Opinion
NO. CIV. S-06-2527 LKK/DAD.
February 28, 2007
ORDER
David W. Pong, plaintiff, brings suit for breach of contract and other claims related to a fraudulent investment scheme. The complaint was originally filed in state court and was removed based on diversity jurisdiction. Pending before the court is a motion to dismiss for improper venue and lack of personal jurisdiction filed by three of the named defendants: American Capital Holding, Inc. ("ACH"); Barnard A. Richmond; and Richard Craig Turner. For the reasons explained herein, the motion to dismiss will be denied but the motion to transfer will be granted.
A fourth defendant, Robert Logel, did not join in the pending motion.
I. Factual Allegations
Plaintiff, a resident of Sacramento, California, alleges that the named defendants made false representations about investment opportunities. Based on these representations, plaintiff loaned defendants approximately 1.5 million dollars over the course of several months. Defendants have failed to repay these loans according to the terms of the promissory notes they made in connection with the loan. Plaintiff avers that in the fall of 2003 defendant Logel represented to plaintiff that Spaulding Ventures LLLC (operated by Logel) was a thriving venture capital fund. Based on these representations, plaintiff purchased membership in Spaulding. Allegedly, Logel did not inform plaintiff that at the time plaintiff invested with Spaulding, it was in the process of finaling a transaction with American Capital Holdings, Inc. ("ACH"), a merchant-banking corporation and a named defendant in this lawsuit. Compl. at 2:6-14. ACH is located in Florida. The majority of the discussions and dealings concerning the loans took place in Florida and California.
In December of 2003, Logel, allegedly acting on behalf of defendants Richmond, Turner and ACL persuaded plaintiff to exchange the Spaulding membership interests he owned for shares of ACH stock. Logel made several representations about ACH's potential, representations that plaintiff now believes to have been false. Logel told plaintiff that there was absolutely no risk to the principal amount of his loan or his investments, as it would be "100% guaranteed." Based on Logel's statements, plaintiff loaned ACH $500,000 and received a promissory note on December 15, 2003. Compl. at 3:6-13. Logel reportedly told plaintiff that he would make "boatloads of money" with the investments with ACH. Pong Decl. in Support of Opp'n to Def.'s Mot. to Dismiss. Plaintiff believed that Logel "was working with the other defendants to solicit loans and investments" from him. Id.
In May, 2004, defendant Richmond made representations that ACH's public offering was imminent and that it needed a short term cash infusion. Plaintiff wired $80,711.93 to ACH's account.
In June of 2004, defendants again lead plaintiff to believe that ACH would be "going public" shortly and that plaintiff would "reap extremely large returns." Compl. at 4:7. Based on these representations, plaintiff loaned ACH an additional $250,000.00 and received a promissory note on June 4, 2004 to that effect.
Finally, in August of 2003, plaintiff was again told that if he loaned ACH additional funds, plaintiff would be "taking steps that would dramatically increase the value of his ACH shares." Compl. at 4:11-13. Plaintiff loaned ACH an additional $400,000.00 and a promissory note was executed to that effect on August 23, 2004.
Both the June and August promissory notes have matured and defendants have failed to repay any of the loans. Plaintiff subsequently filed suit for breach of contract and fraud. Plaintiff also brought claims for rescission and damages under California Corporations Code Section 25501.
Plaintiff avers that defendants breached the terms of the June and August promissory notes and that defendants engaged in fraud when making representations to plaintiff about ACH's potential. As a result of the breach of contract and the false representations, plaintiff avers that he has lost $1,730,711.93, plus interest.
Both the June and August promissory notes contain the following forum selection clause:
"This note . . . shall be construed, governed and enforced in accordance with the laws of the State of Florida with venue being agreed to as Palm Beach County, Florida." See Plf.'s Compl., Ex. 2, June 4, 2004 Promissory Note for $250,000.00 Ex. 3, August 23, 2004 Promissory Note for $400,000.00.
II. Standards
Fed.R.Civ.P. 12(b)(3) governs a motion to dismiss premised on the enforcement of a forum selection clause. Argueta v. Banco Mexicano, S.A., 87 F.3d 320, 324 (9th Cir. 1996); see alsoOffshore Sportswear, Inc. v. Vuarnet Int'l, B.V., 114 F.3d 848, 851 (9th Cir. 1997) ("We treat dismissal based on a forum selection clause like a dismissal for improper venue under Rule 12(b)(3)").
If venue is improper in this district, then the court may transfer the case to any district or division in which it could have been brought if it is in the interests of justice. 28 U.S.C. § 1406(a). Section 1406(a) provides that: "the district court of a district in which is filed a case laying venue in the wrong division or district shall dismiss, or if it be in the interest of justice, transfer such a case to any district or division in which it could have been brought."
It is well established that "[o]nce venue is challenged, the burden is on the plaintiff to show that venue is proper."Whiteman v. Resort, 1999 WL 163044, at *1 (N.D.Cal. 1999) (citingPiedmont Label Co. v. Sun Garden Packing Co., 598 F.2d 491, 496 (9th Cir. 1979)).
III. Analysis
Defendants contend that this court lacks personal jurisdiction and, alternately, that the forum selection clauses contained in the promissory notes mandate that venue is proper only in Florida. As explained below, the court concludes that the forum selection clauses contained in the promissory notes are binding and therefore, venue in the Eastern District of California is improper. Given that this motion may be resolved on the forum selection clause issue alone, the court need not address the question of whether defendants are subject to personal jurisdiction in the Eastern District.
A. Whether the Forum Selection Clause Should be Given Effect
Within the Ninth Circuit, federal law governs the validity of a forum selection clause. Manetti-Farrow, Inc. v. Gucci America, Inc., 858 F.2d 509, 512-13 (9th Cir. 1988). The Supreme Court has explained that forum selection clauses are prima facie valid and should not be set aside unless the party challenging enforcement of such a provision can show it is "`unreasonable' under the circumstances." The M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 10 (1972).
Preliminarily, the court must determine if the forum selection clause is mandatory or permissive. The Ninth Circuit has held that "where venue is specified with mandatory language the clause will be enforced." Docksider, Ltd. v. Sea Technology, Ltd., 875 F.2d 762, 764 (9th Cir. 1989). However, if the language is merely permissive, the forum selection clause will not bar suits from being filed in other venues. Hunt Wesson Foods, Inc. v. Supreme Oil Co., 817 F.2d 75, 77 (9th Cir. 1987).
In short, the court must make three determinations. First, the court must determine whether the forum selection clauses are mandatory or permissive. Second, the court must determine whether enforcement of the clauses would be unreasonable, and third, if the clauses are enforceable, whether the case should be dismissed or transferred. The court addresses each in turn.
1. Whether The Clauses Are Mandatory Or Permissive
As noted, both promissory notes at issue in this case contain the following language: "This note . . . shall be construed, governed and enforced in accordance with the laws of the State of Florida with venue being agreed to as Palm Beach County, Florida." See Plf.'s Compl., Ex. 2, June 4, 2004 Promissory Note for $250,000.00 Ex. 3, August 23, 2004 Promissory Note for $400,000.00. The parties dispute whether this language is mandatory or permissive.
Several key Ninth Circuit decisions guide the court's analysis. First, in Docksider, Ltd. v. Sea Technology, Ltd., the court found the following language mandatory:
This agreement shall be deemed to be a contract made under the laws of the State of Virginia, United States of America, and for all purposes shall be interpreted in its entirety in accordance with the laws of said State. Licensee hereby agrees and consents to the jurisdiction of the courts of the State of Virginia. Venue of any action brought hereunder shall be deemed to be in Gloucester County, Virginia.Docksider, Ltd., 875 F.2d at 763. Similarly, in Pelleport Investors, Inc. v. Budco Quality Theatres, Inc., the court found mandatory a clause which read:
Exhibitor [Budco] expressly agrees that any and all disputes arising out of or in connection with this Agreement shall be litigated only in the Superior Court for Los Angeles, California (and in no other), and Exhibitor hereby consents to the jurisdiction of said court.Pelleport, 741 F.2d 273, 275 (9th Cir. 1984).
In contrast, in Hunt Wesson, the court determined that the following clause was permissive:
Buyer and Seller expressly agree that the laws of the State of California shall govern the validity, construction, interpretation*764 and effect of this contract. The courts of California, County of Orange, shall have jurisdiction over the parties in any action at law relating to the subject matter of the interpretation of this contract.Hunt Wesson Foods, 817 F.2d at 76.
In comparing the difference between permissive and mandatory language, the Docksider court remarked that:
Hunt Wesson is distinguishable because the forum selection clause underlying this action [Docksider] contains the additional sentence stating that `[v]enue of any action brought hereunder shall be deemed to be in . . . Virginia.' This language requires enforcement of the clause because Docksider not only consented to the jurisdiction of the state courts of Virginia, but further agreed by mandatory language that the venue for all actions arising out of the license agreement would be Gloucester County, Virginia. This mandatory language makes clear that venue, the place of suit, ___ lies exclusively in the designated county.Docksider, 875 F.2d at 764. While the line between permissive and mandatory language is uncertain, as a general rule, when venue is specified with mandatory language (such as "shall be"), the clause is enforceable. See Northern California Dist. Council of Laborers v. Pittsburg-Des Moines Steel Co., 69 F.3d 1034, 1037 (9th Cir. 1995).
The clauses at issue in this case appear closer to the contract language in Docksider and Pelleport than the clause in Hunt Wesson.
Giving words in a contract common or normal meaning is a basic rule of contract interpretation. Hunt, 817 F.2d at 77 (citing 4 S. Williston, A Treatise on the Law of Contracts, § 618 (W. Jaeger 3d ed. 1961)). Here, the words "shall be construed" and "venue being agree to . . . "clearly indicate that the clauses exclude plaintiff from suing outside of Palm Beach County. Put somewhat differently, an ordinary reading of these words indicates that the language is mandatory and not permissive.
The wording of the forum selection clauses in the case at bar are also similar to other forum selection clauses which were also found to be mandatory. See e.g., Nascone v. Spudnuts, Inc., 735 F.2d 763, 765 (3d Cir.1 984) ("This franchise shall be construed according to the laws of the State of Utah, and venue for any proceeding relating to the provisions hereof shall be Salt Lake County, State of Utah" construed as mandatory); In re Fireman's Fund Insurance Companies, 588 F.2d 93, 94 (5th Cir. 1979) ("If the Sub-contractor shall institute any suit or action for the enforcement of any of the obligations under this agreement, the venue of such suit or action shall be laid in the County of Essex and State of New Jersey" deemed enforceable); Excell, Inc. v. Sterling Boiler Mechanical, Inc., 106 F.3d 318, 320 (10th Cir. 1997) (holding the following words mandatory: "Jurisdiction shall be in the State of Colorado, and venue shall lie in the County of El Paso, Colorado").
Having concluded that the forum section clauses are mandatory, the court turns next to the question of whether enforcing the clauses is reasonable.
2. Whether Enforcement of Clauses is Reasonable and Just
It is well established that a forum selection clause should govern absent strong countervailing factors. M/S Bremen, 407 U.S. at 10. The Supreme Court has explained that a forum selection clause is unreasonable if (1) its incorporation into the contract was the result of fraud, undue influence, or overweening bargaining power, Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585, 591 (1991) (2) the selected forum is so "gravely difficult and inconvenient" that the complaining party will "for all practical purposes be deprived of its day in court," Bremen, 407 U.S. at 18 or (3) enforcement of the clause would contravene a strong public policy of the forum in which the suit is brought. Id. at 15.
In the case at bar, plaintiff fails to demonstrate that enforcing the forum selection clause would be unreasonable. Plaintiff presents three arguments, which the court addresses in turn.
a. Public Policy Concerns
First, plaintiff argues that the forum selection clause violates California's "anti-waiver" statute for securities fraud actions.
Plaintiff asserts that "California has a strong public policy against waiver of the right to bring actions for rescission or for damages for securities fraud in a California court under California Corporations Code Section 25701." Pl.'s Opp'n at 8. This section of the California Corporations Code applies to offers to sell or buy securities in California and provides that: "Any condition, stipulation or provision purporting to bind any person acquiring any security to waive compliance with any provision of this law or any rule or order hereunder is void." Cal. Corp. Code § 25701.
Plaintiff, however, fails to explain how this provision "declares" that enforcement of the forum selection clause would violate California public policy. See Bremen at 15. The provision, does not, specifically address waiver and venue. InJones v. GNC Franchising, Inc., the Ninth Circuit upheld the district court's repudiation of the forum selection clause because California law specifically provided that a "provision in a franchise agreement restricting venue to a forum outside this state is void . . ." 211 F.3d 495, 498 (9th Cir. 2000) (quoting Cal. Bus. Prof. Code § 20040.5). The Ninth Circuit reasoned that California Business and Professions Code § 20040.5 expresses a strong public policy to protect California franchisees from the expense, inconvenience, and possible prejudice of litigating in a non-California venue. Id. Given the absence of similar language, California Corporations Code Section 25701 does not appear to express a strong public policy regarding venue. On this ground alone, plaintiff fails to meet his "heavy burden" of showing that the forum selection clause should not be enforced because it contravenes strong public policy. See Bremen.
Although there are no published cases which discuss Section 25701 specifically, its language mirrors the anti-waiver language in the federal Securities Act of 1933 and the Securities Exchange Act of 1934. Whether the anti-waiver provisions in the Securities Acts invalidate forum selection clauses is an issue that has been litigated extensively.
The Securities Act of 1933 (the "`33 Act") provides that: "Any condition, stipulation, or provision binding any person acquiring any security to waive compliance with any provision of this subchapter or of the rules and regulations of the Commission shall be void." 15 U.S.C. § 77n. The 1934 Securities Exchange Act (the "`34 Act") contains a substantially similar provision. 15 U.S.C. § 78cc(a).
The Ninth Circuit's decision in Richard's v. Llyod's of London is instructive. In Richard's, plaintiffs were United States citizens and the defendant was the English insurance market, Lloyds of London. Plaintiffs signed a contract containing a forum selection clauses designating British courts and choice of law clauses designating English law. Subsequently, plaintiffs sought to invalidate the forum selection and choice of law provisions on the grounds that they violated the strong public policies of United States, as expressed in the anti-waiver provisions of the United States Securities Acts of 1933 and 1934 as well as parallel state securities law and RICO.
Though the Richard's case pertains to international contracts, it addresses the strength of the presumption of validity that is accorded to forum clauses. Indeed, many of the decisions regarding forum selection clauses pertain to international contracts, yet the legal conclusions remain binding on this court. See e.g., Argueta v. Banco Mexicano, S.A., 87 F.3d 320, 324-25 (9th Cir. 1996) (noting that the standard set forth inBremen "has been widely applied to forum selection clauses in general" and not limited to the admiralty context).
The Ninth Circuit rejected the contention and observed that the anti-waiver provisions are worded very broadly, as they cover: "`any condition, stipulation, or provision binding any person acquiring any security to waive compliance with any provision of this subchapter. . . .'" Richards, at 1293 (citing anti-waiver provision, emphasis in original). The court went on to observe that "this language is broad enough to reach any offer or sale of anything that could be alleged to be a security, no matter where the transaction occurs." Id.
The court rejected plaintiffs' argument that the anti-waiver provision constituted strong public policy and thus invalidated the forum selection clause. In rejecting plaintiffs' argument, the court reasoned, "[t]his assertion, if true, expands the reach of federal securities law to any and all such transactions, no matter how remote from the United States." Id. at 1293. The court went on to agree with the Fifth Circuit that "we must tread cautiously before expanding the operation of U.S. securities law in the international arena." Id., citing Haynsworth v. The Corporation, 121 F.3d 956, 966 (5th Cir. 1997).
The case at bar does not pertain to international contracts. Nonetheless, the logic applies with equal force in the domestic setting. _ In Richard's, the court ultimately held that the forum selection clause did not contravene public policy. In so holding, the Ninth Circuit joined the majority of other circuits in finding that forum selection clauses are valid despite anti-waiver provisions. See Haynsworth v. The Corporation, a/k/a Lloyd's of London, 121 F.3d 956, 962 (5th Cir. 1997); Allen v. Lloyd's of London, 94 F.3d 923, 928 (4th Cir. 1996); Shell v. R.W. Sturge, Ltd., 55 F.3d 1227, 1229-30 (6th Cir. 1995); Bonny v. Society of Lloyd's, 3 F.3d 156, 159 (7th Cir. 1993), cert. denied, 510 U.S. 1113, 114 S.Ct. 1057, 127 L.Ed.2d 378 (1994);Roby v. Corporation of Lloyd's, 996 F.2d 1353, 1362-63 (2d Cir.);Riley v. Kingsley Underwriting Agencies, Ltd., 969 F.2d 953, 957 (10th Cir.); Lipcon v. Underwriters at Lloyd's, London, 148 F.3d 1285, 1291 (11th Cir. 1998).
Together, these cases reflect a trend: "Federal courts have . . . increasingly enforced private stipulations in securities fraud litigation, despite the antiwaiver provisions of the federal securities laws." Alan R. Palmiter, Toward Disclosure Choice in Securities Offerings, 1999 Colum. Bus. L. Rev. 1, 74 (1999). In most of these cases, the courts' holdings rely on the proposition that the forum provided for in the forum selection clause provides remedies to the plaintiff. See, e.g., Society of Lloyd's v. Reinhart, 402 F.3d 982 (10th Cir. 2005) (holding that the forum selection clause naming English courts was enforceable because there was no indication that English remedies were inadequate substitutes for those of state securities act);Haynsworth, 121 F.3d at 969 (enforcing forum selection clause because "English law provides a variety of protections for fraud and misrepresentations in securities transactions.")
Florida law provides similar, if not identical, protections for fraud and misrepresentation in securities transactions. Plaintiff has failed to explain how the remedies he seeks under California law are not available under Florida law, or how the protections under California law are greater than under Florida law.
Defendants provided the court with excerpts of the Florida statute. In comparing the codes of the two states, it appears that the protections are the same and plaintiff has not argued to the contrary.
Concluding that the forum selection clause should be enforced is consistent with the holdings of other district courts faced with similar circumstances. For example, in Gagnon v. Ryerson, Inc., the court rejected plaintiff's argument that Oregon public policy regarding noncomplete agreements rendered a forum selection clause unenforceable. The court noted that "plaintiff did not present any evidence that Illinois law provides less protection than Oregon law and, therefore, failed to prove that the Noncompete Clause would be enforced any differently in Illinois." Gagnon v. Ryerson, Inc., No. 07-68-AS, Slip Op. at 4. (D. Or. Fed. 1, 2007).
The Gagnon court concluded that "[i]n the absence of any clear showing that Plaintiff will be prejudiced by the litigation of this matter in the Illinois courts, this court finds no reason not to enforce the forum selection clause set forth in the Agreement." Id., at 5. See also E. J. Gallo Winery v. Andina Licores S.A., 440 F. Supp. 2d 1115 (E.D. Cal. 2006) (in rejecting plaintiff's public policy argument, court reasoned "the [f]act that forum or choice of law specified by contract affords remedies that are different or less favorable to laws of forum preferred by plaintiff is not alone valid basis to deny enforcement of forum selection and choice of law provisions.")
Plaintiff cites to Nutracea v. Langley Park Investments PLC, 2007 WL 135699, 3 (E.D. Cal. 2007). The Nutracea case, however, is distinguishable. In that case, plaintiffs were in California, defendants in England and the forum selection clause provided that venue was in New York. The court found it significant that neither of the parties had any relationship to New York. The same cannot be said of the case at bar. Here, the defendants clearly have a relationship to Florida and plaintiff has failed to demonstrate that Florida law does not provide the same protections.
The court finds that the forum selection clause is reasonable in that enforcement of the clause would not "contravene a strong public policy of the forum in which suit is brought, whether declared by statute or by judicial decision." Bremen, at 15.
b. Inconvenience to Plaintiff
Plaintiff also argues that he would be at a "distinct disadvantage if he had to litigate in Florida." Pl.'s Opp'n to Def.'s Mot. to Dis. at 15. Plaintiff maintains that he has no contacts with Florida. Id. While undoubtedly true, plaintiff fails to provide any evidence that litigating this case in Florida "would be so difficult and inconvenient that the party would effectively be denied a meaningful day in court."Pelleport, 741 F.2d at 281 (citing Bremen, 407 U.S. at 18).
Pursuing a lawsuit in another state is not per se unreasonable. See Carnival Cruise Lines, 499 U.S. at 594; see also Fireman's Fund Insur. Co. v. M/V DSR Atlantic, 131 F.3d 1336, 1338 (9th Cir. 1998) ("serious inconvenience" of litigating in Korea did not render clause "unreasonable"); Flake v. Medline Industries, Inc., 882 F. Supp. 947, 949-950 (E.D. Cal. 1995) (J. Levi) (clause requiring California plaintiff to litigate in Illinois upheld); Koresko v. RealNetworks, Inc. 291 F. Supp. 2d 1157, 1158 (E.D. Cal. 2003) (J. Wanger) (upholding clause requiring California plaintiff to file suit in Washington state).
c. Allegation that Promissory Notes were Obtained Through Fraud
Lastly, plaintiff argues that since the promissory notes were obtained through fraud, they cannot be enforced and therefore, the forum selection clauses cannot be enforced. See Pl.'s Opp'n at 9. It is well established, however, that a party opposing the enforcement of a forum selection clause must establish that the forum selection clause itself (as opposed to the entire contract) was obtained through fraud. See Argueta, 87 F.3d at 325 ("forum selection clause is unreasonable if . . . its incorporation into the contract was the result of fraud, undue influence, or overweening bargaining power") (citing Carnival Cruise Lines, 499 U.S. at 591). Although plaintiff maintains that the promissory notes were obtained through fraud, the complaint and plaintiff's opposition fail to show that the inclusion of the forum selection clauses themselves were the product of fraud. Again, plaintiff fails to meet his burden of showing that the forum selection clause should not be enforced.
In sum, plaintiff has failed to show that enforcing the forum selection clause would be "unreasonable or unjust, or that the clause [is] invalid for reasons such as fraud or overreaching."Manetti-Farrow, 858 F.2d at 512. Accordingly, the court finds that the forum selection clauses contained in the June and August promissory notes are binding.
B. Transfer under 28 U.S.C. § 1406
Section 1406(a) provides: "The district court of a district in which is filed a case laying venue in the wrong division or district shall dismiss, or if it be in the interest of justice, transfer such a case to any district or division in which it could have been brought." 28 U.S.C. § 1406(a).
Under § 1406, this court may transfer the pending case to the Southern District of Florida or dismiss the action altogether. "Normally transfer will be in the interest of justice because normally dismissal of an action that could have been brought elsewhere is time-consuming and justice-defeating." Miller v. Hambrick, 905 F.2d 259, 262 (9th Cir. 1990) (addressing transfer under 28 U.S.C. § 1631). Here, plaintiff states in his opposition brief that he would prefer the action be transferred, not dismissed. Given plaintiff's preference, transfer is in the interest of justice in this case.
V. Conclusion
1. Defendants' Motion to Transfer is GRANTED. 2. The case is ordered TRANSFERRED to the Southern District of Florida. IT IS SO ORDERED.