Huffington v. T.C. Group LLC

• Decision Date: 19 February 2010
• Docket Number: Civil Action No. 09-11256-PBS.
• Parties: Michael HUFFINGTON, Plaintiff, v. T.C. GROUP, LLC, The Carlyle Group, Carlyle Capital Corporation, Ltd., Carlyle Investment Management, LLC and David M. Rubenstein, Defendants.
• Court: U.S. District Court — District of Massachusetts

685 F.Supp.2d 239

Michael HUFFINGTON, Plaintiff,

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

Civil Action No. 09-11256-PBS.

United States District Court, D. Massachusetts.

Decided: Feb. 19. 2010.

Philip Y. Brown, Paul V. Curcio, Rory Z Fazendeiro, Edward F. Whitesell, Jr. Adler, Pollock & Sheehan, PC, Boston MA, for Plaintiff.

Nicholas J. Boyle, Vidya A. Mirmira Sarah F. Teich, Robert A. Van Kirk, Williams & Connolly LLP, Washington, DC, Kevin Marcus Colmey, Patrick P. Dinardo, Pamela S. Holleman, Sullivan & Worcester LLP, Michael B. Galvin, William A. Haddad, Dwyer & Collora, LLP, Boston, MA, for Defendants.

MEMORANDUM AND ORDER

Saris, District Judge.

I. INTRODUCTION

This case involves an investment gone bad. Plaintiff, Michael Huffington, decided to invest in a fund raised by the Carlyle Group ("Carlyle") ¹ after discussions with David Rubenstein, the Founder and Managing Director of Carlyle. Plaintiff alleges a violation of Mass. Gen. Laws ch. 110A § 410, negligent misrepresentation, and unfair deceptive trade practices in violation of Mass. Gen. Laws ch. 93A, § 11.

The Carlyle Group defendants ² move to dismiss the complaint for improper venue. For the reasons stated below, the Court ALLOWS the motion.

? BACKGROUND FACTS

In the First Circuit, "a motion to dismiss based upon a forum-selection clause is treated as one alleging the failure to state a claim for which rehef can be granted under Fed.R.Civ.P. 12(b)(6)." Silva v. Encyclopedia Britannica, Inc., 239 F.3d 385 387 (1st Cir.2001). For the purposes of a motion dismiss for improper venue, the Court "tak[es] the allegations in the complaint as true and mak[es] all reasonable inferences in favor of the Plaintiff." Doran V. Mass. Turnpike Auth., 348 F.3d 315, 318 (1st Cir.2003).

On August 29, 2006, the Carlyle Group formed a new fund, Carlyle Capital ("the Fund"), with the stated goal of "achieving] risk-adjusted returns." (Compl. ¶13.) During a meeting at Huffington's home in Boston on October 20, 2006, Rubenstein presented the Fund as an investment opportunity for Huffington. (Id. ¶16.) At the meeting, Rubenstein told Huffington that the Fund would be managed conservatively, and provided Huffington with a brochure stating the same. (Id.¶¶ 16-18.) During their first meeting and through subsequent letters, mailed promotional materials, and telephone conversations prior to the plaintiff's investment, the defendant omitted material information about the leveraging of the Fund. (Id. ¶¶ 16-22.)

The forum selection clause contained in the Subscription Agreement signed by both parties states:

The courts of the State of Delaware shall have exclusive jurisdiction over any action, suit or proceeding with respect to this Subscription Agreement....

(Def.'s Ex. 6 at 11.)

On January 9, 2007, Huffington, through the Lanai Living Trust ("the Trust") ³ invested $20,000, 000 in the Fund, and in return received 1, 000, 000 shares. (Compl. ¶30.) On January 26, 2007, two weeks after his investment was finalized, Rubenstein told Huffington that the Fund would be leveraged.⁴ (Id. ¶ 31.)

Through e-mail and phone conversations from March 5, 2007 until November 15,

2007, Huffington continually inquired about the status of the Fund and was assured that his investment was safe. In

2008, at the time of the margin calls, ⁵ the Fund was leveraged 32 times for $670 million in equity. (Id. ¶ 49.)

On March 6, 2008, Rubenstein telephoned Huffington to tell him that the Fund had defaulted on its debt. (Id. ¶ 52.) On March 14, 2008, Rubenstein called Huffington again and informed him that the Fund was going under. (Id. ¶ 57.) At that point, the share price had dropped to $0.35 per share, which represents a decrease in value of more than 98 percent from when Huffington purchased shares in 2007. (Id. ¶59.) Two days later. The shareholders of the Fund voted to wind up the Fund. (Id. ¶¶ 58.) Plaintiff alleges that the "losses were a direct result of the extremely risky 32:1 leverage ratio... maintained by the Fund immediately prior to its collapse." (Id. ¶ 61.) Plaintiff lost his entire investment.

III. LEGAL ANALYSIS

The defendants assert that this action must be dismissed because Huffington's claims are controlled by the forum selection clause contained in the Subscription Agreement. Plaintiff responds that his claims are not covered by the forum selection clause, and that enforcement of the clause would violate pubhc policy.

Forum selection clauses "are prima facie valid and should be enforced unless enforcement is shown by the resisting party to be 'unreasonable' under the circumstances." M/S Bremen v. Zapata Offshore Co., 407 U.S. 1, 10, 92 S.Ct. 1907, 32 L.Ed.2d 513 (1972). Forum selection clauses will be honored unless the objecting party can show "that enforcement would be unreasonable and unjust, or that the clause was invalid for such reasons as fraud or overreaching... [or that] enforcement would contravene a strong pubhc policy of the forum in which suit is brought, whether declared by statute or judicial decision." Id. at 15, 92 S.Ct. 1907. "It is the language of the forum selection clause itself that determines which claims fall within its scope." Rivera v. Centra Medico de Turaho, Inc., 575 F.3d 10, 19 (1st Cir.2009) (applying Bremen standard to a diversity suit).

The forum selection clause at issue directs to Delaware "any action, suit or proceeding with respect to this Subscription Agreement." The parties vehemently dispute the meaning of the phrase "with respect to." Under the caselaw, the phrase "with respect to" is typically interpreted as synonymous with "relating to, " and broader in scope than "arising out of." As the Second Circuit explained,

"The term "related to" is typically defined more broadly and is not necessarily tied to the concept of a causal connection.... Courts have similarly described the term "relating to" as equivalent to the phrases "in connection with" and "associated with," see Jackson v. Lajaunie, 270 So.2d 859, 864 (La.l972), and synonymous with the phrases "with, respect to," and "with reference to," see Phoenix Leasing, Inc. v. Sure Broad., Inc., 843 F.Supp. 1379, 1388 (D.Nev. 1994), affd, 89 F.3d 846 (9th Cir.1996), and have held such phrases to be broader in scope than the term "arising out of." See Jackson, 270 So.2d at 864."

Coregis Ins. Co. v. Am. Health Found.,

Inc., 241 F.Sd 123, 128 (2d Cir.2001). The general rule is that "contract-related tort claims involving the same operative facts as a parallel claim for breach of contract should be heard in the forum selected by the contracting parties." Lambert v. Kysar, 983 F.2d 1110, 1121-22 (1st Cir.1993).

In light of this caselaw, the Court concludes that the forum selection clause covers the claims asserted in this action. While the claims of misrepresentation may not all arise out of the Subscription Agreement, they all relate to the Subscription Agreement. (See Compl. ¶¶74-76 (misrepresentations concern "information about the Fund both prior to and during the term of [Huffington's] investment" that induced Huffington to invest in the Fund and remain invested in the Fund).) See Northeast Data Sys., Inc. v. McDonnell Douglas Computer Sys. Co., 986 F.2d 607, 609-10 (1st Cir.1993) (stating that when the essential elements of tort claims consist of contractual violations, those claims are related to the contract and are therefore governed by a contract's forum selection clause); see also Doe v. Seacamp Ass'n, Inc., 276 F.Supp.2d 222, 227-228 (D.Mass.2003) (tort and statutory claims, including misrepresentation and Chapter 93A claims, covered by forum selection clause); see also id. at 228 ("where the source of the duty which the defendants allegedly owed to the plaintiffs is derived from the contractual relationship, the contractual provisions should govern").

To escape the hook of the forum selection clause, Huffington contends that his claims are predominantly based on fraudulent misconduct that occurred prior to the execution of the Subscription Agreement. While forum selection clauses may be voided based on fraud, see Bremen, 407 U.S. at 15, 92 S.Ct. 1907, the fraud must relate to the inclusion of the forum selection clause as opposed to more generalized allegations of fraudulent inducement. As the Supreme Court explained,

[the fraud exception provided in Bremen] does not mean that any time a dispute arising out of a transaction is based upon an allegation of fraud, as in this case, the clause is unenforceable. Rather, it means that [a]... forumselection clause in a contract is not enforceable if the inclusion of that clause in the contract was the product of fraud or coercion.

Scherk v. Alberto-Culver Co., 417 U.S. 506, 519 n. 14, 94 S.Ct. 2449, 41 L.Ed.2d 270 (1974) (emphasis in original).

Although the plaintiff alleges that he was induced to purchase the securities by misrepresentation, the plaintiff does not allege that the inclusion of the forum selection clause in the contract was the product of misconduct. Therefore, the forum selection clause is enforceable.

B. Anti-Waiver Provision and Public Policy Exception

Relying on Marram v. Kobrick Offshore Fund, Ltd., 442 Mass. 43, 809 N.E.2d 1017 (2004), plaintiff contends that the Massachusetts blue sky law, Mass. Gen. Laws ch 10A, bars the parties from enforcing the forum selection clause contained in the Subscription Agreement. First, Plaintiff argues that the anti-waiver provisions of the Massachusetts blue sky law void the forum selection clause. Mass. Gen. Laws ch. 110A, § 410(g) provides: "Any condition, stipulation, or provision binding any person acquiring any security to waive compliance with any provision of this chapter or any rule or order hereunder is void." While this provision states that a person may not waive compliance with statutory provisions, it does not prevent a person from agreeing to litigate those rights in a...