Alvarez et al v. Babik et al

Filing 43

MEMORANDUM ORDER GRANTING DEFENDANTS' MOTION TO TRANSFER. Tthis Court GRANTS IN PART Defendants' Motion to Dismiss for Improper Venue, or to Transfer 13 . Accordingly, it is hereby ORDERED that this action be TRANSFERRED to the United States District Court for the Western District of Pennsylvania for all further proceedings. Signed by Chief Judge John Preston Bailey on 3/21/2014. (kd)

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF WEST VIRGINIA
CLARKSBURG

DAVID B. ALVAREZ, MANUEL ALVAREZ
III, VINCENT D’ANNUNZIO, and
DAVID D’ANNUNZIO,
Plaintiffs,
v.

Civil Action No. 1:13-CV-252
(BAILEY)

MICHAEL BABIK, JAMES JONES
and NICHOLAS ONDERKO,
Defendants.

MEMORANDUM ORDER GRANTING
DEFENDANTS’ MOTION TO TRANSFER
I. Introduction
Pending before this Court is Defendants’ Motion to Dismiss for Improper Venue, or
to Transfer [Doc. 13]. Having been fully briefed, the motion is ripe for disposition. This
Court has reviewed the above and is of the opinion that this matter shall more appropriately
be adjudicated in the United States District Court for the Western District of Pennsylvania.
Accordingly, the Defendants’ Motion to Transfer [Doc. 13] is hereby GRANTED to the
extent that this matter is ORDERED TRANSFERRED.
II. Statement of Facts and Procedural History
The plaintiffs summarize their Complaint as follows: In 2006, plaintiffs saw an
opportunity to start up an equipment leasing business and recruited defendants as

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managers to run the day-to-day affairs. Plaintiffs furnished virtually all of the capital
required to start the business, Blue Mountain Equipment Rental Corporation (“BMERC”),
and together owned 73.6% of the shares as of November 3, 2011.

A 2006 “Pre-

Incorporation Agreement” gave defendants (the “Managing Shareholders”) an option to
“buy down” plaintiffs’ interest to 40% for $1,800,000.

When BMERC received a

$75,000,000 buyout opportunity in September 2011, the plaintiffs helped defendants obtain
a loan for the $1,800,000 the defendants needed to buy down the plaintiffs’ interest to 40%.
On November 16, 2011, defendants borrowed $1,800,000 and bought an additional 33.6%
of BMERC’s stock worth over $13,000,000 upon closing of the $75,000,000 asset sale.
Plaintiffs helped the defendants obtain this premium in recognition of the defendants’ efforts
in making BMERC worth $75,000,000. All parties agreed that this “stock swap” would take
effect as of October 31, 2011, so that the defendants would collectively receive 60% of the
income from the sale of assets, which would occur after October 31, 2011.
Plaintiffs learned in September 2012 that I.R.S. regulations governing “S”
corporations would not allow BMERC to effectuate the stock swap “as of” October 31,
2011, but instead required the shareholders to pay taxes based on the weighted average
of their share ownership spread out over all 365 days of 2011. Consequently, while the
plaintiffs received only 40% of the sale proceeds (10% each), they had to pay income taxes
based on their weighted average ownership of 68%. As a result, the plaintiffs paid income
tax on $11,740,256 in income that actually ended up in the defendants’ pockets – an
excessive and inequitable allocation that required the plaintiffs to pay additional income
taxes of approximately $700,000 each.
Plaintiffs have made demand upon the defendants for reimbursement and have held
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board meetings to address the situation. Defendants have refused to surrender their
windfall, and have refused to attend board meetings. Plaintiffs seek a judgment herein
based on the defendants’ flagrant breach of the fiduciary duties owed among shareholders
of a closely-held corporation so as to require the defendants to disgorge the $11,740,256
on which the plaintiffs paid taxes. Plaintiffs also seek to recover damages against
defendant Babik for the negligent discharge of his duties as BMERC’s Treasurer and Chief
Financial Officer and his negligent preparation of inaccurate tax returns that forced the
plaintiffs to incur, now and in the future, substantial amounts of interest and penalties on
late tax payments. [Doc. 1, pp. 1-3].
The plaintiffs assert two counts in their Complaint: Count I – Breach of Fiduciary
Duty and Count II – Negligent Preparation of Corporate Tax Returns.
The plaintiffs all reside in or near Clarksburg, West Virginia. The defendants all live
in the Western District of Pennsylvania. Plaintiffs assert venue is proper in this District
pursuant to 28 U.S.C. § 1391(b)(2) “because a substantial part of the events or omissions
giving rise to the claim occurred in this judicial district.” (Id. at ¶ 6).
The plaintiffs filed this action in this Court on November 20, 2013 [Doc. 1]. On
December 13, 2013, the defendants filed the instant Motion to Transfer, to which the
plaintiffs object.
III. Applicable Law
When a defendant objects to venue under Rule 12(b)(3), the plaintiff bears the
burden of establishing that venue is proper. See Plant Genetic Sys., N.V. v. Ciba Seeds,
Mycogen Plant Sci., Inc., 933 F.Supp. 519, 526 (M.D. N.C. 1996) (citing Bartholomew

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v. Va. Chiropractors Ass'n, Inc., 612 F.2d 812, 816 (4th Cir. 1979)).
Under 28 U.S.C. § 1406(a), “[t]he district court of a district in which is filed a case
laying venue in the wrong division or district court shall dismiss, or if it be in the interest of
justice, transfer such case to any district . . . in which it could have been brought.” In cases
where the court’s jurisdiction is founded solely on diversity of citizenship, which this Court
has previously determined, transfer of venue is appropriate in:
(1) a judicial district where any defendant resides, if all defendants reside in
the same State; (2) a judicial district in which a substantial part of the events
or omissions giving rise to the claim occurred, or a substantial part of the
property that is the subject of the action is situated; or (3) a judicial district in
which any defendant is subject to personal jurisdiction at the time the action
is commenced, if there is no district in which the action may otherwise be
brought.
28 U.S.C. § 1391(a).
IV. Discussion
A.

Transfer to Proper Venue Under 28 U.S.C. § 1406(a)

As previously noted, the plaintiffs assert venue is proper in this District pursuant to
28 U.S.C. § 1391(b)(2) “because a substantial part of the events or omissions giving rise
to the claim occurred in this judicial district.” (Id. at ¶ 6). This Court disagrees.
In their Complaint, the plaintiffs assert two counts: Count I – Breach of Fiduciary
Duty and Count II – Negligent Preparation of Corporate Tax Returns. Plaintiffs allege that
the defendants breached their fiduciary duties by exploiting the corporate tax

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consequences of the asset sale and stock swap. As the defendants point out, these are
matters of BMERC’s internal corporate affairs which are conducted at its principal place of
business in Uniontown, Pennsylvania, within the Western District of Pennsylvania.
In support of their argument that the Northern District of West Virginia is a proper
venue, the plaintiffs argue that the Pre-Incorporation Agreement shows that five of the six
original BMERC shareholders live within the Northern District of West Virginia; several
board meetings were held in the Clarksburg, West Virginia area; BMERC has expanded
its operations into West Virginia; and BMERC registered a trade name with the West
Virginia Secretary of State. This Court has considered these arguments, but is not
convinced that such facts establish that “a substantial part of the events or omissions”
which give rise to this particular claim occurred in this District.
As such, this Court finds that the plaintiffs have not met their burden establishing
that the Northern District of West Virginia is a proper venue. This Court, however, does not
find dismissal to be appropriate; rather, this Court finds it is in the interests of justice to
transfer this matter to a district in which it could have been brought. See 28 U.S.C.
§ 1406(a).
B.

28 U.S.C. § 1404(a) Analysis

“The analysis of whether a transfer is ‘in the interest of justice’ is the same under
Section § 1404(a) as it is under Section 1406(a). WRIGHT, MILLER & COOPER, § 3827, at
264-66.” Nichols v. G.D. Searle & Co., 991 F.2d 1195, 1201 n. 5 (4th Cir. 1993).
Accordingly, this Court will look to § 1404(a) to guide it to the proper forum. Title 28 U.S.C.
§ 1404(a) permits this Court to transfer a civil action to any other district where such action

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may have been brought “[f]or the convenience of the parties, in the interest of justice . . ..”
Thus, the threshold question of a Section 1404(a) analysis is whether the judicial district
to which transfer is sought qualifies under the applicable venue statutes as a judicial district
where the civil action “might have been brought.” If the Court answers this initial question
in the affirmative, the Court must make an “individualized, case-by-case consideration of
convenience and fairness.” Toney v. Family Dollar Store, Inc., 273 F.Supp.2d 757, 763
(S.D. W.Va. 2003), quoting Stewart Org., Inc. v. Ricoh Corp., 487 U.S. 22, 29 (1988).
In so doing, this Court has broad discretion. Nichols v. G.D. Searle & Co., 991 F.2d 1195
(4th Cir. 1993).
It is clear from the pleadings that the defendants all reside in Pennsylvania and do
not contest personal jurisdiction in this case. Accordingly, this Court has answered the
initial question, whether that judicial district is one in which this civil action might have been
brought, in the affirmative.
Further, this Court must consider the plaintiff’s choice of forum. “Unless the
balancing of these factors weighs strongly in favor of the defendant, the plaintiff’s choice
of forum generally should not be disturbed.” Casana Furniture Co., Ltd. v. Coaster Co.
of America, 2009 U.S. Dist. LEXIS 23141 *3, *4 (M.D. N.C. 2009), Brown v. Flowers, 297
F.Supp.2d 846, 850 (M.D. N.C. 2003); Collins v. Straight, Inc., 748 F.2d 916, 921 (4th Cir.
1984). Moreover, “[w]hile a district court has discretion to transfer the action to a more
appropriate venue, a court should not transfer venue where doing so would only shift the
inconvenience to another party.” Casana, U.S. Dist. LEXIS 23141 *4-5. This Court has
already determined that the plaintiffs choice of forum was not an appropriate venue;

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accordingly, this Court will give it no weight.
This Court will now consider the following factors, which, in this Court’s discretion,
will help guide it to the more proper venue. Some of the factors which this Court may
consider include: (1) ease of access to sources of proof; (2) the convenience of parties and
witnesses; (3) the cost of attendance for witnesses; (4) the availability of compulsory
process; (5) the interest in having localized interests decided at home; and (6) the interests
of justice. Toney v. Family Dollar Store, 273 F.Supp.2d at 763.
1.

The Ease of Access to Sources of Proof

Courts have recognized that “modern developments have made sources of proof
more accessible, despite their physical location.” Knapper v. Safety Kleen Systems, Inc.,
2009 U.S. Dist. LEXIS 30118 *16 (E.D. Tex. 2009). In this case, like most transactions
dispute cases, sources of proof will consist of electronic and documentary evidence
supported by witness testimony. In this particular case, it appears to this Court that
sources of proof are easily accessible no matter where the case is heard. There are no
“premises to view,” no heavy machinery to send or move, just documents, and these are
routinely produced and delivered/distributed in electronic form.
While it still has some relevance, “identifying the location of electronic sources of
proof will typically not tip this factor in favor of transfer.” J2 Global Comms., Inc. v. Protus
IP Solutions, Inc., 2009 WL 440525 at *4 (E.D. Tex. Feb. 20, 2009); see also, Odom v.
Microsoft, 596 F. Supp.2d 995, 1000 (E.D. Tex. 2009)("[b]ecause electronic information
can be accessed conveniently in any number of locations, not simply the location where
the information is 'stored,' it does not follow that transfer to the location of the stored

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information is more convenient for anyone"); Konami Digital Entertainment Co. v.
Harminex Music Systems, Inc., 2009 U.S. Dist. 24748 *14 (E.D. Tex. 2009) (“With
respect to sources of proof that are purely electronic information, such as the source code
at issue in Odom, it does not follow that transfer to Massachusetts where Defendant
Harmonix would have relevant source code would be more convenient for anyone.”).
Therefore, neither party would likely be inconvenienced by conducting discovery in
either fora as the majority of documents relevant to this action have already been submitted
to this Court and, alternatively, could be transmitted to the Western District of Pennsylvania
with ease. Accordingly, this Court will not give this factor a great deal of weight.
2.

The Cost and Convenience to Parties and Witnesses

“If no witness or evidence is within the chosen district, courts will transfer an action
to a district with witnesses and evidence.” Speed Trac Tech., Inc., 567 F.Supp.2d 799,
804. The witnesses appear to be located in both the Northern District of West Virginia and
Western District of Pennsylvania. This Court recognizes the close proximity of the parties
and witnesses to either forum.
Therefore, this Court finds that the facts of this particular case do not greatly weigh
in either party’s favor. Accordingly, this Court believes this factor to be of little use in the
instant inquiry.
3.

The Availability of Compulsory Process

This Court notes that many of the non-party witnesses in this action are within the
100-mile radius of the Northern District of West Virginia’s subpoena power for deposition
under Fed. R. Civ. P. 45(c)(3)(A)(ii). Any witnesses located in the Pittsburgh or Greene

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County area are clearly within the allowed 100 mile radius; therefore, compulsory process
would be available. Assuming, however, that some witnesses will have to be subpoenaed
for deposition in this matter, Federal Rule of Civil Procedure 45(b)(2) provides that
subpoenas may be served at any place without the district court that is within 100 miles of
the place of the deposition. This Court believes that any additional burden caused by
transfer will be borne by the defendant.
Based on the above facts, this Court finds transfer to the Western District of
Pennsylvania would be appropriate.
4.

The Interests of Justice

Finally, in assessing a motion to transfer, this Court must consider the interests of
justice, “‘an analysis encompassing those factors unrelated to witness and party
convenience.’” Original Creatine Patent Co., Ltd. v. Met-Rx USA, Inc., 387 F.Supp.2d
564, 571 (E.D. Va. 2005)(quoting Acterna, L.L.C. v. Adtech, Inc., 129 F.Supp.2d 936,
939-40 (E.D. Va. 2001)). This factor includes such considerations as: (a) a court's
familiarity with the applicable law (especially relevant, for example, in cases in which the
claims involve interpretation of another state's statutes or another court's jurisprudence);
(b) where the claims at issue arose and any consequent local interest in resolving the case
locally; and (c) the relative congestion of the courts' dockets. See Original Creatine, 387
F.Supp. at 571 (citing Intranexus, Inc. v. Siemens Medical Solutions Health Servs., 227
F.Supp.2d 581, 583 (E.D. Va. 2002)).
a.

The Court's Familiarity with the Applicable Law.

As an initial matter, this Court must determine which state’s law applies – West

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Virginia or Pennsylvania. When it exercises jurisdiction based on diversity of citizenship,
the court must apply the choice-of-law rules of the state in which it sits. Klaxon Co. v.
Stentor Elec. Mfg. Co., 313 U.S. 487, 496, 61 S.Ct. 1020 (1941). Accordingly, West
Virginia conflicts rules apply. In undertaking his choice-of-law analysis in Energy Corp. of
America v. Bituminous Cas. Corp., 543 F.Supp.2d 536, Judge Copenhaver of the
Southern District of West Virginia discussed the matter of Liberty Mut. Ins. Co. v. Triangle
Indus., Inc., 182 W. Va. 580 (1990). In that case, the Supreme Court of Appeals of West
Virginia announced a new conflicts of law rule:
Relying on Section 6 of the Restatement (Second) of Conflict of Laws, the Triangle
court considered a number of factors in identifying the state with the most significant
relationship, including:
(a) the needs of the interstate and international systems;
(b) the relevant policies of the forum;
(c) the relevant policies of other interested states and the relative interests of those
states in the determination of the particular issue;
(d) the protection of justified expectations;
(e) the basic policies underlying the particular field of law;
(f) certainty, predictability and uniformity of result; and
(g) ease in the determination and application of the law to be applied.
Id. at 567.
Turning to the § 6 factors, this Court concludes that no other state has a more
significant relationship to the transaction and the parties than Pennsylvania. Further, both
plaintiffs and defendants agree that Pennsylvania law applies. The Western District of
Pennsylvania is indisputably more familiar with its own law. Therefore, this factor weighs
in favor of transfer to the Western District of Pennsylvania.

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b.

Local Interest.

As previously noted, BMREC is headquartered in the Western District of
Pennsylvania and most witnesses, documents, and activity related to the underlying
conduct are centered in that judicial district. See In Re Campbell Transportation Co., 368
F.Supp.2d 553, 555-57 (N.D. W.Va. 2005) (transferring case from the Northern District of
West Virginia to the Western District of Pennsylvania as Pennsylvania had a greater local
interest where the events giving rise to the lawsuit occurred there and the majority of
witnesses were located there). This Court recognizes that the plaintiffs reside in West
Virginia; however, the plaintiffs have failed to produce any evidence that this dispute has
caused any actual injury to the State of West Virginia or its taxpayers, other than
themselves.
c.

Docket Conditions.

This Court is unaware whether the Western District of Pennsylvania’s docket is less
congested than that of the Northern District of West Virginia.
Accordingly, having thoroughly weighed the factors herein, this Court finds it is
appropriate to transfer all claims to the Western District of Pennsylvania on the grounds
that such a transfer will serve the interests of justice. See 28 U.S.C. § 1404(a).
V. Conclusion
Based upon the foregoing, this Court hereby GRANTS IN PART Defendants’ Motion
to Dismiss for Improper Venue, or to Transfer [Doc. 13]. Accordingly, it is hereby
ORDERED that this action be TRANSFERRED to the United States District Court for the
Western District of Pennsylvania for all further proceedings.

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It is so ORDERED.
The Clerk is hereby directed to transmit copies of this Order to counsel of record
herein and to transfer all related filings in this matter to the Clerk of the United States
District Court for the Western District of Pennsylvania.
DATED: March 21, 2014.

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