Delis v. Sionix Corp et al

Filing 42

ORDER by Judge Lucy H. Koh denying 33 Motion to Set Aside Default; denying 38 Stipulation to continue the case management conference; denying 39 Motion for leave to file the late joint case management statement; granting 7 Motion to Dismiss; denying 14 Motion to Quash (lhklc2, COURT STAFF) (Filed on 9/13/2013)

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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United States District Court
For the Northern District of California

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SAN JOSE DIVISION

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DEAN DELIS,

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Plaintiff,
v.
SIONIX CORP., et al,
Defendants.

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Case No.: 13-CV-01463-LHK
ORDER GRANTING DEFENDANTS’
MOTION TO DISMISS, DENYING AS
MOOT ALL OTHER PENDING
MOTIONS, AND VACATING THE
CASE MANAGEMENT HEARING OF
SEPTEMBER 19, 2013

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Plaintiff Dean Delis alleges fraud, fraudulent concealment, and various federal and state
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securities law claims against Sionix Corp. (“Sionix”), its officers and directors; Ascendiant
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Securities, LLC (“Ascendiant”) as Sionix’s broker-dealer; and Michael Cole, an employee of
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Ascendiant. This case is before the Court for determination of the following three motions: (1)
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Sionix, joined by its officers and directors, moves to dismiss for improper venue; (2) Defendant
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Wells, an officer and director of Sionix, moves to set aside default; and (3) Ascendiant moves to
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quash service of summons. The Court finds that these motions are suitable for decision without
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oral argument pursuant to Civil Local Rule 7-1(b), VACATES the hearing and case management
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conference set for September 19, 2013, at 1:30 p.m., and DENIES the parties’ stipulation and
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proposed order to continue the case management conference, ECF No. 38. For the reasons
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discussed below, the Court GRANTS the motion to dismiss without prejudice to Delis refiling in
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Case No.: 13-CV-01463-LHK
ORDER GRANTING MOTION TO DISMISS AND DENYING AS MOOT ALL OTHER PENDING MOTIONS

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the appropriate forum, and DENIES as moot both the motion to set aside the default of David

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Wells and the motion to quash service of summons.

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I.

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BACKGROUND
Delis alleges that defendant Michael Cole, a broker with Ascendiant, contacted Delis in

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March 2013 regarding a convertible note offering by Sionix (the “Debenture”). ECF No. 1 ¶ 18.

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Cole described the offering as “oversubscribed,” a claim which defendant David R. Wells, a Sionix

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officer and director, repeated to Delis. Id. at ¶ 18–20. Delis also alleges that Wells and Cole

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claimed that an investor had contacted Sionix to express interest in purchasing the entire offering.

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Id. at ¶ 19. Delis proceeded to purchase the Debenture for $100,000, only to find the offering

United States District Court
For the Northern District of California

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undersubscribed, and Sionix, as a result, undercapitalized. Id. at ¶ 23.

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Delis brings this action, claiming that Coles’ and Wells’ representations were fraudulent

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under the common law and violated various federal and state securities laws. Specifically, Delis

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alleges violations of Section 12 of the 1933 Act, 15 U.S.C. § 77l (using means of interstate

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commerce to sell an unregistered security); Section 10 of the 1934 Act, 15 U.S.C. § 78j(b) (using

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means of interstate commerce to use manipulative or deceptive device in connection with the

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purchase or sale of securities); Section 17 of the 1933 Act, 15 U.S.C. § 77q(a) (using means of

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interstate commerce for the purpose of fraud or deceit); Section 20 of the 1934 Act, 15 U.S.C. § 78t

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(joint and several liability for persons in control of the person in violation of the law); Section

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25110 of the California Corporations Code (offering or selling an unqualified security); and

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Section 25401 of the California Corporations Code (selling security by means of false statements

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or omissions), as well as common law fraud, fraudulent concealment, and breach of fiduciary duty.

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ECF No. 1 ¶ 26–77.

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In response, Sionix and its officers and directors move to dismiss for improper venue

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pursuant to Federal Rule of Civil Procedure 12(b)(3), arguing that the Debenture contains a forum

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selection clause restricting Delis’ selection of forum to those courts sitting in Orange County,

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California. The note provides in relevant part:

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Each party agrees that all legal proceedings concerning the interpretation,
enforcement and defense of the transactions contemplated by any of the Transaction

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Case No.: 13-CV-01463-LHK
ORDER GRANTING MOTION TO DISMISS AND DENYING AS MOOT ALL OTHER PENDING MOTIONS

Documents (whether brought against a party hereto or its respective Affiliates,
directors, officers, shareholders, employees or agents) shall be commenced in the
state and federal courts sitting in the County of Orange (the "California Courts").
Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the
California Courts for the adjudication of any dispute hereunder or in connection
herewith or with any transaction contemplated hereby or discussed herein (including
with respect to the enforcement of any of the Transaction Documents), and hereby
irrevocably waives, and agrees not to assert in any suit, action or proceeding, any
claim that it is not personally subject to the jurisdiction of such California Courts, or
such California Courts are improper or inconvenient venue for such proceeding.

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ECF No. 1 at 18 (emphasis added).

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II.

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United States District Court
For the Northern District of California

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MOTION TO DISMISS FOR IMPROPER VENUE
A.

LEGAL STANDARD

Under Federal Rule of Civil Procedure 12(b)(3), a defendant may move to dismiss a

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complaint for improper venue. Even where venue is otherwise proper, a defendant may move to

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dismiss under Rule 12(b)(3) on the basis of a forum selection clause. See Argueta v. Banco

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Mexicano, S.A., 87 F.3d 320, 324 (9th Cir. 1996). When considering a motion to dismiss pursuant

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to Rule 12(b)(3), a court need not accept the pleadings as true and may consider facts outside of the

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pleadings. Id. Once the defendant has challenged the propriety of venue in a given court, the

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plaintiff bears the burden of showing that venue is proper. See Piedmont Label Co. v. Sun Garden

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Packing Co., 598 F.2d 491, 496 (9th Cir. 1979). Pursuant to 28 U.S.C. § 1406(a), if the court

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determines that venue is improper, the court must either dismiss the action or, if it is in the interest

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of justice, transfer the case to a district or division in which it could have been brought. Whether to

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dismiss for improper venue, or alternatively to transfer venue to a proper court, is a matter within

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the sound discretion of the district court. See King v. Russell, 963 F.2d 1301, 1304 (9th Cir. 1992).

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Forum selection clauses “are prima facie valid and should be enforced unless enforcement

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is shown by the resisting party to be ‘unreasonable’ under the circumstances.” The Bremen v.

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Zapata Off-Shore Co., 407 U.S. 1, 10 (1972). Such unreasonable circumstances include the

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following circumstances:

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(1) Its incorporation into the contract was the result of fraud, undue influence, or
overweening bargaining power; (2) the selected forum is so gravely difficult and
inconvenient that the complaining party will for all practical purposes be deprived
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Case No.: 13-CV-01463-LHK
ORDER GRANTING MOTION TO DISMISS AND DENYING AS MOOT ALL OTHER PENDING MOTIONS

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of its day in court; or (3) enforcement of the clause would contravene a strong
public policy of the forum in which the suit is brought.
Argueta, 87 F.3d at 325 (internal citations and quotation marks omitted).

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B.

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Sionix, joined by its officers and directors, argues that venue is improper under the terms of

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the Debenture and thus moves the Court to dismiss this action. The Court agrees, for the following

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reasons.

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ANALYSIS

The Debenture contains a forum selection clause that the Court must find prima facie valid.

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The plain language of the clause states unequivocally that “all legal proceedings concerning the

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interpretation, enforcement, and defense of the transactions contemplated by [the Debenture]” must

United States District Court
For the Northern District of California

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be filed in the County of Orange. ECF No. 1 at 18. The relevant question here is whether Delis’

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claims are covered by the forum selection clause. In other words, the Court must assess whether

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Delis’ claims concern the disputes explicitly covered by the forum selection clause, i.e. “all legal

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proceedings concerning the interpretation, enforcement, and defense of the transactions

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contemplated by [the Debenture].” ECF No. 1 at 18. An examination of the Complaint reveals

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that all nine causes of action arise out of and relate to the Debenture, and thus fall within the scope

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of the Deventure’s forum selection clause.

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The first cause of action, alleging a violation of the Securities Exchange Act of 1933 (using

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means of interstate commerce to sell an unregistered security), asserts that Defendants used

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interstate commerce to sell the convertible note by having phone and in-person communications

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with Delis. Compl. at ¶ 30. The second cause of action, alleging a violation of Section 10(b) of the

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Securities Exchange Act of 1934 (using interstate commerce to use a deceptive device in

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connection with the purchase or sale of securities), alleges that “defendants made untrue statements

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of material fact . . . which operated as a fraud and deceit on Plaintiffs. . . . The purpose and effect

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of Defendants’ scheme was to artificially inflate the price of the convertible note to induce

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Plaintiffs to purchase the convertible note from Defendants. . . .” Compl. at ¶ 35-36. The

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resolution of both these causes of action directly relates to the enforcement and defense of the

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security transaction memorialized in the Debenture. The third cause of action, alleging a violation

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Case No.: 13-CV-01463-LHK
ORDER GRANTING MOTION TO DISMISS AND DENYING AS MOOT ALL OTHER PENDING MOTIONS

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of Section 17 of the 1933 Act (using interstate commerce for the purpose of fraud or deceit),

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similarly relates to the Debenture by alleging Defendants made “misstatements, omissions, [and]

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fraudulent and manipulative activities” to get Delis to purchase the convertible note. Compl. at ¶

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40. The fourth cause of action, alleging a violation of Section 20 of the 1934 Act (joint and several

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liability for persons in control of the person in violation of the law), claims Defendants Currier and

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Wells “had the power and authority to use Sionix to engage in the wrongful conduct complained of

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herein.” Compl. at ¶ 43. The fifth cause of action, alleging a violation of Section 25110 of the

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California Corporations Code (offering or selling an unqualified security) alleges that the

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convertible note was never qualified under California law and thus Sionix violated the California

United States District Court
For the Northern District of California

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Code when selling the convertible note to Delis. Compl. at ¶ 48. The sixth cause of action,

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brought under Section 25401 of the California Corporations Code (selling a security by means of

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false statements or omissions), states that “[i]n offering and selling the convertible note to

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Plaintiffs, Defendants made untrue statements of material fact and omitted to state material facts to

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Plaintiffs.” Compl. at ¶ 53. Again, these latter three claims arise out of the Debenture and concern

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whether the security transaction which it memorializes is defensible or enforceable.

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Delis’ seventh, eighth, and ninth causes of action are tort claims. Under Ninth Circuit case

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law, whether the forum selection clause applies to tort claims depends on whether the “resolution

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of the claims relates to the interpretation” of the Debenture. Manetti-Farrow, Inc., 858 F.2d at 514.

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The seventh cause of action, alleging general fraud, claims Defendant Michael Cole misrepresented

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to Delis that “there was substantial demand for the convertible note offering and that the

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convertible note offering was oversubscribed.” Compl. at ¶ 61. The eighth cause of action, for

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fraudulent concealment, alleges that Defendants “fraudulently concealed the fact that the

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convertible note offering was undersubscribed . . .” Compl. at ¶ 68. Delis’ ninth claim posits that

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Defendants breached a fiduciary duty to Delis by “making the misrepresentations . . . for purposes

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of generating commissions from the convertible note offering in violation of their ethical and

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professional obligations.” Compl. at ¶ 76. There is no reasonable argument that these three claims,

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each of which assert that Delis’ purchase of the convertible note was the result of fraud or

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Case No.: 13-CV-01463-LHK
ORDER GRANTING MOTION TO DISMISS AND DENYING AS MOOT ALL OTHER PENDING MOTIONS

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misrepresentation, do not relate to the interpretation of the Debenture, as the misrepresentations

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allegedly made were made in direct connection with the Debenture and its terms. Further, the

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Complaint concedes that the entire action arises out of and relates to the Debenture, noting that the

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Plaintiff “seeks to redress the damages he has suffered as a result of the fraud perpetrated by the

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Defendants in connection with the purchase of an unregistered $100,000 convertible note . . .”

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Compl. at ¶ 1. Ultimately, because all of Plaintiff’s causes of action directly concern the

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interpretation, enforcement, and defense of the security transaction memorialized in the Debenture,

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the forum selection clause governs this case.

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As for the factors that render a forum selection clause unenforceable in some cases, see

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For the Northern District of California

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Argueta, 87 F.3d at 325, Plaintiff has failed to prove that the incorporation of the forum selection

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clause in the Debenture was the product of fraud or undue influence, or overweening bargaining

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power. He also has not shown that litigation in the selected forum, the courts of the County of

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Orange, will present grave difficulties such that he will be deprived of his day in court, or that

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enforcement of the clause would contravene a strong public policy of this forum, the Northern

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District of California. Id.

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In light of Defendants’ persuasive arguments that the forum selection clause governs, Delis

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has the burden of demonstrating that it does not. See Piedmont Label Co., 598 F.2d at 496. Delis

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has not even attempted to meet this burden. Delis does not challenge the validity of the clause, nor

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does Delis otherwise challenge its applicability to this action—indeed, Delis failed to respond to

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Defendants’ motion at all. Accordingly, the Court finds that the forum selection clause is valid and

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governs here. Given the mandatory language of the forum selection clause, the Court must

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conclude that venue is improper. Ninth Circuit case law distinguishes between “permissive” forum

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selection clauses, which establish venue or jurisdiction in a specified court but still permit venue

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elsewhere, and “mandatory” forum selection clauses, which require actions to be brought only in

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the specified court. Docksider, Ltd. v. Sea Tech., Ltd., 875 F.2d 762, 763 (9th Cir. 1989); Hunt

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Wesson Foods, Inc. v. Supreme Oil Co., 817 F.2d 75, 77-78 (9th Cir. 1987). For a clause to be

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mandatory and thus restrict venue to the court specified in the agreement, the clause “must contain

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Case No.: 13-CV-01463-LHK
ORDER GRANTING MOTION TO DISMISS AND DENYING AS MOOT ALL OTHER PENDING MOTIONS

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language that clearly designates a forum as the exclusive one.” Northern California Dist. Council

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of Laborers v. Pittsburg-Des Moines Steel Co., 69 F.3d 1034, 1037 (9th Cir. 1995). In this case,

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the forum selection clause contains mandatory language, thereby restricting venue exclusively to

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the courts sitting in Orange County, California. Compare ECF No. 1 at 18 (providing that actions

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“shall be commenced” in selected forum, giving selected forum “exclusive jurisdiction”) with

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Docksider, Ltd., 875 F.2d at 762 (finding that mandatory “shall” in the forum selection clause

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creates exclusive forum selection).

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Having found that venue is improper, the Court may either dismiss the action or, if it is in
the interest of justice to do so, transfer venue to a court where the action could have been brought.

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United States District Court
For the Northern District of California

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See 28 U.S.C. § 1406(a). Here, Defendants request dismissal, and Plaintiff remains silent. As no

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party has advocated for transfer, the Court finds dismissal is more appropriate. The Court

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GRANTS Defendants’ motion to dismiss without prejudice to Delis refiling in the appropriate

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forum.

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III.

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In light of the Court’s order on Defendants’ motion to dismiss for improper venue, the Court

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MOTION TO QUASH SERVICE OF SUMMONS AND MOTION TO SET ASIDE
DEFAULT OF DAVID R. WELLS

DENIES as moot the motion to set aside the default of Defendant David R. Wells, ECF No. 33, and
DENIES as moot the motion to quash service of summons, ECF No. 14.
IV.

CONCLUSION
For the foregoing reasons, the Court GRANTS the motion to dismiss without prejudice to

Delis refiling in the appropriate forum, and DENIES as moot both the motion to set aside the
default of David Wells and the motion to quash service of summons.

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IT IS SO ORDERED.

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Dated: September 13, 2013

_________________________________
LUCY H. KOH
United States District Judge

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Case No.: 13-CV-01463-LHK
ORDER GRANTING MOTION TO DISMISS AND DENYING AS MOOT ALL OTHER PENDING MOTIONS