Third Nat. Bank in Nashville v. WEDGE Group Inc.

• Decision Date: 22 September 1989
• Docket Number: No. 88-5825,6019,88-5825
• Parties: THIRD NATIONAL BANK IN NASHVILLE, Plaintiff-Appellant, v. WEDGE GROUP INCORPORATED, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 1087

882 F.2d 1087

THIRD NATIONAL BANK IN NASHVILLE, Plaintiff-Appellant, v. WEDGE GROUP INCORPORATED, Defendant-Appellee.

No. 88-5825, 6019.

United States Court of Appeals, Sixth Circuit.

Argued April 20, 1989.

Decided Aug. 16, 1989.

Rehearing Denied Sept. 22, 1989.

Garry K. Grooms, Thomas P. Kanaday, Jr. (argued), Farris, Warfield & Kanaday, Nashville, Tenn., for plaintiff-appellant.

Stephen A. Riley, Bass, Berry & Sims, Nashville, Tenn., Paul E. Harris, R. Allen Ashcraft, Jr., Steven B. Harris (argued), Harris & Westmoreland, Houston, Tex., for defendant-appellee.

Before KEITH, KENNEDY and RYAN, Circuit Judges.

RYAN, Circuit Judge.

This appeal presents a question of the reach of the Tennessee long-arm statute, which is coextensive with the limits of due process. The district court dismissed the diversity action of plaintiff Third National Bank in Nashville, holding that defendant WEDGE Group Incorporated was not subject to personal jurisdiction in Tennessee. We disagree and reverse.

I.

From 1982 to 1986 Third National Bank in Nashville, a Tennessee bank, made loans totalling approximately $42 million to The Rogers Companies, Inc. ("TRC"), a construction firm incorporated in Delaware and with its principal place of business in Tennessee. TRC was a wholly-owned subsidiary of WEDGE Group Incorporated, a Delaware corporation with its principal place of business in Texas. In conjunction with its loans to TRC, Third National obtained a security interest in, among other assets, TRC's accounts receivable and rights to payment.

TRC, along with its various subsidiaries, had entered a "Tax Sharing Agreement" with WEDGE in 1980. This agreement was executed in Texas and, by its terms, is subject to Texas law. Under the agreement, WEDGE, TRC, and TRC's subsidiaries formed a consolidated group for income tax reporting purposes and filed consolidated federal income tax returns. The agreement required TRC to calculate a "hypothetical" tax liability, as if it and its subsidiaries were not members of the consolidated group, and if this hypothetical tax liability was more than TRC's share of actual taxes paid under the consolidated group tax return, TRC was liable to WEDGE for the difference; if the hypothetical liability was less than TRC's actual tax payments, WEDGE was liable to TRC for the difference. WEDGE was also obligated under the Tax Sharing Agreement to pay TRC an amount equal to the tax benefit to the consolidated group of any TRC net operating losses used to offset group income in the consolidated return.

After the Tax Sharing Agreement was executed in October 1980, WEDGE officers who served as TRC directors met regularly in Nashville with TRC personnel to review and direct the operations of TRC and its subsidiaries. These meetings occurred on a monthly basis through 1984 and less frequently in 1985 and 1986.

In April and May 1985, WEDGE officers and TRC personnel negotiated with Third National for a continued extension of credit from Third National to TRC and its subsidiaries. These negotiations resulted in a third amendment to the Third National-TRC loan agreement, dated June 1985. To induce Third National to enter this amended agreement, WEDGE agreed to make a capital contribution to TRC of $7.5 million, which WEDGE deposited in a checking account at Third National. Only WEDGE officers were authorized to direct disbursements from this Tennessee bank account.

In 1986, TRC's financial position deteriorated, and WEDGE officers negotiated with TRC management for the sale of WEDGE's ownership interest in TRC. During these negotiations, WEDGE sought to deny liability for amounts owed TRC under the Tax Sharing Agreement. The issue was temporarily resolved in June 1986, when representatives of WEDGE, Third National, and TRC met in Nashville and entered an "Agreement Relative to Accounts Receivable," also known as the "Tax Receivable Agreement." Under this agreement, Third National agreed temporarily to forbear seeking collection from WEDGE of amounts owed by WEDGE to TRC under the Tax Sharing Agreement. Upon execution of the Tax Receivable Agreement, WEDGE completed its sale of its ownership interest in TRC to TRC management.

Subsequently, TRC allegedly defaulted on its loan obligations to Third National, and in November 1987 Third National brought this diversity action against WEDGE in the United States District Court for the Middle District of Tennessee. Third National claims that TRC owes approximately $6.2 million under their loan agreement, and that "[b]y reason of [Third National's] security interest in [TRC's] Accounts, Third National is entitled to enforce TRC's rights under the Tax Sharing Agreement with WEDGE." Third National claims that under the Tax Sharing Agreement WEDGE owes TRC, and therefore Third National, approximately $2.6 million.

In December 1987, WEDGE filed a motion to dismiss under Fed.R.Civ.P. 12(b)(2) for lack of personal jurisdiction. After the magistrate recommended denial of the motion, WEDGE timely filed objections, and in an order dated May 1988 the district court rejected the magistrate's recommendation and granted WEDGE's motion to dismiss. The district court denied Third National's motion to reconsider, and this appeal followed.

II.

"The burden of establishing jurisdiction is on the plaintiff." Welsh v. Gibbs, 631 F.2d 436, 438 (6th Cir.1980), cert. denied, 450 U.S. 981, 101 S.Ct. 1517, 67 L.Ed.2d 816 (1981). The district court granted WEDGE's motion to dismiss without an evidentiary hearing, relying solely on the pleadings, affidavits, and other written submissions. In such a case, "the burden on the plaintiff is relatively slight and the district court 'must consider the pleadings and affidavits in the light most favorable to the plaintiff.' " Welsh, 631 F.2d at 439 (citation omitted.) "[T]he plaintiff should be required only to make a prima facie case of jurisdiction, that is, he need only 'demonstrate facts which support a finding of jurisdiction in order to avoid a motion to dismiss.' " Welsh, 631 F.2d at 438 (citation omitted).

In a diversity case, a federal court determines whether personal jurisdiction exists over a nonresident defendant by applying the law of the state in which it sits. American Greetings Corp. v. Cohn, 839 F.2d 1164, 1167 (6th Cir.1988). The Tennessee long-arm statute provides for personal jurisdiction over nonresidents on "[a]ny basis not inconsistent with the constitution of this state or the United States." Tenn.Code Ann. Sec. 20-2-214 (1980). Under this statute, Tennessee courts exercise personal jurisdiction "to the full limit allowed by due process." Masada Investment Corp. v. Allen, 697 S.W.2d 332, 334 (Tenn.1985). The sole question on this appeal, therefore, is whether the exercise of personal jurisdiction over WEDGE in Tennessee would violate due process.

The Supreme Court has held repeatedly that

due process requires only that in order to subject a defendant to a judgment in personam, if he be not present within the territory of the forum, he have certain minimum contacts with it such that the maintenance of the suit does not offend "traditional notions of fair play and substantial justice."

International Shoe Co. v. Washington, 326 U.S. 310, 316, 66 S.Ct. 154, 158, 90 L.Ed. 95 (1945) (quoting Milliken v. Meyer, 311 U.S. 457, 463, 61 S.Ct. 339, 342, 85 L.Ed. 278 (1940)). The critical question minimum-contacts analysis seeks to answer is whether "the defendant's conduct and connection with the forum State are such that he should reasonably anticipate being haled into court there." World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 297, 100 S.Ct. 559, 569, 62 L.Ed.2d 490 (1980).

In analyzing the due-process limits of personal jurisdiction, a distinction is made between "general" jurisdiction and "specific" jurisdiction. See, e.g., Burger King Corp. v. Rudzewicz, 471 U.S. 462, 472 & 473 n. 15, 105 S.Ct. 2174, 2181 & 2182 n. 15, 85 L.Ed.2d 528 (1985). In a case of general jurisdiction, a defendant's contacts with the forum state are of such a "continuous and systematic" nature that the state may exercise personal jurisdiction over the defendant even if the action is unrelated to the defendant's contacts with the state. See, e.g., Perkins v. Benguet Consolidated Mining Co., 342 U.S. 437, 72 S.Ct. 413, 96 L.Ed. 485 (1952). In a specific jurisdiction case, "a State exercises personal jurisdiction over a defendant in a suit arising out of or related to the defendant's contacts with the forum." Helicopteros Nacionales de Colombia, S.A. v. Hall, 466 U.S. 408, 414 n. 8, 104 S.Ct. 1868, 1872 n. 8, 80 L.Ed.2d 404 (1984). We think it apparent that WEDGE's contacts with Tennessee are not of a "continuous and systematic" nature such that Tennessee could maintain personal jurisdiction over WEDGE in an action unrelated to its Tennessee contacts. Thus, personal jurisdiction in this case, it it exists, must be specific jurisdiction.

In Southern Machine Co. v. Mohasco Industries, Inc., 401 F.2d 374 (6th Cir.1968), a case of specific jurisdiction, this court set forth a three-part test for determining whether, consistent with due process, personal jurisdiction may be exercised:

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.

401 F.2d at 381. Analyzing the present case under the three Southern Machine criteria, we conclude that specific jurisdiction exists over WEDGE in Tennessee.

A.

The first Southern Machine criterion requires that the defendant must have "purposefully avail[ed] [it]self of the privilege of acting in the forum state or causing a consequence...