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Steven E. Schwarz and Reena Levin v. Sellers Markets

September 7, 2011

STEVEN E. SCHWARZ AND REENA LEVIN, PLAINTIFFS,
v.
SELLERS MARKETS, INC., JAMES SELLERS, DEBORAH SELLERS, TENNYSON WEST LLC, BANCROFT PARTNERS LLC, MICHAEL SCHMITZ, DAVID SLOAN, AQUILLIAN INVESTMENTS LLC, AND RESTAURANT SOLUTIONS, INC., DEFENDANTS.



The opinion of the court was delivered by: Judge Feinerman

MEMORANDUM OPINION AND ORDER

Plaintiffs Steven E. Schwarz and Reena Levin brought this action against James Sellers, Deborah Sellers, Sellers Markets, Inc., Tennyson West LLC, Bancroft Partners LLC, Michael Schmitz, David Sloan, Aquillian Investments LLC, and Restaurant Solutions, Inc., alleging violations of SEC Rules 10b-3 and 10b-5, 17 C.F.R. §§ 240.10b-3, 240.10b-5, the Illinois Securities Act, 815 ILCS 5/1 et seq., and § 25401 of the California Corporation Code, as well as breach of contract, fraudulent inducement, and breach of fiduciary duty. Schwarz, an attorney, is representing both himself and Levin, his spouse; for ease of reference, they together will be referred to as "Schwarz." Based exclusively on a forum selection clause in the parties' contract, all Defendants but one have moved to dismiss this case for improper venue under Federal Rule of Civil Procedure 12(b)(3) and 28 U.S.C. § 1406(a) or, alternatively, to transfer the case to the Northern District of California under § 1406(a). For the following reasons, this case is transferred to the Northern District of California pursuant to 28 U.S.C. § 1404(a).

Background

Sellers Markets is a restaurant business in San Francisco, California, whose principals are James Sellers and Deborah Sellers. In June 2006, hoping to open a second location in San Francisco, the Sellers decided to solicit additional investors, including Schwarz. According to the complaint, James Sellers told Schwarz that, if he invested, he could redeem his shares after three years for their purchase price plus five percent interest. In reliance on that alleged promise and also on financial information provided by some of the other defendants, Schwarz purchased $40,000 of Sellers Markets Series B Preferred stock pursuant to a contract dated June 27, 2006, and styled Sellers Markets, Inc. Amended and Restated Investors' Rights Agreement ("Agreement"). Doc. 41-1. On July 17, 2009, Schwarz asked to redeem his shares for their purchase price plus five percent interest. After nearly a year's worth of correspondence, James Sellers sent Schwarz an email denying the request.

Schwarz filed this suit in January 2011. Shortly after being served with summons, Sellers Markets, James Sellers, and Deborah Sellers filed a motion to dismiss for improper venue or, in the alternative, to transfer to the Northern District of California. The motion cites Rule 12(b)(3) and 28 U.S.C. § 1406(a) as authority for dismissal and § 1406(a) as authority for transfer; it does not purport to seek transfer under 28 U.S.C. § 1404(a). The motion is premised on a forum selection clause in the Agreement, which reads:

7.12 Jurisdiction; Venue. With respect to any disputes arising out of or related to this Agreement, the parties consent to the exclusive jurisdiction of, and venue in, the state courts in San Francisco County in the State of California (or in the event of exclusive federal jurisdiction, the courts of the Northern District of California).

Doc. 41-1 at 25. The other defendants were served with summons after the motion was filed; with one exception, they have joined the motion. The exception is Restaurant Solutions, Sellers Markets' accountant, which has moved under Rule 12(b)(2) to dismiss for lack of personal jurisdiction on the ground that it did not have the requisite contacts with Illinois. By agreement of the parties, Restaurant Solutions' motion has been stayed pending resolution of the motion to dismiss for improper venue or to transfer.

Discussion

The parties' submissions raise three questions. The first is whether the Agreement's forum selection clause is mandatory or permissive. The second question, reached only if the clause is mandatory, is whether the clause is valid and enforceable. The third question, reached only if the clause is valid and enforceable, is whether the case should be dismissed, transferred, or neither.

I. Whether the Agreement's Forum Selection Clause Is Mandatory

Schwarz maintains that the Agreement's forum selection clause is permissive rather than mandatory. Schwarz's premise-that a permissive clause, being permissive, does not demand that litigation proceed in the designated forum, and thus cannot be invoked to dismiss or transfer a lawsuit brought in a non-designated forum-is correct. See Muzumdar v. Wellness Int'l Network, Ltd., 438 F.3d 759, 761-62 (7th Cir. 2006). But Schwarz's classification of the clause as permissive is incorrect.

A forum selection clause is mandatory where its "language is obligatory" and "clearly manifests an intent to make venue compulsory and exclusive." Paper Express, Ltd. v. Pfankuch Maschinen GmbH, 972 F.2d 753, 756 (7th Cir. 1992). The clause here provides that "the parties consent to the exclusive jurisdiction of, and venue in, the state courts in San Francisco County in the State of California (or in the event of exclusive federal jurisdiction, the courts of the Northern District of California)." The clause's meaning is pellucid: Venue is exclusive in the California state court sitting in San Francisco County, unless there is exclusive federal jurisdiction over the suit, in which case venue lies exclusively in the Northern District of California. There is exclusive federal jurisdiction over this suit because Schwarz brings claims under SEC Rules 10b-3 and 10b-5. See 15 U.S.C. § 78aa ("The district courts of the United States . shall have exclusive jurisdiction . of all suits in equity and actions at law brought to enforce any liability or duty created by this chapter or the rules and regulations thereunder."). Because the clause makes venue compulsory and exclusive in the Northern District of California, it is mandatory. See Muzumdar, 438 F.3d at 761 (clause providing "JURISDICTION AND VENUE OVER ANY DISPUTES ARISING OUT OF THIS AGREEMENT SHALL BE PROPER ONLY IN THE FEDERAL OR STATE COURTS IN DALLAS COUNTY, TEXAS" is mandatory); Cont'l Ins. Co. v. M/V ORSULA, 354 F.3d 603, 607 (7th Cir. 2003) (same for clause providing that any suit "arising out of the goods carried under this Bill of Lading shall, whenever the port of loading or the port of discharge named on the face hereof is in the United States of America, be brought only in the United States District Court having admiralty jurisdiction at the USA port of loading or USA port of discharge, as the case may be, to the exclusion of any other court or forum"); Paper Express, 972 F.2d at 756 (same for clause providing "the parties agree that in any dispute jurisdiction and venue shall be in California") (internal quotation marks omitted); Piechur v. Redbox Automated Retail, LLC, 2010 WL 706047, at *3 (S.D. Ill. Feb. 24, 2010) ("By agreeing to submit to the 'exclusive jurisdiction' in a particular forum, the parties in this case have manifested their intent to make that venue exclusive and to exclude venue in all other jurisdictions.").

II. Whether the Agreement's Forum Selection Clause Is Valid and Enforceable

Settled law holds that a mandatory forum selection clause is "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 Off-Shore Co., 407 U.S. 1, 10 (1972). "The Supreme Court has construed this exception narrowly: forum selection . clauses are 'unreasonable' (1) if their incorporation into the contract was the result of fraud, undue influence or overweening bargaining power; (2) if the selected forum is so gravely difficult and inconvenient that [the complaining party] will for all practical purposes be deprived of its day in court; or (3) if enforcement of the clauses would contravene a strong public policy of the forum in which the suit is brought, declared by statute or judicial decision." Bonny v. Soc'y of Lloyd's, 3 F.3d 156, ...


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