CMC Industries, Inc. et al v. CRIC TRT Acquisition, LLC et al

Filing 82

MEMORANDUM OPINION AND ORDER re: 34 AMENDED MOTION to Dismiss for Lack of Jurisdiction filed by Larry Krauss, Leo S. Schwartz: At bottom, CMC Industries's claim against the Individual Defendants stems from the alleged failure of the latt er to comply, as an internal governance matter, with certain board resolutions as officers of CMC Industries, a Texas corporation, concerning a Wells Fargo escrow account in Utah, all of which is governed by Texas law. That dispute has no demonstrabl e connection to New York or to the New York forum-selection clauses in the SPA and the MSA. It follows that the Court lacks personal jurisdiction over the Individual Defendants and that the sole claim against them, Count Three of the Amended Complain t, must be and is dismissed. Within one week of the date of this Memorandum Opinion and Order, the parties shall file letters, not to exceed three pages, addressing whether and to what extent dismissal of the claim against the Individual Defendants a ffects the remaining claims and other pending motions. The Clerk of Court is directed to terminate Docket No. 34 and to terminate Defendants Leo S. Schwartz and Larry Krauss as parties. (Larry Krauss and Leo S. Schwartz terminated.) (Signed by Judge Jesse M. Furman on 9/14/2018) (jwh)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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CMC INDUSTRIES, INC., et al.,
:
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Plaintiffs,
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-v:
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CRIC TRT ACQUISITION, LLC, et al.,
:
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Defendants.
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:
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09/14/2018
18-CV-209 (JMF)
MEMORANDUM OPINION
AND ORDER

JESSE M. FURMAN, United States District Judge:
In this case, familiarity with which is presumed, Plaintiffs CMC Industries, Inc. (“CMC
Industries”) and CMC Acquisition, LLC (“CMC Acquisition”) bring claims against Defendants
CRIC TRT Acquisition, LLC (“CRIC”), BNSF-Delpres Investments Ltd. (“BNSF”), Leo S.
Schwartz, and Larry Krauss. (Docket No. 1). Plaintiffs’ central claims stem from a complex
transaction, memorialized in a May 17, 2016 Stock Purchase Agreement (the “SPA”), in which
CMC Acquisition purchased from CRIC a majority interest in CMC Industries, which is the sole
member of non-party Texas Rail Terminal, LLC (“Texas Rail”), which, in turn, is the sole
member of non-party TRT LeaseCo, LLC (“TRT”). (Docket No. 32 (“Am. Compl.”), ¶¶ 1-2).
In the Amended Complaint’s First and Second Causes of Action, CMC Acquisition brings claims
against CRIC and BNSF, a limited guarantor, concerning certain pre-closing tax liabilities. (See
id. ¶¶ 71-87). In its Third Cause of Action, a different Plaintiff — CMC Industries — brings a
claim against Schwartz and Krauss (the “Individual Defendants”) for their alleged conduct as
officers and directors of CMC Industries. (See id. ¶¶ 88-92). Specifically, the Amended
Complaint alleges that the Individual Defendants breached fiduciary duties owed to CMC

Industries, Texas Rail, and TRT in connection with actions they did and did not take in
connection with a Utah escrow account holding rental income paid to TRT. (See id.).
Krauss, a citizen and domiciliary of Canada, (Docket No. 36 (“Rakhunov Decl.”), Ex. 1,
¶ 2), and Schwartz, a citizen and domiciliary of Florida (Rakhunov Decl., Ex. 2, ¶ 2), now move,
pursuant to Rule 12(b)(2) of the Federal Rules of Civil Procedure, to dismiss the claim against
them for lack of personal jurisdiction. (Docket No. 34; see also Docket No. 35 (“Defs.’ Mem.”),
at 14-23).1 “In order to survive a motion to dismiss for lack of personal jurisdiction, a plaintiff
must make a prima facie showing that jurisdiction exists.” Licci ex rel. Licci v. Lebanese
Canadian Bank, SAL, 732 F.3d 161, 167 (2d Cir. 2013) (quoting Thomas v. Ashcroft, 470 F.3d
491, 495 (2d Cir. 2006)). In this case, whether CMC Industries can make that showing turns on
whether the Individual Defendants are bound by the New York forum-selection clauses in either
of two agreements to which they are not direct parties: the SPA and a Management Services
Agreement (the “MSA”), dated July 14, 2016, between non-parties TRT and DGI-BNSF Corp.
(See Docket No. 44 (“Pls.’ Opp’n”), at 9).2 “[I]n order to bind a non-party to a forum selection
clause,” however, “the party must be closely related to the dispute such that it becomes
foreseeable that it will be bound.” BMW of N. Am. LLC v. M/V Courage, 254 F. Supp. 3d 591,

1

There are several other motions pending: a motion filed by Plaintiffs to amend the
Amended Complaint (Docket No. 65); a motion filed by Plaintiffs to dismiss certain
counterclaims (Docket No. 53); and a motion filed by Defendants to dismiss the Amended
Complaint pursuant to Rule 12(b)(1) of the Federal Rules of Civil Procedure for lack of subjectmatter jurisdiction. (Docket No. 34). Per a discussion on the record at a conference held on
August 22, 2018, the Court is addressing the Individual Defendants’ motion to dismiss for lack
of personal jurisdiction separately as the remaining motions are interrelated.
2

The SPA and MSA are attached to, and incorporated by reference in, the Amended
Complaint (see Am. Compl. Exs. A, B), and thus may be considered here. See, e.g., Buckley v.
City of New York, No. 17-CV-224 (JMF), 2018 WL 264114, at *2 (S.D.N.Y. Jan. 2, 2018) (citing
New York Pet Welfare Ass’n v. City of New York, 850 F.3d 79, 86 (2d Cir. 2017).

2

598 (S.D.N.Y. 2017) (internal quotation marks omitted). “A non-party is closely related to a
dispute if its interests are completely derivative of and directly related to, if not predicated upon
the signatory party’s interests or conduct.” Id. (internal quotation marks omitted).
Applying those standards here, the Court concludes that neither the SPA nor the MSA
provides a basis to exercise personal jurisdiction over the Individual Defendants. First, Plaintiffs
misleadingly suggest that the SPA was “the genesis of all the disputes between the parties.”
(Pl.’s Opp’n 10). Yes, the SPA is the “genesis” of all Plaintiffs’ claims insofar as it is how CMC
Acquisition acquired an interest in CMC Industries. But that aside, CMC Industries’s claim
against the Individual Defendants has nothing to do with the SPA. The claim does not involve
the parties to the SPA, it does not allege breach of the SPA, and it does not call for interpretation
of the SPA; instead, it involves an internal corporate governance dispute between a Texas
corporation and foreign shareholders of that corporation governed by Texas law. Notably,
elsewhere, CMC Acquisition itself has conceded that “the SPA includes no provision concerning
the post-acquisition management of CMC or TRT LeaseCo,” (Docket No. 54, at 17), rendering it
irrelevant to the corporate governance dispute underlying the claim against the Individual
Defendants. That is correct — and defeats Plaintiffs’ reliance on the SPA for personal
jurisdiction over the Individual Defendants. “Where, as in the present action, the rights being
asserted do not originate from the contract containing the forum selection clause, the clause does
not apply.” Arma v. Buyseasons, Inc., 591 F. Supp. 2d 637, 645 (S.D.N.Y. 2008).3

3

The Court is unpersuaded by Plaintiffs’ contention that the SPA’s forum-selection clause
is “extremely broad.” (Pls.’ Opp’n 11 (internal quotation marks omitted)). The breadth of the
clause, which applies to “all disputes, legal actions, suits and proceedings arising out of or
relating to” the agreement, (Am. Compl. Ex. A, § 11.18 (emphasis added)), bears on whether a
dispute between parties to the clause falls within its scope; but Plaintiffs cite no authority for the
proposition that it bears on the analysis of whether a non-party is bound by the clause in the first
instance.
3

Plaintiffs’ reliance on the MSA fails for similar reasons. Plaintiffs contend that the
Individual Defendants are “closely related” to the MSA because the agreement “installed” them
“in the very positions giving rise to the fiduciary duties they allegedly breached.” (Pls.’ Opp’n 1;
accord id. at 13-14). But that is a mischaracterization of the MSA — the plain terms of which
control over any contrary allegations in the Amended Complaint. See, e.g., Park v. FDM Grp.
(Holdings) PLC, No. 16-CV-1520 (LTS), 2017 WL 946298, at *3 (S.D.N.Y. Mar. 9, 2017),
(allegations that are “inconsistent with the plain terms of the relevant documents” are therefore
“not plausible”), order vacated in part on reconsideration sub nom. Park v. FDM Grp., Inc.,
2018 WL 4100524 (S.D.N.Y. Aug. 28, 2018). Section 2 of the MSA, upon which Plaintiffs
principally rely, does provide that non-party DGI-BNSF shall “provide personnel to serve as
certain executive officers of CMC . . . and its subsidiaries.” (Am. Compl. Ex. B, § 2). But the
provision does not specify the relevant personnel, let alone name the Individual Defendants.
And while Section 9 of the MSA restrains Kingsway Financial Services Inc., an Ontario affiliate
of TRT, from “caus[ing] CMC or any of its subsidiaries to remove Leo Schwartz or Larry Krauss
as officers of CMC or any of its subsidiaries” absent certain conditions not relevant here, (id.
§ 9), that restraint on the authority of a third party does not give rise to any duties on the part of
the Individual Defendants. In short, the MSA neither gave rise to, nor defined the scope of, the
fiduciary duties that underlie Plaintiffs’ claim against the Individual Defendants. See, e.g., In re
Musicland Holding Corp., 424 B.R. 95, 100 (Bankr. S.D.N.Y. 2010) (“[T]he state of
incorporation governs the scope of the fiduciary duties owed by a corporation’s directors and
officers.”); In re Solomat Partners, L.P., 261 B.R. 72, 80 (Bankr. D. Conn. 2001) (stating that
“the law of the State of incorporation . . . generally governs the resolution of a claim for breach
of that [fiduciary] duty”); see also NAF Holdings, LLC v. Li & Fung (Trading) Ltd., 772 F.3d

4

740, 743 n.2 (2d Cir. 2014) (“Under New York law, courts look to the law of the state of
incorporation in adjudicating a corporation’s internal affairs.” (internal quotation marks
omitted)). Accordingly, it cannot be said that they are “closely related” enough to the MSA for
its forum-selection clause to be invoked. See Arma, 591 F. Supp. 2d at 645.
At bottom, CMC Industries’s claim against the Individual Defendants stems from the
alleged failure of the latter to comply, as an internal governance matter, with certain board
resolutions as officers of CMC Industries, a Texas corporation, concerning a Wells Fargo escrow
account in Utah, all of which is governed by Texas law. That dispute has no demonstrable
connection to New York or to the New York forum-selection clauses in the SPA and the MSA.
It follows that the Court lacks personal jurisdiction over the Individual Defendants and that the
sole claim against them, Count Three of the Amended Complaint, must be and is dismissed.4
Within one week of the date of this Memorandum Opinion and Order, the parties shall file
letters, not to exceed three pages, addressing whether and to what extent dismissal of the claim
against the Individual Defendants affects the remaining claims and other pending motions.
The Clerk of Court is directed to terminate Docket No. 34 and to terminate Defendants
Leo S. Schwartz and Larry Krauss as parties.

SO ORDERED.
Date: September 14, 2018
New York, New York

__________________________________
JESSE M. FURMAN
United States District Judge

4

Given that conclusion, the Court need not and does not reach the Individual Defendants’
alternative argument based on an alleged failure to be served. (See Defs’ Mem. 23).
5