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McRae v. Tautachrome, Inc.

United States District Court, D. Kansas

June 21, 2018

ERIC L. MCRAE, Plaintiff,
v.
TAUTACHROME, INC., Defendant.

          MEMORANDUM AND ORDER

          ERIC F. MELGREN UNITED STATES DISTRICT JUDGE

         Plaintiff Eric L. McRae brought this action alleging breach of contract, promissory estoppel, and fraud by silence against Defendant Tautachrome, Inc. Tautachrome moves for a change in venue to the United States District Court for the District of Arizona, or alternatively to dismiss count one of McRae's second amended complaint. For the following reasons, Tautachrome's motion to transfer case or in the alternative, motion to dismiss (Doc. 12) is denied.

         I. Factual and Procedural Background[1]

         Tautachrome is a corporation incorporated in the State of Delaware with its principal place of business in the state of Arizona. McRae is an investor and citizen of Kansas. McRae entered into a Convertible Promissory Note (the “Note”) and Subscription Agreement (the “Agreement”) on May 27, 2016 with Tautachrome. The Note and Agreement stated that McRae would lend Tautachrome $50, 000 for 18 months at a five percent interest rate, until November 27, 2017, when the rate would double. The Note further stated that after one year, on May 28, 2017, McRae could convert the principal balance and all accrued but unpaid interest to common stock of Tautachrome.

         The formula for his conversion right was as follows:

Principal and Outstanding Interest (Conversion Rate * Conversion Price).

         McRae claims there was an oral agreement between both parties on November 28, 2016 for Tautachrome to employ McRae as a Business Operations Manager. McRae alleges that he executed and delivered to Tautachrome an Engagement Agreement (the “Engagement”), which was supposed to be a representation of the oral agreement, on February 2, 2017. The Engagement was not signed by Tautachrome; McRae claims that Tautachrome's failure to sign the Engagement was a strategic maneuver to defraud him. Tautachrome terminated McRae without prior notice on June 16, 2017. McRae claims that this termination is a violation of the Engagement, and Tautachrome's refusal to honor McRae's conversion right is a violation of the Note.

         The Agreement, signed by both parties, has a provision titled “Governing Law; Jurisdiction; Service of Process.” Tautachrome claims that this provision is a binding venue clause, limiting claims under the Note and Agreement to be brought only in Arizona, and that Kansas is a forum non conveniens. The relevant portion states:

Each of the parties irrevocably agrees that the other party may enforce any claim arising under this Subscription Agreement and will irrevocably agree with respect to any claim arising from the transaction contemplated hereby in the courts of the State of Arizona or United States District Court for the District of Arizona, as the party bringing the claim may so choose. For the purpose of any action, suit, or proceeding initiated in such courts with respect to any such claim, each of the parties irrevocably submits to the jurisdiction of such courts. Each of the parties shall waive, to the fullest extent allowed by law, any objection which it may now or hereafter have to venue of any such suit, action or proceeding brought in any such court and any claim that any such suit, action or proceeding in such court has been brought in an inconvenient forum.

         On January 2, 2018, Tautachrome filed a motion for change of venue or, in the alternative, motion to dismiss pursuant to Rule 12(b)(6). And on June 13, 2018, Tautachrome emailed the Court explaining that the statute of frauds argument in furtherance of Tautachrome's motion to dismiss was withdrawn. Formal notice of withdrawal was filed on the same day.

         II. Legal Standard

         A. Motion to Transfer Venue

         Tautachrome moves for a change of venue pursuant to 28 U.S.C. § 1404. The relevant portion of § 1404 states: “For the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought . . . .”[2] Unless the balance of interests “is strongly in favor of the movant, the plaintiff's choice of forum should rarely be disturbed.”[3] A forum selection clause is treated as a manifestation of the parties' preferences as to a convenient forum.[4]

         A valid forum selection clause in a contract may preclude a federal court from exercising jurisdiction if the parties have agreed in that clause to litigate elsewhere.[5] Forum selection clauses are presumed prima facie valid and should be enforced unless unreasonable under the circumstances.[6] The party opposing enforcement has a heavy burden to show the provision itself is invalid;[7] this requires a showing of fraud, overreaching, or that enforcement would be unreasonable and unjust under the circumstances.[8] Even if enforceable, forum selection clauses may merely be permissive and not mandatory if they only permissively grant jurisdiction at a venue, rather than mandate one venue to the exclusion of others.[9] Mandatory forum selection clauses contain clear language showing that jurisdiction is appropriate only in the designated forum.[10]

         B. Motion to Dismiss

         Under Rule 12(b)(6), a defendant may move for dismissal of any claim where the plaintiff has failed to state a claim upon which relief can be granted. On such motion, the court must decide “whether the complaint contains ‘enough facts to state a claim to relief that is plausible on its face.' ”[11] A claim is facially plausible if the plaintiff pleads facts sufficient for the court to reasonably infer that the defendant is liable for the alleged misconduct.[12] The plausibility standard reflects the requirement in Rule 8 that pleadings provide defendants with fair notice of the nature of claims, as well as the grounds on which each claim rests.[13] Under Rule 12(b)(6), the court must accept as true all factual allegations in the complaint, but need not afford such a presumption to legal conclusions.[14] If the allegations in the complaint are “so general that they encompass a wide swath of conduct, much of it innocent, then the plaintiffs ‘have not nudged their claims across the line from conceivable to plausible.' ”[15]

         III. Analysis

         Before addressing the parties' arguments, the Court must first determine whether federal or state law governs the interpretation of the Note and Agreement. “Because contracts designating a place of jurisdiction or venue may implicate both state substantive law and federal procedural law, courts have struggled with which law to apply, and the Tenth Circuit has not issued a definitive statement regarding the issue.”[16] Here, both parties have agreed that Arizona state law would apply to the claims in McRae's second amended complaint. The Agreement language states “this Subscription Agreement shall be governed by and construed in accordance with the laws of the State of Arizona.” But even if a choice-of-law clause provides that the parties' agreement will be construed under a state's substantive law, federal procedural law still generally governs the application of clauses that designate a place of jurisdiction or venue under a motion to transfer.[17]

         “When confronted with a forum selection clause and a substantive choice of law provision, courts in this circuit often apply federal procedural law to determine the effect of the forum selection clause, especially when the outcome under state and federal law is consistent, and when the parties agree that federal law governs.”[18] This Court cannot find that a material difference would result from the application of either law.[19] Thus, the Court will follow the trend in this circuit to apply federal procedural law in determining the effect of the forum selection clause in this case.

         A. Motion to Transfer Venue

         Tautachrome has moved to transfer this case to the U.S. District Court for the District of Arizona, arguing that the Agreement's forum selection clause is binding and mandatory. McRae argues that the Agreement's forum selection clause should not apply because his claims are brought under the Note, not the Agreement. Alternatively, McRae claims that the forum selection clause is merely permissive, thus it should not overcome his current choice of forum. Tautachrome and McRae also dispute whether there is enough evidence to show that Kansas is an inconvenient forum for litigating this claim. Accordingly, the three issues this Court must answer regarding Tautachrome's motion to transfer venue are: (1) whether the forum selection clause is incorporated in the Note; if so, (2) whether the forum selection clause is mandatory or permissive; and finally (3) whether Kansas is a forum non conveniens.

         1. Incorporation of Clause

         McRae argues that the venue clause does not apply to McRae's claims because the Note makes no mention of the venue clause in the Agreement, or of a choice of forum in Arizona. Tautachrome argues that the Note is incorporated because it is attached to the Agreement as Schedule A, and both the Note and Agreement expressly reference one another.

         When determining whether a promissory note and security agreement should be interpreted together, this Court has found the following two factors to be determinative: (1) execution of each document on or about the same day to govern the same transaction; and (2) whether each document clearly ...


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