Rouse Woodstock v. Surety Federal Sav. & Loan Ass'n

• Decision Date: 18 March 1986
• Docket Number: No. 84 C 3011.,84 C 3011.
• Citation: 630 F. Supp. 1004
• Parties: ROUSE WOODSTOCK, INC., Plaintiff, v. SURETY FEDERAL SAVINGS & LOAN ASSOCIATION, Defendant.
• Court: U.S. District Court — Northern District of Illinois

630 F. Supp. 1004

ROUSE WOODSTOCK, INC., Plaintiff, v. SURETY FEDERAL SAVINGS & LOAN ASSOCIATION, Defendant.

No. 84 C 3011.

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

March 18, 1986.

COPYRIGHT MATERIAL OMITTED

James E. Beckley, Beckley & Associates, Chicago, Ill., Michael O. Finkelstein, Barrett, Smith, Shapiro, Simon, & Armstrong, New York City, for plaintiff.

James D. Ossyra, Hopkins & Sutter, Chicago, Ill., for defendant.

MEMORANDUM AND ORDER

MORAN, District Judge.

Defendant moves to transfer this case to the Western District of North Carolina. Plaintiff Rouse Woodstock, Inc. (Rouse), a Chicago commodity futures commission merchant, brought this action to recover an unpaid balance of $84,148.29 in the account of defendant Surety Federal Savings & Loan Association (Surety) of Morganton, North Carolina. Surety, however, has counterclaimed for $9,000,000, the approximate amount of its losses in commodities trading with Rouse. It also has filed an action in the federal court for the Western District of North Carolina against Rouse and three other commodity merchants seeking a total of $14,000,000. From the beginning venue for this case has been a trouble-some question. This court denied one motion by Surety to transfer venue, but expressly gave it leave to renew the motion after further developments. The developments have now taken place and the motion is renewed, but the question is no less troublesome.

BACKGROUND

The underlying facts in this case are complex. Surety, like many other financial institutions, found itself in the early 1980s on the wrong side of changing interest rates and attempted to improve its posture through commodities trading. Though the idea to try commodities apparently first came from Surety's president, Billy Davis, the actual trading was left in the hands of Rickey Reynolds, who joined Surety in November of 1981 and rose to vice-president. Like some other financial institutions, Surety's strategies in the commodities market left it worse off than before. By early 1983 it had three accounts with three different merchants, each separately approved by the board of directors, each opened apparently out of dissatisfaction with the preceding merchant.

At that point, probably in March 1983, Joseph Pentecoste, an agent for Rouse, contacted Reynolds to offer his services. According to Reynolds' deposition, from the outset he told Pentecoste that the purpose of the new Rouse account would be speculation, in the hope of gaining enough to cover the losses from previous trading. Federal regulations allow savings and loan associations to hedge but not to speculate. According to Surety, its board had resolved to cease all commodities trading on March 31, 1983. Reynolds nevertheless caused an account in Surety's name to be opened with Rouse apparently in early April. He admits that he forged the signatures of both Davis and Surety's secretary, Charles Henson, to the account documents. He also secretly removed the corporate seal from Henson's desk and stamped one document with it. The papers were drawn up for a hedging account, but no one seriously disputes that the account was traded speculatively.

Trades for the account were normally ordered through telephone conversations between Reynolds in Morganton and Pentecoste in Chicago, and effected through the Chicago Board of Trade. At one point, Rouse maintains, its then president, Arthur Hahn, noted the size of the account and learned that the documents for it could not be located in Rouse's files. He called Davis to verify the account's status. Davis does not remember the call, but according to Reynolds Davis merely referred the call to him. A new set of documents was sent to Davis for corporate approval, but again according to Reynolds Davis merely passed them on to him. Reynolds again forged the signatures, secretly applied the corporate seal and returned the documents to Rouse. At another point Louis Skydell, a Rouse executive, visited Surety. Davis was on vacation but Reynolds arranged a brief meeting with Henson. Reynolds admits making misleading remarks to Henson so that Henson would respond to Skydell in a manner which would not arouse suspicion.

Trading continued unchecked until mid-November 1983, when the association's auditors uncovered the size of the losses. Reynolds resigned. The United States Attorney's office for the Western District of North Carolina launched an investigation, grounded in part on tapes Rouse had made of conversations between Reynolds and Pentecoste, which led to the indictment of both. Pentecoste gave evidence to the U.S. Attorney, pled guilty to one count of conspiracy to divert funds from Surety and was sentenced to three years probation and a $10,000 fine. Reynolds pled guilty to one count of falsifying documents going to a federal agency and one count of conspiracy. He is now serving a five-year sentence at the federal prison in Big Springs, Texas.

Surety claims overall losses from Reynolds' commodity trading of some $14,000,000, which has left it virtually without funds. It believes that all the futures commission merchants with whom it dealt bear responsibility for those losses. In its suit in North Carolina it seeks recovery from all four merchants through three counts: a breach of the merchant's duty of care toward customers under the Commodities Exchange Act, failure to supervise their agents and associated persons as required by the same Act, and breach of a common law duty of care. A fourth count is directed only at Rouse, asserting that Rouse either knew or should have known from the outset that its account in Surety's name was unauthorized. Its counterclaims against Rouse here are virtually identical to its claims against Rouse there. By agreement between the parties and the North Carolina court, if the motion to transfer is denied Rouse will be dropped from that action.

This court previously determined that this case potentially could be transferred to the Western District of North Carolina since the action could have been brought there. It also noted the existence of a clause in the account documents consenting to Chicago as the forum and venue for any suits over the account. Because of the circumstances surrounding the opening of the account, Surety disputes the enforceability of that clause. We noted the dispute but did not decide the question.

We did, however, reject Surety's argument that giving weight to the plaintiff's choice of forum in a case where the counterclaim appears to be the larger claim was allowing the tail to wag the dog. We held that since Rouse is headquartered here, and the forum had a real connection to the suit since the trades were performed here, the plaintiff's choice of forum was entitled to the usual weight given in transfer cases. We found the factors favoring North Carolina as a location for the suit to be about evenly balanced by the factors favoring Illinois. Since transfer is only granted when a defendant shows a clear balance favoring it, we denied transfer. Rouse Woodstock, Inc. v. Surety Federal Savings & Loan Association, No. 84 C 3011, slip op. (N.D.Ill. Feb. 5, 1985).

DISCUSSION

On a motion to transfer venue under 28 U.S.C. § 1404(a) the statute directs us to consider the convenience of the parties, the convenience of witnesses and the interests of justice. The principal issue here under convenience of the parties is whether the forum selection clause is valid, thereby blocking Surety from asserting its own inconvenience. There are important witnesses both here and in North Carolina, although the scale probably tips towards Chicago since Pentecoste is here. The interests of justice, on the other hand, may favor North Carolina somewhat. A related action is pending there and the tapes and transcripts used in the grand jury investigation are still in the custody of the United States Attorney in Asheville. No factor stands out as obviously decisive.

I. The Venue Selection Clause

Federal courts usually enforce contractual provisions which stipulate a choice of forum or venue for controversies arising under the contract. Burger King Corp. v. Rudzewicz, 471 U.S. ___, ___ n. 14, 105 S.Ct. 2174, 2182 n. 14, 85 L.Ed.2d 528 (1985). A clause in Rouse's documents for the Surety account says that "any judicial ... proceeding in any way arising out of or related to this Agreement ... will, at Rouse Woodstock's option, take place in Chicago, Illinois." The clause further provides that if the action could have been brought in Surety's home district, and Surety prevails, Rouse will pay Surety's transportation cost to Chicago. Rouse urges the enforcement of this clause to defeat the transfer motion.

This court notes at the outset, however, that even if such a clause is valid and enforceable, we are not bound by it for purposes of a transfer motion. The question of a proper venue for a suit is a question of federal law which takes priority over private contractual rights. The decision on whether or not to enforce the clause can therefore only be made as part of an overall consideration of factors relating to venue. Benge v. Software Galeria, Inc., 608 F.Supp. 601, 606 (E.D.Mo.1985). See also D'Antuono v. CCH Computax Systems, Inc., 570 F.Supp. 708, 711 (D.R.I. 1983); Hoffman v. Burroughs Corp., 571 F.Supp. 545, 548 (N.D.Tex.1982). A venue selection clause therefore does not of itself prevent transfer out of the venue which the clause directs. A court still must weigh the factors as Congress has directed it in § 1404(a). Plum Tree, Inc. v. Stockment, 488 F.2d 754, 757-758 (3d Cir.1973); Meineke Discount Muffler Shops, Inc. v. Feldman, 480 F.Supp. 1307, 1310 (S.D.Tex. 1979).

Most courts conclude, therefore, that a valid forum or venue selection clause at most affects only consideration of the convenience of the parties. Plum Tree, 488 F.2d at 758. Section 1404(a) requires an evaluation of the convenience of witnesses and the interests of justice as well...