Recurrent Capital Bridge Fund I, LLC et al v. EMX Group, Inc. et al
Filing
30
OPINION AND ORDER: For the foregoing reasons, all of defendants' motions are denied. The Clerk of the Court is directed to close these motions [Docket No. 6]. A conference is scheduled for July 2 at 4:30 pm. (Signed by Judge Shira A. Scheindlin on 6/26/2012) (djc)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
----------------------------------------------------- )( . USDCSDNY
. DOCUMEf\ll
RECURRENT CAPITAL BRIDGE
FUND I, LLC, CRAGMONT CAPITAL
LLC AND ETHAN EINWOHNER,
. Ef...EGIRON,lCALIX FILED
DOC it _-----:'__~-:
DATE FlLED~ ~ j d..:?! I ~
.-:
.(
.
Plain tiffs,
OPINION AND ORDER
- against
12 Civ. 772 (SAS)
ISR SYSTEMS AND SENSORS CORP.,
EM)( GROUP, INC., EM)(
INTERNATIONAL, INC., EM)(
INTERNATIONAL LLC, JAMES M.
HERRMANN, ROBERT V. GIBBS AND :
TIMOTHY ARION,
Defendants.
----------------------------------------------------- )(
SHIRA A. SCHEINDLIN, U.S.D.J.:
I.
INTRODUCTION
Three investors, Recurrent Capital Bridge Fund ("Recurrent"),
Cragmont Capital LLC ("Cragmont"), and individual investor Ethan Einwohner
bring several causes of action under contract, tort, and equity against defendants in
connection with the transfer of assets from an entity in which these investors held
shares to an entity in which they did not. Plaintiffs allege that James Herrmann,
Robert Gibbs, and Timothy Arion together fonned EMX International LLC
("EMX-II") to circumvent plaintiffs' rights as shareholders in ISR Systems and
1
Sensors Corp. (“ISR”) and its successors. Plaintiffs claim that defendants
fraudulently conveyed ISR’s valuable assets – especially its corporate opportunity
to purchase EMX Inc. – to a series of shell companies for no consideration, in
breach of contract, and in breach of their fiduciary duties to plaintiffs as joint
shareholders in ISR. Arion and EMX-II each move to dismiss the claims against
them pursuant to Rule 12(b)(2) of the Federal Rules of Civil Procedure for lack of
personal jurisdiction.1 Herrmann, Gibbs, Arion, ISR, EMX Group, EMX
International Inc. (“EMX-I”), and EMX-II (collectively, “defendants”) move to
dismiss the claims against them under the doctrine of forum non conveniens or,
alternatively, to transfer this action to the Middle District of Florida under section
1404(a) of Title 28 of the United States Code. For the reasons set forth below,
defendants’ motions are denied in their entirety.
II.
BACKGROUND2
In February of 2007, Herrmann founded ISR,3 a Delaware corporation
1
Arion resides in Florida and has no contacts with New York other
than those described herein.
2
The facts below include only those necessary for the resolution of the
instant motions. For the purposes of these motions, all of plaintiffs’ un-rebutted
factual averments are taken as true.
3
Arion disputes plaintiffs’ allegation that he helped form and manage
ISR, and held shares in it. Plaintiffs support their allegations by pointing to a
Private Placement Memo (“PPM”) listing Arion as an officer and shareholder in
the company. Because the PPM only describes Herrmann as ISR’s founder, Arion
2
with its principal place of business in Florida, for the purpose of acquiring three
defense technology companies: EMX Inc., Wave Technologies Inc. (“Wave”), and
SensArray Infrared Corp. (“SensArray”).4 In pursuit of those ends, ISR hired
Highland Global Partners, Inc. (“Highland”), a New York corporation with its
principal place of business in New York, to help raise the necessary financing for
the acquisitions and to structure the planned transactions.5 Arion was personally
involved6 in Highland’s work throughout this period.7 On behalf of ISR, a senior
officer at Highland approached Recurrent, a Delaware Limited Liability Company
with its principal place of business in New York, with an opportunity to invest in
the new company.8 ISR decided to make a private offering of its common stock to
is considered to be an officer and shareholder in ISR, but is not considered to have
been involved in its formation.
4
See PPM, Ex. 2 to Amended Complaint (“Am. Compl.”), at 2, 4, 6.
5
See Am. Compl. ¶¶ 20-21.
6
Arion contends that he only did so in his capacity as CEO of EMX
Inc. See 3/19/12 Affidavit of Timothy J. Arion (“Arion Aff.”) ¶¶ 7-10. For
purposes of resolving these motions, I need not decide whether plaintiffs
adequately rebutted his testimony.
7
See Am. Compl. ¶ 21; 4/28/10 Email from Arion to Ezra Schwartz
(Einwohner’s business parnter) (“4/28 Email”), Ex. 4 to Am. Compl. (affirming
that Arion had been working with Highland since Spring 2007); 5/5/10 Email from
Arion to Gibbs (“5/5 Email”), Ex. 5 to Am. Compl. (affirming that Arion had
worked with Herrmann and Highland on the proposed transactions).
8
See Am. Compl. ¶¶ 5, 21.
3
certain investors (“Bridge Offering”).9 In April 2008, Highland proposed that
Recurrent participate in the Bridge Offering and Recurrent agreed.10 Pursuant to
that agreement, Einwohner, in his position as a Recurrent officer, purchased
187,500 “Bridge Shares” of ISR’s common stock in exchange for a $250,000
Bridge Loan pursuant to a duly executed Subscription Agreement.11 Herrmann
owned 25.1% of ISR’s common stock prior to obtaining the bridge financing and
planned to retain 12.86% after dilution from the Bridge Offering, which was
expected to raise fifteen to eighteen million dollars.12 Arion stood to benefit from
the Bridge Offering in three ways: ISR would pay him $2,661,889.00 out of the
funds it raised in the Bridge Offering for EMX Inc., which he owned in full; he had
an agreement to earn an annual salary of $100,000 with ISR that would only be
paid upon the success of their financing efforts; and his interest in ISR would
substantially increase in value if the company could raise the necessary capital and
9
See id. ¶ 24.
10
See id. ¶ 25.
11
See id. ISR never actually signed the Subscription Agreement, but the
contract did not require ISR to sign it in order to accept its terms. The Agreement
defined acceptance as ISR receiving the Subscription Amount and not returning
any of the payment within five days. See Subscription Agreement, Ex. 3 to Am.
Compl. at 3. Because ISR did not return any such payment, the Subscription
Agreement was a legally effective contract between Recurrent and ISR.
12
See PPM at 20.
4
complete the proposed transactions.13 Arion owned 7.5% of ISR’s common stock
prior to obtaining the bridge financing and planned to retain 4.13% after dilution
from the Bridge Offering.14
The Subscription Agreement included a forum selection clause
providing that it “shall be governed by and construed under the laws of the State of
New York,” which extended to “[a]ny legal suit, action or proceeding arising out
of or relating to this Subscription Agreement.”15 The clause further mandated that
parties to the contract “waive any objection . . . to the venue” of the Southern
District of New York, and “irrevocably consent to jurisdiction” in the Southern
District.16
ISR represented to Einwohner and Recurrent that it had entered into
binding agreements with EMX Inc., Wave, and SensArray to acquire one hundred
percent of their outstanding capital stock.17 However, at the time the Chief
Executive Officer of SensArray died in November 2008, ISR encountered a serious
13
See Am. Compl. ¶ 23.
14
See PPM at 20.
15
Am. Compl. ¶ 28; Subscription Agreement at 10.
16
Am. Compl. ¶ 28; Subscription Agreement at 10.
17
See Am. Compl. ¶ 19.
5
cashflow problem.18 ISR subsequently defaulted on the Bridge Loan the following
month.19
After the default, Herrmann and Highland reassured Recurrent and
Einwohner that they were working to salvage the deal to acquire the two remaining
companies, EMX Inc. and Wave.20 But instead, in May 2010, Hermann and Arion
formed a new entity, EMX Group, Inc. (“EMX Group”), a Florida corporation with
its principal place of business in Florida, located in the same office as ISR.21
Herrmann also brought in Robert Gibbs as his new partner in EMX Group.22
Shortley thereafter, EMX Group acquired ISR’s corporate opportunities for no
consideration, including the opportunity to purchase EMX Inc.23 Herrmann
subsequently obtained a written commitment from Arion24 to sell one hundred
18
See id. ¶ 30. The Amended Complaint is unclear as to the causal
relationship between the death and the cashflow problem, but implies that ISR had
acquired SensArray by that point in time.
19
See id. ¶ 31.
20
See id. ¶¶ 34-36.
21
See id. ¶¶ 8, 9, 38.
22
See id. ¶ 40.
23
See id. ¶ 38.
24
Arion was the Chief Executive Officer and sole shareholder of EMX
Inc. See id. ¶¶ 23, 39.
6
percent of EMX Inc. to EMX Group.25
Gibbs told Recurrent and Einwohner that they could still salvage their
original investment in ISR by helping EMX Group acquire EMX Inc.26 In return
for their help, Gibbs and Herrmann promised a five and ten percent equity interest
in the resultant company to Recurrent and Einwohner, respectively.27 In reliance
on those representations, between May and December 2010, Einwohner invested
substantial time and effort into supporting EMX Group’s attempts to acquire EMX
Inc.28 He received no compensation for his efforts except the promised equity
interest.29 Those efforts included meeting with EMX Group’s new underwriter,
Anderson & Strudwick, Inc., a Virginia-based investment bank.30 Einwohner also
met with EMX Group’s new counsel, Stephen Hazard of McElroy, Deutsch,
Mulvaney & Carpenter LLP (“McElroy Deutsch”), a New Jersey-based law firm.31
Throughout this period, Gibbs and Herrmann repeatedly reiterated their promise to
25
See id. ¶ 39.
26
See id. ¶ 41.
27
See id. ¶ 42.
28
See id. ¶¶ 43-46.
29
See id. ¶¶ 43-48.
30
See id.. ¶ 44.
31
See id.
7
Recurrent and Einwohner of future equity interests in EMX Group or its
successor.32
EMX Group had no officers, directors, or shareholders, and was
wholly uncapitalized.33 Einwohner, through his personal investment company
Cragmont, a Delaware limited liability company with its principal place of
business in New York, extended a small loan to EMX Group. In exchange, EMX
Group promised Cragmont thirty thousand shares of its common stock and the
possibility of additional shares as payment for interest on the loan.34 As of
December 2011, the Cragmont loan remained unpaid and Cragmont had received
none of the promised shares.35
In October of 2010, Herrmann, Gibbs, and Arion created EMX-I, a
Delaware corporation with its principal place of business in Florida, through which
they hoped to finally complete the acquisition of EMX Inc.36 EMX-I was located
at the same address as EMX Group and ISR.37 Though EMX-I had no tangible
32
See id. ¶¶ 46-47.
33
See id. ¶ 49.
34
See id. ¶¶ 6, 49-52.
35
See id. ¶ 52.
36
See id. ¶¶ 10, 53-54.
37
See id. ¶¶ 8-10.
8
assets, it acquired the rights, resources, and corporate opportunities of EMX Group
for no consideration, including the opportunity to purchase EMX Inc.38
Subsequently, Gibbs proposed a draft term sheet for the acquisition of EMX Inc.39
The term sheet provided for Einwohner to receive his promised ten percent interest
and Recurrent its five percent interest in the new company.40 Shortly thereafter,
Herrmann, Gibbs, and Arion ceased all contact with Recurrent and Einwohner.41
In January of 2011, Herrmann, Gibbs, and Arion formed yet another
company, EMX-II, a Delaware corporation with its principal place of business in
Florida.42 EMX-II shares an address with Herrmann.43 EMX-II acquired the rights
and resources of EMX-I, including the opportunity to purchase EMX Inc., for no
consideration.44 The following July, using Anderson & Strudwick as its
underwriters and McElroy Deutsch as its counsel, EMX-II actually acquired EMX
Inc., relying at least in part on the analysis and efforts made by Einwohner on
38
See id. ¶ 53.
39
See id. ¶ 54.
40
See id.
41
See id. ¶ 55.
42
See id. ¶¶ 11, 57.
43
See id. ¶¶ 11, 12.
44
See id. ¶ 57.
9
behalf of EMX Group.45
On January 31, 2012, plaintiffs brought the instant action seeking to:
enforce the terms of the Subscription Agreement; enforce the terms of the
Cragmont Note; recover damages arising out of defendants’ alleged breaches of
fiduciary duties, misappropriation of corporate opportunity, and fraudulent
conveyance; and recover restitution for defendants’ unjust enrichment.
III.
LEGAL STANDARDS
A.
Rule 12(b)(2) Motion to Dismiss
When a federal district court sits in diversity, “personal jurisdiction is
determined by the law of the state in which the district court sits.”46 A court may
rely solely on pleadings and affidavits to determine jurisdiction, in which case the
plaintiff “need only make a prima facie showing that the court possesses personal
jurisdiction over the defendant.”47 The court must credit plaintiffs’ factual
averments as true.48 “[A]ll allegations are construed in the light most favorable to
45
See id.. ¶ 58.
46
DiStefano v. Carozzi N. Am., Inc., 286 F.3d 81, 84 (2d Cir. 2001).
47
Id. (citing Marine Midland Bank, N.A. v. Miller, 664 F.2d 899, 904
(2d Cir. 1981)). Accord Volkswagenwerk Aktiengesellschaft v. Beech Aircraft
Corp., 751 F.2d 117, 120 (2d Cir. 1984).
48
See Metropolitan Life Ins. Co. v. Robertson-Ceco Corp., 84 F.3d 560,
567 (2d Cir. 1996).
10
the plaintiff and doubts are resolved in the plaintiff’s favor, notwithstanding a
controverting presentation by the moving party.”49 However, if a defendant
“rebuts plaintiffs’ unsupported allegations with direct, highly specific, testimonial
evidence regarding a fact essential to jurisdiction—and plaintiffs do not counter
that evidence—the allegation may be deemed refuted.”50 If the court finds personal
jurisdiction proper under state law – here, New York Civil Practice Law and Rules
(“CPLR”) sections 301 and 302 – it must then determine if exercising jurisdiction
would exceed the bounds of the Due Process Clause of the Fourteenth Amendment
to the United States Constitution.51
B.
Motion to Transfer Venue Under Section 1404(a)
Section 1404(a) provides that “[f]or the convenience of parties and
witnesses, in the interest of justice, a district court may transfer any civil action to
any other district or division where it might have been brought.” The moving party
bears the burden of satisfying two requirements in order to successfully transfer an
action under section 1404(a).52 “First, the transferee court must be able to exercise
49
A.I. Trade Fin., Inc. v. Petra Bank, 989 F.2d 76, 79-80 (2d Cir. 1993).
50
Schenker v. Assicurazioni Genereali S.p.A., Consol., No. 98 Civ.
9186, 2002 WL 1560788, at *3 (S.D.N.Y. July 15, 2002).
51
See id. at *1.
52
See D.H. Blair & Co. v. Gottdiener, 462 F.3d 95, 106 (2d Cir. 2006).
11
jurisdiction over the parties and must be an appropriate venue for the action;
second, the balance of convenience and justice must favor transfer.”53 The district
court has broad discretion to decide motions to transfer and should do so upon
determinations of “convenience and fairness on a case-by-case basis.”54
The court should consider the following factors in deciding a section
1404(a) transfer motion: (1) plaintiff’s choice of forum, (2) the convenience to
witnesses, (3) the location of relevant documents and ease of access to sources of
proof, (4) the convenience of parties to the suit, (5) the locus of operative facts, (6)
the availability of process to compel the attendance of unwilling witnesses, (7) the
relative means of the parties, (8) the forum’s familiarity with the governing law,
(9) trial efficiency, and (10) the interest of justice, based on the totality of
circumstances.55
C.
Motion to Dismiss for Forum Non Conveniens
The common law doctrine of forum non conveniens invests courts
with the discretion to “dismiss a claim even if the court is a permissible venue with
53
Fellus v. Sterne, Agee & Leach, Inc., 783 F. Supp. 2d 612, 617
(S.D.N.Y. 2011) (citing Stewart Org. v. Ricoh Corp., 487 U.S. 22, 30 (1988)).
54
In re Cuyahoga Equip. Corp., 980 F.2d 110, 117 (2d Cir. 1992)
(citing Stewart, 487 U.S. at 29).
55
See Fellus, 783 F. Supp. 2d at 617-18; see also D.H. Blair, 462 F.3d
at 106-07 (listing factors 1-7 as “some” of the factors to consider).
12
proper jurisdiction over the claim.”56 Dismissal is appropriate to avoid
“oppressiveness and vexation to a defendant . . . out of all proportion to plaintiff’s
convenience.”57 But district courts have “more discretion to transfer under
[section] 1404(a) than they [do] to dismiss on grounds of forum non conveniens.”58
As a result, forum non conveniens “‘has continuing application only in cases where
the alternative forum is abroad,’ and perhaps in rare instances where a state or
territorial court serves litigational convenience best.”59 When the alternative fora
are sister federal courts, “Congress has codified the doctrine and has provided for
transfer, rather than dismissal” pursuant to section 1404(a).60 The defendant bears
the burden of showing the existence of an alternative forum.61
D.
The Enforceability of Forum Selection Clauses
Forum selection clauses are entitled to a “presumption of
56
PT United Can Co. v. Crown Cork & Seal Co., 138 F.3d 65, 73 (2d
Cir.1998).
57
Piper Aircraft Co. v. Reyno, 454 U.S. 235, 241 (1981) (quoting Koster
v. Lumbermens Mut. Cas. Co., 330 U.S. 518 (1947) (quotation marks omitted)).
58
Id. at 253.
59
Sinochem Int’l Co. v. Malaysia Int’l Shipping Corp., 549 U.S. 422,
430 (2007) (quoting American Dredging Co. v. Miller, 510 U.S. 443, 449, n. 2
(1994) (internal citation omitted)).
60
Id.
61
See Wiwa v. Royal Dutch Petroleum Co., 226 F.3d 88, 100 (2d Cir.
2000).
13
enforceability.”62 A party can rebut that presumption with a showing that
“enforcement would be unreasonable and unjust, or . . . the clause was invalid for
such reasons as fraud or overreaching.”63 The Supreme Court, in M/S Bremen v.
Zapata, held that when parties have “freely negotiated” a forum selection clause, a
contention by one party that the forum is so inconvenient as to be unjust should fail
unless the moving party shows that “trial in the contractual forum will be so
gravely difficult and inconvenient that he will for all practical purposes be
deprived of his day in court.”64 The Second Circuit has recognized the M/S
Bremen holding as approving a “pre-existing favorable view” of forum selection
clauses that applies broadly to all such clauses.65 Courts should treat a forum
selection clause as “a significant factor that figures centrally in the district court’s
[transfer] calculus.”66 As the parties’ “expressed preference,” a forum selection
clause impacts both the convenience and fairness prongs of the transfer analysis.67
62
Aguas Lenders Recovery Group v. Suez, S.A., 585 F.3d 696, 700 (2d
Cir. 2009).
63
M/S Bremen v. Zapata Off–Shore Co., 407 U.S. 1, 15 (1972).
64
407 U.S. at 18.
65
TradeComet.com LLC v. Google, Inc., 647 F.3d 472, 475-76 (2d Cir.
2011) (rejecting the notion that M/S Bremen only applies to admiralty law or
international agreements).
66
Stewart, 487 U.S. at 29.
67
Id.
14
IV.
APPLICABLE LAW
A.
Jurisdiction by Contractual Consent
A party can consent to personal jurisdiction by contract prior to
litigation.68 Contractual consent to jurisdiction, through forum selection clauses,
“obviat[es] the need for a separate analysis of the [Constitutional] propriety of
exercising personal jurisdiction.”69 This Circuit agrees with a number of other
Circuits that “the fact a party is a non-signatory to an agreement is insufficient,
standing alone, to preclude enforcement of a forum selection clause.”70 The
various doctrines under which non-signatories are bound by forum selection
68
See National Equip. Rental, Ltd. v. Szukhent, 375 U.S. 311, 315-16
(1964) (“ [I]t is settled . . . that parties to a contract may agree in advance to submit
to the jurisdiction of a given court.”).
69
Packer v. TDI Sys., Inc., 959 F. Supp. 192, 196 (S.D.N.Y. 1997)
(citing Jones v. Weibrecht, 901 F.2d 17, 18 (2d Cir. 1990)). Accord D.H. Blair &
Co., 462 F.3d at 103 (no due process analysis needed once court established
personal jurisdiction through a forum selection clause).
70
Aguas Lenders, 585 F.3d at 701 (citing with approval Holland Am.
Line Inc. v. Wärtsilä N. Am., Inc., 485 F.3d 450 (9th Cir. 2007); Coastal Steel
Corp. v. Tilghman Wheelabrator Ltd., 709 F.2d 190 (3d Cir. 1983), overruled on
other grounds by Lauro Lines S.R.L. v. Chasser, 490 U.S. 495 (1989); TAAG
Linhas Aereas de Angola v. Transam. Airlines, Inc., 915 F.2d 1351 (9th Cir. 1990);
Marano Enters. of Kansas v. Z–Teca Rests., L.P., 254 F.3d 753 (8th Cir. 2001);
Lipcon v. Underwriters at Lloyd’s, London, 148 F.3d 1285 (11th Cir. 1998); Hugel
v. Corp. of Lloyd’s, 999 F.2d 206 (7th Cir. 1993); Bonny v. Society of Lloyd’s, 3
F.3d 156 (7th Cir. 1993)).
15
clauses include the successor-in-interest71 and “closely related” doctrines.72
1.
Successor-in-Interest
The successorship doctrine “prevents parties to contracts from using
evasive, formalistic means lacking economic substance to escape contractual
obligations.”73 Successor liability is appropriate under New York common law in
four situations: (1) a buyer assumes the seller’s liabilities; (2) the transaction was
undertaken to defraud investors; (3) the buyer and seller engaged in a de facto
merger; or (4) the buyer is a mere continuation of the seller.74
The de facto merger doctrine invests courts with discretion to consider
multiple factors “in a flexible manner that disregards mere questions of form and
asks whether, in substance, ‘it was the intent of [the successor] to absorb and
71
See id. (“[A] forum selection clause is integral to the obligations of
the overall contract, and a successor in interest should no more be able to evade it
than any other obligation under the agreement.”).
72
See, e.g., Nanopierce Techs., Inc. v. Southridge Capital Mgmt. LLC,
No. 02 Civ. 0767, 2003 WL 22882137 at *5-6 (S.D.N.Y. Dec. 4, 2003) (non-party
to contract bound by its forum selection clause by virtue of being closely related to
signatory company in her capacity as its CFO).
73
Aguas Lenders, 585 F.3d at 701 (citing United States v. Mexico Feed
and Seed Co., Inc., 980 F.2d 478, 487 (8th Cir. 1992) and Anspec Co. v. Johnson
Controls, Inc., 922 F.2d 1240, 1246 (6th Cir. 1991)).
74
See Cargo Partner AG v. Albatrans, Inc., 352 F.3d 41, 45 (2d Cir.
2003).
16
continue the operation of [the predecessor].’”75 Appropriate factors for
consideration include: continuity of ownership; whether the predecessor company
ceased operations; whether the successor company assumed liabilities necessary to
the predecessor’s operations; and continuity of management, personnel, physical
location, assets, and general business operation.76 While not all factors necessarily
need be present, “‘continuity of ownership is the essence of a merger’ and is what
helps [] distinguish a merger from an asset sale.”77 “The continuity-of-ownership
element ‘is designed to identify situations where the shareholders of a seller
corporation retain some ownership interest in their assets after cleansing those
assets of liability.’”78
2.
The Closely Related Doctrine
A non-party to a contract may be subject to its forum selection clause
75
Nettis v. Levitt, 241 F.3d 186, 194 (2d Cir. 2001) (per curiam)
(quoting Woodrick v. Jack J. Burke Real Estate, Inc., 703 A.2d 306, 314 (N.J.
Super. Ct. App. Div. 1997)), rev’d on other grounds, Slayton v. American Exp.
Co., 460 F.3d 215 (2d Cir. 2006).
76
See id.
77
New York v. National Service Indus., Inc., 460 F.3d 201, 211 (2d Cir.
2006) (quoting Cargo Partner, 352 F.3d at 47).
78
Id. (quoting United States v. General Battery Corp., 423 F.3d 294,
305 (3d Cir. 2005)).
17
if the non-party is so “closely related” to either the parties to the contract79 or the
contract dispute itself80 that enforcement of the clause against the non-party is
foreseeable. However, “the phrase ‘closely related’ is not particularly
illuminating,”81 and as such courts have varied in their application of the doctrine.82
Nonetheless, many courts have used the doctrine to bind non-party, non-signatory
79
See In re Optimal U.S. Litig., 813 F. Supp. 2d 351, 369 (S.D.N.Y.
2011) (“a forum selection clause may bind non-parties to a contract if ‘the
relationship between the non-party and the signatory [is] sufficiently close so that
the non-party’s enforcement of the forum selection clause is foreseeable by virtue
of the relationship between the signatory and the party sought to be bound.’”)
(quoting Direct Mail Prod. Servs. Ltd. v. MBNA Corp., No. 99 Civ. 10550, 2000
WL 1277597, at *3 (S.D.N.Y. Sept. 7, 2000)).
80
See, e.g., Cuno, Inc. v. Hayward Indust. Prods., Inc., No. 03 Civ.
3076, 2005 WL 1123877 (S.D.N.Y. May 10, 2005) (non-party is closely related to
dispute when its interests are derivative of and predicated upon the interests of the
signatory).
81
In re Lloyd’s Am. Trust Fund Litig., 954 F. Supp. 656, 669 (S.D.N.Y.
1997).
82
See, e.g., Thibodeau v. Pinnacle FX Invs., No. 08 Civ. 1662, 2008 WL
4849957, at *5 n. 4 (E.D.N.Y. Nov. 6, 2008) (principals of signatory corporation
bound because they were closely related to the signatory and being sued in
connection with their activity at signatory corporation); Cfirstclass Corp. v.
Silverjet PLC, 560 F. Supp. 2d 324, 329 (S.D.N.Y. 2008) (successor to signatory
was closely related); Burrows Paper Corp. v. Moore & Assocs., No. 07 Civ. 62,
2007 WL 2089682, at *3 (N.D.N.Y. July 20, 2007) (third-party beneficiary is
closely related as it would “defy logic” to allow non-signatory to seek enforcement
of the agreement but avoid its obligations); Weingrad v. Telepathy, Inc., No. 05
Civ. 2024, 2005 WL 2990645, at *5–6 (S.D.N.Y. Nov. 7, 2005) (finding
non-signatories closely related where they allegedly acted in concert); Nanopierce,
2003 WL 22882137, at *5–6 (enforcing forum selection clause against CFO of
signatory company).
18
corporate officers to contracts entered into by their corporate employer.83
Regardless of the specific application, the enforcement of the forum selection
clause against the non-party must have been foreseeable prior to suit, which
implies that the non-signatory must have been otherwise involved in the
transaction in some manner.84
B.
Breach of Fiduciary Duty
Although a precise definition of a fiduciary relationship is
“‘impossible of statement,’ a fiduciary relationship may be found in any case ‘in
which . . . confidence has been reposed and betrayed.’”85 Under New York law,
establishing a fiduciary duty is necessarily “fact-specific,” and the duty
characteristically evinces “a higher level of trust than normally present in the
83
See, e.g., Nanopierce, 2003 WL 22882137, at *5-6; Thibodeau, 2008
WL 4849957, at *5 n. 4; Firefly Equities, LLC v. Ultimate Combustion Co., Inc.,
736 F. Supp. 2d 797, 799 (S.D.N.Y. 2010) (binding corporate officer to contract
signed in his capacity as corporate officer). See also Manetti-Farrow, Inc. v. Gucci
Am., Inc., 858 F.2d 509, 514 n. 5 (9th Cir. 1988) (enforcing forum selection clause
against non-signatory directors of a corporation).
84
See Hugel, 999 F.2d at 210 (“In order to bind a non-party to a forum
selection clause, the party must be ‘closely related’ to the dispute such that it
becomes ‘foreseeable’ that it will be bound.”).
85
United Feature Syndicate, Inc. v. Miller Features Syndicate, Inc., 216
F. Supp. 2d 198, 218 (S.D.N.Y. 2002) (quoting Penato v. George, 383 N.Y.S.2d
900, 904 (2d Dep’t 1976)).
19
marketplace between those involved in arm’s length business transactions.”86
Particularly relevant here is that “one who . . . is a shareholder, officer and director
of a closely held corporation, is under a duty ‘to deal fairly, in good faith, and with
loyalty’ to . . . other shareholders.”87 “[S]hareholders in a closely held corporation
share a fiduciary duty among themselves.”88 Shareholders can breach that duty by
“utilizing information obtained in a fiduciary capacity to appropriate a business
opportunity belonging to the corporation.”89
V.
DISCUSSION
A.
This Court Has Personal Jurisdiction Over EMX- II
1.
EMX-II Is the Successor-in-Interest to ISR, EMX Group,
and EMX-I
Plaintiffs argue that EMX-II is ISR’s successor-in-interest and, as
such, is bound by the forum selection clause in the Subscription Agreement.90
Because EMX-II engaged in de facto mergers with ISR, EMX Group, and EMX-I,
86
EBC I, Inc. v. Goldman Sachs & Co., 5 N.Y.3d 11, 19 (2005) (citing
Northeast Gen. Corp. v. Wellington Adv., 82 N.Y.2d 158 (1993)).
87
American Fed. Group, Ltd. v. Rothenberg, 136 F.3d 897, 905 (2d Cir.
1998) (quoting Benson v. RMJ Sec. Corp., 683 F. Supp. 359, 375 (S.D.N.Y.
1988)).
88
Benson, 683 F. Supp. at 374.
89
American Fed. Group, 136 F.3d at 906.
90
See Opp. Mem. at 27-28.
20
it is indeed ISR’s successor-in-interest. Failure to find successorship would allow
defendants to “us[e] evasive, formalistic means lacking economic substance to
escape contractual obligations.”91
a.
EMX Group Was ISR’s Successor-in-Interest
Taking plaintiffs’ factual averments as true and drawing all inferences
in their favor, the intent of EMX-II was “to absorb and continue the operation of”
ISR and its subsequent iterations.92 ISR’s animating purpose was to acquire EMX
Inc. and two other defense contractors,93 and its operations focused on preparation
for those transactions.94 Those efforts continued through May 2010, when
Herrmann, ISR’s founder and CEO, helped found a new entity, EMX Group.95
EMX Group had the same address as ISR.96 Upon the formation of EMX Group,
ISR’s operations in pursuit of EMX Inc. effectively ceased, as ISR’s former
executive instead entered into an agreement to purchase EMX Inc. on behalf of his
91
Aguas Lenders, 585 F.3d at 701.
92
Nettis, 241 F.3d at 194; Am. Compl. ¶¶ 38-39, 53-54, 57-58.
93
See PPM.
94
See Am. Compl. ¶¶ 18-23.
95
See id. ¶¶ 34-38.
96
See id. ¶¶ 8-9.
21
new company, EMX Group.97 EMX Group also picked up where ISR left off by
seeking out new underwriters for the same acquisition ISR had pursued – that of
EMX Inc.98 ISR’s original opportunity to acquire EMX Inc. was a valuable asset,
founded on “Agreements and Plans of Merger pursuant to which ISR [would]
acquire 100% of the outstanding capital stock of . . . EMX.”99
Because EMX Group had common owners, physical location, and
operations with ISR, its acquisition of ISR’s valuable business opportunities
created a de facto merger of the two companies.100 This is precisely the type of
situation where “the shareholders of a seller corporation [attempt to] retain some
ownership interest in their assets after cleansing those assets of liability,” here the
liability owed to Einwohner and Recurrent under the Subscription Agreement.101
b.
EMX-I Was EMX Group’s Successor-in-Interest
History repeated itself in October of 2010, when Herrmann helped
found a third company, EMX-I, at the same address as ISR and EMX Group.102
97
See id. ¶ 39.
98
See id. ¶ 44.
99
PPM at 5.
100
See Nettis, 241 F.3d at 194.
101
National Service Indus., 460 F.3d at 211 (quoting General Battery
Corp., 423 F.3d at 306 (quotation marks omitted)).
102
See Am. Compl.¶¶ 8-10, 53.
22
All three companies had substantial ownership in common, with Herrmann
founding all of them.103 EMX-I acquired EMX Group’s business opportunities for
no consideration, and immediately began pursuing the acquisition of EMX Inc.104
EMX Group’s opportunity to acquire EMX Inc. was a valuable asset,
based on a written commitment from EMX Inc.’s founder and CEO to sell one
hundred percent of his company to EMX Group.105 Without any officers, directors,
shareholders, or capital,106 EMX Group would become defunct by transferring its
major assets – its corporate opportunities – for no consideration. Accordingly,
when EMX-I acquired the corporate opportunities of EMX Group, the two engaged
in a de facto merger.
c.
EMX-II Was EMX-I’s Successor-in-Interest
In January of 2011, the ownership and management of EMX-I formed
yet another company, EMX-II. EMX-II does not share a common address with
ISR and its two predecessors.107 However, I am persuaded that it nonetheless
evinces a continuity of physical location because EMX-II shares a common
103
See id. ¶¶ 18, 38, 53.
104
See id. ¶¶ 53-54.
105
See id. ¶ 39.
106
See id. ¶ 49.
107
See id. ¶¶ 8-11.
23
address with Herrmann, the founder and CEO of ISR, EMX Group, and EMX-I.108
EMX-II engaged in fundamentally the same operations as its predecessors,
succeeding where the others failed by acquiring EMX Inc.109 It did so after
acquiring the opportunity from EMX-I for no consideration, and in part by using
contacts, analysis, and efforts made on behalf of EMX-II’s predecessor
corporations.110 As such, EMX-II’s acquisition of a corporate opportunity from
EMX-I represented a de facto merger of the two companies.
2.
The Forum Selection Clause Is Enforceable Against ISR
and Its Successors
The series of de facto mergers imputes ISR’s liabilities and
contractual obligations – including those under the 2008 Subscription Agreement –
to all of ISR’s successors-in-interest.111 “If successorship is established, a
non-signatory is subject to the [] presumption of the enforceability of mandatory
forum selection clauses.”112
Notably, neither Arion nor EMX-II disputes the enforceability of the
forum selection clause against ISR. Instead, they argue that the clause grants the
108
See id. ¶¶ 11-12.
109
See id. ¶ 58.
110
See id.
111
See Nettis, 241 F.3d at 193; Aguas Lenders, 585 F.3d at 701.
112
Aguas Lenders, 585 F.3d at 701.
24
court personal jurisdiction if the plaintiffs “only want to pursue their breach of
contract claims on the non-recourse speculative investment agreements.”113 Arion
and EMX-II contend that the gravamen of plaintiffs’ complaint is their “claims to
obtain an ownership interest, or the value thereof, in [EMX-II].”114 This argument
is of no moment, however, as personal jurisdiction is not claim specific,115 and
defendants have not moved to dismiss the breach of contract claims. In any event,
a number of plaintiffs’ other claims, including and especially the claims for breach
of fiduciary duty, “aris[e] out of or relat[e] to [the] Subscription Agreement” and
as such are covered by it.116 The Subscription Agreement made Einwohner and
Recurrent joint shareholders with Herrmann, creating a fiduciary relationship
among them.117 Subsequently, Herrmann allegedly breached those duties in his
repeated efforts to cleanse his corporate assets of their liability to Einwohner and
Reccurent. All of plaintiffs’ breach of fiduciary duty claims, including the aiding
and abetting claim against EMX-II, arise out of, and are therefore covered by, the
113
Reply Memorandum of Law in Further Support of Motion to Dismiss
Plaintiffs’ Complaint or Transfer this Matter to the District Court for the Middle
District of Florida (“Reply Mem.”) at 1.
114
Id.
115
See, e.g., Fed. R. Civ. P. 18; CPLR § 601.
116
Subscription Agreement at 10.
117
See Benson, 683 F. Supp. at 374.
25
Subscription Agreement.
Because EMX-II has not argued that the forum selection clause is
unjust or unfair, the clause is enforceable against ISR and its successors-in-interest,
including EMX-II. Pursuant to the clause, I find that EMX-II has consented to
jurisdiction in New York for all claims arising out of the Subscription Agreement,
including several of the claims brought in this action. EMX-II’s contractual
consent to jurisdiction “obviat[es] the need for a separate analysis of the
[Constitutional] propriety of exercising personal jurisdiction.”118
B.
This Court Has Personal Jurisdiction Over Arion
Arion contends that because he is not a signatory to the Subscription
Agreement, he is not bound by its forum selection clause.119 Plaintiffs contend that
Arion is derivatively bound by ISR’s agreement to the forum selection clause in
the Subscription Agreement, and cite to a number of cases in support. One of
those cases, Nanopierce Technologies,120 is directly on point. The Nanopierce
court, invoking the “closely related” doctrine, found a non-party to a contract
bound to its forum selection clause by virtue of her position as the signatory
118
Packer, 959 F. Supp. at 196.
119
See Reply Mem. at 6-7. This argument is particularly weak given that
the duly executed Subscription Agreement did not require a signature for
acceptance. See Subscription Agreement at 3; Am. Compl. ¶ 25.
120
2003 WL 22882137.
26
company’s Chief Financial Officer.121 Here, Arion was one of only five officers at
ISR.122 He was also a shareholder in ISR, a closely held corporation.123 Arion
worked with Highland, ISR’s New York agent, on its efforts to effectuate the
purchase of his company EMX Inc.124 Whether he did so as EMX Inc.’s CEO or as
an executive officer at ISR is immaterial; the fact that he worked with Highland in
any capacity125 establishes that he had extensive knowledge of ISR’s efforts to
raise capital in New York. Those efforts were not ancillary to his involvement in
ISR. If the financing had been successful, Arion would have substantially
benefitted from it apart from his capacity as a shareholder in ISR. The financing
would have enabled ISR to purchase Arion’s shares in EMX Inc. for a significant
sum of money126 and pay him a generous annual salary.127 Those are unique and
significant personal benefits particular to Arion. Whether or not Arion ostensibly
worked with Highland as EMX Inc.’s CEO, he was still an executive officer at ISR
121
See id. at *6.
122
See PPM at 58-60.
123
See id. at 20.
124
See Am. Compl. ¶ 21
125
See 4/28 Email; 5/5 Email.
126
See Am. Compl. ¶ 23.
127
See id.; PPM at 59.
27
with knowledge of and substantial connection to ISR’s New York financing
efforts. On these facts alone, I am persuaded that Arion was closely related to
those efforts.
Because Arion was closely related to ISR’s efforts to obtain financing
in New York, and because the Subscription Agreement was a product of those
efforts, Arion is bound by the Subscription Agreement’s forum selection clause.
Pursuant to the clause, I find that Arion has consented to jurisdiction in New York
for all claims arising out of the Subscription Agreement, including several of the
claims brought in this action. Arion’s contractual consent to jurisdiction
“obviat[es] the need for a separate analysis of the [Constitutional] propriety of
exercising personal jurisdiction.”128
C.
Transfer Under Section 1404(a)
While a forum selection clause will not necessarily dispose of a
motion to transfer under section 1404(a), it should be “a significant factor that
figures centrally in the district court’s [transfer] calculus.”129 The court must still
consider all the other relevant factors, with the forum selection clause informing
their resolution.
The totality of factors counsel in favor of keeping the case in New
128
Packer, 959 F. Supp. at 196.
129
Stewart, 487 U.S. at 29, 31.
28
York. The fact that the forum selection clause was freely negotiated strongly
suggests that its enforcement would satisfy the fairness prong of section 1404(a).130
Because the clause also provides for New York law to govern most, if not all, of
the claims in this action, this forum’s familiarity with the relevant law favors
keeping the case here. New York is also plaintiffs’ choice of forum and their home
forum. While the situs of injury for the breach of fiduciary duty claims is in
Florida, the transactions giving rise to that duty occurred mainly in New York, so
the locus of operative facts do not favor one forum over the other for plaintiffs’
breach of fiduciary duty claims. The relevant facts for the contract and equity
claims likewise do not favor one forum over the other, as plaintiffs dealt with
ISR’s New York agents in forming their contract with a Florida corporation. A
number of witnesses are located in or near New York, negating many of the
convenience and process concerns raised by defendants.131 Perhaps most
importantly, New York has a strong interest in ensuring that participants in its
capital market are protected from the evasive means allegedly employed here to
avoid liabilities incurred in New York.
While the Middle District of Florida may be an acceptable alternative
130
See id. at 29 (“[T]he District Court will be called on to address such
issues as . . . the fairness of transfer in light of the forum-selection clause and the
parties’ relative bargaining power.”).
131
See Opp. Mem. at 33.
29
forum, this Court provides an equally reasonable forum. Given that this Court is
also the forum all parties agreed to in the Subscription Agreement and is the
plaintiffs’ choice, transfer to Florida is inappropriate.
D.
Forum Non Conveniens
In moving to dismiss on the grounds of forum non conveniens, the
movant bears the burden of showing the existence of an alternative forum.132 Here,
defendants suggest that the Middle District of Florida provides the appropriate
alternative forum.133 But when alternative fora are sister federal courts, “Congress
has codified the doctrine and has provided for transfer, rather than dismissal.”134
Defendants do not even suggest, let alone demonstrate, that this case is one of the
“rare instances where a state or territorial court serves litigational convenience
best.”135 The motion is plainly without merit and is therefore denied.
132
See Wiwa, 226 F.3d at 100.
133
See Memorandum of Law in Support of Defendants’ Motion to
Dismiss Plaintiffs’ Complaint for Lack of Jurisdiction and Forum Non Conveniens
or, Alternatively, to Refer this Matter to the District Court for the Middle District
of Florida at 15.
134
Sinochem Int’l, 549 U.S. at 430.
135
Id.
30
v.
CONCLUSION
For the foregoing reasons, all of defendants' motions are denied. The
Clerk of the Court is directed to close these motions [Docket No.6]. A conference
is scheduled for July 2 at 4:30 pm.
SO ORDERED:
Dated:
New York, New York
June 26,2012
31
- Appearances For Plaintiffs:
Matthew J. Press, Esq.
Law Office of Matthew J. Press
The Chrysler Building
405 Lexington Avenue, Seventh Floor
New York, New York 10174
(212) 922-1111
For Defendants:
Scott S. Flynn, Esq.
McElroy, Deutsch, Mulvaney & Carpenter LLP
1300 Mt. Kemble Avenue
P.O. Box 2075
Morristown, New Jersey 07962
(973) 993-8100
32
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