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ARA Incorporated v. City of Glendale

United States District Court, D. Arizona

March 21, 2018

ARA Incorporated, Plaintiff,
City of Glendale, Defendant.



         Pending before the Court is Defendant's Motion to Dismiss for Failure to State a Claim. (Doc. 17). The Court denies the motion.


         In May 2011, Plaintiff ARA entered a factoring agreement with JG Staffing, in which ARA bought JG Staffing's accounts receivable at a discount. (Doc. 1 ¶ 7; Doc. 1, Exh. A). The factoring agreement included a clause that required Minnesota law to govern the construction, interpretation, and enforcement of the contract. (Doc. 1, Exh. A). In March 2015, ARA sued JG Staffing for breach of the factoring agreement, and ARA won a jury award of more than $700, 000. (Doc. 1 ¶ 10). In August 2015, JG Staffing entered a separate contract to provide temporary staffing for Defendant City of Glendale. (Doc. 1 ¶ 11). In July 2016, ARA learned about the staffing contract, and it informed the City of Glendale of its asserted right to collect payments for the staffing services. (Doc. 1 ¶ 13). Despite ARA's request, Glendale continued to pay JG Staffing directly for the temporary staffing support. (Doc. 1 ¶ 17). ARA subsequently filed this lawsuit on July 17, 2017, alleging a breach of UCC and Arizona statutes, as well as breach of contract[1]. (Doc. 1). In its motion to dismiss, Glendale claims that the 2011 factoring agreement does not apply to its present contract with JG Staffing, and even if it did, certain payments are barred by the applicable statute of limitations. (Doc. 17).


         I. Legal Standard

         The City of Glendale requests the Court to dismiss all claims for “failure to state a claim upon which relief can be granted.” Fed.R.Civ.P. 12(b)(6). To survive dismissal for failure to state a claim pursuant to Rule 12(b)(6), a complaint must contain more than “labels and conclusions” or a “formulaic recitation of the elements of a cause of action[;]” it must contain factual allegations sufficient to “raise a right to relief above the speculative level.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). While “a complaint need not contain detailed factual allegations . . . it must plead ‘enough facts to state a claim to relief that is plausible on its face.'” Clemens v. DaimlerChrysler Corp., 534 F.3d 1017, 1022 (9th Cir. 2008) (quoting Twombly, 550 U.S. at 570). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Twombly, 550 U.S. at 556). Plausibility requires “more than a sheer possibility that a defendant has acted unlawfully.” Twombly, 550 U.S. at 555. When analyzing a complaint for failure to state a claim under Rule 12(b)(6), “[a]ll allegations of material fact are taken as true and construed in the light most favorable to the nonmoving party.” Smith v. Jackson, 84 F.3d 1213, 1217 (9th Cir. 1996). However, legal conclusions couched as factual allegations are not given a presumption of truthfulness, and “conclusory allegations of law and unwarranted inferences are not sufficient to defeat a motion to dismiss.” Pareto v. FDIC, 139 F.3d 696, 699 (9th Cir. 1998).

         II. Analysis

         A. Choice of Law

         The factoring agreement states that it was “made and accepted and shall be construed, interpreted and enforced in accordance with the laws of the State of Minnesota, without regard to conflict of law principles . . . .” (Doc. 1. Exh. A, ¶ 23). Elsewhere, it states that the “terms herein shall have the respective meanings ascribed to them in the Uniform Commercial Code, Minnesota Statutes Chapter 336.” (Doc. 1. Exh. A, ¶ 8). Therefore, the Court will use Minnesota law to construe and interpret the 2011 factoring agreement.

         B. Whether Factoring Agreement Included After-Acquired Property

         In Minnesota, the legislature adopted the Uniform Commercial Code concerning after-acquired property, which states that “a security agreement may create or provide for a security interest in after-acquired collateral.” Minn.Stat. § 336.9-204(a); U.C.C. § 9-204(a). Neither the statute nor any case law before the court specifies that any particular language is necessary for a security agreement to create an interest in after-acquired collateral. Although after-acquired clauses “are a great convenience[, ]” using an after-acquired clause in the original security agreement is “not the only means by which perfected security interests can be obtained in subsequently contracted obligations.” James Talcott, Inc. v. Franklin Nat. Bank of Minneapolis, 292 Minn. 277, 291 (1972).

         Minnesota has not explicitly ruled that security agreements for accounts receivable presumptively include after-acquired property, but this is the common approach in other jurisdictions. The Ninth Circuit, for example, presumes that a security interest for accounts receivable includes after-acquired property because accounts receivable are “constantly turning over” and “no creditor could reasonably agree to be secured by an asset that would vanish in a short time in the normal course of business.” In re Filtercorp, Inc., 163 F.3d 570, 579 (9th Cir. 1998) (citing Stoumbos v. Kilimnik, 988 F.2d 949, 954-55 (9th Cir. 1993). “The position that no express language is required is described as the ‘majority' view, . . . or the ‘modern trend.” Stoumbos v. Kilimnik, 988 F.2d 949, 954-55 (9th Cir. 1993) (citations omitted). A Minnesota practice guide explains that Minn.Stat. § 336.9-204 “provides no guidance as to what language is required to obtain a security interest in after-acquired property” and “[b]ecause inventory and accounts are self-liquidating (such that nothing would remain for the secured party if the security interest did not automatically attach to newly acquired inventory or accounts), [a majority of other] courts held that mere use of the word ‘inventory' or ‘accounts' was sufficient to cover presently existing and after acquired inventory and accounts.” 20 Minn. Prac., Business Law Deskbook § 10:18.

         ARA's factoring agreement with JG Staffing grants a security interest to ARA in JG Staffing's “business assets, including, without limitation, all accounts . . . .” (Doc. 1, Exh A. ¶ 8). The agreement also defines “Accounts Receivable” to include accounts “arising out of or relating to the sale of temporary staffing or similar services any time or from time to time . . . .” (Doc. 1, Exh A. ¶ 1(a)). Because Minnesota law does not explicitly require an after-acquired clause, and because ARA would not likely agree to be secured by an asset that would be depleted in a short time in the normal ...

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