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NY Corporation controller able to accept in Minnesota lawsuit

Thursday, December 20, 2001
Supreme Court
New York County
Justice Omansky

NAVARRE CORP. v. JELLYBEAN RECORDINGS, INC. — In this action to recover a judgment, plaintiff Navarre Corporation moves for summary judgment in lieu of complaint directing entry of judgment against defendant Jellybean Recordings, Inc. in the amount of $153,093.86 with interest and costs based on a money judgment rendered, by default, in the State of Minnesota, County of Hennepin, District Court, Fourth Judicial District, Court File No. DC DJ 01-000962 on January 30, 2001.

Defendant cross-moves, pursuant to CPLR 3211(a)(7) and (a)(8), to dismiss the motion for summary judgment in lieu of complaint with prejudice and without leave to replead.

Plaintiff is a Minnesota corporation which is engaged in the wholesale distribution of musical, literary, and artistic recordings on various recording media of its clients to retail stores. Plaintiff has its principal place of business at 7400 49th avenue North, New Hope Minnesota.

Defendant, a New York corporation, which had its principal place of business at 235 Park Avenue South, 10th floor, New York, New York, is a “record label” company engaged in the business of producing, distributing, marketing, advertising, promoting, and selling sound recordings. Defendant alleges that it never maintained, and does not now maintain, any officers or employees within the State of Minnesota. According to defendant, it had no bank accounts or telephone numbers within Minnesota or owns any property, nor is it registered as a foreign corporation in that State or filed Minnesota corporate income tax returns.

In late 1996 or early 1997, defendant was looking for a new wholesale distributor for its sound recordings. Plaintiff entered the bidding and solicited defendant’s business in New York. The parties engaged in negotiations leading up to the parties’ execution of a National Distribution and Warehousing Agreement, dated February 1, 1997 (“the Distribution Agreement”), whereby plaintiff was engaged to sell and distribute defendant’s sound recordings to plaintiff’s retail accounts in the Unites States. Pursuant to the terms of the Distribution Agreement, defendant appointed plaintiff as its exclusive distributer for sales and distribution of defendant’s records. Under the terms of the Distribution Agreement, plaintiff was to provide defendant with weekly sales and inventory reports showing the total shipments of defendant’s sound recordings and defendant was required to make weekly payments to plaintiff upon issuance of an invoice by plaintiff.

Section 9 of the Distribution Agreement contains numerous provisions concerning termination of the contract. Pursuant to section 9.1, defendant record label company or “Label” may terminate the Agreement, without cause, if it has been in effect for a period of at least one year. Label must give NAVARRE at lest 60 days advance written notice of termination. Label may terminate this Agreement without cause and without liquidated damages …, if Label gives NAVARRE a six-month notice of termination no sooner than 24 months from the Agreement’s effective date.

In the event that defendant did not wait two years and give plaintiff six months notice prior to terminating the business relationship, the liquidated damages provision found in section 9.2 of the Distribution Agreement would be triggered. Section 9.2 provides, in pertinent part, that [u]pon termination by Label without cause, it shall pay to NAVARRE for the loss of the rights granted under this Agreement, to liquidate damages and not as a penalty, a dollar amount derived from the gross margins that would have been realized by NAVARRE during the remaining term of this Agreement. For this calculation, the gross margin percentages realized by NAVARRE from the net sales (account shipments and returns) over the six-month period preceding the giving of notice will be used to determine the average gross margin dollars realized per month. This dollar amount will then be multiplied by the months remaining in the term of the Agreement. NAVARRE’S invoice for this amount shall include documentation to support its calculation. Payment shall be made within 60 days.

Defendant had the right to audit plaintiff’s books and recordings to confirm the accuracy of plaintiff’s calculation provided that defendant placed the amount of such payment in an escrow account pending verification. In addition, section 6.2 of the Distribution Agreement provided that plaintiff “may return for full credit up to 100 percent of all conforming sound recordings received from [defendant].”

On November 30, 1999, defendant gave plaintiff written notice that it was terminating the Distribution Agreement “at the end of the Initial Term on January 31, 2000.” Although the termination letter was more than two years after the effective date of the Distribution Agreement, the correspondence only gave plaintiff 60-days notice rather than the six month notice required to avoid liquidated damages under section 9.2 of the parties’ contract.

Plaintiff acknowledged the termination and informed its customers in a letter dated January 28, 2001 that, as of January 31, 2000, it would no longer distribute products released by defendant. Plaintiff informed customers that it would only process returns of defendants’s product which had already been issued by plaintiff. Each of plaintiff’s customers received a list of defendant’s product which was still “active.” Defendant maintains that plaintiff was not entitled to accept any returns of defendant’s products from retailers after the termination date and that the charges are improper.

It is unclear if plaintiff is actually entitled to, or if it ever assessed liquidated damages, under section 9.2 of the Distribution Agreement. However, plaintiff seeks judgment on the $152,692.86 it claims defendant owes it, representing marketing and manufacturing expenses as well as returns of defendant’s product “which Navarre received in the ordinary course of its business and/or in compliance with the parties’ agreement (Burke 6/8/2001 Aff. at 2, ¶4; see, Distribution Agreement §6.2).

Defendant has not challenged the judgment in Minnesota nor has the defendant ever commenced an action in that State challenging the validity of the parties’ forum selection clause.

Under the Full Faith and Credit Clause of the United States Constitution, the judgment of one court is conclusive and binding in another State only if the first court had jurisdiction to render it (Farmland Dairies v. Barber, 65 NY2d 51, 55, rearg denied 65 NY2d 929 [1985], citing Underwriters Nat. Assur. Co. v. North Carolina Life and Acc. And Health Ins. Guar. Assn., 455 US 691, 704-705 [1982][remaining citation omitted]); US Const, art IV, §1).
New York recognizes foreign judgments predicated on any jurisdictional basis that it recognizes in its internal law (Porisini v. Petricca, 90 AD2d 949, 950 [4th Dept 1982]; CPLR 5305 et seq). In the event that “a sister State’s exercise of long-arm jurisdiction is challenged, the law of that State, even though it may be at odds with the New York rule, determines whether jurisdiction was properly obtained” (China Express, Inc. v. Volpi & Son Machine Corp., 126 AD2d 239, 242 [1st Dept 1987]).

In Minnesota, parties may consent to personal jurisdiction in a contract (Rykoff-Sexton, Inc. v. American Appraisal Assocs. Inc., 469 NW2d 88, 90 [1991]). A forum selection clause in Minnesota is not governed by that State’s rules covering venue and jurisdiction but rather by the rules of contractual defenses (OT Industries v. OT-tehdas Oy Santasalo-Sohlberg Ab, 346 NW2d 162, 167 [Ct App 1984]). Minnesota courts enforce forum selection clauses unless the party seeking to avoid the clause shows that the agreement is unfair or unreasonable (Hauernstin & Bermeister, Inc. v. Met-Fab Indus., Inc., 320 NW2d 886, 889 [1982]). A contractual forum selection clause is unreasonable under Minnesota law if the chosen forum is a seriously inconvenient place for trial, the choice of forum agreement is one of adhesion, or the agreement is otherwise unreasonable (id. at 890).

Section 11.1 of the Distribution Agreement provides that[a]ny dispute arising our of this agreement may not be brought and persecuted in a court chosen by the party initiating the dispute. Any dispute arising our of this Agreement and challenged by NAVARRE shall be brought and prosecuted in a court within Hennepin County Minnesota. For this purpose, Label [defendant] appoints the Secretary of State of Minnesota as its agent for services of process. A simultaneous notice will also be given directly to Label [defendant].

Defendant clearly and unequivocally agreed that contract disputes would be heard in Hennepin County in Minnesota.
Defendant has never challenged the validity of the forum selection clause before a Minnesota Court or raised that issue as a defense to the Minnesota Action. Moreover, defendant has not stated any fact in this application which would require this Court to deny enforcement of the Minnesota judgment on the ground that the forum selection clause is either unfair or unreasonable under Minnesota law (Hauernstin & Bermeister, Inc. v. Met-Fab Indus., Inc., supra, 320 NW2d, at 890). The record shows that both parties are sophisticated business entities which were represented by counsel during the negotiations of the Distribution Agreement (ibid.). Therefore, the forum selection clause in section 11.1 of the Distribution Agreement is not a contract of adhesion under Minnesota law and is enforceable (ibid.).

Although defendant maintains that the forum selection clause is ambiguous and does not provide for exclusive venue in Minnesota, this court finds no confusion or ambiguity in the provision. Contrary to defendant’s assertions, the sentences in section 11.1, referring to service on the Secretary of State and “simultaneous notice” to the party do not contradict the use of a Minnesota forum. Rather, this provision provides that plaintiff could serve the Secretary of State in Minnesota and give “simultaneous notice” directly to defendant.

The fact that jurisdiction ceases in Minnesota when a foreign corporation ceases to do business and withdraws from that State is also not dispositive (Garber v. Bancamerica-Blair Corp., 205 Minn 275, 280; 285 NW 723, 727 [1939]). Minnesota recognizes that a corporation may consent to jurisdiction despite the fact that it is not doing business in the State at the time of service of process (Garber v. Bancamerica, supra, 205 Minn, at 278; 285 NW, at 726).

Defendant’s argument that the forum clause no longer applies to the underlying dispute, since defendant terminated the contact over a year prior to plaintiff’s suit in Minnesota, is without merit. The parties could have limited the scope of the forum selection clause to disputes pending before termination of the Distribution Agreement, but they did not and instead opted for a more broadly worded provision. The termination of the Distribution Agreement also does not effect the applicability of section 11.1 because the monies in dispute arise under provisions of the Distribution Agreement concerning liquidated damages and/or reimbursement for returns. Since the sums charged by plaintiff to defendant were clearly generated by operation of the contract and are not charges which occurred as the result of transactions which were extraneous to the Distribution Agreement, the action in Minnesota qualifies as a dispute arising from the Distribution Agreement (see, In re Cullman Ventures, Inc., 252 AD2d 222, 226-228 [1st Dept 1998]). The forum selection clause in section 11.1 applies to the underlying dispute in Minnesota.

Given the fact that the forum selection clause is enforceable and applicable to the present dispute, plaintiff is not required to show that Minnesota had long-arm jurisdiction over defendant (Garber v. Bancamerica, supra, 205 Minn, at 278; 285 NW, at 726). That branch of defendant’s cross motion which argues that this court may not enforce the Minnesota judgment on the ground that Minnesota does not have long-arm jurisdiction over defendant is denied since defendant agreed by contract to accept suit in a Minnesota forum for all disputes arising out of the Distribution Agreement (ibid.).

Plaintiff never served the Secretary of State in Minnesota as required under the contract, presumably because defendant never registered as a foreign corporation doing business in that State. Therefore, plaintiff had to comply with the Minnesota statutes governing personal service on a corporation.

Under Minnesota law, service of process on a domestic or foreign corporation may be properly effected only “by delivering a copy to an officer or managing agent, or to any other agent authorized expressly or impliedly or designated by statute to receive service of summons” (Minn R Civ P §4.03[c]). Minnesota has held that the Legislature intended the term “managing agent” to refer only to those agents who possess powers similar in character and importance to those possessed by the officers expressly named; that they intended only those agents who have charge and control of the business activities of the corporation or of some branch or department thereof, and who, in respect to the matters entrusted to them, are vested with powers requiring the exercise of an independence judgment and discretion

(Tullis v. Federated Mut. Ins. Co., 570 NW2d 309, 311 [1997], quoting Derrick v. Drolson Co., 244 Minn 144, 149, 69 NW2d 124, 128 [1955], quoting Hatinen v. Payne, 150 Minn 344, 346, 185 NW 386, 387 [1921]). Minnesota courts have also accepted the notion service is effectuated if the corporate management duties of the person served are sufficiently important to imply an authority on the part of that agent to accept serve of process (Derrick v. Drolson Co., supra, 244 Minn, at 153-154, 69 NW2d, at 131).

Plaintiff served the summons and complaint for the Minnesota action on defendant’s corporate headquarters in New York and left the documents with Frank Bonfante, defendant’s controller.

Defendant maintains that service on Mr. Bonfante does not satisfy the requirements of Minnesota law because Mr. Bonfante’s position does not fit the description of a managing agent as defined by Minnesota law. According to defendant, Mr. Bonfante’s role is that of a “bookkeeper” and he is not an officer or managing agent of defendant. Defendant alleges that Mr. Bonfante has no power to exercise independent judgment or to make any other management level decision. Defendant also states that Mr. Bonfante is not personally authorized to accept service of process on behalf of the defendant corporation. In support of its arguments, defendant submits an affidavit from Mr. Bonfante who admits that he was present in the office when plaintiff’s process server arrived. Mr. Bonfante states that he informed the server that there were no officers present at the time and that he was the controller. According to Mr. Bonfante
my principal function is to administer the royalty accounts of [defendant’s] recording artists, and to process royalties to and payments from those accounts. Although it is my duty to prepare the semi-annual royalty statements for [defendant’s] recording artists, and to prepare the checks for any royalty payments owed, I do not have authority to sign the royalty checks (Bonfante 6/4/2001 Aff, at ¶2).

However, the court finds that Mr. Bonfante’s duties are of sufficient managerial importance to vest him with authority to accept service as defined by Minnesota law. The position of controller in a New York corporation, where defendant is incorporated, is considered a high-ranking job title and qualifies as a managing agent of sufficient authority to accept process under New York’s CPLR 311 (Sullivan Realty Organization, Inc. v. Syart Trading Corp., 68 AD2d 756, 759 [2d Dept 1979]; see, Taveras v. W. H. Nicholas Co., 126 AD2d 719 [2d Dept 1987]). Nothing in the submitted record leads this court to believe that Mr. Bonfante’s duties do not comport with the normal obligations of a controller working for a New York corporation or that Mr. Bonfante actually functioned as a low-level billing clerk without managerial authority in the defendant corporation. Mr. Bonfante is clearly aware of the nature of defendant’s major corporate accounts and obligations to recording artists. He is not a low-ranking employee who is hired to perform routine bookkeeping tasks or billings. The record also shows that Mr. Bonfante is responsible for computing and distributing artistic royalties, which in the recording industry often adds up to large sums of money.

Therefore, plaintiff has satisfied the governing Minnesota service requirements by serving a person of sufficient authority in the corporation to constitute a managing agent for purposes of establishing personal jurisdiction over the defendant. Defendant’s cross motion to dismiss the New York action on the ground that the Minnesota Court did not have authority to issue the default judgment is denied. Since defendant has also failed to raise an issue as to the jurisdiction of this court over the present matter, the remaining branches of defendant’s cross motion to dismiss the New York action for lack of personal jurisdiction are denied.

The question of whether plaintiff satisfied the bond posting requirement under Rule 55.01(d) of Minnesota’s Rules of Civil Procedure is not properly before this court which is precluded, by New York law, from inquiring into the underlying merits of the judgment of a sister State (All Terrain Properties, Inc. v. Hoy, 265 AD2d 87, 91 [1st Dept 2000]). Defendant has cited no authority which holds that failure to post bond in a default judgment is a jurisdictional defect under the law of Minnesota, rendering the award void and unenforceable (cf., Nussbaumer v. Fetrow, 556 NW2d 595, 599 [Ct App, 1996], review denied [1997]1). Moreover, plaintiff has presented evidence that it has posted a default bond as of August 14, 2001 in Minnesota. The question of whether the default judgment was properly issued in January 2001 without posting of an immediate bond should have been addressed to the Minnesota Court, the forum which is the better authority to interpret and rule on the procedural law of that State. Absent a reversal or vacature by a Minnesota Court, the Minnesota judgment is presumptively valid and the court finds that the judgment rendered on January 30, 2001 by the District Court in Minnesota is enforceable in New York (All Terrain Properties, Inc. v. Hoy, supra, 265 AD2d, at 91). Plaintiff’s motion for summary judgment in lieu of complaint is granted.

Accordingly, it is

ORDERED that the motion for summary judgment in lieu of complaint is granted; and the Clerk of the Court is directed to enter judgment in favor of plaintiff and against defendant in the amount of $153,093.86, together with interest as prayed for allowable by law, until the entry of judgment, as calculated by the Clerk, and thereafter at the statutory rate, together with costs and disbursements to be taxed by the Clerk upon submission of an appropriate bill of costs.