Summary
transferring case in the interests of justice after finding no personal jurisdiction
Summary of this case from Gaymar Industries, Inc. v. Firstmerit Bank, N.A.Opinion
06 Civ. 6482 (LLS).
March 6, 2007
Opinion and Order
Defendants move to dismiss the complaint pursuant to Fed.R.Civ.P. 12 for lack of personal or subject matter jurisdiction, for improper venue, and for failure to state a claim upon which relief can be granted; or to transfer the action to California pursuant to 28 U.S.C. § 1404. Defendants also seek sanctions under Fed.R.Civ.P. 11.
For the reasons that follow, the Court finds that it has no personal jurisdiction over defendants, and transfers the case to the United States District Court for the Central District of California. Defendants' motion for sanctions is denied.
THE COMPLAINT
The complaint alleges the following:
Plaintiff Digital Lab Solutions, LLC ("Digital"), is a New York limited liability company which provides digital image capture, retouching, workflow, and asset management. Cmplt. ¶ 12. Defendant RecCenter Studios, LLC ("RecCenter") is a California limited liability company located in Los Angeles. Id. at ¶ 5. It is a single photography studio. Id. at ¶ 13. Defendant Stephen Stickler ("Stickler") is the sole owner and member of RecCenter, with sole control of its business and operations. Id. at ¶¶ 7-8. He resides in Los Angeles. Id. at ¶ 6.
In October 2005, Digital became interested in obtaining a photo studio in Los Angeles and engaged in discussions with Stickler about the potential purchase of RecCenter's studio. Id. at ¶¶ 14-15. On January 17, 2006, David Barnett of Digital formed Splashlight LA, a California limited liability company with the same address as RecCenter in Los Angeles. Id. at ¶¶ 9, 19. Digital owned a 65% interest in Splashlight LA, and RecCenter owned the remaining 35%. Id. at ¶ 20. On March 15, 2006, Digital and Stickler, on behalf of RecCenter, entered into an Operating Agreement for Splashlight LA, which provided that its validity, interpretation and enforcement "shall be governed by the laws of the State of California without regard to principles of conflicts of law." Id. at ¶ 23.
Splashlight LA has not conducted any business. Id. at ¶ 28. Digital alleges that defendants concealed and misrepresented material information about RecCenter's capital and debts, and did not grant Digital access to its books and records, until after the Operating Agreement was signed. Digital claims breach of contract, fraud and fraudulent misrepresentation, conspiracy to commit fraud, negligent misrepresentation, and fraud in the inducement of the Operating Agreement. It also seeks declaratory judgment canceling and dissolving Splashlight LA, and rescission of the Operating Agreement.
THE MOTION
Defendants move to dismiss the complaint pursuant to Fed.R.Civ.P. 12(b)(1) for lack of subject matter jurisdiction, Fed.R.Civ.P. 12(b)(2) for lack of personal jurisdiction, Fed.R.Civ.P. 12(b)(3) for improper venue, and pursuant to Fed.R.Civ.P. 12(b)(6) for failure to state a claim upon which relief can be granted. In the alternative, defendants move to transfer the action to California pursuant to 28 U.S.C. § 1404.
Additionally, defendants move for sanctions under Fed.R.Civ.P. 11.
Subject Matter Jurisdiction
Subject matter jurisdiction is premised on diversity. Defendants argue that the amount in controversy does not exceed the statutory requirement of $75,000.The Second Circuit "recognizes a rebuttable presumption that the face of the complaint is a good faith representation of the actual amount in controversy." Wolde-Meskel v. Vocational Instruction Project Cmty. Servs., Inc., 166 F.3d 59, 63 (2d Cir. 1999).
It "must appear to a legal certainty that the claim is really for less than the jurisdictional amount to justify dismissal."Id., quoting St. Paul Mercury Indem. Co. v. Red Cab Co., 303 U.S. 283, 289 (1939).
In this case, the complaint asserts that "[t]he amount in controversy exceeds the statutory requirement." Cmplt. ¶ 1. Digital alleges that it paid tens of thousands of dollars to Stickler and RecCenter for the funding of Splashlight LA and for rent, insurance, and salary. It also alleges that Digital is entitled to 65% of any revenue that might have been generated by Splashlight LA.
It does not appear to a legal certainty that plaintiff's claim is for less than $75,000 and the allegation of jurisdiction in the complaint is sufficient to bring the claim in federal court. Therefore, defendants' motion to dismiss for lack of subject matter jurisdiction is denied.
Personal Jurisdiction
Defendants move to dismiss the complaint for lack of personal jurisdiction. In a diversity action, the court resolves this question under the law of the forum state in which the district court sits. D.H. Blair Co. v. Gottdiener, 462 F.3d 95, 104 (2d Cir. 2006).
On a Rule 12(b)(2) motion made before discovery, plaintiff has to make only a prima facie showing of personal jurisdiction, and all pleadings and affidavits are construed in plaintiff's favor.PDK Labs, Inc. v. Friedlander, 103 F.3d 1105, 1108 (2d Cir. 1997).
A. Personal Jurisdiction under New York Civil Practice Law and Rules ("C.P.L.R.") § 302(a)(1)
Plaintiff alleges that defendants are subject to personal jurisdiction pursuant to C.P.L.R. § 302(a)(1), which provides:
As to a cause of action arising from any of the acts enumerated in this section, a court may exercise personal jurisdiction over any non-domiciliary, or his executor or administrator, who in person or through an agent:
1. transacts any business within the state or contracts anywhere to supply goods or services in the state
Under § 302(a)(1), "long-arm jurisdiction over a nondomiciliary exists where (i) a defendant transacted business within the state and (ii) the cause of action arose from that transaction of business. If either prong of the statute is not met, jurisdiction cannot be conferred under CPLR 302(a)(1)." Johnson v. Ward, 4 N.Y.3d 516, 519, 829 N.E.2d 1201, 1202, 797 N.Y.S.2d 33, 34 (2005).
Digital argues defendants transacted business in New York based on the following:
There were dozens, if not hundreds, of e-mails between Stickler and RecCenter and me [Jim Ingram, the president of Digital] or Digital in New York. Stickler was always aware that I (and Digital) was located in New York while we were negotiating this deal. A large portion of these e-mails were sent by Stickler to me in New York.
January 10, 2007 Certification of Jim Ingram ("Ingram Cert.") ¶ 12. Plaintiff also alleges that Stickler transacted business in New York because Digital paid for rent and Stickler's salary and insurance from New York. Ingram Cert. ¶ 26.
One invoice and a collections demand letter are addressed to Stickler c/o Digital in New York. January 10, 2007 Certification of Ray Vicencio, Digital's controller ("Vicencio Cert.") Ex. B, Ex. E. Stickler also sent two letters on Digital stationery requesting that all billing information pertaining to telephone and internet service and equipment rentals be changed to Digital's name and address. Id. at Ex. C, Ex. D.
To determine whether an out-of-state defendant transacts business in New York, the court considers the following factors:
(i) whether the defendant has an on-going contractual relationship with a New York corporation; (ii) whether the contract was negotiated or executed in New York and whether, after executing a contract with a New York business, the defendant has visited New York for the purpose of meeting with parties to the contract regarding the relationship; (iii) what the choice-of-law clause is in any such contract; and (iv) whether the contract requires franchisees to send notices and payments into the forum state or subjects them to supervision by the corporation in the forum state.Agency Rent A Car Sys., Inc. v. Grand Rent A Car Corp., 98 F.3d 25, 29 (2d Cir. 1996) (internal citations omitted). The court's ultimate determination is based on "totality of the circumstances." Id.
In this case, defendants negotiated an Operating Agreement with plaintiff, yet the resulting company, Splashlight LA, never did business. Thus, defendants do not have an on-going contractual relationship with a New York corporation.
The Operating Agreement was mainly negotiated via e-mail messages sent between California and New York, with visits by Digital's representatives to California. Defendants did not visit New York after the execution of the Operating Agreement.
The choice-of-law clause in the Operating Agreement designates California law as the governing law. The Operating Agreement does not require defendants to send notices or payments to New York, nor does it subject them to supervision by Digital in New York.
Therefore, all factors except the negotiations between Digital in New York and defendants in California weigh against a finding that defendants transacted business in New York.
"Telephone calls and correspondence sent into New York, by a non-domiciliary defendant who is outside New York, generally are insufficient to establish personal jurisdiction." Int'l Customs Associates v. Ford Motor Co., 893 F. Supp. 1251, 1261 (S.D.N.Y. 1995) (citing cases), aff'd, 201 F.3d 431 (2d Cir. 1999) (summary order), cert. denied, 530 U.S. 1264 (2000). "If the purpose of the calls is for the defendant to actively participate in business in New York, then they alone may support a finding of New York long arm jurisdiction under C.P.L.R. § 302(a)(1)."Carlson v. Cuevas, 932 F. Supp. 76, 78 (S.D.N.Y. 1996) (citing cases). However, where a defendant's "contacts with New York consist of telephone calls, fax transmissions, and correspondence in connection with the negotiation of a contract that has a center of gravity well outside the state," there is no personal jurisdiction under C.P.L.R. § 302(a)(1). See Palace Exploration Co. v. Petroleum Dev., 41 F. Supp. 2d 427, 434 (S.D.N.Y. 1998).
In this case, the correspondence between plaintiff and defendants was in connection with contract negotiations for the formation of a California company governed by California law. The purpose of defendants' e-mails was not actively to participate in business in New York, but rather to create a new business in California. Therefore, looking at the "totality of the circumstances," defendants did not transact business in New York and are not subject to personal jurisdiction under C.P.L.R. § 302(a)(1).
B. Personal Jurisdiction under C.P.L.R. § 302(a)(2)
Plaintiff alleges that the court has jurisdiction over defendants under C.P.L.R. § 302(a)(2), which permits jurisdiction over a defendant who "commits a tortious act within the state, except as to a cause of action for defamation of character arising from the act." The statute "reaches only tortious acts performed by a defendant who was physically present in New York when he performed the wrongful act." Bensusan Restaurant Corp. v. King, 126 F.3d 25, 28-29 (2d Cir. 1997), citing Feathers v. McLucas, 15 N.Y.2d 443, 261 N.Y.S.2d 8, 209 N.E.2d 68 (1965).
Defendants were located in California during all stages of the alleged tortious acts. Therefore, they committed no tortious act in New York that could render them subject to jurisdiction under C.P.L.R. § 302(a)(2).
C. Personal Jurisdiction under C.P.L.R. § 302(a)(3)
Plaintiff alleges that the court has jurisdiction over defendants under C.P.L.R. § 302(a)(3), which permits jurisdiction over a defendant who
commits a tortious act without the state causing injury to person or property within the state, except as to a cause of action for defamation of character arising from the act, if he
(i) regularly does or solicits business, or engages in any other persistent course of conduct, or derives substantial revenue from goods used or consumed or services rendered, in the state, or
(ii) expects or should reasonably expect the act to have consequences in the state and derives substantial revenue from interstate or international commerce
Defendants are not subject to jurisdiction under § 302(a)(3)(i) because they do not regularly do or solicit business in New York, nor do they derive "substantial revenue from goods used or consumed or services rendered" in New York.
For the Court to exercise personal jurisdiction over defendants under § 302(a)(3)(ii), four factors must be met:
(1) the non-domiciliary commits a tort outside of New York; and (2) there is injury to the plaintiff in New York; and (3) the non-domiciliary should reasonably have foreseen consequences in New York; and (4) the non-domiciliary derives substantial revenue from interstate or international commerce.Barricade Books, Inc. v. Langberg, 2000 WL 1863764, at *4 (S.D.N.Y. 2000).
Taking the allegations in the complaint as true, the first three requirements are arguably met.
However, Digital does not sufficiently demonstrate that defendants derive substantial revenue from interstate or international commerce and therefore the fourth factor is not met. The requirement of substantial revenue from interstate commerce "was intended to exclude non-domiciliaries whose business operations are of a local nature." Barricade Books, 2000 WL 1863764, at *6. Courts can look at the absolute amount or percentage of a defendant's income derived from interstate commerce. Id. "Among the most important facts of each case are the overall nature of the defendant's business and the extent to which he can fairly be expected to defend lawsuits in foreign forums." Id., citing Ronar, Inc. v. Wallace, 649 F. Supp. 310, 318 (S.D.N.Y. 1986); Path Instruments Int'l Corp. v. Asahi Optical Co., 312 F. Supp. 805, 810 (S.D.N.Y. 1970).
These defendants do not regularly do business outside of California. Their business is local in nature. RecCenter consists of one photographic studio in Los Angeles, and Stickler resides in Los Angeles. Defendants did not solicit business outside of California. The failed Operating Agreement with plaintiff was defendants' only venture into interstate commerce, and defendants did not gain substantial revenue from it.
Plaintiff points to a $10,101.25 bill from a law firm, a collections demand letter for $6,036.04 for equipment rental, and the payment of rent, insurance, and salary as defendants' revenue derived from interstate commerce. See Vicencio Cert. Ex. A, Ex. B; Ingram Cert. ¶ 26.
Digital does not put a dollar amount on these payments. Stickler states that one month's rent at the studio, two months of the studio's utility and phone bills, and three salary checks paid by Digital amount to under $7,000. December 11, 2006 Declaration of Stephen Stickler ¶ 28.
The debt of $6,036.04 is demanded from Stephen Stickler, not Digital, and therefore cannot be viewed as revenue to any defendant (there is no showing that Digital paid it). The alleged revenue is not substantial enough to raise the inference that defendants engaged in "the type of national practice that the New York legislature felt could fairly be required to appear in New York for torts alleged to have occurred outside of the state." See Barricade Books, 2000 WL 1863764, at *6.
Therefore, the Court has no personal jurisdiction over defendants under C.P.L.R. § 302(a)(3).
D. General Jurisdiction
Plaintiff also alleges that defendants are subject to general jurisdiction in New York. Under New York law, a foreign defendant can be sued in New York "if it is engaged in such a continuous and systematic course of doing business here as to warrant a finding of its presence in this jurisdiction." Realuyo v. Abrille, 93 Fed. Appx. 297, 299 (2d Cir. 2004), quoting Frummer v. Hilton Hotels Int'l, Inc., 227 N.E.2d 851 (1967), cert. denied, 389 U.S. 923 (1967). The non-domiciliary must be engaged in a "continuous and systematic course of doing business in New York." Hoffritz for Cutlery, Inc., 763 F.2d at 58. To determine whether a defendant is doing business in New York, a court considers the following factors: "the existence of an office in New York; the solicitation of business in the state; the presence of bank accounts and other property in the state; and the presence of employees of the foreign defendant in the state." Id.
In this case, plaintiff does not meet any of these elements and thus this Court lacks jurisdiction over defendants.
TRANSFER
Section 1404(a) of title 28 of the United States Code provides that, "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." The court may transfer an action to another venue even if it lacks personal jurisdiction over the defendants. Fort Knox Music, Inc. v. Baptiste, 257 F.3d 108, 112 (2d Cir. 2001).
As is apparent from the foregoing discussion, all events material to the dispute took place in Los Angeles and this case could have been brought in the United States District Court for the Central District of California. Therefore, in the interests of justice, this case will be transferred there.
RULE 11 SANCTIONS
A motion for sanctions under this rule shall be made separately from other motions or requests and shall describe the specific conduct alleged to violate subdivision (b). It shall be served as provided in Rule 5, but shall not be filed with or presented to the court unless, within 21 days after service of the motion (or such other period as the court may prescribe), the challenged paper, claim, defense, contention, allegation, or denial is not withdrawn or appropriately corrected.
Defendants admit they did not comply with the requirements. The motion for sanctions was not brought in strict compliance with Rule 11 (it was made as part of the motion to dismiss instead of as a separate motion and with insufficient notice).
On their face, at least some of the claims by Digital may be meritorious. There was a potential basis for jurisdiction in New York. For these reasons, as well as the technical defects in the making of the motion, the motion for sanctions is denied.
CONCLUSION
The Clerk of the Court is directed to transfer this case to the United States District Court for the Central District of California.
So ordered.