Starin Marketing, Inc. v. Swift Distribution, Inc.
Filing
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OPINION AND ORDER: The Court GRANTS IN PART and DENIES IN PART theDefendant's Motion to Dismiss the Plaintiff's Complaint 12 . The Court DENIES the Motion as to Count I but GRANTS the Motion as to Count II. The Court ORDERS that Count II be DISMISSED WITHOUT PREJUDICE. Any amended complaint is to be filed by 9/30/2016. Signed by Judge Theresa L Springmann on 8/22/2016. (lhc)
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF INDIANA
STARIN MARKETING, INC.,
Plaintiff,
v.
SWIFT DISTRIBUTION, INC., d/b/a/
ULTIMATE SUPPORT SYSTEMS,
Defendant.
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CAUSE NO.: 2:16-CV-67-TLS
OPINION AND ORDER
This matter is before the Court on the Defendant’s Motion to Dismiss Plaintiff’s
Complaint [ECF No. 12], filed on April 20, 2016. On January 21, 2016, the Plaintiff, Starin
Marketing, Inc., filed a two-count Complaint [ECF No. 4] against the Defendant, Swift
Distribution, Inc., d/b/a Ultimate Support Systems. On February 23, 2016, the case was removed
to federal court, pursuant to 28 U.S.C. §§ 1332, 1441, and 1446. The Defendant then moved to
dismiss the Complaint, pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6),
asserting that the Court lacks subject matter jurisdiction over the claim for declaratory judgment
and the Complaint fails to state a claim upon which relief may be granted. On May 18, 2016, the
Plaintiff filed its Response to the Defendant’s Motion to Dismiss [ECF No. 22]. On May 31,
2016, the Defendant filed its Reply in Support of its Motion to Dismiss [ECF No. 24]. On July
19, 2016, the Court heard oral argument on the Defendant’s Motion to Dismiss. With this matter
now being fully briefed, the Defendant’s Motion to Dismiss is granted in part and denied in part.
COMPLAINT ALLEGATIONS
The Plaintiff is an Indiana corporation that markets and delivers, among other things,
audio systems and equipment through its brand development services and procurement
programs. (Compl. ¶ 1, ECF No. 4.) The Defendant is a California corporation “in the business
of wholesaling sound systems and equipment.” (Id. ¶ 2.) Given the compatibility of their
businesses, the parties entered into an Amended and Restated Fulfillment and Distribution
Agreement (the “Agreement”) on August 7, 2014. (Id. ¶ 3.)
Under the Agreement, the Plaintiff “purchase[d] goods from [the Defendant], and [was]
responsible for warehousing the goods, managing the inventory of the goods, [and] fulfillment of
orders from [the Defendant’s] customers.” (Id. ¶ 4.) The Defendant “reconcile[d] and
reimburse[d] [the Plaintiff] for costs of the goods sold to [the Defendant’s] customers, together
with interest thereon” and paid the Plaintiff a fixed monthly fee based on the value of monthly
commissioned sales. (Id. ¶ 5.) Section 2.A.i.d., located in the portion of the Agreement titled
“[Plaintiff] Obligations,” stated that the Plaintiff shall:
Maintain sufficient operating capital via dedicated credit facility, or otherwise, in
order to support [the Plaintiff’s] purchasing and inventory obligations for this
Agreement. The Parties acknowledge that, as of the Effective Date, such
obligations may not exceed Four Million Two Hundred Thousand Dollars
($4,200,000). If, at any time during the Term, [the Defendant] requests that [the
Plaintiff] increase operating capital and overall inventory levels to support [the
Defendant’s] sales growth, but [the Plaintiff] is unable or unwilling to
accommodate such request, [the Defendant] may terminate this Agreement upon
written notice to [the Plaintiff], and without penalty. (Compl. Ex. A, at 4, ECF
No. 4)
On January 21, 2016, the Plaintiff filed a lawsuit against the Defendant alleging two
counts: First, that after entering into the Agreement, the Defendant allegedly breached Section
2.A.i.d. when it “shipped goods to [the Plaintiff], without [the Plaintiff’s] consent, in an amount
which . . . exceeded the $4.2 million limitation on purchasing and inventory obligations” and
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forced the Plaintiff to purchase those excess shipments, (Compl. ¶ 11), and when it “failed to
make timely reimbursement and interest payments to” the Plaintiff. (Id. ¶¶ 11–12.) Second, that
the Plaintiff seeks a declaratory judgment because it “retains significant inventory which [the
Plaintiff] has purchased from [the Defendant] in conformity with [the Plaintiff’s] fulfillment
obligations under the Agreement, and which [the Plaintiff] desires to re-label and resell in order
to mitigate the damages resulting from [the Defendant’s] breaches of the Agreement.” (Id. ¶¶
13–17.)
STANDARD OF REVIEW
Rule 12(b)(1) provides that a party may assert the defense of lack of subject matter
jurisdiction by motion. Fed. R. Civ. P. 12(b)(1). “Subject-matter jurisdiction is the first question
in every case, and if the court concludes that it lacks jurisdiction it must proceed no further.”
Illinois v. City of Chi., 137 F.3d 474, 478 (7th Cir. 1998). When considering a motion to dismiss
for lack of subject matter jurisdiction, a court must accept as true all well-pleaded factual
allegations and draw all reasonable inferences in favor of the plaintiff. Alicea-Hernandez v.
Catholic Bishop of Chi., 320 F.3d 698, 701 (7th Cir. 2003).
Similarly, when reviewing a complaint attacked by a Rule 12(b)(6) motion, a court must
accept all of the factual allegations as true and draw all reasonable inferences in favor of the
plaintiff. Erickson v. Pardus, 551 U.S. 89, 93 (2007). The complaint need not contain detailed
facts, but surviving a Rule 12(b)(6) motion “requires more than labels and conclusions . . . .
Factual allegations must be enough to raise a right to relief above the speculative level.” Bell Atl.
Corp. v. Twombly, 550 U.S. 544, 555 (2007). “A claim has facial plausibility when the pleaded
factual content allows the court to draw the reasonable inference that the defendant is liable for
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the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Twombly, 550 U.S.
at 556).
When a party seeking dismissal under Rule 12(b)(6) submits documents with its motion
to dismiss, courts can either ignore the documents or convert the motion to one for summary
judgment. Fed. R. Civ. P. 12(d); Tierney v. Vahle, 304 F.3d 734, 738 (7th Cir. 2002); Venture
Ass’n Corp. v. Zenith Data Sys. Corp., 987 F.2d 429, 431 (7th Cir. 1993). Here, both Parties filed
affidavits from various company employees and exhibits of company emails, but questions exist
regarding the validity and scope of those documents on issues unrelated to the Agreement.
Therefore, the Court does not find it appropriate to convert the Defendant’s Motion to Dismiss to
one for summary judgment at this time. The Court disregards those additional documents
submitted by the Parties and confines its analysis to the Complaint and the documents referenced
in and attached to the Complaint. See Fed. R. Civ. P. 10(c) (“A copy of a written instrument that
is an exhibit to a pleading is a part of the pleading for all purposes.”).
ANALYSIS
This Court has subject matter jurisdiction over the case because the matter in controversy
exceeds the sum or value of $75,000.00 and is between citizens of different states. 28 U.S.C.
§ 1332. This Court has the authority to grant declaratory relief pursuant to 28 U.S.C. § 2201.
A.
Choice of Law
A federal court exercising diversity jurisdiction must apply the substantive law of the
forum in which it sits, Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78 (1938), including that
pertaining to choice of law, Klaxon Co. v. Stentor Elec. Manuf. Co., 313 U.S. 487, 496 (1941). In
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Indiana, contractual choice-of-law provisions apply to the substantive law governing claims
arising out of the contract. Smither v. Asset Acceptance, LLC, 919 N.E.2d 1153, 1157–58 (Ind.
Ct. App. 2010).
The Agreement between the Parties contains a choice-of-law provision, which states that
California law governs any disputes between the parties. (Compl. Ex. A, at 19.) The Parties do
not contest the Agreement’s validity and also agree that the choice-of-law clause governs.
Therefore, the Court will apply California law to the Plaintiff’s breach of contract claim.
B.
Breach of Contract (Count I)
In Count I, the Plaintiff alleges that the Defendant committed breach of contract. To
succeed on a breach of contract claim in California, a plaintiff must prove: (1) the existence of a
contract, (2) the plaintiff’s performance or excuse for non-performance, (3) the defendant’s
breach, and (4) damages. Oasis W. Realty, LLC, v. Goldman, 250 P.3d 1115, 1121 (Cal. 2011).
In support of its Motion to Dismiss, the Defendant first argues that it did not breach the
Agreement because the $4,200,000 credit limit in Section 2.A.i.d. imposes a duty only upon the
Plaintiff, not the Defendant. Second, the Defendant argues that the Plaintiff’s Complaint fails to
allege that the Plaintiff had performed or allege an excuse for its non-performance. The
Defendant does not dispute the existence of a contract or damages.
1.
Breach of the $4.2 Million Cap Obligations Under the Agreement
Under California contract law, “[a] contract must be so interpreted as to give effect to the
mutual intention of the parties as it existed at the time of contracting, so far as the same is
ascertainable and lawful.” Cal Civ. Code § 1636. For a written contract, “the intention of the
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parties is to be ascertained from the writing alone, if possible,” and a court must consider the
whole contract “so as to give effect to every part, if reasonably practicable, each clause helping
to interpret the other.” Id. §§ 1639, 1641.
“Where the meaning of the words used in a contract is disputed, the trial court must
provisionally receive any proffered extrinsic evidence which is relevant to show whether the
contract is reasonably susceptible of a particular meaning.” Morey v. Vannucci, 75 Cal. Rptr. 2d
573, 578 (Ct. App. 1998) (citing Pac. Gas & Elec. Co. v. G.W. Thomas Drayage & Rigging Co.,
442 P.2d 641, 645–46 (Cal. 1968)).
As a preliminary matter, the Agreement between the Plaintiff and the Defendant is
structured like an output contract. The Defendant sends its products to the Plaintiff, the Plaintiff
pays the Defendant, and the Plaintiff holds the Defendant’s products as inventory until further
instructions. The Defendant notifies the Plaintiff once a purchaser is located, the Plaintiff ships
the products to that purchaser, and the Defendant reimburses the Plaintiff for costs plus interest.
This process is repeated with the Defendant’s product output.
Here, the Parties dispute the meaning of Section 2.A.i.d. of the Agreement. The Plaintiff
asserts that the plain text of Section 2.A.i.d. creates a $4,200,000 “limitation on purchasing and
inventory obligations,” and is thus a credit limit on the quantity that the Defendant may send to
the Plaintiff. (Compl. ¶ 11). The Defendant argues that the plain text of Section 2.A.i.d. imposes
a purchasing and inventory obligation on the Plaintiff that may exceed $4,200,000 when the
Defendant requests that the Plaintiff go over that threshold. In essence, Section 2.A.i.d. creates a
“floor for [the Plaintiff], but not a ceiling for either party.” (Def.’s Br. Supp. Mot. Dismiss 12,
ECF No. 13.) Because of this dispute as to the meaning of Section 2.A.i.d., the Court may
consider extrinsic evidence submitted by the parties. Morey, 75 Cal. Rptr. 2d at 578.
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To support its interpretation, the Defendant notes that Section 2.A.i.d. is located in a
portion of the Agreement entitled “[Plaintiff] Obligations.” This provision places a duty on the
Plaintiff to provide credit, but no reciprocal duty on the Defendant. Rather, the Defendant claims
that it is allowed to seek increases in its credit line from the Plaintiff without prior approval. If
the Plaintiff is unable or unwilling to satisfy the Defendant’s request, Section 2.A.i.d. authorizes
the Defendant to terminate the Agreement. Thus, the Defendant could not have breached the
Agreement because Section 2.A.i.d. expressly requires nothing of the Defendant, as it imposes
obligations only on the Plaintiff.
In rebuttal, the Plaintiff offers extrinsic evidence to show that Section 2.A.i.d. prohibits
the Defendant from exceeding the $4,200,000 credit limit unless both Parties consent. The
Plaintiff’s Response included copies of email exchanges between the Parties during their contract
negotiations. On August 1, 2014, Bill Pak, the Plaintiff’s CEO, balked at an earlier contract
proposal because it included no credit limit: “[this proposal] [a]ppears to require [the Plaintiff] to
provide [the Defendant] with an unlimited credit line. We cannot agree to this for obvious
reasons.” (Pl.’s Resp. Ex. B, at 1, ECF No. 23-2). In response, Mike Belitz, the Defendant’s
CEO, stated that the Defendant did not “expect total control of the credit line” and would “treat
this as if it was [the Defendant’s] own credit line with a limit.” (Id.) Thus, Section 2.A.i.d
obligated the Defendant to obtain the Plaintiff’s prior approval before sending more than
$4,200,000 worth of inventory; the Defendant’s failure to do so here constituted breach.
Based upon the pleadings and extrinsic evidence presented, the Court finds that the
Plaintiff’s interpretation of Section 2.A.i.d. is more likely what the Parties intended at the time of
contracting. Under that interpretation, the Defendant is obligated to seek the Plaintiff’s consent
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before exceeding the $4,200,000 credit limit.1 If the Defendant shipped goods to the Plaintiff in
excess of that $4,200,000 credit limit and failed to obtain the Plaintiff’s prior consent, the
Defendant would have breached the Agreement. That situation is precisely what the Plaintiff
alleged in the Complaint: “[the Defendant] has shipped goods to [the Plaintiff], without [the
Plaintiff’s] consent, in an amount which has exceeded the $4.2 million limitation.” (Compl. ¶
11.)
Accordingly, the Plaintiff’s allegations of the Defendant’s breach of contract are
sufficient for purposes of this Motion to Dismiss.2
2.
Plaintiff’s Failure to Allege Performance or Excuse Its Non-Performance
Under California law, a party cannot recover for breach of contract if that party failed to
allege either performance or an excuse for non-performance. An exception arises “[w]hen a
party’s failure to perform a contractual obligation constitutes a material breach of the contract,”
which discharges the other party’s duty to perform. Brown v. Grimes, 120 Cal. Rptr. 3d 893, 902
(Ct. App. 2011); Loral Corp. v. Moyes, 219 Cal. Rptr. 836, 844 (Ct. App. 1985); see also Cal.
Civ. Code § 1440.
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This interpretation is consistent with the requirement of “good faith” inherent in all output contracts.
Cal. Comm. Code (CCC) § 2306. “If an estimate of output or requirements is included in the agreement,
no quantity unreasonably disproportionate to it may be tendered or demanded.” Id. § 2306 cmt. 3. The
Defendant’s interpretation is questionable because it would authorize the Defendant to grossly exceed the
$4,200,000 credit limit and then terminate the Agreement when the Plaintiff could not obtain sufficient
credit; such an arrangement would be inconsistent with the “good faith” requirement.
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Separately, the Defendant argues that the Complaint “does not identify any amounts that are allegedly
delinquent, any Sections of the Agreement under which any amounts could be deemed delinquent, or
explain the factual circumstances under which any amounts became delinquent.” (Def.’s Br. Supp. Mot.
Dismiss 9.) It is technically correct that the Complaint does not allege a sum certain that the Defendant is
delinquent, but the Court’s finding renders this argument moot. The Plaintiff sufficiently alleged that the
Defendant breached when it failed to obtain the Plaintiff’s consent before exceeding the Agreement’s
$4,200,000 credit limit. Omitting a sum certain of the Defendant’s allegedly delinquent amounts does not
make the Plaintiff’s breach of contract claim any less plausible.
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The Defendant argues that the Complaint fails to allege facts showing that the Plaintiff
performed all aspects of the Agreement or that excused the Plaintiff’s non-performance.
Specifically, the Defendant identified as unperformed the Plaintiff’s “properly stor[ing] and
car[ing] for products,” “provid[ing] marketing and sales support,” “maintain[ing] a sales team,”
and “properly us[ing] Ultimate’s trademarks,” among other issues. (Def.’s Reply 2–3, ECF No.
24.) However, the Plaintiff alleged that the Defendant committed a “material breach[] of the
Agreement” when it exceeded the $4,200,000 credit limit. (Compl. ¶¶ 11–12.) Because one
party’s material breach discharges the other party’s duty to perform under California law, Brown,
120 Cal. Rptr. 3d at 902; Loral Corp, 219 Cal. Rptr. at 844, the Plaintiff has alleged facts
sufficient to excuse its non-performance under the Agreement.
Accordingly, the Plaintiff’s breach of contract claim includes specific allegations that
suggest its plausibility. Even though this claim may be unsupportable after discovery, it does not
warrant dismissal at this stage of the proceedings. The Court denies the Defendant’s Motion to
Dismiss Count I (Breach of Contract) of the Plaintiff’s Complaint.
C.
Declaratory Judgment Claim (Count II)
In Count II, the Plaintiff seeks a declaratory judgment against the Defendant. A federal
court sitting in diversity applies the federal Declaratory Judgment Act. See Aetna Life Ins. Co. of
Hartford, Conn. v. Haworth, 300 U.S. 227, 239–40 (1937); Bourazak v. N. River Ins. Co., 379
F.2d 530, 533 (7th Cir. 1967); Inst. for Study Abroad, Inc. v. Int’l Studies Abroad, Inc., 263 F.
Supp. 2d 1154, 1156–57 (S.D. Ind. 2001). Under the Declaratory Judgment Act, a court may
“declare the rights and other legal relations of any interested party” if an “actual controversy” of
a justiciable nature exists, as required by statute and the Constitution. 28 U.S.C. § 2201(a). A
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court maintains broad discretion in determining whether to entertain a declaratory judgment,
Winton v. Seven Falls Co., 515 U.S. 277, 287 (1995), and “may properly decline to assume
jurisdiction in a declaratory action when the other remedy would be more effective or
appropriate.” City of Highland Park v. Train, 519 F.2d 681, 693 (7th Cir. 1975).
Requesting declaratory judgment, the Plaintiff argues that the Agreement’s terms allow
the Plaintiff to relabel and resell any of the Defendant’s inventory currently in the Plaintiff’s
possession. The Defendant asserts that the Court lacks subject matter jurisdiction over a
declaratory judgment claim because the Plaintiff failed to properly plead a breach of contract
claim and because there is no justiciable controversy between the Parties. (Def.’s Br. Supp. Mot.
Dismiss 12–14.)
The argument that this Court lacks subject matter jurisdiction over the Plaintiff’s
Complaint was predicated on the Court dismissing the Plaintiff’s breach of contract claim under
Rule 12(b)(6). But the Court has already found that the Plaintiff’s allegations of the Defendant’s
breach of the Agreement were plausible. Accordingly, this argument no longer applies.
But even if the Defendant’s argument was not dependent upon the breach of contract
claim, the argument that there is no justiciable controversy between the Parties is more
persuasive. The Defendant does not read “the Agreement to require that [the Plaintiff] purchase
all products shipped by Ultimate.” (Def.’s Reply 11 (emphasis added).) According to the
Defendant, under the Agreement the Plaintiff voluntarily assumed any excess inventory that the
Defendant shipped, which means that there cannot be a justiciable controversy as to the rights
and ownership of any excess inventory. Alternatively, the Defendant states that it “timely
reduced the inventory held by [the Plaintiff] to below $4.2 million” after the Plaintiff notified the
Defendant in January 2016 of the excess inventory. (Def.’s Br. Supp. Mot. Dismiss 13.)
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Both of these arguments require interpreting the Agreement’s terms to determine whether
the Defendant breached the Agreement. As such, any decision on declaratory relief is inevitably
bound up in the breach of contract claim. On the one hand, finding a breach of the Agreement
could entitle the Plaintiff to a declaratory judgment on relabeling and reselling the inventory. On
the other hand, finding no breach of the Agreement would likely bar any declaratory relief for
the Plaintiff. Because of this, the Court believes that proceeding solely upon the breach of
contract claim will “be more effective or appropriate” a remedy for the Plaintiff than maintaining
an additional claim for declaratory judgment. City of Highland Park, 519 F.2d at 693.
Accordingly, the Court grants the Defendant’s Motion to Dismiss Count II (Declaratory
Judgment). The Court’s dismissal is without prejudice to the Plaintiff’s ability to later amend its
Complaint and allege a declaratory judgment action, should the breach of contract claim no
longer adequately afford relief to the Plaintiff.
CONCLUSION
Based on the foregoing, the Court GRANTS IN PART and DENIES IN PART the
Defendant’s Motion to Dismiss the Plaintiff’s Complaint [ECF No. 12]. The Court DENIES the
Motion as to Count I but GRANTS the Motion as to Count II. The Court ORDERS that Count II
be DISMISSED WITHOUT PREJUDICE. Any amended complaint is to be filed by September
30, 2016.
SO ORDERED on August 22, 2016.
s/ Theresa L. Springmann
THERESA L. SPRINGMANN
UNITED STATES DISTRICT COURT
FORT WAYNE DIVISION
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