts look to state
law in deciding such motions. 437 F.3d at 609.
1
We note that the Seventh Circuit was somewhat equivocal in its support of this approach. Specifically, the
court recognized that a motion to dismiss for lack of personal jurisdiction serves very nearly the same function as a
motion to transfer, since the losing plaintiff in a case like this will presumably refile the case in a court with jurisdiction
over the defendant, just as if a transfer order had been issued. Because of this functional similarity, the Seventh Circuit
suggested that a case like this might be properly analyzed under Stewart by applying the balancing test prescribed by
the transfer statute, 28 U.S.C. § 1404(a). 437 F.3d at 608-09.
To hold that Stewart required the application of federal law would, however, undermine the very heart of the
Supreme Court’s reasoning that the rule of the threshold motion should control. Also, the Seventh Circuit’s presumption
that a losing plaintiff will respond to a dismissal by refiling in a proper forum is not an ironclad guarantee. It is not
difficult to imagine a situation where a plaintiff would decide not to pursue its claim in a far away forum, either because
of the cost and inconvenience involved or because the plaintiff perceived the forum less hospitable to its claim. These
No. 06-3063 Preferred Capital v. Sarasota Kennel Club, et al. Page 4
Preferred Capital argues that we should follow the approach of several other circuit courts
by applying the traditional substantive/procedural test for resolving conflicts between federal and
state law in diversity cases and by then finding that federal law applies because interpreting a forum
selection clause is procedural, rather than substantive, in nature.2 Jumara v. State Farm Ins. Co.,
55 F.3d 873, 877-78 (3d Cir. 1995); Jones v. Weibrecht, 901 F.2d 17, 19 (2d Cir. 1991), Manetti-
Farrow, Inc. v. Gucci America, Inc., 858 F.2d 509, 513 (9th Cir. 1988). But see Nutter v. New
Rents, Inc., No. 90-2493, 1991 U.S. App. LEXIS 22952, at *14 (4th Cir. October 1, 1991) (holding
that the interpretation of a forum selection clause is substantive and state law should apply).
In each of the three published cases, a party invoked a forum selection clause in a context
other than a motion to transfer or motion to dismiss for lack of personal jurisdiction. In each case,
the court decided that since a motion to transfer was not involved, Stewart did not control the
decision of which law to apply. They then held that interpretation of such clauses was procedural
in nature, because the federal procedural interest outweighed the state’s interest in having its rule
applied. E.g. Manetti-Farrow, 858 F.2d at 513.
Of these approaches, the threshold-question approach employed in Stewart is the best fit for
the question before us. Like the Supreme Court in Stewart, we can answer the question of which
law should apply to interpreting the forum selection clause by addressing the immediate issue of
personal jurisdiction and applying the well-established choice of law mechanism that this analysis
provides. It is unnecessary for us to directly confront “the sticky question of which law, state or
federal,” governs in all diversity suits. Stewart, 487 U.S. at 25-26.
In diversity actions, federal courts apply state law to determine questions of personal
jurisdiction. Intera Corp. v. Henderson, 428 F.3d 605, 615 (6th Cir. 2005). In our case, then, the
recent holding of the Ohio Supreme Court controls our decision here. Power Eng’g Group, Inc., 860
N.E.2d at 746. Because it violates the public policy of the state of Ohio, the Norvergence forum
selection clause is not enforceable.
Even if we were to agree with Preferred Capital that the procedural/substantive balancing
test were to apply here, our result would not change. First, we note that resolving the conflict
between federal and state law in a situation where there is no federal statute or rule on point requires
us to make a “relatively unguided Erie choice.” Hanna v. Plumer, 380 U.S. 460, 471 (1965).
Second, the Supreme Court has instructed that when a federal procedural statute or Rule of
Procedure is not on point, courts should strive for uniformity of outcomes between federal and state
courts. Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 496 (1941). Finally, when deciding
what is procedural and what is substantive for diversity purposes, we apply a functional test based
on the “twin aims of the Erie rule: discouragement of forum-shopping and avoidance of inequitable
administration of the laws.” Hanna, 380 U.S. at 468.
Under these guidelines, we conclude that Ohio law should apply to the interpretation of this
forum selection clause. To apply federal law would undercut both aims of the Erie test – it would
encourage forum shopping by providing differing outcomes in federal and state court. See Stewart,
realities suggest that treating the motion to dismiss for lack of personal jurisdiction and the motion to transfer as
functional equivalents is not a sound basis for applying the transfer statute to the facts of this case.
2
During oral arguments, Preferred Capital also contended that the facts of this case were distinguishable from
the facts of the Ohio Supreme Court’s Power Engineering case, and thus the same result is not compelled here. Our
examination of the records of the two cases turns up no such distinctions. Indeed, the forum selection clauses at issue
in the two cases are identical and the broader contracts are identical except for the descriptions of the specific services
to be provided and monthly payment amounts.
No. 06-3063 Preferred Capital v. Sarasota Kennel Club, et al. Page 5
487 U.S. at 39-40 (Scalia, J., dissenting) (arguing that the Erie test should govern the interpretation
of forum selection clauses and concluding that the test compels the application of state law).
Further, the state interest in limiting the adjudication of contract cases against out-of-state
defendants pursuant to the Norvergence forum selection clause outweighs the federal court’s interest
in applying its own rules to interpreting the forum selection clause. See Byrd v. Blue Ridge Elec.
Coop., 356 U.S. 525, 537-538 (1958) (comparing the competing federal and state interests to
determine whether the state or federal rule should apply in a diversity case). In Power Engineering,
the Ohio Supreme Court held that “when one party to a contract containing a floating forum
selection clause possesses undisclosed intent to assign its interest in the contract almost immediately
to a company in a foreign jurisdiction, the forum selection clause is unreasonable and violates public
policy” absent a clear showing that the countersigning party knowingly waived personal jurisdiction
in any forum. 860 N.E. at 746. That the forum selection clause at issue here violates the public
policy of the State of Ohio is not an interest that we consider lightly. The Ohio Supreme Court has
found the clause against public policy because of the possibility of fraud. This is a strong
“substantive” conclusion of Ohio law. On the other hand, the federal court’s interest is in applying
consistent rules to interpreting forum selection clauses. As the Supreme Court in Stewart explained,
the interpretation of forum selection clauses in federal courts is not a uniform exercise requiring a
per se rule; the context in which the clause is raised can determine how it is interpreted. Given this
relative imbalance between the federal and state interests at issue here, we do not agree with
Preferred Capital that the Erie test requires us to find the issue simply a procedural rather than a
substantive matter.
For the foregoing reasons, we affirm the judgment of the District Court.