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Hostforweb Inc. v. Cloud Equity Group SIM LLC

United States District Court, N.D. Illinois, Eastern Division

November 14, 2019

HOSTFORWEB INCORPORATED, an Illinois company, Plaintiff,
v.
Cloud Equity Group SIM LLC; Cloud Equity Group SPG LLC; Cloud Equity Investors, LLC; and, Cloud Equity Group, LLC, SEAN FRANK; MOHAN NADARAJAH; RAU RAJAN; Host for Web, Inc., a Delaware corporation; OCI-Host-For-Web, LLC, a Delaware limited liability company; Defendants.

          MEMORANDUM OPINION & ORDER

          MARY M. ROWLAND UNITED STATES DISTRICT JUDGE

         Plaintiff Hostforweb Incorporated (“Plaintiff”) filed suit against Defendants Cloud Equity Group SIM LLC, Cloud Equity Group SPG LLC, Cloud Equity Investors, LLC, Cloud Equity Group, LLC, Sean Frank (“Frank”), and OCI-HostForWeb, LLC (“OCI”) (collectively “Cloud Equity Defendants”), and Defendants Mohan Nadarajah (“Mohan”), Ray Rajan (“Rajan”), and Host-For-Web, Inc. (“HFW, Inc.”) for breach of contract, fraud and civil conspiracy. The Defendants move to dismiss with prejudice under Rule 12(b)(3) for improper venue. Cloud Equity Defendants also move to dismiss under Rule 12(b)(2) for lack of personal jurisdiction.[1] For the following reasons, Defendants' motions to dismiss under Rule 12(b)(3), (Dkt. 8), (Dkt. 10) (Dkt. 18), are granted without prejudice.

         BACKGROUND

         The following facts are alleged in Plaintiff's Complaint and are presumed true for the purpose of resolving the pending motions. HFW, Inc., a Delaware company, purchased the assets of Plaintiff, an Illinois company, pursuant to an Asset and Stock Purchase Agreement which was executed on August 29, 2014. Mohan and Ray, both residents of Canada and directors of HFW, Inc., had authority to conduct business and execute transactions on behalf of HFW, Inc. A Promissory Note was executed and delivered on August 29, 2014 in the amount of $1, 550, 00 from HFW, Inc. to Plaintiff. To secure the Promissory Note, HFW, Inc. granted Plaintiff a security interest in all the assets transferred in the Asset and Stock Purchase Agreement and pledged all outstanding and issued shares of stock in HFW, Inc., through a Share Pledge Agreement.

         On December 14, 2016, Plaintiff filed suit in the Circuit Court of Cook County, Chancery Division against HFW, Inc., Ray and Mohan claiming they failed to make payments under the Promissory Note. Plaintiff exercised its right to take ownership of all outstanding and issued shares of HFW, Inc. pursuant to the Share Pledge Agreement. On January 26, 2017, Plaintiff and the defendants to the state court litigation signed a Litigation Stay Agreement to allow the HFW, Inc., time to find a third-party buyer.

         “Cloud Equity Group”, collectively consisting of Cloud Equity Group SIM LLC; Cloud Equity Group SPG LLC, Cloud Equity Investors, LLC, and Cloud Equity Group, LLC, all citizens of New York, was secured as a buyer. Frank, a citizen of Delaware, was the authorized representative of Cloud Equity Group. Frank and Cloud Equity Group formed OCI, a Delaware limited liability company, to purchase the assets of HFW, Inc. The purchase was accomplished through an Asset Purchase Agreement (“APA”) executed on March 23, 2017.

         In this case Plaintiff alleges that Ray, Mohan, Frank and Cloud Equity Group represented to Plaintiff that the APA defined term “Target Annual Revenue” would “mean and contain the actual annualized revenue of active service at close for HFW [Inc.].” (Dkt. 1 at ¶19). The Complaint further alleges that on November 10, 2017, Ray confirmed to Plaintiff that “the actual and historical annualized revenue at active service at close was $3, 603, 000.00.” (Dkt. 1 at ¶21). The Complaint explains that the “final draft of the APA, signed by Frank, Ray and Mohan, which Plaintiff's counsel had never previously approved, defined Target Annual Revenue as meaning $3, 603, 000.00.” (Dkt. 1 at ¶22, citing APA).

         Plaintiff alleges that based on these representations, Plaintiff and HFW, Inc., resolved the issues in the prior litigation through a Settlement Agreement, allowing Ray and Mohan to sell the assets of HFW, Inc. to the Cloud Equity Group. Plaintiff alleges that it has since discovered that “the actual and historical revenue was between 10% and 20% lower” than the Target Annual Income. (Id. ¶25). According to Plaintiff the Target Annual Income was artificially inflated in the APA to defraud Plaintiff. Moreover, OCI and Cloud Equity Group failed to make the final payment “even using the fictitious Target Annual Revenue.” (Dkt. 1 at ¶28).

         On January 4, 2019, Plaintiff filed suit in this Court claiming: (1) breach of contract against Cloud Equity Defendants for failing to fulfill their obligations pursuant to the APA; (2) fraud against all Defendants for fraudulently increasing the Target Annual Revenue to induce Plaintiff to release its lien on shares of stock and to enter into a Settlement Agreement in the prior litigation; and 3) conspiracy against the Defendants for entering into the APA to deliberately mislead Plaintiff about the actual and historical annualized revenue of active service at close being $3, 603, 000.00.

         Defendants move to dismiss Rule 12(b)(3) for improper venue because the forum selection clause contained in the APA requires that any litigation arising under it be brought in Delaware. (Dkt. 17 at 2; Dkt. 18 at 2; Dkt. 21 at 1). Cloud Equity Defendants also move to dismiss under Rule 12(b)(3) for lack of personal jurisdiction arguing that Plaintiff “fails to allege any facts establishing personal jurisdiction over the Cloud Equity Defendants.” (Dkt. 17 at 2).

         DISCUSSION

         Defendants argue that because Plaintiff alleges it is a “direct third-party beneficiary of the APA, ” Plaintiff is bound by the forum selection clause in the APA, which requires that any litigation arising under the APA must be brought in Delaware. (Dkt. 8 at 2; Dkt. 10 at 2) (citing Dkt. 1, ¶30). Plaintiff argues that it is not bound to the forum selection clause in the APA because (1) it is not a party to the APA; and (2) the forum selection clause in the Settlement Agreement, signed by all parties, is Illinois. (Dkt. 21 at 2).

         Federal Rule of Civil Procedure 12(b)(3) permits dismissal for improper venue. “A lack of venue challenge, based upon a forum-selection clause, is appropriately brought as a Rule 12(b)(3) motion to dismiss.” Continental Ins. Co. v. M/V Or-sula, 354 F.3d 603, 606-607 (7th Cir. 2003) (citations omitted). Under Rule 12(b)(3), the court must take all allegations in the complaint as true. Deb v. Sirva, Inc., 832 F.3d 800, 809 (7th Cir. 2016). When a defendant challenges venue under Rule 12(b)(3), Plaintiff bears the burden of showing that venue is proper. Retreat Properties, LLC v. KA Designworks Inc., No. 17 C 5608, 2018 WL 4339378, at *8 (N.D. Ill. Sept. 11, 2018).

         The two operative documents in this case, the Settlement Agreement and the APA, contain two different choice of forum selections, Illinois and Delaware, respectively. The governing law clause in the Settlement Agreement states: “This Agreement will be governed by the laws of the State of Illinois and the dispute shall be determined by … a Court of competent jurisdiction in the State of Illinois.” (Dkt. 21, Ex. 1 at 6). The APA, on the other hand, contains a forum selection clause which requires the parties to “submit to the jurisdiction of the courts of the State of Delaware or the courts of the United States located in ...


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