Kompass Kapital Funding, LLC v. Sage Surfaces LLC

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KOMPASS KAPITAL FUNDING, LLC, Plaintiff, v. SAGE SURFACES, LLC, Defendant.

No. 22-2522-DDC-TJJ

United States District Court, D. Kansas

April 28, 2023

MEMORANDUM AND ORDER

Daniel D. Crabtree United States District Judge

This matter comes before the court on defendant Sage Surfaces LLC's Motion to Transfer, or Alternatively, to Dismiss for Forum Non Conveniens (Doc. 11). Plaintiff Kompass Kapital Funding, LLC responded (Doc. 13), and defendant replied to plaintiff's Response (Doc. 16). For reasons explained below, the court grants defendant's Motion to Transfer and transfers this lawsuit to the United States District Court for the Southern District of Texas. Also, it denies as moot defendant's Motion to Dismiss.

I. Factual and Procedural Background

The following facts come from the Verified Petition that plaintiff filed in Johnson County, Kansas District Court (Doc. 1-1), as well as exhibits attached to defendant's Memorandum in Support of its Motion to Transfer, or Alternatively, to Dismiss (Doc. 12).^[1] Defendant-a provider of countertop surfacing products-entered an agreement with Braco Sales, Inc., a nonparty to this action. Doc. 12-2 (Sage/Braco Agreement). Plaintiff then entered a factoring agreement^[2] with Braco. Doc. 1-1 at 2 (Pet. ¶ 7). The factoring agreement gave plaintiff an option to purchase from Braco all accounts receivable owed to Braco. Id. (Pet. ¶ 9). Plaintiff exercised that option and purchased all accounts receivable that defendant owed to Braco. Id. at 3 (Pet. ¶ 12). Plaintiff notified defendant, and defendant acknowledged that notification. Id. at 3-4 (Pet. ¶¶ 13-14). Between November 24, 2021, and January 26, 2022, defendant made payments that it owed to Braco directly to plaintiff. Id. at 4 (Pet. ¶ 15). Braco then informed defendant that it should stop making payments to plaintiff and, instead, should make payments directly to Braco. Doc. 12-3 (emails from Braco to Sage). Defendant then remitted $112,753.41 to Braco. Doc. 1-1 at 4 (Pet. ¶ 16). Plaintiff alleges that defendant should have made this payment to plaintiff-not Braco-and that defendant thus owes plaintiff this amount plus interest and attorneys' fees. Id. at 4-5 (Pet. ¶¶ 16, 20, 21, 22).

Plaintiff filed this action in the District Court of Johnson County, Kansas. Doc. 1-1 at 1-5 (Pet.). Defendant removed the case to our court, invoking diversity jurisdiction under 28 U.S.C. § 1332. Doc. 1. Defendant now has moved to transfer, or alternatively, dismiss this case based on a forum selection clause^[3] contained in the agreement between defendant and Braco. These issues are fully briefed. As explained below, the court grants defendant's Motion to Transfer and denies as moot defendant's Motion to Dismiss.

II. Legal Standard

“Federal courts are courts of limited jurisdiction and, as such, must have a statutory basis to exercise jurisdiction.” Montoya v. Chao, 296 F.3d 952, 955 (10th Cir. 2002) (citation omitted). “A court lacking jurisdiction cannot render judgment but must dismiss the cause at any stage of the proceedings in which it becomes apparent that jurisdiction is lacking.” Basso v. Utah Power & Light Co., 495 F.2d 906, 909 (10th Cir. 1974) (citation omitted); see also 28 U.S.C. § 1447(c) (“If at any time before final judgment it appears that the district court lacks subject matter jurisdiction, the case shall be remanded.”). Even where a federal court has subject matter jurisdiction, “a valid forum selection clause may prohibit a federal court from exercising jurisdiction if the parties contractually agreed to litigate the matter elsewhere.” K.R.W. Constr., Inc. v. StrongholdEng'gInc., 598 F.Supp.3d 1129, 1135-36 (D. Kan. 2022).

III. Analysis

Defendant asserts that the court should transfer, or alternatively, dismiss this action because a forum selection clause contained in the agreement between defendant and Braco requires the parties to litigate this dispute in Harris County, Texas. The court addresses this question, below. But first, the court identifies the governing law that applies to this dispute.

A. Choice of law

Our court has determined that the effect of a forum-selection clause is a matter of federal law. K.R.W. Constr., Inc., 598 F.Supp.3d at 1135. Here, however, the court also must determine whether plaintiff is bound by the forum selection clause. And because defendant argues that plaintiff is bound by the forum selection clause based on the Uniform Commercial Code, the court also must apply substantive state contract law. See 15 Charles A. Wright, Arthur R. Miller & Richard D. Freer, Federal Practice and Procedure § 3803.1, Westlaw (4th ed. updated Apr. 2023) (noting that “the context in which the clause is asserted can be determinative” and that federal law may not apply if the issue is not “whether the forum selection clause is enforceable” (citations omitted)).

A federal court exercising diversity jurisdiction applies the substantive law of the forum state, where the court is located, including its choice of law rules. Emp'rs Mut. Cas. Co. v. Bartile Roofs, Inc., 618 F.3d 1153, 1170 (10th Cir. 2010) (citation omitted). So, our court applies Kansas's choice of law principles. The Kansas Supreme Court has adopted a general rule that “‘the law of the forum applies unless it is expressly shown that a different law governs, and in case of doubt, the law of the forum is preferred.'” Brenner v. Oppenheimer & Co., Inc., 44 P.3d 364, 376 (Kan. 2002) (quoting Sys. Design & Mgmt. Info., Inc. v. Kansas City Post Office Emps. Cred. Union, 788 P.2d 878, 881 (Kan.Ct.App. 1990)). “‘Generally the party seeking to apply the law of a jurisdiction other than the forum has the burden to present sufficient facts to show that other law should apply.'” In re K.M.H., 169 P.3d 1025, 1032 (Kan. 2007) (quoting Layne Christensen Co. v. Zurich Canada, 38 P.3d 757, 767 (Kan.Ct.App. 2002)).

Here, defendant asserts that the court need not conduct a choice of law analysis because the governing law is the same under either state's law that could apply. The agreement between defendant and Braco contains a choice of law provision requiring that Texas law govern the agreement. Doc. 12-2 at 9 (Safe/Braco Agreement). But because both Texas and the forum state-Kansas-have adopted the U.C.C., the court need not conduct a choice of law analysis since both state's laws are the same. Avedon Eng'g, Inc. v. Seatax, 126 F.3d 1279, 1284 (10th Cir. 1997) (“[C]hoice of law analysis is generally unnecessary if the relevant states have enacted identical controlling statutes.”); see also Schlumberger Tech. Corp. v. Greenwich Metals, Inc., No. 07-2252-EFM, 2009 WL 5217358, at *5 (D. Kan. Dec. 30, 2009) (declining to conduct a choice of law analysis where parties had “not identified any state law principles that differ or affect the interpretation of [the] contract under the UCC”).

B. Whether plaintiff is bound by the forum selection clause

Next, the court must determine whether plaintiff is bound by the forum selection clause contained in a contract between defendant and Braco. The court concludes that plaintiff is bound by that provision. Plaintiff argues that it is not bound by the forum selection clause because (1) the forum selection clause does not contemplate an action on the accounts receivable; (2) plaintiff is pursuing a private cause of action under U.C.C. § 9-406, not a breach of contract claim; and (3) under U.C.C. § 9-404, plaintiff-an assignee of Braco-is not subject to all terms of the agreement between defendant and Braco. Doc. 13 at 2-8. The court addresses each argument, in turn.^[4]

1. Forum selection clause scope

Plaintiff argues that the forum selection clause contained in someone else's contract-the agreement between defendant and Braco-does not apply to an action on the accounts. Doc. 13 at 6. The court is not persuaded. The forum selection clause reads:

Choice of Law and Venue. This Agreement shall be governed by the laws of the State of Texas, without the application of conflict of laws principles. Any judicial proceeding arising out of this Agreement shall be adjudicated in a court of competent jurisdiction with venue of the action being situated in Harris County, Texas.

Doc. 12-2 at 9 (Sage/Braco Agreement). Plaintiff argues that this provision doesn't apply to this case because plaintiff isn't seeking to enforce any terms of the agreement between defendant and Braco. Doc. 13 at 6. Plaintiff further argues that its claim arises out of a violation of the U.C.C. and thus does not arise out of the original agreement. Id.

The scope of the forum selection clause is an issue of contract interpretation. At issue here is the forum selection clause's use of the language “arising out of this Agreement.” The phrase “arising out of” is narrow. E.g., EarthKind, LLC v. Lebermuth Co. Inc., No. 5:19-CV-00051-KDB-DCK, 2020 WL 1815903, at *5 (W.D. N.C. Apr. 9, 2020) (“[F]ederal courts have repeatedly interpreted the scope of ‘arising out of' a contract more narrowly than language such as ‘relating to,' ‘associated with,' or ‘arise in connection with' a contract.”); Valencell, Inc. v. Apple Inc., No. 5:16-CV-1-D, 2017 WL 2819768, at *1 (E.D. N.C. June 28, 2017) (“Numerous courts have held that ‘arising out of' forum-selection clauses are narrower than forum-selection clauses that cover, for example, litigation ‘arising out of or related to' an agreement, or ‘arising out of or in connection with' an agreement.”). The ordinary meaning of the phrase “arising out of” is “to originate from a specified source.” Reading Health Sys. v. Bear Stearns & Co., 900 F.3d 87, 99 (3d Cir. 2018); Phillips v. Audio Active Ltd., 494 F.3d 378, 389-90 (2d Cir. 2007).

To satisfy that definition, a plaintiff's claims must involve an assertion of “rights or duties...