Alvarez v. Babik
| Decision Date | 21 March 2014 |
| Docket Number | Civil Action No. 1:13-CV-252 |
| Court | U.S. District Court — Northern District of West Virginia |
| Parties | DAVID B. ALVAREZ, MANUEL ALVAREZ III, VINCENT D'ANNUNZIO, and DAVID D'ANNUNZIO, Plaintiffs, v. MICHAEL BABIK, JAMES JONES and NICHOLAS ONDERKO, Defendants. |
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.
The plaintiffs summarize their Complaint as follows: In 2006, plaintiffs saw an opportunity to start up an equipment leasing business and recruited defendants asmanagers 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 heldboard 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.
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) .
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).
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 taxconsequences 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).
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 actionmay 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;accordingly, this Court will give it no weight.
This Court will now consider the following factors,...
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