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KFC Corp. v. Wagstaff

United States District Court, W.D. Kentucky

June 20, 2013


Decided: June 19, 2013.

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[Copyrighted Material Omitted]

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For KFC Corporation, KFC U.S. Properties, Inc., Plaintiffs: Charles J. Cronan, IV, Margaret R. Grant, Stites & Harbison, PLLC - Louisville, Louisville, KY.

For Denman E. Wagstaff, Donald Steinke, Alyce J. Wagstaff, Frances J. McKenna Steinke, Phil Atterberry, Wendell Wagstaff, Defendants: David S. Kaplan, LEAD ATTORNEY, Casey L. Hinkle, Miller Wells PLLC - Louisville, Louisville, KY; Adam K. Spease, Miller Wells PLLC - Lexington, Lexington, KY.


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Charles R. Simpson III, Senior United States District Judge.

This case is before the court on two motions by the Defendants against the Plaintiffs, KFC Corporation and KFC U.S. Properties, Inc. (collectively " KFCC" ), a motion to dismiss for lack of personal jurisdiction pursuant to Fed.R.Civ.P. 12(b)(6) (DN 13), and a motion to transfer the action to the U.S. District Court for the District of Minnesota (" District of Minnesota" ) pursuant to 28 U.S.C. § 1404 or 28 U.S.C. § 1412 (DN 19).


It is undisputed that the Defendants are the owners, officers, and directors of six related franchisee corporations that operate Kentucky Fried Chicken (" KFC" ) restaurants in six states--California, Idaho, Oregon, Alaska, Texas, and Minnesota. KFCC is a Kentucky corporation and the Defendants' franchisee corporations are all California corporations. The individual Defendants do not reside in Kentucky.

The Defendants' franchisee corporations defaulted on the original franchise agreements governing their collective seventy-seven KFC restaurants by failing to pay royalties and advertising costs they owed KFCC (DN 16). KFCC then terminated them as franchisees. The default, however, triggered negotiations between the Defendants and KFCC for a Reinstatement Agreement, which would give the Defendants' franchisee corporations an opportunity to sell the restaurants, to sign promissory notes for the outstanding debt they owed KFCC, and to upgrade the restaurants for resale (DN 16). The following list summarizes the subsequent contractual agreements between the parties.

(1) In June 2010, KFCC entered an agreement with the Defendants' franchisee corporations and each individual Defendant--the Prenegotiation and Forbearance Agreement (" Prenegotiation Agreement" ). It provided that KFCC would forgo legal proceedings for the breach of the original franchise agreements in order to allow time to negotiate payment of existing obligations and possible reinstatement of the franchise agreements for the purpose of facilitating the sale of the Defendants' seventy-seven KFC restaurants (DN 16). [1] Each of the six individual Defendants signed this agreement personally, while an agent signed on behalf of the franchisee corporations (DN 18 Filed under Seal). [2]
(2) In August 2010, KFCC and the Defendants' franchisee corporations entered into a Reinstatement Agreement and related letter agreements,

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which required the Defendants to sign Promissory Notes for past-due debts owed to KFCC (DN 16).
(3) In August 2010, KFCC and the Defendants' franchisee corporations signed New Franchise Agreements (DN 16).
(4) In August 2010, the Defendants' franchisee corporations signed Promissory Notes to pay KFCC past-due obligations arising from the franchisee corporations' default.
(5) In November 2010, the individual Defendants signed personal guaranty agreements for the franchisee corporations. Those agreements guarantied the payment of the Promissory Notes' and other obligations under the prior franchise agreements. [3]

In April 2011, all six of the Defendants' franchisee corporations filed for Chapter 11 bankruptcy in Minnesota (DN 16). KFCC is a creditor in the pending bankruptcy proceeding in Minnesota.

In this action, in Count I, KFCC requests a declaratory judgment that the individual Defendants, as guarantors, are liable to KFCC for the debts that arise out of and relate to the Defendants' KFC restaurant operations, promissory notes, and other contracts with the Defendants. In Count II, KFCC alleges that the Defendants breached their personal guaranties and KFCC requests an award for past-due and future obligations arising from the Defendants' alleged breach. KFCC also requests an award for pre-and post-judgment interest, attorneys' fees, costs, interest, and expenses connected with this action (DN 1).


KFCC's complaint alleges that exercising personal jurisdiction is proper because the Defendants consented to Kentucky jurisdiction in a collection of documents that cross-reference one another and together comprise the contract among the parties. These documents include (1) the Prenegotiation Agreement; (2) the Promissory Notes (" Notes" ) for past due royalties; and (3) the Defendants' personal guaranties (DN 16). KFCC contends that personal jurisdiction is also proper because the action satisfies Kentucky's long-arm statute (DN 1).

The Defendants' motion to dismiss argues that the individual Defendants did not consent to personal jurisdiction in Kentucky and that personal jurisdiction is not proper under Kentucky's long-arm statute

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because they were not " transacting business" in Kentucky to satisfy the requirements enumerated in the statute. They also argue that even if they were transacting business under the long-arm statute, exercising personal jurisdiction would violate the Defendants' due process rights because they lack minimum contacts with Kentucky (DN 13).


The plaintiff bears the burden of establishing personal jurisdiction. Air Prods. & Controls, Inc. v. Safetech Int'l, Inc., 503 F.3d 544, 549 (6th Cir. 2007). When a district court resolves a motion to dismiss for lack of personal jurisdiction by relying on written submissions and affidavits rather than holding an evidentiary hearing, the plaintiff is only required to make a prima facie showing that personal jurisdiction exists to defeat the motion. Id.; Neogen Corp. v. Neo Gen Screening Inc., 282 F.3d 883, 887 (6th Cir. 2002). Without a hearing, the court must construe the pleadings and affidavits in the light most favorable to the plaintiff, CompuServe, Inc. v. Patterson, 89 F.3d 1257, 1262 (6th Cir. 1996), and cannot " consider facts proffered by the defendant that conflict with those offered by the plaintiff." Neogen, 282 F.3d at 887.

I. Personal Jurisdiction over the Defendants

A. Personal Jurisdiction Based on Consent

We first address the Defendants' motion to dismiss for lack of personal jurisdiction. " A party to a contract may waive its right to challenge personal jurisdiction by consenting to personal jurisdiction through a forum selection clause." M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 11, 92 S.Ct. 1907, 32 L.Ed.2d 513 (1972). Forum selection clauses are prima facie valid. Se. Commc'n Serv. v. Allstate Tower, Inc., CIV. A. 408CV-13-M, 2008 WL 1746638, *4 (W.D. Ky. Apr. 14, 2008). The use of a forum selection clause is one way in which contracting parties may agree in advance to submit to the jurisdiction of a particular court. Preferred Capital, Inc. v. Assocs. in Urology, 453 F.3d 718, 721 (6th Cir. 2006). Such a clause contained in an arm's length commercial transaction is presumed to be valid and enforceable. Id.; Allstate, 2008 WL 1746638 at *4.

The Supreme Court has stated that, in light of present-day commercial realities, a forum selection clause in a commercial contract should control absent a strong showing that it should be set aside. Zapata, 407 U.S. at 15. Where the record is devoid of an allegation that the forum selection clause is fundamentally unfair or unreasonable, a defendant has voluntarily submitted itself to personal jurisdiction and venue. Powerscreen USA, LLC v. S& L Equip., Inc., * 22-23 (W.D. Ky. July 29, 2008). A fundamentally unfair or unreasonable forum selection clause may exist where the clauses result from " fraud, undue influence, or overwhelming bargaining power." Zapata, 407 U.S. at 12-13. [4]

Under Kentucky law, when determining the parties' intent from the terms of a contract, the " entire context of the agreement" must be taken into account. Veech v. Deposit Bank of Shelbyville, 278 Ky. 542, 128 S.W.2d 907, 911 (Ky. 1939). " [A]greements in writing, executed at the same time between the same parties and relating to the same subject-matter, will be

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considered to make one contract for the purpose of determining the meaning of the parties, though the agreements are contained in several instruments, and though they do not bear the same date, nor be absolutely contemporaneous in execution." Macpherson v. Bacon's Ex'r, 180 Ky. 773, 203 S.W. 744, 746 (Ky. 1918).

Where a plaintiff claims, as KFCC does here, that the guarantor is bound by a forum selection clause in an underlying guaranty agreement, the court " must carefully consider the language of the guaranty alongside the underlying contract" to " determine the intention of the parties while at the same time preserving the integrity of these unique instruments in keeping with Kentucky law." Fazoli's Franchising Sys., LLC. v. Diwa III, Inc., 2008 WL 4525433, *5-6 (E.D. Ky. Sept. 30, 2008) ( citing ABCO-BRAMER, Inc. v. Markel Ins. Co., 55 S.W.3d 841, 844 (Ky. Ct. App. 2000) (holding that where an underlying contract is incorporated into a performance bond, the ...

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