Spread Your Wings, LLC v. AMZ Group

Background

Spread Your Wings, LLC (SYW), Blossom Hill Buildings, LLC (BHB), and Andrew S. Dumbaya filed the action under diversity jurisdiction. The complaint sought rescission of four agreements that SYW and BHB entered into with AMZ Group LLC. Mr. Dumbaya signed related guaranties. According to the complaint, the agreements appeared to provide for AMZ to advance money and receive repayment from a percentage of SYW’s future receipts through electronic debits.

The plaintiffs alleged that AMZ’s debits did not track a percentage of SYW’s receipts, that SYW became overextended, and that AMZ treated the agreements as loans with annual percentage rates exceeding 179 percent. They asserted claims for declaratory and injunctive relief, violations of California usury laws, violations of California’s unfair competition law, and money had and received. They sought rescission, restitution, statutory penalties, and more than $2 million in damages.

AMZ disputed that the agreements were loans and contended that it had performed its contractual obligations. AMZ also alleged that the plaintiffs breached the agreements by changing bank accounts and preventing authorized electronic debits. AMZ had separately sued the plaintiffs in New York state court for breach of contract, claiming that the plaintiffs owed more than $1.3 million under the agreements.

Forum-selection clauses

AMZ moved to dismiss based on forum non conveniens, a legal doctrine used to enforce an agreement selecting another forum for a dispute. The court explained that when the selected forum is another federal court, transfer under 28 U.S.C. § 1404(a) is the appropriate remedy rather than outright dismissal.

The first three agreements stated that New York law governed and that suits, actions, or proceedings could be brought in any court sitting in New York if AMZ elected that forum. The July 29, 2019 agreement contained somewhat different wording but likewise required litigation to be instituted in a court sitting in New York. The court held that the wording allowed cases in both New York state and federal courts.

The court also held that the clauses covered the plaintiffs’ claims. The parties disputed whether the agreements were merchant cash agreements or loans and whether their actual performance matched the agreements’ terms. The court concluded that those disputes concerned the interpretation and performance of the agreements. It further explained that forum-selection clauses can cover both contract and tort claims when the claims relate to the agreement.

Whether the clauses were enforceable

The court stated that a forum-selection clause should generally be enforced unless the resisting party shows one of three circumstances: fraud or coercion in including the clause, enforcement would violate a strong public policy of the forum where the case was filed, or proceeding in the selected forum would be so difficult that the party would effectively have no meaningful opportunity to litigate.

The plaintiffs argued that the agreements were unlawful and therefore could not contain enforceable forum clauses. The court rejected that argument because there was no apparent dispute that the agreements existed, and the plaintiffs did not specifically claim that the forum clauses themselves were included through fraud or coercion. The court also found that the plaintiffs had reasonable notice of the clauses. The provisions appeared under bold, underlined headings concerning governing law, venue, and jurisdiction, and the plaintiffs did not show that Mr. Dumbaya lacked time to review the contracts or an opportunity to seek legal advice.

The court also rejected the plaintiffs’ inconvenience argument. The plaintiffs stated that New York was inconvenient and that they had retained New York counsel, but they did not show that New York would provide no remedy or that litigating there would effectively deprive them of their day in court.

The plaintiffs principally argued that transfer would violate strong California public policies reflected in California usury and lending laws. The court concluded that the plaintiffs had not shown that a New York court would deny them an adequate remedy, much less any remedy. The court noted the plaintiffs’ argument that California’s interest-rate ceiling was 10 percent and New York’s was 25 percent, but observed that the alleged rates exceeded 179 percent and therefore exceeded both stated ceilings. The court also found that the plaintiffs had not adequately supported their arguments concerning California financial-disclosure laws, jury-trial rights, class-action rights, or Medicaid-related funding.

Disposition

After finding the forum-selection clauses enforceable, the court considered whether public-interest factors nevertheless made transfer inappropriate. It found that the plaintiffs had not identified exceptional circumstances or public-interest factors sufficient to overcome the federal policy favoring enforcement of forum-selection clauses.

Judge Demarchi ordered that AMZ’s motion to dismiss be granted. Rather than dismissing the complaint outright, the court ordered the action transferred to the United States District Court for the Eastern District of New York because AMZ’s related lawsuit was pending there. The Clerk was directed to transfer the action and close the file in the Northern District of California. The order did not decide whether the agreements were loans, whether they violated California law, or whether either side ultimately prevailed on the underlying contract dispute.