I Need to Sue an Out-Of-State Party. Can I Sue Them in Tennessee?

In today’s interconnected world, lawyers often encounter situations where a client needs to sue someone out-of-state. This situation presents all sorts of questions, first of which is where should the lawsuit be filed?  Obviously, Tennessee individuals and businesses would prefer to have their cases heard in Tennessee, saving time and travel expense or the cost of hiring out-of-state counsel. However, sometimes that pesky Constitution gets in the way, preventing plaintiffs from suing out-of-state defendants in Tennessee courts when those defendants do not have any reasonable connection to Tennessee. 

This limitation arises from the Due Process clause in the 14th Amendment to the U.S. Constitution. For over 100 years, the Supreme Court of the United States has held that the 14th Amendment limits state courts’ authority to enter binding judgments against nonresident defendants.  For instance, if a Tennessean and a Californian get in a car accident in Montana, it doesn’t seem fair to allow the Tennessean to sue the Californian in Tennessee. Neither the Californian nor the accident appear to have any relation to Tennessee, and it would be an unreasonable burden to require the defendant to travel to Tennessee to defend the suit. 

Fortunately, state and federal courts continue to clarify when it makes sense to allow plaintiffs to sue out-of-state parties in state court. Last week, the Tennessee Supreme Court offered some clarification in this area. It held that a Tennessee company could sue a Texas company with whom it had a contract, even when the Texas company had no real presence in Tennessee. The details of that case are discussed below. 

Background of the Lawsuit: A Business Relationship Goes Off the Rails

Crouch Railway Construction is based in Brentwood, Tennessee. A few years ago, Crouch approached Lonestar Energy Fabrication, a Texas company, with a business proposal. Lonestar was considering building a railcar repair facility in Texas, and Crouch offered to provide preliminary planning and consulting services for the facility. The parties executed a contract that did not contain choice of law or forum selection clauses. 

During the business relationship, Crouch performed its responsibilities under the contract in Tennessee, Lonestar performed its responsibilities in Texas, and the parties communicated by email. No representatives from Lonestar ever came to Tennessee as part of this project, but Crouch employees occasionally traveled to Texas. Eventually, the business relationship fell apart, and Lonestar refused to pay its final two bills to Crouch. Crouch sued Lonestar in Tennessee state court to pay the contract balance; Lonestar argued that the case should be dismissed because Tennessee courts did not have jurisdiction over Lonestar. 

When Does a Court have “Personal Jurisdiction” Over an Out-of-State Party? 

When determining whether a Tennessee court has personal jurisdiction over an out-of-state party, the key inquiry is whether the out-of-state party has sufficient “minimum contacts” in Tennessee. “Contacts” are sufficient when they show that the defendant has purposely directed activities, or availed itself, to Tennessee. In other words, the contacts are sufficient when the defendant’s conduct and connection with Tennessee are such that he should reasonably anticipate being hauled into Tennessee court. The contacts must arise out of the defendant’s own purposeful, deliberate actions. 

While a contract between two parties may be considered in showing a party’s contacts with Tennessee, the contract itself is insufficient to establish personal jurisdiction. The Court must also look at the relationship between the parties and their actions before and after the contract’s execution, including examining prior negotiations, contemplated future consequences, and the parties’ actual course of dealing. 

Application to Lonestar

In Crouch v. Lonestar, the Tennessee Supreme Court ultimately held that Tennessee Courts had personal jurisdiction over Lonestar, stating that Lonestar had sufficient contacts in Tennessee. The Court considered the following facts in determining that Lonestar had sufficient Tennessee contacts: 

·      Lonestar entered a contract with Crouch, knowing Crouch was a Tennessee Company;

·      Lonestar sought custom professional services from Crouch, not stock goods; 

·      Lonestar knew that Crouch’s services would be performed in Tennessee; 

·      Lonestar emailed the executed contract to Crouch in Tennessee;  

·      Lonestar communicated with Crouch in Tennessee throughout the relationship, including some substantive communications to facilitate completion of performance of the contract; and 

·      Lonestar sent partial payment by mail to Tennessee. 

Note that no one from Lonestar ever actually stepped foot in Tennessee, concerning this contract. On the contrary, Crouch traveled to Texas numerous times to work on the project. Most communications were sent through email or by telephone, except for a single check mailed to Tennessee. Despite this, the Court explained that Lonestar had plenty of knowledge that Crouch operated predominately in Tennessee and would be performing all of its work here, so Lonestar should have been on notice that it could be called to answer for nonpayment under contract in Tennessee. 

Lonestar argued that it did not seek out Crouch, but instead, Crouch sought out Lonestar and made the business proposal in Texas. However, the Court determined that Lonestar could have declined to do business with a Tennessee company, and found this was evidence that Lonestar’s actions were purposeful and deliberate. Therefore, the Tennessee contacts were substantial.

The communications between the parties were a substantial factor in the Court’s decision. Lonestar was not just ordering stock goods out of a warehouse in Tennessee; it communicated with a Tennessee company over a very specialized project. Lonestar provided input to Crouch regularly, suggesting that this was an on-going business relationship, rather than an isolated or one-shot business transaction. Lonestar had continuing obligations under the contract, connecting it to work being performed in Tennessee. The Court referred to Lonestar as an “active purchaser,” finding evidence of substantial availment, or purposefully directing its activities, to Tennessee, unlike a passive purchaser, who would place an order and wait for delivery. 

So How do I know if I can sue an out-of-state company here in Tennessee? 

This decision in this context is huge. It appears to greatly reduce the burden for Tennessee parties to bring out-of-state defendants into state court. However, the court acknowledged that its decision (which was unanimous) could have gone either way, which suggests that it may not hold the same way on subsequent similar cases. But for the time being, the Crouch decision makes it substantially easier for Tennesseans to sue out-of-state individuals and businesses in Tennessee Courts. Here are some facts that may make it more likely that you are able to sue an out-of-state party in Tennessee include: 

·      You entered a business arrangement with the defendant, and the defendant knew you were in Tennessee;

·      You performed the work in Tennessee, and the defendant knew you were going to do that; 

·      The work you performed was specialized and individual to this specific client;

·      The defendant sent payment to you in Tennessee (payment by credit card probably counts); and

·      The defendant communicated with you and played an active role in the business relationship. 

On the other hand, some of these facts that may hinder your ability to file suit in Tennessee: 

·      The defendant merely placed an order from you and waited on fulfillment;

·      The defendant placed an order for stock goods instead of specialized services;

·      You and the defendant did not communicate at all after signing the contract; and

·      The defendant did not know you were in Tennessee or that you would be performing the work in Tennessee. 

Of course, everyone’s case is fact-specific and there are several things to consider in determining whether a Tennessee court would be the proper forum for any type of lawsuit. If you’re in a business dispute and you need help, call the lawyers at Meridian Law at 615-229-7499. 

Robert Martin