637 F.3d 18 (1st Cir. 2011), 10-1405, Huffington v. T.C. Group, LLC

Docket Nº:10-1405.
Citation:637 F.3d 18
Opinion Judge:BOUDIN, Circuit Judge.
Party Name: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.
Attorney: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.
Judge Panel:Before LYNCH, Chief Judge, BOUDIN and HOWARD, Circuit Judges.
Case Date:February 25, 2011
Court:United States Courts of Appeals, Court of Appeals for the First Circuit
 
FREE EXCERPT

Page 18

637 F.3d 18 (1st Cir. 2011)

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.

February 25, 2011

Heard Nov. 4, 2010.

Page 19

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

Page 20

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

Page 21

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...

To continue reading

FREE SIGN UP