Life Lesson: Be Diligent or Be Forced to Litigate in Indiana!

the-old-red-barn-1233750-1024x736In litigating claims, parties (particularly the attorneys) must exercise diligence. This means being timely when it comes to gathering evidence, complying with a court order, or filing a pleading, motion, appeal etc. In its Commentary to the Model Rules of Professional Responsibility, the American Bar Association specifically warns that procrastination can seriously harm a client’s cause. Good attorneys heed this warning. Procrastination can and will often prompt the court to dismiss a litigant’s claims or objections. Illustrative is a recent case from the U.S. Fifth Circuit Court of Appeal.

In 2011, Red Barn Motors, Inc. entered into a financing agreement with Dealer Services Corporation (“DSC”). Under the financing agreement, DSC would finance Red Barn’s purchase of vehicles at auction. But soon, things went sour. In March of 2013, Red Barn stopped making payments on its line of credit with DSC and DSC began seizing some of Red Barn’s assets. The next month, Red Barn delivered several vehicles to Louisiana’s First Choice Auto Auction, L.L.C. First choice was supposed to sell the vehicles, but instead, it delivered them to DSC. Red Barn eventually declared bankruptcy. At some point, DSC was absorbed by another company, NextGear Capital Inc.

Red Barn filed a lawsuit in the U.S. District Court for the Middle District of Louisiana against NextGear and First Choice. Red Barn alleged that NextGear breached the financing agreement and benefited from unjust enrichment and that NextGear and First Choice committed conversion. According to Red Barn’s petition, sometimes six to eight weeks would pass before the auction house could transfer title to DSC, and DSC would refuse to pay the auction house until it received the title, though it would charge interest and fees starting from Red Barn’s initial purchase.

NextGear moved to transfer the case to the U.S. District Court Southern District of Indiana. A forum-selection clause in the financing agreement with Red Barn stipulated that the Southern District of Indiana would be the venue for any disputes arising out of the agreement. Both Red Barn and First Choice opposed, preferring the case remain in the Middle District of Louisiana. First Choice argued that venue would be improper in Indiana because its principal place of business is in Louisiana and the relevant events took place in Louisiana. Red Barn argued that the forum-selection clause should not be enforced and that in any event, the financing agreement was procured by fraud because NextGear intended to breach its promises when it signed the agreement. First Choice also argued that the forum-selection clause should not be applied because it was not a signatory to the financing agreement.

The Middle District of Louisiana granted NextGear’s motion for transfer, reasoning that First Choice knowingly exploited the contract and that the forum-selection clause applied. 28 U.S.C. Section 1404(a) allows a district court to transfer any civil dispute to any other district to which the parties consent. The Middle District of Louisiana held that this provision could apply here even though the Southern District of Louisiana would probably not otherwise have personal jurisdiction over First Choice (or power to hear the claims against First Choice). The Middle District of Louisiana also concluded that under the facts presented, no exceptional case existed so as to ignore the forum-selection clause. The case was then electronically transferred to the Southern District of Indiana in September 2014.

In January and February of 2015, Red Barn and First Choice filed mandamus petitions, seeking the U.S. Fifth Circuit Court of Appeal to overturn the transfer.  In their petitions, Red Barn and First Choice argued that the District Court erroneously enforced the forum-selection clause against First Choice. They argued that First Choice was not a signatory to the contract, received no benefits under it, and had no knowledge of its terms.

The Fifth Circuit refused to grant Red Barn’s and First Choice’s petitions. Its main reason was both party’s failure to exercise diligence in making their objections to the transfer.

In analyzing the petitions, the Fifth Circuit noted that 28 U.S.C. Section 1651 grants the federal circuit courts of appeal authority to issue writs of mandamus. A writ of mandamus is an order compelling a judicial officer to perform some duty; in this case, transfer the case back to the Middle District of Louisiana. But this authority can only be exercised if the federal circuit court of appeal hearing the mandamus petition has jurisdiction. See United States v. Denedo 556 U.S. 904 (2009). Generally, federal circuits courts of appeal have jurisdiction over appeals from the federal circuit embracing the district court that made the particular decision in issue. See 28 U.S.C. § 1294.

The Fifth Circuit Court of Appeal only has jurisdiction to hear appeals from the district courts of Louisiana, Texas, and Mississippi. This case was originally filed in the Middle District of Louisiana but transferred to the Southern District of Indiana. Once the case was transferred, the Middle District of Louisiana lost its jurisdiction to hear the case. Thus, the Seventh Circuit – the federal circuit encompassing the Southern District of Indiana – would have jurisdiction. Unless the Southern District of Indiana were to transfer the case back, the Fifth Circuit could not take up any appeal here.

Searching for some method of exercising jurisdiction (which would have perhaps benefitted Red Barn First Choice), the Fifth Circuit considered the case law of other federal circuit courts of appeal. It noted that several federal circuits endorse a method which allows the transferring district court to request that that the receiving district court returns the case. See In re Warrick, 70 F.3d 736 (2d Cir. 1995). Yet the Fifth Circuit concluded that a writ of mandamus was not warranted here, despite this alternative remedy. It considered that the receiving district court should only return the case where the case was transferred in spite of the petitioner’s diligence. Red Barn and First Choice waited more than three months to file their petitions. The Fifth Circuit did not consider this diligent. Red Barn and First Choice could have filed their petitions before the case was officially transferred, but neither company offered any explanation as to why they did not.

An important lesson can be learned from this case: be diligent or forfeit your objections. Had Red Barn and First Choice filed their mandamus petitions timely, the Fifth Circuit may have heard their objections and granted their request. But neither company did or put forward any good reason as to why they waited three months to file. Now, both companies will have to inconveniently litigate their claims in Indiana.

Additional Sources: IN RE RED BARNS MOTORS INC.

Written by Berniard Law Firm Blog Writer: Noah Al-Malt

Additional Berniard Law Firm Articles on Federal Procedure: Failure to Maintain a Claim at Each Level of the Court System Causes Man to Lose Federal Question Jurisdiction