Carlyle Investement Management LLC et al v. Carlyle Capital Corporation Limited (In Liquidation) et al
Filing
53
MEMORANDUM OPINION. Signed by Judge Sue L. Robinson on 8/4/2011. (nmf)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
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Plaintiffs,
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v.
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CARLYLE CAPITAL CORPORATION )
LIMITED (in Liquidation), a Guernsey
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limited company, ALAN JOHN
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ROBERTS, NEIL MATHER,
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CHRISTOPHER MORRIS, and
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ADRIAN JOHN DENIS RABIT, solely in )
their capacity as Joint Liquidators of
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Carlyle Capital Corporation
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(in Liquidation), a Guernsey limited
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company,
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Defendants.
CARLYLE INVESTMENT
MANAGEMENT, L.L.C.,
TC GROUP, L.L.C.,
and TCG HOLDINGS, L.L.C.,
Civ. No. 11-26-SLR
Thomas C. Grimm, Esquire, R. Judson Scaggs, Jr., Esquire, Jeremy A. Tigan, Esquire,
and Angela C. Whitesell, Esquire of Morris, Nichols, Arsht and Tunnell, LLP,
Wilmington, Delaware. Counsel for Plaintiffs. Of Counsel: Robert A. Van Kirk,
Esquire, R. Hackney Wiegmann, Esquire, Nicholas J. Boyle, Esquire, Sarah F. Teich,
Esquire, Jonathan E. Pahl, Esquire, and Colleen E. Maring, Esquire of Williams and
Connolly, LLP.
Kurt M. Heyman, Esquire and Melissa N. Donimirski, Esquire of Proctor Heyman, LLP,
Wilmington, Delaware. Counsel for Defendants. Of Counsel: Eric L. Lewis, Esquire
and A. Katherine Toomey, Esquire of Baach, Robinson and Lewis, PLLC.
MEMORANDUM OPINION
Dated: August 4,2011
Wilmington, Delaware
~~e
I. INTRODUCTION
Carlyle Investment Management, L.L.C. ("CIM"), TC Group, L.L.C. (UTC Group"),
and TCG Holdings, L.L.C. ("TCGH") (collectively, "plaintiffs"), filed the present action
against Carlyle Capital Corporation Limited (in liquidation) ("CCC") and Joint Liquidators
Alan John Roberts, Neil Mather, Christopher Morris, and Adrian John Denis Rabit
(collectively, "the liquidators") in the Court of Chancery of the State of Delaware ("Court
of Chancery") on December 29,2010. (0.1. 1, ex. A at 24, 1l5) Plaintiffs seek an anti
suit injunction ordering the liquidators to suspend their litigation in all jurisdictions other
than Delaware consistent with the forum selection clause in the Investment Management
Agreement ("IMA"). (Id. at 1l37) The liquidators removed the action from the Court of
Chancery to this court on January 7,2011. (0.1. 1 at 1) On January 21,2011, plaintiffs
filed a motion for expedited remand to the Court of Chancery pursuant to 28 U.S.C. §
1447(c). (0.1. 4) On January 26,2011, the liquidators filed a motion to dismiss these
proceedings under Fed. R. Civ. P. 12(b)(6). (0.1. 8) Plaintiffs followed with a motion for
preliminary injunctive relief pursuant to Fed. R. Civ. P. 65(a) seeking to restrain the
liquidators from prosecuting claims against plaintiffs in any forum other than Delaware.
(0.1. 29) Currently before the court are plaintiffs' motions to remand and for a
preliminary injunction, and the liquidators' motion to dismiss.
II. BACKGROUND
A. Contractual Issue
CIM is a Delaware limited liability company (0.1. 1, ex. A at 25, 1l6) that served as
the investment manager for CCC (Id. at 1l14) pursuant to the terms of the IMA. (Id. at 1l
16) TeG is a global investment managementfirm and an affiliate of elM. (Id.) TeGH is
its sole managing member. (Id.)
eee was organized as a limited liability company under the laws of Guernsey on
August 29, 2006 and operations commenced in September 2006. (Id. at,-r 15) elM and
eee entered into the IMA on or about September 20,2006. (Id. at,-r 16) The IMA
governs the relationship between elM and eee. (Id. at,-r 34) Mourant-Ozannes
("Ozannes"), a Guernsey law firm, provided advice regarding the formation and operation
of eee and reviewed the IMA. (Id.) elM managed eee under the IMA from September
2006 until March 2008. (Id. at ,-r 29)
eee issued a preliminary Private Placement Memorandum ("PPM") to potential
private investors in September 2006 following review by Ozannes. (/d. at,-r 20) The PPM
discussed and described the IMA and informed potential investors that a copy of the IMA
would be provided upon request. (Id.) The final version was published to all potential
and actual private investors in December 2006 and contained the same disclosures. (/d.
at,-r 22) Further, in June 2007, eee published an Offering Memorandum, for the public
sale of elass B shares, which also described the IMA. (/d. at,-r 24)
B. Procedural History
1. The first Chancery action
"eee invested primarily in Agency (Le., Freddie Mac or Fannie Mae) residential
mortgage-backed securities, and used repurchase agreements to finance such
investments." (Id. at 1125) Following two declines in the market, eee defaulted on
certain of its financing agreements on March 6,2008 and was placed into liquidation on
March 17,2008. (Id. at 1l1l25-27) Joint Liquidators were appointed by the Royal eourt of
3
Guernsey. (Jd.)
On July 7, 2010, the liquidators filed four substantively identical lawsuits against
plaintiffs and CCC's former directors in the Court of Chancery of the State of Delaware
("the first Chancery action"), the Supreme Court of the District of Columbia (the "District
of Columbia litigation"), the Royal Court of Guernsey (the "Guernsey litigation") and the
Supreme Court of the State of New York (the "New York Iitigation").1 (ld. at ~ 30; 0.1. 6,
ex. 1) The complaints, drafted at least in part by Ozannes (0.1. 1, ex. A at 29, ~ 31),
contained eighteen separate causes of action including breaches of fiduciary and other
duties, breach of contract (namely, the IMA), negligence or gross negligence and unjust
enrichment. (Id. at ~ 32)
The downfall of CCC occurred during the credit crisis of 2007 and 2008, and
plaintiffs invested hundreds of millions of dollars of financing into CCC at this time in an
effort to keep it afloat. (0.1. 5 at 3) Despite plaintiffs' attempt to aid CCC and CCC's own
assertion that the conduct of other parties led to its collapse,2 the liquidators, in all four
suits, alleged that plaintiffs, along with CCC's former directors, mismanaged CCC and
bear full responsibility for CCC's losses. 3 (ld. at 4) Further, the liquidators seek a
1The court has not been provided with identifying civil action numbers for these
actions.
2 "The liquidators have asserted publicly that the [repurchase] lenders (not
affiliated with [plaintiffs)) that financed CCC's investments engaged in 'dubious' conduct
causing CCC's collapse." (0.1. 5 at 4)
3 Complaints filed by the liquidators in the four jurisdictions (including the first
Chancery action) describe "how plaintiffs and CCC's former directors recklessly, and in
breach of duty, dissipated nearly one billion dollars in the short space of eighteen
months." Further, the liquidators allege that the IMA is not enforceable because "[it]
was not reached at arms length; rather, it was unilaterally imposed upon CCC at the
4
declaratory judgment that the "IMA is void and/or unenforceable or in the alternative, that
clauses 2(b), 6, and 9 of the IMA4 are void and/or unenforceable by [plaintiffs] and/or any
of [its] respective affiliates as against the [liquidators]." (/d. at 5) All causes of action and
allegations asserted against CIM are connected to and/or are made with respect to the
services CIM provided under the IMA. 5 (D.I. 1, ex. A at 30, ~ 33)
In a letter sent to plaintiffs' counsel on July 7,2010 while the first Chancery action
was pending, the liquidators indicated their preference to litigate the case on its merits in
the Court of Chancery. (Id. at ~ 35) On October 6, 2010, the parties executed a
stipulation setting forth a schedule for briefing motions to dismiss. (Id. at ~ 36) The
parties also agreed to defer further litigation in the other three jurisdictions pending
negotiations to stay or dismiss those proceedings. (ld.) On October 22,2010, plaintiffs
direction of [plaintiffs] ... and was the result of overreaching, unconscionability and the
exercise of [plaintiffs'] control, undue influence and unequal bargaining power over CCC
...." The liquidators also allege that a majority of the claims are governed by
Guernsey law. (D.1. 16 at 2)
4 Section 2(b) provides that "[CIM] shall not be liable for any act or omission,
error of judgment or mistake of law or for any loss suffered by the Fund in connection
with matters to which this Agreement relates, except a loss resulting from willful
misconduct or gross negligence (as determined in accordance with the laws of the
State of Delaware) in the conduct of its duties under this Agreement.
Section 6 states in part that "[CCG] hereby agrees to indemnify and hold
harmless ... [CIM] and its affiliates and the officers, directors ... from and against any
loss, expense, ... unless such act or failure to act was the result of willful misfeasance,
gross negligence (as determined in accordance with the laws of the State of Delaware),
bad faith, or reckless disregard .. with respect to the obligations of [CIM] hereunder.
Section 9 provides that the IMA shall be governed by Delaware law and that
Delaware Courts, federal or state, have exclusive jurisdiction over any action, suit or
proceeding with respect to the IMA. (D.I. 1, ex. A at 40-47)
5 The liquidators allege that TC Group and TCGH provided investment advice
and management services to CCC, as affiliates of and through CIM. (D.1. 1, ex. A at ~
34)
5
here (defendants in the first Chancery action): (1) filed a motion to dismiss for failure to
state a claim (Id. at 1f 37); (2) challenged the assistance of Ozannes in the filing of the
liquidators' complaint (0.1. 5 at 1); and (3) filed a motion to disqualify based on Ozannes'
previous representation of CIM during the drafting of the IMA. (Id. at 9) The parties to
the first Chancery action did not object to personal jurisdiction, the Chancery Court's
equitable jurisdiction, venue, forum or service of the lawsuit as consistent with the terms
of the IMA. (Id.) Proceedings in the other three jurisdictions were adjourned pending
determination of plaintiffs' motion to dismiss the Chancery litigation. (0.1. 1, ex. A at 31
32,
1f 38)
On December 15, 2010, Vice Chancellor Strine held a hearing in which counsel for
the liquidators explained their "de facto" agreement with plaintiffs to litigate in Delaware,
as well as all parties' expectation and CCC's intent that litigation would proceed "solely" in
Delaware. (ld. at 1f 40) The liquidators explained that "the reason why Delaware was
selected as a potential forum is that there is an investment management agreement that
is one of the agreements that is at issue in the complaint ... that invoked the Delaware
forum." (Id.) Vice Chancellor Strine ordered discovery into the liquidators' use of
Ozannes, including production of documents and depositions of Ozannes' lawyers. (Id.
at 1f 41) Until December 16, the liquidators asserted that the District of Columbia,
Guernsey, and New York lawsuits were "protective" only and that they had no intention of
litigating the merits of their claims in those jurisdictions unless the first Chancery action
was dismissed by the court on "non-merits" grounds. (Id. at 1f 44) However, on
December 16, 2010, the liquidators voluntarily dismissed the first Chancery action and
stated their intent to proceed with their action in the Royal Court of Guernsey. (Id. at 1f
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42) The District of Columbia and New York litigations are ongoing. (D.1. 5 at 10) The
Guernsey litigation has been stayed in favor of proceeding in Delaware, the Royal Court
of Guernsey having found that "the importance to be attached to the exclusive jurisdiction
clause in the IMA outweighs any of the factors that would point in favour of Guernsey."
(D.I. 51, ex. A at 1l151)
2. The second Chancery action
On December 29, 2010, plaintiffs filed a second action in the Court of Chancery
seeking to enjoin all of the liquidators' lawsuits but for their pending litigation in Delaware.
(D.1. 1, ex. A at 24, 1l5) Plaintiffs further sought a declaration that the forum selection
clause contained in the IMA was valid and binding, and money damages (including
attorney fees) suffered as a result of the liquidators' breach of the forum selection clause.
(Id. at 1l 5) The liquidators removed the second Chancery action to this court on January
7,2011, pursuant to 28 U.S.C. §§ 1332, 1441, and 1446. (D.1. 1 at 1) On January 21,
2011, plaintiffs filed a motion for remand under 28 U.S.C. § 1447(c) (D.I. 4) seeking
remand to the Court of Chancery before the Guernsey proceedings are advanced in any
material way. (D.1. 5 at 2) Plaintiffs also seek payment of just costs and actual expenses
incurred as a result of the removal. (D.1. 4) Subsequently, on January 26,2011, the
liquidators filed a motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6) or, in the
alternative, to stay proceedings in favor of the Guernsey litigation. (D.1. 8) On February
28,2011, pursuant to Fed. R. Civ. P. 65(a), plaintiffs filed a motion for preliminary
injunctive relief seeking to restrain the liquidators from prosecuting claims against
plaintiffs in the cases in any other action with respect to the IMA in any court not sitting in
Delaware. (D.1. 29)
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III. STANDARD OF REVIEW
The exercise of removal jurisdiction is governed by 28 U.S.C. § 1441(a). The
statute is strictly construed, requiring remand to state court if any doubt exists over
whether removal was proper. See Abels v. State Farm Fire & Casualty Co., 770 F.2d 26,
29 (3d Cir. 1985). The party seeking removal bears the burden to establish federal
jurisdiction. See Steel Valley Auth.
(3d Cir. 1987); Zoren
V.
V.
Union Switch & Signal Div., 809 F.2d 1006, 1010
Genesis Energy, L.P., 195 F. Supp. 2d 598, 602 (D. Del. 2002).
That burden is a high one when seeking to avoid a forum selection clause. MIS Bremen
v. Zapata Off-Shore Co., 407 U.S. 1, 15 (1972), overruled on other grounds by Lines v.
Chesser, 490 U.S. 495 (1989); ING Bank, FSB. v. Palmer, Civ. No. 09-897, 2010 WL
3907825 (D. Del. Sept. 29, 2010) at *1 (holding that a strong presumption exists in favor
of enforcing a forum selection clause). "A forum selection clause does not oust a court of
subject matter jurisdiction." MIS Bremen, 407 U.S. at 12. However, "while the federal
court has jurisdiction, it should decline to exercise it." Foster v. Chesapeake Ins. Co.,
Ltd., 933 F.2d 1207, 1212 N. 7 (3d Cir. 1991). "Such clauses are prima facie valid and
should be enforced unless enforcement is shown by the resisting party to be
'unreasonable' under the circumstances." MIS Bremen, 407 U.S. at 10. To prove that
enforcement is unreasonable, the resisting party must make a "strong showing" either
that: (1) the forum selected is "so gravely difficult and inconvenient that he will for all
practical purposes be deprived of his day in court;" or (2) the forum selection clause was
obtained through "fraud or overreaching." Id. at 15, 18.
IV. DISCUSSION
Remand is appropriate whenever any doubt exists as to whether removal was
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proper. See Abels, 770 F.2d at 29. Moreover, a strong presumption exists in favor of
enforcing a forum selection clause, such as that found in section 9 of the IMA, which
states the following:
This Agreement shall be governed by, and construed in accordance with, the laws
of Delaware, without giving effect to the choice of law principles thereof. The
federal or state courts sitting in Delaware shall have exclusive jurisdiction
over any action, suit or proceeding with respect to this Agreement and each party
hereto hereby irrevocably waives, to the fullest extent permitted by law, any
objection that it may have, whether now or in the future, to the laying of
venue in, or to the jurisdiction of, any and each of such courts for the
purposes of any such suit, action, proceeding or judgment and further waives any
claim that any such suit, action, proceeding or judgment has been brought in an
inconvenient forum, and each party hereto hereby submits to such jurisdiction.
The parties hereby agree that no punitive or consequential damages shall be
awarded in any such action, suit or proceeding.
(0.1. 1, ex. A at 26,
1f 19) (emphasis added)
Clearly, both the Court of Chancery and this
court are appropriate forums under section 9 of the IMA. Having filed the second
Chancery action in Delaware's Court of Chancery, plaintiffs chose an appropriate forum.
This is especially relevant as the action involves state law claims.
To rebut a presumption of enforceability of a forum selection clause, the
liquidators must make a "strong showing" that enforcement is "unreasonable" by proving
that: (1) the forum selected is "so gravely difficult and inconvenient that he will for all
practical purposes be deprived of his day in court;" or (2) the forum selection clause was
obtained through "fraud or overreaching." MIS Bremen, 407 U.S. at 15,18. Absent
either finding, contractual forum selection clauses are binding on the parties that agree to
them. See Foster, 933 F.2d at 1216-17 (finding that defendant, by consenting to submit
to "any court" of competent jurisdiction "at the request of the plaintiff," agreed to go to and
stay in the forum chosen by plaintiff) (emphasis added); QVC Inc. v. Your Vitamins, Inc.,
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Civ. No. 10-094,2010 WL 4873108 at *3 (D. Del. Nov. 29, 2010) (a forum selection
clause is presumptively valid and will be enforced by the forum unless the party objecting
establishes: (1) it is the result of overreaching; (2) enforcement violates public policy; or
(3) enforcement would be unreasonable) (citation omitted)).
Here, the liquidators cannot show that the Delaware forum selected is "gravely
difficult and inconvenient;" they filed the first Chancery action and manifested their
intention to litigate in Delaware with no objections raised as to jurisdiction or venue. (D.1.
1, ex. A at 1111 35, 42, 44) Alternatively, the liquidators have not made a "strong showing"
that the forum selection clause was obtained through "fraud or overreaching." MIS
Bremen, 407 U.S. at 15. Although the liquidators, in the first Chancery action, alleged
that the IMA was not enforceable because U[it] was not reached at arms' length
... and
was the result of overreaching, unconscionability and the exercise of [plaintiffs'] control,
undue influence and unequal bargaining power over CCC" (D.1. 16 at 2), these
allegations are conclusory. Further weakening their argument is the fact that Ozannes,
the Guernsey law firm that provided advice regarding the formation and operation of CCC
and reviewed the IMA during its compilation (D.1. 1, ex. A at 30,11 34), is now serving as
the liquidators' counsel in the Guernsey litigation (id. at 11 31), where the liquidators have
withdrawn their claim that the IMA is invalid and unenforceable. (D.1. 50) Given this
record, there is no indication that the forum selection clause in the IMA is "unreasonable."
See MIS Bremen, 407 U.S. at 10.
The court concludes, therefore, that the liquidators have waived their right to
object to plaintiffs' choice of forum or to remove the litigation from plaintiffs' chosen
forum. This conclusion is consistent with the waiver language of section 9 as interpreted
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in analogous cases. For example, in E.I. Du Pont De Nemours & Co. v. Quality Carriers,
Inc., Civ. No. 10-534,2011 WL 776211 (D. Del. Feb. 28, 2011), the court found that a
similar forum selection clause ("the Parties hereby reciprocally and irrevocably waive in
advance any and all objections to the Delaware courts as forums ....") effected a
waiver, as "the forum selection clause clearly indicate[d] that the parties irrevocably
waive[d] the right to remove." Id. at *3.
The fact that the liquidators did not themselves execute the IMA is of no moment.
In Hays & Co. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 885 F.2d 1149 (3d Cir.
1989), the debtor sig ned a customer agreement with defendant containing an arbitration
clause compelling arbitration of controversies between parties arising out of their
brokerage relationship. Id. at 1150. After the debtor filed for chapter 11 relief, the trustee
filed claims for breach of contract and other fiduciary duties. Id. Although the trustee had
not signed the agreement containing the arbitration clause, the Third Circuit found that
"the trustee stands in the shoes of the debtor for the purposes of the arbitration clause
and that the trustee is bound by the clause to the same extent as would the debtor." Id.
at 1153. 6 See also, Bennett v. Uberty Nat'! Fire Ins. Co., 968 F.2d 969, 972 n.4 (9th Cir.
1992) ("if the liquidator wants to enforce [insolvent's] rights under its contract, she must
also assume its perceived liabilities."). Here, the liquidators stand in the shoes of CCC,
wishing to enforce CCC's rights under the IMA by suing plaintiffs for breach of fiduciary
and other duties, breach of contract, negligence or gross negligence and unjust
6The court recognizes that Hays involves an arbitration, rather than a forum
selection, clause. However, "[a]n agreement to arbitrate before a specific tribunal is, in
effect, a specialized kind of forum selection clause," Scherk v. Alberto-Culver Co., 417
U.S. 506, 519 (1974). Therefore, the holding in Hays is instructive.
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enrichment. (0.1. 1, ex. A at 30,
,-r 32)
Because this controversy arose out of the
relationship between plaintiffs and CCC as governed by the IMA, the liquidators are
bound by the forum selection clause contained in that agreement. (0.1. 1, ex. A at 26,
,-r
19)
V. CONCLUSION
For the reasons stated, plaintiffs' motion for remand to the Court of Chancery is
granted. The liquidators' motion to dismiss (0.1. 8) and plaintiffs' motion for preliminary
injunctive relief (0.1. 29) are denied as moot. An appropriate order shall issue.
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