Bech v. Bech
Filing
147
MEMORANDUM Opinion and Order Signed by the Honorable Virginia M. Kendall on 4/28/2011.(tsa, )
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
CHARLES ADAMS, ET AL.,
Plaintiffs,
v.
RAINTREE VACATION EXCHANGE, LLC,
et al.,
Defendants.
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Case No. 10 C 3264
Judge Virginia M. Kendall
MEMORANDUM OPINION AND ORDER
Charles Adams and 249 other plaintiffs (collectively “Plaintiffs”) sued Raintree Vacation
Exchange, LLC, Raintree Resorts International, Inc., CR Holding and Doug Bech (“Bech”)
(collectively “Raintree”), Starwood Vacation Ownership, Starwood Vacation Properties, Starwood
Hotel and Resorts, Inc., Starwood Resorts and Hotel (collectively “Starwood”), Sergio Rivera,
Michael H. Glazer, and Goodwin Proctor, LLP. Plaintiffs alleged fraud from Raintree and
Starwood’s sale of fractional interests in condominium units for a resort in Mexico. Raintree moved
to dismiss the First Amended Complaint for lack of personal jurisdiction and improper venue and
the Starwood moved to dismiss only for improper venue.1 For the following reasons, the Court
denies Raintree’s Motion to Dismiss for Lack of Personal Jurisdiction and orders an evidentiary
hearing with respect to Raintree and Starwood’s Motion to Dismiss for Improper Venue.
STATEMENT OF FACTS
The following facts are taken from Plaintiffs’ First Amended Complaint and are assumed to
be true for purposes of these motions to dismiss. Murphy v. Walker, 51 F.3d 714, 717 (7th Cir.
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Plaintiffs have not yet served Michael Glazer or Goodwin Proctor LLP.
1995). The Plaintiffs are U.S. citizens, some residents of Illinois, who purchased joint fractional
interests in a resort facility. (First Am. Compl. ¶ 19.) On August 18, 1997, Raintree and Starwood
entered into a Joint Operating Agreement, where both parties agreed to work together to develop,
obtain, and sell resorts. (Id. ¶ 2.) In the beginning of 2004, Raintree and Starwood announced the
sale of fractional condominium ownerships for a resort in Los Cabos, Mexico (“Resort”), the resort
at issue in this litigation. (Id. ¶ 5.)
The building and development costs for the Resort exceeded $26 million dollars. (Id. ¶ 6.)
These costs were met by selling fractional interests in condominium units to Plaintiffs. (Id.) In
2004, the Plaintiffs and Desarrollos Turisticos Regina S. De R.L. De C.V. (“DTR”) entered into a
Fractional Trust Beneficiary Assignment Agreement (“Purchase Agreement”) documenting the rights
and obligations of the parties with respect to the sale of these fractional interests. (Id. ¶ 29.)
Plaintiffs allege that when this agreement was entered into DTR was a wholly owned subsidiary of
Raintree and also under Starwood’s control via the joint venture. (Id.) A provision of this Purchase
Agreement stated:
Twelfth. Applicable Laws and Competent Courts.
In case of controversy on the interpretation and compliance with the rights
and obligations of this Agreement, the parties hereby agree to submit
themselves to the applicable laws and competent courts of the City of
Mexico, Federal District, expressly waiving any other forum that may
correspond to them by reason of their present or future domiciles.
(R. 67, Ex. 4.)
In the first part of this two-part scheme, Plaintiffs allege that Raintree and Starwood, who
“dissipated” the funds in various ways unrelated to the building and maintaining of the Resort, had
no intention at the time that Plaintiffs purchased their fractional interests to build the resort. (Id. ¶¶
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7, 25.) Instead, $10,000,000 of the funds were used to pay a pre-existing debt between Raintree and
Starwood, as well as commissions or sales incentives to employees. (Id.) This left insufficient funds
to complete the Resort project. (Id.)
Raintree and Starwood acknowledged their obligation to repay the Plaintiffs. (Id. ¶ 8.)
Regardless, to protect their interests, the Plaintiffs formed a Committee consisting of others who
suffered financial loss as a result of Raintree and Starwood’s misuse of the contributed funds. (Id.
¶ 9.)2
Counsel for Plaintiffs and Raintree and Starwood met in Chicago on June 10, 2009 to discuss
the possibility of settlement. (R. 93, Ormiston Aff. ¶ 3.) All the parties specifically agreed that from
June 9, 2011 through June 11, 2009, Raintree and Starwood’s attendance at the settlement meeting
“shall not confer jurisdiction” over them. (R. 93, Ex. A, ¶ 4.) The settlement meeting did not
resolve the dispute, and the parties proceeded forward with mediation in Chicago on October 12,
2009. (R. 93, Ormiston Aff. ¶ 4.) Once again, the parties agreed that Raintree and Starwood’s
presence in Chicago from October 11, 2009 through October 14, 2009 “shall not confer jurisdiction.”
(R. 93, Ex. B, ¶ 7.)
But the alleged fraud did not stop with the misuse of Plaintiffs’ funds. Raintree and
Starwood made representations that repayment was forthcoming, even though they knew payment
could not and would not be made, in order to stall Plaintiffs’ attempts to retain counsel and seek
legal redress. (Id. ¶ 17.) Specifically, in 2008 and August 2009, outside of the settlement meeting
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One member on the Committee was Michael Glazer (“Glazer”), an attorney and a named (but unserved)
defendant in this case. (Id. ¶ 10.) Glazer provided general legal advice to the Committee, suggested that the Plaintiffs
did not have to get their own lawyers, and urged them to accept in good faith Raintree and Starwood’s representations
of repayment. (Id. ¶ 10.) Despite his reassurances, however, Glazer did not disclose that his law firm was representing
Starwood’s interests. (Id. ¶ 11.) As Glazer and his firm have not been formally served, and have no involvement in the
motions now pending, the Court will limit its discussion of the facts constituting Count II (malpractice).
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and mediation, Raintree and Starwood contacted multiple Plaintiffs, urging them not to retain
counsel and promising a significant settlement offer if they did not move forward with legal action.
(First Am. Compl. ¶ 18.) Raintree and Starwood, through the Committee and by directly soliciting
the Plaintiffs, made these repayment promises for two reasons. (Id. ¶ 13.) First, even though
Raintree and Starwood knew that full or even substantial repayment was not a financial reality, they
made these promises so Plaintiffs would settle the case for a fraction of what they initially paid for
it, without taking steps to guard their interests. (Id. ¶ 18.) Second, they enabled Raintree and
Starwood to regain ownership interests from the Plaintiffs for pennies on the dollar without having
to pay the full initial purchase price. (Id. ¶¶ 34, 35)
DISCUSSION
Raintree moved to dismiss the complaint under Rule 12(b)(2) for lack of personal jurisdiction
and both Raintree and Starwood moved to dismiss under Rule 12(b)(3) for improper venue based
on the forum selection clause requiring all litigation to take place in Mexico. In the middle of
briefing on these motions, Plaintiffs filed a First Amended Complaint. Raintree, Starwood, and
Plaintiffs submitted position papers on whether the First Amended Complaint cured the deficiencies
raised in the motions. The First Amended Complaint takes the place of the original Complaint and
renders it void. Flannery v. Recording Indus. Ass’n of Am., 354 F.3d 632, 638 n.1 (7th Cir. 2004).
In addition to the briefing on the motions to dismiss, the Court will consider the parties’ position
papers in ruling on jurisdiction and improper venue in light of the First Amended Complaint’s
allegations.
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I.
Personal Jurisdiction
In reviewing a motion to dismiss for lack of personal jurisdiction, the Court accepts all well-
pleaded factual allegations in the First Amended Complaint as true unless controverted by affidavits
outside the pleadings, which the Court may also consider. See Purdue Research Found. v. SanofiSynthelabo, S.A., 338 F.3d 773, 782 (7th Cir. 2003). Factual disputes are construed in the Plaintiffs’
favor. See Logan Prods., Inc. v. Optibase, Inc., 103 F.3d 49, 52 (7th Cir. 1996). When a defendant
challenges the court's exercise of personal jurisdiction, the plaintiff bears the burden of
demonstrating that personal jurisdiction exists. See Jennings v. AC Hydraulic A/S, 383 F.3d 546,
548 (7th Cir. 2004). Where, as here, the Court decides a motion challenging jurisdiction on the basis
of written submissions, the plaintiff “need only make out a prima facie case of personal jurisdiction.”
Hyatt Int’l Corp. v. Coco, 302 F.3d 707, 713 (7th Cir. 2002).
The Court must “determine whether the state in which the district court is located is
authorized to exercise personal jurisdiction” in order to ascertain whether it has personal jurisdiction
over a defendant. Janmark, Inc. v. Reidy, 132 F.3d 1200, 1202 (7th Cir. 1997). The Illinois long
arm statute that governs here permits the exercise of jurisdiction “on any basis permitted by the
Illinois and United States constitutions.” See 735 ILCS 5/2-209(c). Although the due process
provisions of the Illinois and United States Constitutions are not identical, “there is no operative
difference between the limits imposed by the Illinois Constitution and the federal limitations on
personal jurisdiction.” Hyatt Int’l., 302 F.3d at 715.
Personal jurisdiction is proper, therefore, only if the defendant has “minimum contacts” with
the forum state “such that maintenance of the suit does not offend traditional notions of fair play and
substantial justice.” Int’l Shoe Co. v. Washington, 326 U.S. 310, 316 (1945). Personal jurisdiction
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may be either general or specific. See Helicopteros Nationales de Columbia v. Hall, 466 U.S. 408,
414 (1984). Here, the parties only addressed whether this Court has specific jurisdiction over
Raintree.
Specific jurisdiction allows the Court to exercise jurisdiction over a defendant whose contacts
with the forum state are limited, as long as those contacts are of a nature and quality as to give the
defendant fair warning that it could be required to defend a suit there. See Burger King Corp. v.
Rudzewicz, 471 U.S. 462 (1985); Central States, Se. & Sw. Areas Pension Fund. v. Reimar Express
World Corp., 230 F.3d 934, 943 (7th Cir. 2000). In determining whether specific jurisdiction exists
over an out-of-state defendant, the Court must determine whether the minimum contacts between
the defendant and the forum state demonstrate that the defendant “purposefully availed itself of the
privilege of conducting activities” in the forum state such that it “should reasonably anticipate being
haled into court” there. RAR, Inc. v. Turner Diesel, Ltd., 107 F.3d 1272, 1277 (7th Cir. 1997). The
Court focuses on “the relationship among the defendant, the forum, and the litigation.” Heritage
House Rests., Inc. v. Cont’l Funding Group, Inc., 906 F.2d 276, 283 (7th Cir. 1990). The main
factor in the minimum contacts analysis is not physical presence in the forum state but rather
“foreseeability.” Id.
Under the Illinois long arm statute, 735 ILCS 5/2-209(a)(2), a Court has jurisdiction over a
defendant who commits a tortious act in Illinois that causes an injury in Illinois. Heritage House
Rest., Inc. v. Continental Funding Group, Inc., 906 F.2d 276, 281-82 (7th Cir. 1990). A nonresident
sending misleading communications to Illinois plaintiffs in furtherance of a fraudulent scheme can
be a basis for jurisdiction. Id. at 282 (telephone conversation from defendant to Illinois resident
where defendant misrepresented the amount of expenditures that plaintiff had to reimburse was
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sufficient to establish minimum contacts); see, e.g., Club Assistance Program, Inc. v. Zukerman, 594
F. Supp. 341, 347-48 (N.D. Ill. 1984) (Shadur, J.) (misrepresentations over telephone directed at
Illinois resident regarding corporation’s ability to repay debts, in order to cover up the scheme, was
sufficient basis for jurisdiction).
Here, Raintree had contact with Illinois in the second phase of the scheme, namely,
representations made to Plaintiffs, specifically Illinois residents, that it would repay a substantial
portion of their initial investments by buying back their interests for a fraction of the initial purchase
price. The First Amended Complaint alleges, and Raintree’s affidavits do not controvert, the fact
that Raintree “directly solicited” all Plaintiffs, including those in Illinois, with promises of
repayment. (First Am. Compl. ¶ 13.) These misrepresentations about the ability of Raintree to repay
the Plaintiffs, and attempts to settle and regain title to the condominium interests, were intended to
not only bar the Plaintiffs from asserting their claims in Court but also to allow Raintree to regain
ownership in the interests, finalizing the scheme. Both of these objectives furthered the alleged
fraudulent scheme.
Raintree’s direct solicitation of Illinois residents is sufficient for personal jurisdiction, even
though Plaintiffs do not assert that the initial transaction in 2004, where Plaintiffs purchased the
fractional interests from DTR, had ties to Illinois. Similarly, although a party can agree to “contract
around” certain minimum contacts, as exemplified by the June 2009 settlement meeting and October
2009 mediation, the solicitation of Plaintiffs regarding repayment occurred outside of these
exempted periods. See Employers Ins. of Wausau v. Banco De Seguros Del Estado, 199 F.3d 937,
943 (7th Cir. 1999) (citing RAR,Inc., 107 F.3d at 1280) (because a party can waive personal
jurisdiction, parties can agree to “contract around minimum contacts requirement”). In sum,
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according to the allegations in the First Amended Complaint, there is a prima facie case that Raintree
had specific contacts with Illinois for the purpose of executing the scheme, such that it is reasonably
foreseeable that it could be sued in Illinois. The Court therefore denies Raintree’s Motion to Dismiss
for Lack of Personal Jurisdiction.3
II.
Improper Venue
When Plaintiffs initially purchased the fractional ownership interests in the Resort they
signed the Purchase Agreement with DTR, which contained a provision requiring that all disputes
relating to the agreement would be litigated in Mexico. (R. 67, Ex. 4.) Under its terms Plaintiffs
also agreed to “waive” litigating the case in any other forum. (Id.) Plaintiffs attack the validity of
the forum selection clause for two reasons: (1) it is irrelevant to the claims in the First Amended
Complaint, which deal with Raintree and Starwood’s “post closing actions,” namely the unfulfilled
promise to pay Plaintiffs after the project ran out of funds; and (2) Raintree and Starwood are not
able to step into DTR’s shoes to enforce the clause.
Dismissal under Rule 12(b)(3) for improper venue may be appropriate if the parties agreed
to a forum selection clause. Muzumdar v. Wellness Int’l Network, Ltd., 438 F.3d 759, 760 (7th Cir.
2006). Courts typically enforce the parties’ agreement to litigate disputes in a particular forum
because assent to the forum selection clause operates as waiver of the ability to challenge the agreed-
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Raintree contends that there is no personal jurisdiction over Bech under the fiduciary shield doctrine. See
Rice v. Nova Biomedical Corp., 38 F.3d 909, 912 (7th Cir. 1994) (denying personal jurisdiction over an individual
defendant whose contacts with the forum state were “solely on behalf of his employer or other principal”). But the shield
is unavailable for high-ranking company officers, such as Bech who is the chairman and chief executive officer of
Raintree, who have a “direct financial stake in the company’s health.” See, e.g., Margulis v. Medical Parts Intern., Inc.,
98 C 714, 1999 WL 183648, at *5 (N.D. Ill. M arch 25, 1999) (W illiams, J.); see Shapo v. Engle, No. 98 C 7909, 1999
W L 1045086, at *22 (N.D. Ill. Nov. 12, 1999) (Kocoras, J.) (“high-ranking officers . . .cannot avail themselves of the
[fiduciary shield] doctrine”).
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upon forum based on “inconvenience.” Heller Fin., Inc. v. Midwhey Powder Co., Inc., 883 F.2d
1286, 1293 (7th Cir. 1989).
A.
Relevance
Plaintiffs claim that the fraud allegation in the First Amended Complaint relates only to the
“post closing actions,” where Raintree and Starwood made promises about repayment, not to the
initial misrepresentation in the sale of the fractional ownership interests. As a result, Plaintiffs
maintain, the Purchase Agreement—and the forum selection clause—do not apply.
The allegations in the Third Amended Complaint, however, portray the fraud as an
inseparable two-part scheme. In other words, Plaintiffs’ allegations include misrepresentations at
the initial purchase that enabled the scheme to obtain capital and later misrepresentations about
repayment aimed at buying back the Plaintiffs’ interests and foreclosing Plaintiffs from legal relief.
The Purchase Agreement covers “controvers[ies] on the interpretation and compliance with the rights
and obligations of this Agreement,” and this cannot be limited solely to the initial purchase. (R. 67,
Ex. 4.) The broader fraudulent scheme includes Raintree and Starwood’s alleged efforts to finalize
the scheme by buying back the fractional interests from Plaintiffs. Because misrepresentations
during the initial purchase and later during repayment are part of the same scheme, and both are
directly related to the Purchase Agreement, this argument is unavailing.
B.
Affiliation of Raintree and Starwood to DTR
DTR, the initial developer, signed the Purchase Agreements with Plaintiffs that included the
forum selection clause. The issue is whether Raintree and Starwood, as nonsignatories to the
Purchase Agreement, can enforce the forum selection clause against Plaintiffs.
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“To bind a [non-signatory] to a forum selection clause, the party must be ‘closely related’ to
the dispute such that it becomes ‘foreseeable’ that it will be bound.” Hugel v. Corp. of Lloyd’s, 999
F.2d 206, 209 (7th Cir. 1993). But because “closely related” and “foreseeability” are difficult to
define and apply, the Seventh Circuit has used the “principle of mutuality” to determine whether a
non-signatory can enforce a forum selection clause. Frietsch v. Refco, Inc., 56 F.3d 825, 827 (7th
Cir. 1995). The Seventh Circuit held that Refco, a commodities broker, was “closely related” to the
signatories to a forum selection clause, who were promoters and trustees entirely under its control,
and could therefore invoke the clause. Id. at 828. The Refco plaintiffs alleged that Refco had total
control of the signatories and could have used this argument to enforce the forum selection clause
against Refco; but “[i]f so, equity requires that Refco be allowed to invoke the clause. Otherwise
the plaintiffs would have a choice of venues but Refco would not, and there is no reason for such an
asymmetry of procedural choices.” Id. Moreover, by invoking the forum selection clause to which
he was not a signatory, Refco was accepting the plaintiffs’ premise that “the promoters and trustees
were indeed simply cat’s paws of Refco.” Id; see Am. Patriot, 364 F.3d at 889 (suing an “affiliate”
of signatory did not “defeat” forum selection clause); Hugel, 999 F.2d at 210 (signatory owned 100%
of stock in one non-signatory and 99% of the stock of another, and both non-signatories were
“equally bound” by the forum selection clause). Finally, a variation of the equitable estoppel
doctrine can support allowing nonsignatories to enforce the forum selection clause. See, e.g., Organ
v. Byron, 434 F. Supp. 2d 539, 543 (N.D. Ill. 2005) (Zagel, J.) (quoting Sparks Tune-Up Centers,
Inc. v. Strong, No. 95 C 5902, 1994 WL 188211, at *5 (N.D. Ill. May 12, 1994) (allowing nonsignatory to “benefit from” a forum selection clause in order to “prevent a contracting party from
escaping contractual obligations which he bargained for/or agreed upon”)).
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The nature of the corporate relationship between Raintree and DTR is critical to determining
whether they are “closely related.” The Plaintiffs offer a different understanding of that relationship
than Raintree and Starwood. For example, Plaintiffs point to SEC documents showing that Raintree
purchased all of DTR’s stock in 1997, years before the fractional interests in the Resort were sold
to Plaintiffs. Plaintiffs used this piece of evidence to argue that Bech’s affidavit is false, an
allegation that the Court takes very seriously. As a result, Plaintiffs also allege that DTR was a
wholly owned subsidiary of Raintree. (Third Am. Compl. ¶ 29.) In contrast, Bech’s affidavit does
not specifically state that Raintree acquired its interest in DTR in 2007. Rather, it more generally
lays out a series of mergers and acquisitions, without specifically noting how Raintree and DTR are
related. It states that in February 2007 DTR merged with CR Resorts Cancun, and in February 2009
this entity merged with CR Resorts Holding, which became the surviving entity. (Bech Aff. ¶ 2.)
Raintree currently owns Canarias, which owns CR Resorts Parent Nominee Holding, and both
Caniarias and CR Resorts Parent Nominee Holding own all the equity of CR Resorts Holding, the
successor-in-interest to DTR. (Id. ¶ 3.) While Raintree’s defense, in part, is that DTR is a separate
company, it also contends that it is sufficiently affiliated to DTR to enforce the forum selection
clause.
Because Bech’s affidavit and Plaintiffs’ documents do not consistently and adequately clarify
the corporate relationship between DTR and Raintree, an issue upon which Raintree (and
Starwood’s) ability to enforce the forum selection clause hinges, the Court will have an evidentiary
hearing on this issue. See Szabo v. Bridgeport Machines, Inc., 249 F.3d 672, 676-77 (7th Cir. 2001)
(when venue depends on contested facts, court can hold evidentiary hearing before proceeding
forward). The Court therefore orders that there will be an evidentiary hearing to elucidate the nature
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of Raintree’s interest in DTR. As such, the Court denies Plaintiffs’ request for limited discovery on
personal jurisdiction and improper venue, as the evidentiary hearing is a more precise and efficient
way to gather facts on this narrow issue.
The Court also denies Plaintiffs’ Motion to Deem Facts Not in Dispute. Plaintiffs want the
Court to find that because Raintree and Starwood have not specifically controverted certain
statements about Raintree’s interest in DTR, such facts should be deemed admitted. This rule
applies to a Rule 56 motion for summary judgment, not to this motion to dismiss. In a Rule 12(b)(3)
motion to dismiss for improper venue the Court can consider the complaint, affidavits, and facts
outside the complaint without converting it to a motion for summary judgment under Rule 56. See,
e.g., Liebl v. Mercury Interactive Corp., No. 06 C 5364, 2006 WL 362764, at *1 (N.D. Ill. Dec. 12,
2006) (Conlon, J.). Rule 12(d), which governs the conversion of a motion to dismiss to a motion
for summary judgment based on the submission of documents because the parties submitted
evidence outside the pleadings, specifically applies only to a Rule 12(b)(6) motion to dismiss for
failing to state a claim and a Rule 12(c) motion for judgment on the pleadings, neither of which
apply here. The Court therefore denies Plaintiffs’ Motion to Deem Facts Not in Dispute.
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CONCLUSION AND ORDER
The Court denies Raintree’s Motion to Dismiss for Lack of Personal Jurisdiction and denies
Plaintiffs’ Motion for Limited Discovery and to Deem Facts Not in Dispute. The Court orders an
evidentiary hearing on issue of Raintree’s interest in DTR and therefore takes under advisement,
pending that hearing, Raintree and Starwood’s Motion to Dismiss for Improper Venue.
_______________________________________
Virginia M. Kendall
United States District Court Judge
Northern District of Illinois
Date: April 28, 2011
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