Friedman v. World Transp., Inc.

• Decision Date: 08 May 1986
• Docket Number: No. 85 C 8074.,85 C 8074.
• Citation: 636 F. Supp. 685
• Parties: Sheldon T. FRIEDMAN, Plaintiff, v. WORLD TRANSPORTATION, INC., an Arizona Corporation, Crst, Inc., a Foreign Corporation, Investors Transportation Corp., an Arizona Corporation, Herman Finesod, James Haber, Coast Financial Services, Inc., an Oregon Corporation, Trager, Glass & Company, Albert P. Fosha, Individually and d/b/a Worldco Services Group, Inc., Defendants.
• Court: U.S. District Court — Northern District of Illinois

636 F. Supp. 685

Sheldon T. FRIEDMAN, Plaintiff, v. WORLD TRANSPORTATION, INC., an Arizona Corporation, Crst, Inc., a Foreign Corporation, Investors Transportation Corp., an Arizona Corporation, Herman Finesod, James Haber, Coast Financial Services, Inc., an Oregon Corporation, Trager, Glass & Company, Albert P. Fosha, Individually and d/b/a Worldco Services Group, Inc., Defendants.

No. 85 C 8074.

United States District Court, N.D. Illinois, E.D.

May 8, 1986.

Edward A. Berman, Berman, Roberts & Kelly, Robert J. Zaideman, Epstein, Zaideman & Esrig, Chicago, Ill., for plaintiff.

Warren S. Radler/Dale R. Crider, Rivkin, Radler, Dunne & Bayh, Daniel I. Schlessinger/Mark G. Krum, Lord, Bissell & Brook, Chicago, Ill., for defendants.

MEMORANDUM OPINION AND ORDER

ASPEN, District Judge:

In 1984 Sheldon Friedman ("Friedman") was looking for a tax shelter and found one orchestrated by defendant World Transportation, Inc. ("World"). He borrowed $450,000 to invest in six trucks. This tax scheme turned out to be scam, however. He alleges in his eight-count amended complaint that World and the other defendants defrauded him, and he seeks recovery under a potpourri of federal and state causes of action, including the Securities Act of 1933, 15 U.S.C. § 77a et seq., the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq., and the Racketeer Influenced and Corrupt Organization Act, 18 U.S.C. § 1961 et seq., better known as RICO. Various motions to dismiss are now before the Court. We need not address the substantive issues these motions raise because we find that one procedural issue disposes of the matter. For the reasons stated below, we grant the motion of several defendants to transfer this case to the Southern District of New York under 28 U.S.C. § 1406(a).

A. Facts

We take the following facts from the amended complaint and the exhibits attached to it, and from some of the exhibits attached to the parties' briefs. We need only sketch the outlines of the alleged scam. In 1984 World offered wealthy investors seeking to shelter their income a chance to buy "fully equipped Class 8, over-the-road diesel powered tandem axle tractors" plus related equipment for the supposedly bargain-basement price of $88,000 each. From what we can tell, the investors needed only to hand over the money and remember to make the appropriate deductions on their tax returns; World and the other defendants would do the rest. One of the since-dismissed defendants, Investors Transportation Co. ("ITCO") was to manage the trucks. The trucks were "guaranteed" to generate revenues of $.75 per mile for 75,000 miles annually, while costing only $.60 per mile. This income was supposed to cover payment of loan installments. The investment was to produce substantial tax benefits, including an investment tax credit and deductions for accelerated depreciation, operating expenses, and interest on the loan. Instead the investment was allegedly a bust and prompted this suit.

Friedman was one of about ninety investors who signed up. He entered into several agreements. The main one was the "Purchasing Agreement," in which Friedman contracted to buy two trucks. He also entered into a "management agreement," empowering ITCO to manage the trucks, and a promissory note and a security agreement with an Oregon bank and defendant Coast Financial Services ("Coast"). The Purchasing Agreement contained the following "forum selection clause":

Except in respect to an action commenced by a third party in another jurisdiction, Purchaser and Seller agree that any legal suit, action, or proceeding brought by one party hereto against another party hereto arising out of or relating to this Agreement shall be brought exclusively in a United States District Court in the State of New York or, if such court lacks jurisdiction, in the Supreme Court of the State of New York. Purchaser and Seller hereby accept the jurisdictions of such courts for the purpose of any such action or proceeding, and agree that venue for any action or proceeding brought in the State of New York shall lie in the Southern District of New York or the City of New York, as the case may be.

The other agreements contained not forum selection clauses like the above one, but venue waiver clauses, requiring Friedman to waive venue and personal jurisdiction objections to any suits brought against him in various forums, such as Arizona and Oregon.

Despite the forum selection clause of the Purchasing Agreement, Friedman, an Illinois resident, filed his suit here. He is the only plaintiff. This is one of several related suits brought by disgruntled investors. One, a purported class action on behalf of ninety investors, including Friedman, was filed in the Southern District of Florida. Relying on the above forum selection clause, the Florida Court transferred the case to New York. See Adelson v. World Transportation, Inc., 631 F.Supp. 504 (S.D.Fla.1986). Friedman reports that other related suits are pending in Alaska and Colorado. As far as we know, those suits have not as yet been transferred.

World and five other defendants have moved to dismiss the case under Fed.R. Civ.P. 12(b)(3) or transfer under 28 U.S.C. § 1406(a), arguing that the forum selection clause renders venue in this district improper. The other defendant who has responded to the complaint, Coast, has not joined this motion but has not objected to it. We agree that the case should be transferred, but must deal with several issues before entering the transfer order.

B. Waiver

Friedman contends that World waived the venue issue by not raising it in its answer or original motion to dismiss. World answered the amended complaint on December 30, 1985 without mentioning venue. It filed a motion to dismiss, raising various substantive attacks, on January 7, 1986. Three days later, on January 10, World amended its motion to dismiss to include the venue defense. Friedman says it was too late to do so.

The Federal Rules place a premium on raising such threshold procedural issues early in a lawsuit. Rule 12(g) requires a defendant to raise all motions under 12(b)(2)-(5) at one time, under penalty of waiver. Rule 12(h)(1) provides that a defense of improper venue, among others, is waived (A) if omitted from a motion described in Rule 12(g), or (B) if it is neither made by motion "nor included in a responsive pleading or an amendment thereof permitted by Rule 15(a) to be made as a matter of course." In sum, when a venue defense is raised neither in the answer nor in a timely motion to dismiss, it is waived. See generally 15 C. Wright, A. Miller & E. Cooper, Federal Practice & Procedure, §§ 3826, 3829 (1976).

That the venue defense was presented in the amended motion to dismiss rather than in the original one filed three days sooner presents no problem. A party can amend a motion to dismiss to raise an omitted ground if he or she acts promptly and before the court rules on the original motion. See MacNeil v. Whittemore, 254 F.2d 820, 821 (2d Cir.1958); Martin v. Lain Oil & Gas Co., 36 F.Supp. 252, 255 (E.D.Ill.1941); 5 Wright & Miller, Federal Practice & Procedure, § 1389 (1969), at 847-48. The cases reason that an amendment made just a few days following the motion is consistent with the spirit of Rule 12(h) and neither prejudices the plaintiff nor burdens the court. Defendants' amendment came three days after they made their original motion and before a responsive brief was to be filed, and therefore is timely under these standards.

Nor was defendants' failure to mention venue in their answer fatal in light of their filing of the motion to dismiss. In any event, Rule 12(h)(1)(B) makes clear that the answer date is not the do-or-die day for waiver purposes. The omitted defense may be raised in an amendment to the answer made under Rule 15(a) as of right up to 20 days after the answer is filed. The amended motion to dismiss was filed just 11 days after the answer was. In effect, by filing the amended motion the defendants amended their answer as of right to raise this defense. To rule otherwise would raise form over substance. The purpose of the Rule 12 procedure is to ensure that such motions are raised promptly, before the answer is "locked in" except by leave of court. Allowing defendants' motion is consistent with this scheme of the rule. Thus, whether considered as an amendment to the motion to dismiss or to the answer, the venue defense was raised on time and not waived.

C. Exception

Friedman next argues that by its own terms the forum selection clause does not apply because of its "exception" clause. As quoted above, the clause binds Friedman to sue World exclusively in New York for any suit "arising out of or relating to" the Purchase Agreement, "except in respect to an action commenced by a third party in another jurisdiction." Friedman notes that defendant Coast sued him on the promissory note in Oregon.¹ Coast is a third party. He concludes from these two facts that this suit is one commenced by a third party outside of New York which therefore invokes the exception. We disagree.

At the outset, we observe that the meaning and purpose of this clause is unclear. If the clause means merely that third parties are not bound by the forum selection clause, it is useless since the clause could not bind third parties anyhow. Perhaps it means that if both Friedman and World were joined as defendants in a suit by a third party, they could cross-claim in that forum. Or perhaps it means that if a third party sued Friedman, he could file a compulsory counterclaim in that suit relating to the Purchase Agreement and join World.

Whatever it means, the exception clause surely does not mean that the forum selection clause does not apply in this case. Friedman brought this suit (initially in state court) before Coast filed its suit.² Under any definition, the exception clause could not apply because no third party suit existed when Friedman sued World....