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Non-Core Adversary Proceeding Dismissed Where Defendant and Debtor’s Pre-Petition Contract Contained Valid Forum Selection Clause

By Evan T. Miller

On November 15, 2012, Judge Mary F. Walrath of the United States Bankruptcy Court for the District of Delaware issued a Memorandum Opinion in Giuliano v. Genesis Financial Solutions, Inc. (In re Axiant, LLC)(Adv. No. 12-50526 (MFW)), granting the Defendant’s motion to dismiss (the “Motion to Dismiss”) the trustee-plaintiff’s (“Trustee”) complaint (the “Complaint”) for improper venue. The Court found that (i) the Complaint asserted only non-core state law breach of contract (the “Contract”) and unjust enrichment claims; (ii) the Contract’s forum selection clause (the “Clause”) was presumptively valid under Third Circuit law; (iii) the Trustee failed to prove enforcement of the Clause was unreasonable or inapplicable as to him; and (iv) Trustee’s alternative request to transfer the matter to the United States District Court for the Northern District of Georgia (the “Georgia District Court”) was inappropriate for lack of diversity jurisdiction.

Prior to filing for protection under Chapter 11 of the Bankruptcy Code, Axiant, LLC (the “Debtor”) entered into the Contract with the Defendant, pursuant to which the Defendant placed certain accounts with the Debtor for collection on a contingent fee basis. After the Debtor’s bankruptcy case was converted to one under Chapter 7 of the Bankruptcy Code, the Trustee filed a complaint against the Defendant, alleging that: (i) the Defendant breached the Contract by failing to remit pre-petition contingency fees to the Debtor; (ii) the Defendant was unjustly enriched as a result of the breach; and (iii) the Defendant must turn over said property pursuant to 11 U.S.C. § 542. The Defendant then filed the Motion to Dismiss under F.R.C.P. 12(b)(3).

First, the Court rejected Trustee’s request that the Motion to Dismiss be treated as a motion for transfer of venue as opposed to applying the law on forum selection clauses in the context of an adversary proceeding, finding that a motion to transfer venue was simply not before it. Next, the Court found that (i) since the Contract states that Delaware law should govern, the Court should apply Third Circuit law in determining the Clause’s validity; (ii) the Third Circuit has held that such forum selection clauses are binding upon bankruptcy courts in non-core proceedings; and (iii) since the Complaint alleged only state law breach of contract and unjust enrichment claims, both of which are traditionally considered non-core, the Clause was binding in this case. The Court then dismissed the Trustee’s claim that enforcement of the Clause would be unreasonable due to the inconvenience and expense involved, holding that a mere claim of inconvenience or expense is insufficient to establish unreasonableness. Furthermore, the Court denied the Trustee’s assertion that the Clause was unenforceable against him since he was not a party to Contract, holding that a trustee is bound by a debtor’s pre-petition contracts in non-core matters. Finally, the Court denied the Trustee’s alternative request that the case be transferred to the Georgia District Court, reasoning that the case could not have been brought there due to a lack of subject matter jurisdiction over the Complaint’s traditional state law claims. The Court concluded that the interest of justice did not require that the case be transferred rather than dismissed, since the Trustee did not identify the proper state court in which to bring the case. Thus, the Court granted the Defendant’s Motion to Dismiss.

A copy of the opinion can be found here.

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