Edge Telecom, Inc. v. Sterling Bank

• Citation: 143 P.3d 1155
• Decision Date: 10 August 2006
• Docket Number: No. 05CA0827.,05CA0827.
• Parties: EDGE TELECOM, INC. and Robert DeGraw, Plaintiffs-Appellants, v. STERLING BANK, Defendant-Appellee.
• Court: Court of Appeals of Colorado

143 P.3d 1155

EDGE TELECOM, INC. and Robert DeGraw, Plaintiffs-Appellants, v. STERLING BANK, Defendant-Appellee.

No. 05CA0827.

Colorado Court of Appeals, Div. A.

August 10, 2006.

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Deisch, Marion & Klaus, P.C., Jeffrey B. Klaus, Denver, Colorado, for Plaintiffs-Appellants.

Block Markus & Williams, LLC, Donald J. Quigley, Denver, Colorado, for Defendant-Appellee.

Opinion by Chief Judge DAVIDSON.

In this action seeking damages for fraud and misrepresentation, plaintiffs, Edge Telecom, Inc., a Colorado corporation, and Robert DeGraw, appeal from the judgment of the trial court dismissing without prejudice their complaint against defendant, Sterling Bank, a New York corporation, pursuant to a forum selection clause. The trial court determined under C.R.C.P. 12(b)(1) that the forum selection clause was enforceable and, therefore, that it lacked subject matter jurisdiction. We agree that the forum selection clause was enforceable, and, therefore, we affirm.

The pertinent facts are not disputed. In March and April 2004, Edge agreed to purchase telecommunications equipment from a codefendant, NorVergence, Inc., a New Jersey corporation. The companies executed a finance lease, and DeGraw signed the lease as a guarantor. NorVergence then assigned the lease to Sterling. In June 2004, NorVergence filed for bankruptcy protection, and it is not a party to this appeal.

After receiving a demand for payment from Sterling, plaintiffs filed this action in Denver District Court against NorVergence and Sterling, alleging that the lease and guarantee were invalid based on fraud and violation of the Colorado Consumer Protection Act. The action against NorVergence was stayed pursuant to the federal bankruptcy code.

The financial lease contained a forum selection clause in the event of litigation, which provided as follows:

This agreement shall be governed by, construed and enforced in accordance with the laws of the State in which Rentor's principal offices are located or, if this Lease is assigned by Rentor, the State in which the assignee's principal offices are located. Without regard to such State's choice of law considerations ... all legal actions relating to this Lease shall be venued exclusively in a state or federal court located within that State, such court to be chosen at Rentor or Rentor's assignee's sole option.

In similar fashion, the guaranty provided: "The same state law as the rental will govern this guaranty. You agree to jurisdiction and venue as stated in the paragraph titled applicable law of the rental."

Based on these provisions, Sterling filed a motion to dismiss pursuant to C.R.C.P. 12(b)(1), asserting that the trial court did not have subject matter jurisdiction over plaintiffs' claims. The court granted the motion, determining that the forum selection clauses were enforceable and that it had no subject matter jurisdiction over the dispute.

Plaintiffs appeal, contending that the dismissal of their complaint based on the forum selection clause was error. We disagree. Although we do not agree either with defendant's argument that C.R.C.P. 12(b)(1) is an appropriate mechanism by which to litigate this issue or with the trial court's determination that the forum selection clause implicated the court's subject matter jurisdiction, we agree with its conclusion that the clause was enforceable and, therefore, dismissal was proper.

I. Standard of Review

Colorado, like every other jurisdiction of which we are aware, follows the general rule first set forth by the Restatement (Second) of Conflict of Laws in 1971 and adopted one year later by the United States Supreme Court in M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 12, 92 S.Ct. 1907, 1914, 32 L.Ed.2d 513 (1972). Under this rule, a forum selection clause will be enforced unless the party seeking to avoid its effect proves that enforcement would be unfair or unreasonable. ABC Mobile Sys., Inc. v. Harvey, 701 P.2d 137, 139 (Colo.App.1985).

Because forum selection clauses are contractual provisions agreed to by private parties, issues relating to their interpretation and enforcement are matters of substantive contract law. See, e.g., Licensed Practical Nurses, Technicians & Health Care Workers, Inc. v. Ulysses Cruises, Inc., 131 F.Supp.2d 393, 405-06 (S.D.N.Y.2000). Generally, the standard of review for the interpretation of contract terms is de novo. B & B Livery, Inc. v. Riehl, 960 P.2d 134, 136 (Colo.1998).

When the issue of enforcement of a forum selection clause requires factual findings by the trial court, it is a mixed question of law and fact, for which de novo review also is warranted. See Adams Reload Co. v. Int'l Profit Assocs., Inc., 143 P.3d 1056, 2005 WL 3071566 (Colo.App. No. 04CA1253, Nov. 17, 2005) (de novo review required because enforcement of forum selection clause involved legal questions and issues of public policy and fairness); see also In re Vought, 76 P.3d 906, 913 (Colo.2003) (mixed question of law and fact results in legal standard that varies with the facts of the case); E-470 Pub. Highway Auth. v. 455 Co., 3 P.3d 18, 22-23 (Colo. 2000) (when dealing with mixed questions of fact and law, appellate court may choose proper standard of review).

II. Procedural Mechanism for Evaluating Forum Selection Clause

Initially, we address whether the issue was properly framed and decided under C.R.C.P. 12(b)(1). We conclude that it was not.

A. Need for Appropriate Procedural Mechanism

Although forum selection clauses appear frequently in commercial contracts, there is no procedural rule—either in Colorado or elsewhere in other jurisdictions of which we are aware—specifically tailored to a request to dismiss or transfer a case on the basis of a forum selection clause.

As a result, parties and courts have framed such motions in a variety of ways: as motions to dismiss for lack of subject matter jurisdiction; as motions to dismiss for failure to state a claim; as motions alleging improper venue or forum non conveniens; or as motions to transfer from one federal court to another. See, e.g., Steward v. Up N. Plastics, Inc., 177 F.Supp.2d 953, 957 (D.Minn. 2001) (discussing applicable federal rules); Olinick v. BMG Entm't, 138 Cal.App.4th 1286, 1294, 42 Cal.Rptr.3d 268, 274 (2006) (forum non conveniens); see also Ex parte Procom Servs., Inc., 884 So.2d 827, 829 (Ala. 2003) (dismissal through writ of mandamus).

Here, neither party disagrees that the question whether a forum selection clause is enforceable may be a dispositive ruling that should be determined by the trial court as a threshold matter. They disagree, however, as to the appropriate mechanism by which the issue should be presented to a trial court. Specifically, defendant's motion in the trial court asserted that, based on the forum selection clause, the court lacked subject matter jurisdiction over plaintiffs' complaint. In plaintiffs' view, however, defendant's motion was actually a motion to dismiss for failure to state a claim. Thus, on appeal, plaintiffs argue that it was defendant's burden to show in its motion to dismiss that, taking all the allegations of the complaint as true, plaintiff could not prevail under any set of facts and defendant failed to meet that burden. We disagree with both parties.

B. C.R.C.P. 12(b)(1) and (5)

On the one hand, contrary to the trial court's ruling, C.R.C.P. 12(b)(1) is not an appropriate procedural mechanism for addressing a forum selection clause. Subject matter jurisdiction refers to a court's inherent power to deal with a particular case. See, e.g., Cornstubble v. Indus. Comm'n, 722 P.2d 448, 450 (Colo.App.1986). In Colorado, the subject matter jurisdiction of state courts is determined by constitution. See Colo. Const. art. VI, § 9; Colo. Supreme Court Grievance Comm. v. Dist. Court, 850 P.2d 150, 151-52 (Colo.1993) (district courts possess original subject matter jurisdiction over all matters unless otherwise provided by the constitution). Therefore, private parties cannot simply agree in a forum selection clause to deprive a court of its subject matter jurisdiction. See Vanderbeek v. Vernon Corp., 25 P.3d 1242, 1248 (Colo.App.2000) ("parties' agreement as to the place of the action cannot deprive a court of subject matter jurisdiction") aff'd, 50 P.3d 866 (Colo.2002); Cornstubble v. Indus. Comm'n, supra, 722 P.2d at 450.

On the other hand, contrary to plaintiffs' argument, a motion to dismiss for failure to state a claim also is inappropriate. Such a motion requires the court to accept as true the allegations in the complaint and draw all inferences in favor of the plaintiff. See, e.g., Medina v. State, 35 P.3d 443, 452 (Colo.2001). However, that analysis conflicts with the requirement in forum selection clause enforcement cases that the party seeking to avoid the effect of the clause has the burden of proof. See M/S Bremen v. Zapata Off-Shore Co., supra, 407 U.S. at 15-17, 92 S.Ct. at 1916-17 ("heavy burden" requiring a "strong showing"); ABC Mobile Sys., Inc. v. Harvey, supra, 701 P.2d at 139.

We note also that, unlike a motion to dismiss for failure to state a claim or for lack of subject matter jurisdiction, which can be made at any point in the proceedings, dismissal based on a forum selection clause is subject to the doctrine of waiver. See Vessels Oil & Gas Co. v. Coastal Refining & Mktg., Inc., 764 P.2d 391, 392-93 (Colo.App.1988) (evaluating whether defendant had waived its right to move for dismissal based on a forum selection clause).

Accordingly, to the extent the trial court granted defendant's motion to dismiss plaintiffs' complaint based on C.R.C.P. 12(b)(1), it was incorrect.

C. Proper Procedural Mechanism

Although the trial court's dismissal based on lack of subject matter jurisdiction was improper, its error is harmless if the court nonetheless reached the correct outcome. See C.R.C.P. 61; City of Colorado Springs v. Givan, 897 P.2d 753, 761 (Col...