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Ndx Advisors, Inc., Ndx Capital Management, LLC, Ndx Holdings, Inc v. Advisory Financial Consultants

June 6, 2011

NDX ADVISORS, INC., NDX CAPITAL MANAGEMENT, LLC, NDX HOLDINGS, INC., NDX TRADING, INC., AND ST. CROIX CAPITAL MANAGEMENT, LLC, PLAINTIFFS,
v.
ADVISORY FINANCIAL CONSULTANTS, INC. AND RUTHE P. GOMEZ, DEFENDANTS.



The opinion of the court was delivered by: Judge George W. Lindberg

MEMORANDUM OPINION AND ORDER

Before the Court are defendants' motion to transfer venue and motion to dismiss. For the reasons stated below, the motion to transfer is granted and the motion to dismiss is denied in part.

I. Background

Defendant Ruthe Gomez sells mutual funds and was the president and primary owner of defendant Advisory Financial Consultants, Inc. ("AFC"), a broker-dealer. In 2007, defendants brought an arbitration action against TradeRight Corp., Enterprise Trust Co. ("Enterprise"), and Locke Haven, LLC before a Financial Industry Regulatory Authority ("FINRA") arbitration panel in California. In the arbitration proceeding, defendants alleged that in 2006 they sold their client accounts to Locke Haven, for the benefit of TradeRight and Enterprise, under the understanding that Gomez would continue to do business as she had before the transfer and without any change in her existing client relationships. Defendants further alleged that Gomez became registered with TradeRight, and transferred her personal and family accounts to TradeRight. According to the arbitration claim, as a result of Enterprise's misrepresentations and fraud, Enterprise gained complete control over the accounts of Gomez, her family, and her clients. Defendants also contend that TradeRight failed to pay them $225,000 owed under the transfer agreement, submitted a form to the FINRA that contained false and malicious statements about Gomez, ignored Gomez's requests for an accounting, and failed to pay Gomez trailing commissions from her clients' mutual fund investments.

Defendants' original arbitration statement of claim asserted fifteen claims, including breach of fiduciary duty, breach of the implied covenant of good faith and fair dealing, defamation, negligence, conversion, breach of contract, fraud, and conspiracy. Defendants allege that as a result of TradeRight, Enterprise, and Locke Haven's misconduct, Gomez "has suffered loss of clients, loss of income and her reputation and business prospects have substantially declined."

According to the complaint here, Enterprise ceased doing business in March 2008, after it was forced into receivership by the Securities and Exchange Commission. TradeRight also ceased doing business. TradeRight, Enterprise, and Locke Haven are not parties to this action.

In 2010, defendants filed an amended statement of claim in the arbitration proceeding, adding claims against the plaintiffs in this action. In defendants' amended statement of claim in the arbitration, they allege that the plaintiffs here are affiliated entities that are successors in interest to, and alter egos of, TradeRight. In addition to the claims asserted in the original statement of claim, the amended statement of claim asserts that TradeRight fraudulently conveyed assets to plaintiffs.

Plaintiffs filed this action here in early 2011, seeking declaratory and injunctive relief.

Plaintiffs allege that they are not alter egos of TradeRight, that they did not breach any legal duty owed any defendant, and that they are not liable for defendants' losses. In their claim for a declaratory judgment, plaintiffs ask the Court to declare the respective rights and obligations of the parties. In their claim for injunctive relief, plaintiffs ask the Court to enjoin defendants from pursuing claims against them in the California arbitration, and from initiating new or additional claims against plaintiffs "other than in a court of competent jurisdiction." Jurisdiction is based on diversity of citizenship: plaintiffs are citizens of Texas and Minnesota, and defendants are both California citizens.

II. Analysis

A. Motion to Transfer

1. 28 U.S.C. § 1406(a)

The Court first considers defendants' motion to transfer this action to the Northern District of California pursuant to 28 U.S.C. § 1406(a). If venue is improper in the district in which a case was filed, the district court "shall dismiss, or if it be in the interest of justice, transfer such case to any district or division in which it could have been brought." 28 U.S.C. § 1406(a). A diversity case such as this one may be brought in a district "where any defendant resides, if all defendants reside in the same State," or a district "in which a substantial part of the events or omissions giving rise to the claim occurred, or a substantial part of property that is the subject of the action is situated." See 28 U.S.C. § 1391(a). In this context, a corporate defendant "resides" in any judicial district in which it is subject to personal jurisdiction when the action is commenced. Id. § 1391(c).

When a defendant has challenged venue, the plaintiff bears the burden of establishing that venue is proper. See Repository Techs. v. Sys. Consultants, Inc., No. 02 C 8640, 2003 WL 21148340, at *4 (N.D. Ill. May 16, 2003). The Court takes the facts alleged in the complaint as true unless they are controverted by affidavit, and draws all reasonable inferences in plaintiffs' favor. See Johnson-Ester v. Schwarzenegger, No. 09 C 5384, 2010 WL ...


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