Two decisions issued a day apart, one from California and the other from Michigan, highlight the importance of bringing your action in a court where you can obtain jurisdiction over your defendant.
It’s My Seat, a ticketing vendor and concert promoter operating and organized in California, brought an action in the California state court system against Hartford Capital, a New York-based merchant cash advance company. Hartford removed the action to the Central District of California under diversity (actions between parties of different jurisdictions) and moved to dismiss the action for lack of personal jurisdiction.
The facts of the case involve It’s My Seat having sought a low-rate business loan by filing a loan application online. Hartford’s representative contacted It’s My Seat and promised that if It’s My Seat first took a $250,000, 30-day “bridge loan” with an interest rate of 15%, that it would then provide a $750,000 term loan with interest at 8.99%. The bridge loan provided for daily ACH payments in the amount of $3,600. The Hartford representative assured that the term loan would be made but did not document that assurance in any way. It’s My Seat signed and notarized the bridge loan documents and Hartford advanced the bridge loan, but for a previously undisclosed $22,000 “funding fee.” When It’s My Seat protested the funding fee, Hartford’s representative promised to credit the amount. It’s My Seat made the daily payments for the required 30-day period, but the $750,000 line of credit was not issued. The Hartford representative claimed that he was “doing everything I can to get this pushed through.” It’s My Seat continued to make the $3,600 daily payments for 70 days (40 more than originally required) having to obtain third-party emergency loans in order to do so. Ultimately, Hartford refused to provide the term loan on the basis that the third-party loans violated the bridge loan agreements, and It’s My Seat brought the action against Hartford and its representatives.
The court dismissed the action against Hartford and one representative because the complaint was not timely served. The other representative, Stein, moved to dismiss for lack of personal jurisdiction. The question of personal jurisdiction turned on whether Stein’s relevant contacts with It’s My Seat subjected Stein to specific personal jurisdiction.
Where a defendant’s contacts are “not so pervasive as to subject him to general jurisdiction,” the Ninth Circuit applies a three-part specific jurisdiction test: “(1) The nonresident defendant must do some act or consummate some transaction with the forum or perform some act by which he purposefully avails himself of the privilege of conducting activities in the forum, thereby invoking the benefits and protections of its laws. (2) The claim must be one which arises out of or results from the defendant’s forum-related activities. (3) Exercise of jurisdiction must be reasonable.” (citations omitted)
Stein admitted that he called It’s My Seat in California to solicit and conduct business in the form of the bridge and term loans. The court determined that Stein’s contacts with California are therefore integral and essential parts of the claims made in the case and that It’s My Seat made a prima facie showing of the first two prongs. The burden then shifted to Stein to set forth a compelling reason why the exercise of jurisdiction would not be reasonable.
The court then cited the factors in determining reasonableness:
(1) the extent of the defendants’ purposeful injection into the forum state’s affairs; (2) the burden on the defendant of defending in the forum; (3) the extent of conflict with the sovereignty of the defendant’s state; (4) the forum state’s interest in adjudicating the dispute; (5) the most efficient judicial resolution of the controversy; (6) the importance of the forum to the plaintiff’s interest in convenient and effective relief; and (7) the existence of an alternative forum. (citations omitted)
The California court then weighed each of the factors and concluded that Stein failed to make a compelling case that the exercise of jurisdiction in California would not be reasonable and declined to dismiss the action as against Stein.
The Michigan case concerned a dispute between two lenders and their priority in the collateral of a mutual borrower organized and operating in Ohio. The underlying claim is one of great interest although not decided in the case. Plaintiff and its predecessor provided financing to borrower under a revenue purchase agreement and perfected an all-asset Uniform Commercial Code (UCC) filing on Dec. 12, 2019. Defendant provided one or more merchant cash advances and perfected an all-asset UCC filing on Jan. 23, 2020. Defendant also secured ACH payments from the borrower’s bank account.
Plaintiff brought an action in Michigan state court against Defendant for (1) declaratory judgment as to priority in collateral, (2) tortious interference with a contractual relationship, (3) tortious interference with future business expectations, (4) conversion, and (5) temporary, preliminary and permanent injunctive and declaratory relief. Defendant removed the case to the Federal District Court in Eastern Michigan under diversity and moved to dismiss the complaint for lack of personal jurisdiction.
Michigan law recognizes two bases for personal jurisdiction over a corporation: (1) general, and (2) specific (called limited personal jurisdiction). A court has general jurisdiction over a corporation where the defendant’s contacts within the forum are so continuous and systematic as to render it essentially at home in the forum state. As to specific jurisdiction, the inquiry focuses on the relationship among the defendant, the forum and the litigation. For a court to exercise specific jurisdiction, the defendant’s suit-related conduct must create a substantial connection with the forum state. The plaintiff has the burden of proof to establish that a defendant’s contacts are sufficient to subject it to jurisdiction.
Plaintiff argued that the Michigan Court had general jurisdiction over Defendant because Defendant solicited business from Michigan residents through its website and established “long-term lending relationships with Michigan residents” as evidenced by UCC filings in favor of Defendant, and litigation within Michigan courts. The Court found that evidence to be insufficient to establish general jurisdiction over Defendant as it failed to demonstrate continuous and systematic contacts.
Plaintiff further argued that Defendant had utilized its website to solicit business from Michigan residents and establishes general jurisdiction. The Court found no authority to support that proposition and indicated that case law states the opposite. The Court held:
Plaintiff has offered no evidence to support a finding that this is “an exceptional case,” or any authority to support the proposition that Defendant’s contacts are sufficient to establish it was “at home” in Michigan. There is no evidence that Defendant  has physical locations, employees, or officers in Michigan. There is no evidence that Defendant  has bank accounts or conducts daily corporate activities in Michigan. While Plaintiff offers proof that Defendant has filed multiple UCC debtor financing statements and has brought one case within Michigan courts, this evidence merely confirms that Defendant  has done some in-state business in Michigan. This is insufficient for purposes of establishing general jurisdiction.
The Court then focused on whether “specific jurisdiction” would apply. Under specific jurisdiction, a plaintiff may sue a defendant “only on claims that arise out of the defendant’s activities in the forum state.” The Court cited the standard for specific jurisdiction as determined by the Sixth Circuit Court of Appeals:
First, the defendant must purposefully avail himself of the privilege of acting in the forum state or causing a consequence in the forum state. Second, the cause of action must arise from the defendant’s activities there. Finally, the acts of the defendant or consequences caused by the defendant must have a substantial enough connection with the forum state to make the exercise of jurisdiction over the defendant reasonable.
Plaintiff alleged that the second prong was met because Defendant’s “actions had consequences in Michigan resulting in harm to [Plaintiff], a Michigan resident.” However, the Court noted that both the U.S. Supreme Court and Michigan courts have rejected this theory of specific jurisdiction.
When assessing specific jurisdiction, “[t]he proper question is not where the plaintiff experienced a particular injury or effect but whether the defendant’s conduct connects him to the forum in a meaningful way.”
…it is clear that Defendant’s conduct—entering into a contract with a company in Ohio to purchase revenue and withdrawing funds from that company’s bank account in Ohio—may not form the basis for Defendant to be sued in a Michigan court. …. Plaintiff does not allege that any of Defendant’s challenged conduct took place in Michigan.
The dismissal of the action does not bar Plaintiff from pursuing its claims in a proper jurisdiction; it certainly does not appear that any statute of limitations is at risk. However, the cost and time incurred takes its toll on Plaintiff.
Each of the California and Michigan cases rests on nonphysical presence of the parties—email and websites. The Michigan case concerned a loan made into Ohio, while the contacts in the California case concerned a loan made into California. That is not to say that had the Michigan plaintiff brought its case in Ohio that an Ohio court would have ruled differently.
The takeaway is to make a careful analysis when bringing an action against a party of a different jurisdiction, and assure that jurisdiction is proper in the venue where the action is brought.
One final thought: Commercial lenders and factors have long expressed concerns about egregious conduct engaged in by certain merchant cash advance providers. Each of these cases highlights questionable conduct that commercial lenders and factors will want to monitor.
It’s My Seat, Inc. v Hartford Capital LLC, et al. (CD CA, 3/30/21) 2021 WL 1200042
Franklin Capital Funding, LLC v Ace Funding Source, LLC (ED MI, 3/31/21) 2021 WL 1224917