Huffington v. T.C. Group Llc

• Decision Date: 25 February 2011
• Docket Number: No. 10–1405.,10–1405.
• Citation: 637 F.3d 18
• Parties: Michael HUFFINGTON, Plaintiff, Appellant,v.T.C. GROUP, LLC; The Carlyle Group; Carlyle Capital Corporation, Ltd.; Carlyle Investment Management, LLC; David M. Rubenstein, Defendants, Appellees.
• Court: U.S. Court of Appeals — First Circuit

637 F.3d 18

Michael HUFFINGTON, Plaintiff, Appellant,

v.T.C. GROUP, LLC; The Carlyle Group; Carlyle Capital Corporation, Ltd.; Carlyle Investment Management, LLC; David M. Rubenstein, Defendants, Appellees.

No. 10–1405.

United States Court of Appeals, First Circuit.

Heard Nov. 4, 2010.Decided Feb. 25, 2011.

John A. Tarantino with whom Paul V. Curcio, Philip Y. Brown, Edward F. Whitesell, Jr. and Adler Pollock & Sheehan P.C. were on brief for appellant.Robert A. Van Kirk with whom Vidya A. Mirmira, Jonathan E. Pahl and Williams & Connolly LLP were on brief for appellees.Before LYNCH, Chief Judge, BOUDIN and HOWARD, Circuit Judges.BOUDIN, Circuit Judge.

This appeal concerns a forum selection clause in a securities contract. Michael Huffington, a Massachusetts resident, made a $20 million investment in a fund raised by The Carlyle Group (“Carlyle”), a trade name for T.C. Group, LLC, a global investment management firm organized under Delaware law with its principal place of business in Washington, D.C. The investment occurred after Huffington had discussions with David Rubenstein, a founder and managing director of Carlyle.

According to the complaint, whose allegations we accept as true for purposes of this appeal, Chmielinski v. Massachusetts, 513 F.3d 309, 311 (1st Cir.2008), there had been earlier discussions between Huffington and Rubenstein about Carlyle's private equity business, but Huffington expressed reservations about private equity because of his cautious investment philosophy and told Rubenstein that he “wanted something more conservative.” Rubenstein told Huffington that he would check on Carlyle investment products more suitable for Rubenstein's risk profile.

On August 29, 2006, Carlyle formed Carlyle Capital Corporation, Ltd. (“the fund”), which was to be managed by Carlyle Investment Management with the stated goal of achieving “risk-adjusted returns.” Unlike most of Carlyle's offerings, the fund was not private equity but was rather an independent, Guernsey-based company; ¹ its aim was to invest in fixed-income securities, primarily residential mortgage-backed securities issued by the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”). The value of such securities depends, of course, on the cash flow generated by the mortgages and the prospects that the principal and interest will be paid.

According to Huffington, Rubenstein—in a visit to the former's home in Boston—presented the fund as a lower risk investment vehicle that would suit Huffington's philosophy and told Huffington that Carlyle and the fund used a conservative investment strategy that avoided “overleverage.” Rubenstein followed up with a letter repeating that the fund was a lower risk investment with limited downside. Other materials from Carlyle and telephone conversations with John Stomber, who was in charge of the fund, reinforced this message.

On January 9, 2007, Huffington, using an investment vehicle whose details are irrelevant to this appeal, committed to purchasing shares of the fund for $20 million. As part of the commitment, Huffington executed a subscription agreement (“the agreement”), which governed his rights and duties as a shareholder in the fund. The agreement included a choice of law clause and a forum selection clause. The choice of law clause provided:

[T]he parties expressly agree that all terms and provisions hereof shall be governed, construed and enforced solely under the laws of the State of Delaware, without reference to any principles of conflicts of law (except insofar as affected by the state securities or “blue sky” laws of the jurisdiction in which the offering described herein has been made to the Investor).

The forum selection clause provided: “The courts of the State of Delaware shall have exclusive jurisdiction over any action, suit or proceeding with respect to this Subscription Agreement....”

On January 26, 2007, Huffington met with Stomber and other Carlyle representatives and was told—for the first time, he claims—that the fund would be leveraged. Nevertheless, Huffington received assurances that despite the fund's use of leverage, he should not be concerned about its risk. On February 20, Carlyle notified Huffington that the fund had accepted his commitment, and Huffington wired his $20 million investment.

In the spring, summer, and fall of 2007, Huffington made inquiries about the status of the fund and was repeatedly assured by Stomber that his investment was safe. But even as these reassurances were given to Huffington, the fund's performance began to suffer because the value of mortgage-backed securities held by the fund started declining. In March 2008, the fund—having leveraged its equity thirty-two times to buy securities—defaulted on its loans and, its traded shares having plunged to less than ninety-eight percent of their initial offering price, went into liquidation.

On July 13, 2009, Huffington brought suit in Massachusetts state court alleging three claims against the Carlyle defendants and the Guernsey-based fund for allegedly misrepresenting the risks associated with the fund: (1) a violation of the Massachusetts Blue Sky Law (formally, the Massachusetts Uniform Securities Act), Mass. Gen. Laws ch. 110A, § 410 (2008), (2) common-law misrepresentation, and (3) a violation of the Massachusetts Consumer Protection Act, Mass. Gen. Laws ch. 93A, § 11. The Carlyle defendants removed the case to federal court.

On February 19, 2010, the district court dismissed Huffington's claims without prejudice, Fed.R.Civ.P. 12(b)(6), concluding that the forum selection clause encompassed his claims and that the clause did not offend Massachusetts public policy. Huffington v. T.C. Group, LLC, 685 F.Supp.2d 239, 244 (D.Mass.2010). Huffington now appeals to contest this ruling, whose correctness turns on legal issues that we review de novo, Rafael Rodríguez Barril, Inc. v. Conbraco Indus., Inc., 619 F.3d 90, 92 (1st Cir.2010). Although the Carlyle defendants assert that Huffington was made well aware of both the prospective leverage and the risks associated with the investment, the merits of the controversy are not before us—only the proper venue for their determination.

A forum selection clause may make the designated forum merely available for resolution of disputes or it may make it “exclusive,” at least in the sense that either side can insist upon it as the venue. See Rivera v. Centro Médico de Turabo, Inc., 575 F.3d 10, 17 (1st Cir.2009). In this case, both sides agree that the clause is exclusive; the issues primarily in dispute are whether the clause covers the claims set forth in Huffington's complaint and, if so, whether the clause is enforceable.

We start with the coverage question. The terse language of the forum selection clause, already quoted in full, makes Delaware courts the exclusive forum for “any action, suit or proceeding with respect to this Subscription Agreement.” Huffington argues that his claims are not “with respect to” the agreement because he advances no contract claim and his stated statutory and common-law tort claims rest on alleged misrepresentations that occurred before he signed the agreement.

Under the choice of law clause, the agreement itself—necessarily including the forum selection clause—is (the blue sky exception aside) governed by Delaware law; but the parties do not claim that Delaware law varies from ordinary contract principles. Nor do they suggest that the forum selection clause is illuminated by any extrinsic evidence, say, of pre-contract negotiations about it. So the scope question turns, as often is so with contracts, on plain language, attributed purpose, available precedent, and any background policy considerations that may bear.

Starting with language, see Rivera, 575 F.3d at 19, Huffington's position would wear well if the clause encompassed only claims “to enforce or for breach of” this agreement, e.g., Jacobson v. Mailboxes Etc. U.S.A., Inc., 419 Mass. 572, 646 N.E.2d 741, 744 (1995) (“all actions enforcing this agreement”); but the clause by its terms reaches any claim “with respect to” the agreement and easily invites a broader application. This is confirmed by the usual sources: dictionaries and case law construing such phrases.

Dictionaries describe the phrase “with respect to” as synonymous with the phrase “with reference or regard to something,” 13 The Oxford English Dictionary 732 (2d ed. 1989) (emphasis omitted); and they define the word “respect” in the context of the phrase as meaning simply “relation,” “reference,” “connection,” or “association” to a particular thing.² Thus, a suit is “with respect to” the agreement if the suit is related to that agreement—at least if the relationship seems pertinent in the particular context.

So, too, courts describe the phrase “with respect to” as synonymous with the phrases “with reference to,” “relating to,” “in connection with,” and “associated with,” and they have held such phrases to be broader in scope than the term “arising out of,” to be broader than the concept of a causal connection, and to mean simply “connected by reason of an established or discoverable relation.” Coregis Ins. Co. v. Am. Health Found., Inc., 241 F.3d 123, 128–29 (2d Cir.2001) (Sotomayor, J.) (collecting authorities); see also John Wyeth & Bro. Ltd. v. CIGNA Int'l Corp., 119 F.3d 1070, 1074–75 (3d Cir.1997) (Alito, J.).

Huffington counters that the “misrepresentations at issue would be actionable regardless of whether the parties executed a contract,” but that is not quite so. On some facts a misrepresentation can be actionable without a contract, but the alleged “misrepresentations at issue” are actionable here, on Huffington's own theories of liability, only because they caused him to enter into an agreement whereby he made an unfavorable purchase. In a nutshell, only if the misrepresentations proximately caused the agreement...