Opinion
651353/11
01-12-2012
David S. Montoya & Scott W. Hartman, Plaintiffs, v. Cousins Chanos Casino, LLC, LISA BLUE BARON & LESLIE DIANE, Defendants.
Plaintiffs: Mark W. Smith Noelle Kowalczyk Smith Valliere PLLC Defendants: Jeffrey C. Dannenberg Kestenbaum, Dannenberg & Klein, LLP
Plaintiffs: Mark W. Smith Noelle Kowalczyk Smith Valliere PLLC
Defendants: Jeffrey C. Dannenberg Kestenbaum, Dannenberg & Klein, LLP
Shirley Werner Kornreich, J.
In this declaratory judgment action, defendants Cousins Chanos Casino, LLC (Cousins), Lisa Blue Baron and Leslie Diane (collectively defendants) move, pursuant to CPLR 3211 (a) (1), (4), (7) and (8), to dismiss the complaint.
I.Background
A.The Complaint
The complaint alleges the following.
In 2007, plaintiffs, David S. Montoya and Scott W. Hartman (collectively plaintiffs), formed Lumax Gaming, Inc. (Lumax), to acquire ownership in the Silver Saddle Saloon and Casino (the Casino) located in Las Vegas, Nevada. At the time Lumax was formed, Saeed Shakeri and his company, Silver Saddle, Inc., owned the Casino and operated it under a Nevada gaming license (Hartman Aff., Ex. D [hereinafter, the Complaint],¶¶ 1, 3, 17). Hartman and Montoya were the only officers and directors of Lumax and were its sole shareholders.
The defendants are all high net worth individuals who, in the aggregate, invested at least $2 million in Lumax. Each defendant was provided with a private placement memorandum (PPM) before he or she invested. The PPM explained, in general terms, that Lumax's business plan was to purchase and operate the Casino, that the process of obtaining a gaming license was difficult and that the defendants might not receive their licenses (Complaint, ¶ 17). The PPM stated that "[t]his is an offering to accredited investors who accept the responsibility for conducting their own investigations and consulting with their own professional advisors in connection with their investment" (Complaint, ¶ 21). The PPM also stated that it only contained selected information regarding Lumax and its principals and that the investors were expected to carry out their own independent examination of Lumax and of the merits and risks of the offering plan (Complaint, ¶ 22).
The PPM explained that: Lumax would purchase the Casino by paying most of the purchase price from money it received from investors and a senior debt holder, Trafalgar Capital Specialized Investment Fund Luxembourg (Trafalgar)(Complaint, ¶ 24); Lumax would receive only the "non-gaming" assets of the Casino; the current owner of the Casino, Shakeri, would lease the Casino from Lumax for up to one year; and after that time, if Lumax could not procure a gaming license, renegotiate the lease or find another licensed operator to take over the Casino, the investors might lose their entire investment (Complaint, ¶¶ 25, 26).
Each investor received a Subscription Agreement that reiterated that he/she was responsible for making his/her own independent investigation into Lumax and its principals. In the Subscription Agreement, each investor expressly acknowledged his/her receipt of the PPM and confirmed that: (1) he/she was "afforded a meaningful opportunity to request, receive and to review all additional information considered by [him/her] to be necessary to verify the accuracy of, or to supplement the information contained in" the PPM; and (2) he/she "had not relied on [Lumax or its officers or directors] in connection with [his/her] investigation of the accuracy of the information or [his/her] investment decision" (Complaint, ¶ 33). Paragraph 9 of the Subscription Agreement stated that the agreement "shall be governed and construed in accordance with the laws of the State of New York" and that "[t]he parties consent to the exclusive jurisdiction of the federal and state courts of the Borough of Manhattan, the State of New York, to adjudicate any dispute arising hereunder" (Hartman Aff., Ex. B).
Although the individual promissory notes, issued pursuant to the Subscription Agreement, does not have an exclusive jurisdiction clause, they do state that they are to be governed by the laws of New York (Hartman Aff., Ex. C, ¶ 15).
Plaintiffs allege that, in accordance with their business plan, they used the funds that the defendants invested to buy the Casino and once they had purchased the Casino, they submitted their applications for gaming licenses. Thereafter, Montoya withdrew his application for a gaming license for "strategic reasons", ostensibly, to reduce the cost and decrease the processing time for the application. Montoya eventually sold his interest in Lumax to Hartman (Complaint, ¶¶ 37, 38).
In May 2009, Lumax ran out of money and was forced to renegotiate the terms of its loan agreement with the senior debt holder, Trafalgar. In exchange for additional capital from Trafalgar, Lumax agreed, inter alia, to a reduction in the period it would have to pay back the loan (Complaint, ¶ 39). Ultimately, the Nevada Gaming Commission declined to rule on Hartman's application for a gaming license, and Hartman sold Lumax to Shakeri.
According to a Nevada complaint, in which plaintiffs as well as Shakeri and his entity Silver Saddle, Inc. are defendants, a license ultimately was granted to Lumax in Shakeri's name, but Shakeri refused to activate the license, instead operating under his own entity, Silver Saddle, Inc. (Dannenberg Aff., Ex. B, Nevada Complaint, ¶ 87).
In December 2010, defendants threatened to sue plaintiffs in Nevada on the ground that plaintiffs had misled them about their investment (Complaint, ¶ 42). In March 2011, in response to those threats, plaintiffs commenced this declaratory judgment action seeking a declaration that: (1) plaintiffs have fully performed their obligations to defendants under the terms of the Subscription Agreement and corresponding promissory notes; (2) any common-law claims based on defendants investment in Lumax are preempted by New York's Martin Act, (NY General Business Law §§ 352 et seq., hereafter the Martin Act); (3) to the extent that defendants seek to assert any claims against the plaintiffs based on defendants' investments in Lumax, those claims must be asserted in New York's state or federal courts and (4) they are entitled to indemnification based on the Subscription Agreements.
B.Defendants File Suit Against Plaintiffs in Nevada
Approximately six weeks after plaintiffs commenced the New York declaratory judgment action, defendants filed a suit against plaintiffs in Nevada. The Nevada action alleges that plaintiffs, together with Shakeri, engaged in fraud, fraudulent concealment and securities fraud in connection with the solicitation of investments; deceptive trade practices; unjust enrichment; conspiracy; breach of fiduciary duties; aiding and abetting breach of fiduciary duties and gross mismanagement (Dannenberg Aff., Ex. B). Plaintiff Montoya filed a motion to dismiss the Nevada action based on the forum selection clause in the Subscription Agreements. At a hearing on that motion on November 15, 2011, Judge Gonzalez stayed the Nevada action for 60 days "for a determination to be made by the New York court as to whether the venue selection clause of the Subscription Agreement with Lumax would apply to Montoya (Transcript, pg. 12, line 23 through pg. 13, line 2 attached to 11/29/11 Dannenberg Letter).
II.Argument
In support of their motion to dismiss the complaint, defendants argue that neither Montoya nor Hartman were signatories to the Subscription Agreement and, as a result, lack standing to bring this declaratory judgment action. Moreover, they claim that the forum selection clause in the Subscription Agreement is inapplicable because the causes of action in the Nevada complaint, common-law and statutory claims, do not arise from the Subscription Agreement. In addition,defendants contend that this action should be dismissed because there is another action pending between the parties in Nevada and this action was commenced solely in an effort to circumvent Nevada's adjudication of defendants' claims.
Defendants also argue that the complaint fails to state a viable cause of action. It is defendants' position that the New York complaint was filed in anticipation of a theoretical set of claims that plaintiffs expected defendants to file in Nevada and, therefore, plaintiffs are seeking an impermissible advisory opinion. Finally, defendants take the position that this court lacks personal jurisdiction over them because they have no contacts with New York and, inasmuch as the dispute involves defendants' investment in a casino in Las Vegas, Nevada, the New York courts have no interest in this dispute.
In opposition, plaintiffs argue that: they have standing to bring this action because they are intended beneficiaries of the agreement and/or are closely related to Lumax, one of the signatories of the agreement; the statutory and common law claims in the Nevada action arise under the Subscription Agreement since the causes of action relate to plaintiffs' alleged fraud, mismanagement and misrepresentation in connection with defendants investment in the Casino; dismissal of this action, which was the first filed, is not warranted; plaintiffs are merely asking the court to declare the parties' respective rights and remedies under the Subscription Agreement; New York Courts routinely enforce contractual forum selection clauses and pursuant to New York's General Obligations Law (GOL) § 5-1402, this court must exercise jurisdiction over the defendants.
III.Discussion
A.Standing
Although plaintiffs are not signatories to the Subscription Agreements, they have standing to maintain this action on the ground that they are "closely related" to Lumax, one of the signatories of the agreement (Freeford Ltd. v Pendelton, 53 AD3d 32, 39 [1st Dept 2008]). In Direct Mail Prod. Servs. Ltd. v MBNA Corp., (2000 WL 1277597, *3, 2000 US Dist LEXIS 12945, *7-8 [SDNY 2000]), the court opined that a non-party may enforce a forum selection clause if the nonparty is "closely related" to one of the signatories. The court explained that "the relationship must be such that the nonparty's enforcement of the forum selection clause is foreseeable by virtue of the relationship between the signatory and the party sought to be bound" [internal quotations and citations omitted].
Here, plaintiffs who are nonparties to the Subscription Agreements, were the only officers and shareholders of Lumax and the only beneficiaries of Lumax's profits and losses under the Subscription Agreements. Under these circumstances, defendants had every reason to foresee that Hartman and Montoya would seek to enforce the forum selection clause in the Subscription Agreements between Lumax and each defendant (see, Freeford Ltd. v Pendelton, 53 AD3d at 39; see also Dovin Constr., Inc. v Raimondo & Sons Constr. Co., Inc., 29 AD3d 364 [1st Dept 2006] [corporate officer has standing to invoke forum selection clause even though not party to subcontract where liability of officer and corporation arise from same alleged facts]).
B.Forum Selection Clause
Section 5-1402 of the GOL provides:
[A]ny person may maintain an action or proceeding against a foreign corporation [or] non-resident . . . where the action or proceeding arises out of or relates to any contract, agreement or undertaking for which a choice of New York law has been made . . . and which (a) is a contract, agreement or undertaking . . relating to any obligation arising out of a transaction covering in the aggregate, not less than one million dollars, and (b) which contains a provision or provisions whereby such foreign corporation or non-resident agrees to submit to the jurisdiction of the courts of this state.
Section 5-1402 "contains a statutory mandate that a clause designating New York as the forum shall' be enforceable, in cases involving $1 million or more, regardless of any inconvenience to the parties" (National Union Fire Ins. Co. of Pittsburgh, Pa. v Worley, 257 AD2d 228, 230 [1st Dept 1999]). It "preclude[s] a New York court from declining jurisdiction even where the only nexus is the contractual agreement (id. [emphasis in the original]).
Indeed, CPLR 327 (b) states that a "court shall not stay or dismiss any action on the ground of inconvenient forum, where the action arises out of or relates to a contract, agreement or undertaking to which section 5-1402 of the general obligations law applies, and the parties to the contract have agreed that the law of this state shall govern their rights or duties in whole or in part." See Sterling Natl. Bank v Eastern Shipping Worldwide, Inc., 35 AD3d 222, 223 (1st Dept 2006)(where party to contract agrees to forum selection, he is precluded from attacking court's jurisdiction on forum non conveniens grounds).
Here, the Subscription Agreement contains both New York choice of law and forum selection clauses. By signing the Subscription Agreement containing the forum selection clause, defendants agreed to submit to the jurisdiction of the New York courts. Moreover, they do not deny that the transaction involved, in the aggregate, more than $1 million. Hence, even though none of the parties resides in New York and almost none of the alleged conduct occurred in New York, the courts will enforce the New York forum selection clause which provides that New York is the exclusive forum to adjudicate disputes arising from the agreement (Hartman Aff., Ex. B, ¶ 9; see International Med. Tech., Inc. v Lintech, LLC, 2000 WL 1449889, *1, 2000 US Dist LEXIS 19522, *3 [SDNY 2000]).
However, even if GOL5-1402 was not applicable, defendants have failed to demonstrate that the forum selection clause is unreasonable (Brooke Group v JCH Syndicate 488, 87 NY2d 530, 534 [1996] [contractual forum selection clauses "are prima facie valid and enforceable unless shown by the resisting party to be unreasonable"]). Such clauses can be set aside if their enforcement would be "unreasonable or unjust" or if there is a showing of "fraud or overreaching, such that a trial in the contractual forum would be so gravely difficult and inconvenient that the challenging party would . . . be deprived of his or her day in court" (Sterling Natl. Bank , 35 AD3d 222 [internalquotation marks and citation omitted]; see also British W. Indies Guar. Trust Co. v Banque Internationale A Luxembourg, 172 AD2d 234 [1st Dept 1991]). Here, defendants, all sophisticated business men and women, have not alleged any fraud or overreaching by plaintiffs with respect to the forum selection clause, and they have failed to demonstrate or even allege that they will be deprived of their day in court if the clause is enforced.
Defendants argument that the forum selection clause is inapplicable because the claims in the Nevada action do not "arise from" the Subscription Agreement is without merit.In fact, defendants' complaint in the Nevada action describes the nature of the claims against Hartman and Montoya as arising "out of a scheme . . . to fraudulently induce [defendants, here] to invest in an enterprise that they knew or should have known was destined to fail, [their] gross mismanagement and self-dealing with respect to the enterprise, and [their] knowing and intentional misrepresentations and omissions of information related to the enterprise before, during and after the demise of the enterprise" (Dannenburg Aff., Ex. B, ¶ 1).
Because of the strong public policy favoring enforcement of forum selection clauses, courts have construed these clauses broadly to encompass tort claims brought in relation to the contract and/or which arise out of the business relationship (see e.g. Freeford Ltd. v Pendleton, 53 AD3d at 36; Caesars Bahamas Inv. Corp. v Baha Mar Joint Venture Holdings, Ltd., 2008 NY Slip Op 32533 [U], 2008 WL 4360436 [Sup Ct, NY County 2008] [forum selection clause sufficiently broad to encompass fraud claim where questions about its intention to go forward with the project were intrinsically tied to the factual circumstances surrounding the Subscription Agreement]).
In Direct Mail Prod. Svcs., Ltd v MBNA Corp. (2000 WL 1277597, *6, 2000 US Dist LEXIS 12945 *16) the court held that the fact that plaintiffs had plead tort claims, rather than breach of contract claims, did not mean that the forum selection clause in the parties' contract did not apply. There, the court reasoned:
[A] forum selection clause should not be defeated by artful pleading of claims not based on the contract containing the clause if those claims grow out of the contractual relationship, or if the gist' of those claims is a breach of that relationship . . . . Thus, the circuit courts have held that a contractually-based forum selection clause will also encompass tort claims if the tort claims ultimately depend on the existence of a contractual relationship' between the parties . . . or if resolution of the claims relates to interpretation of the contract' . . . or if the tort claims involve the same operative facts as a parallel claim for breach of contract.([internal citations omitted]; see also, Triple Z Postal Servs, Inc. v United Parcel Serv., Inc., 13 Misc 3d 1241 [A], 2006 NY Slip Op 52202 [U] at *8-9, [Sup Ct NY County 2006][causes of action in complaint for, inter alia, tortious interference and fraudulent misrepresentation grow out of and are inextricably linked to the parties contractual relationship and are encompassed by the forum selection clause]).
In this case, defendants causes of action for fraud, fraudulent concealment, unjust enrichment, gross mismanagement and self dealing against Hartman and Montoya in the Nevada action grow out of the contractual relationship between the parties and require interpretation of the contract for resolution. Consequently, GOL 5-1402, CPLR 327 (b) and the related case law mandate enforcement of the forum selection clause in the contract, and dismissal is not warranted for lack of jurisdiction or forum non conveniens.
C.Performance Under the Subscription Agreements
CPLR 3001 states that "[t]he supreme court may render a declaratory judgment having the effect of a final judgment as to the rights and other legal relations of the parties to a justiciable controversy whether or not further relief is or could be claimed" (see also, 43 NY Jur2d Declaratory Judgments §§ 4, 22). "The general purpose of the declaratory judgment is to serve some practical end in quieting or stabilizing an uncertain or disputed jural relation either as to present or prospective obligations" (Thome v Alexander & Louisa Calder Found., 70 AD3d 88, 99 [1st Dept 2009]quoting James v Alderton Dock Yards, 256 NY 298, 305 [1931]). Although a court may address and resolve questions of fact in the context of an action for a declaratory judgment (Siegel, NY Prac. § 436, at 739 [5th ed], citing Rockland Power & Light Co. v City of New York, 289 NY 45 [1942]), "the point and the purpose of the relief is to declare the respective legal rights of the parties based on a given set of facts, not to declare findings of fact" (Thome v Alexander & Louisa Calder Foundation, 70 AD3d at 100; see also QBE Ins. Corp. v ADJO Contr. Corp., 32 Misc 3d 1231 [A], NY Slip Op 51508 [U] at *3 [Sup Ct, Nassau County 2011]).
Moreover, "[a] cause of action for a declaratory judgment is unnecessary and inappropriate when the plaintiff has an adequate, alternative remedy in another form of action . . ." (Apple Records v Capitol Records, 137 AD2d 50, 54 [1st Dept 1988] [internal citations omitted]).
In this case, plaintiffs' request for a declaration that they complied in all respects with the Subscription Agreement, requires the court to declare findings of fact, rather than to decide issues of law. This is not the function of a declaratory judgment. Indeed, the declaratory judgment cause of action is unnecessary because plaintiffs can raise the issue of their compliance as a defense in any action defendants may interpose based on breach of the Subscription Agreements.
Also, it appears that plaintiffs are seeking an impermissible advisory opinion from the court to determine whether they have viable defenses to defendants' lawsuit. A declaratory judgment regarding plaintiffs' possible defenses will not have the effect of a final judgment because it will not have any immediate impact and it may never resolve anything (Cuomo v Long Is. Light. Co., 71 NY2d 349, 354 [1988] ["the courts may not issue judicial decisions that can have no immediate effect and may never resolve anything"] [internal quotation marks and citations omitted];see e.g. Olszewski v Park Terrace Gardens, Inc., 27 AD3d 308[1st Dept 2006]) .
For the reasons stated above, plaintiffs request for a declaratory judgment that is entitled to indemnification based on the Subscription Agreement also is dismissed.
C.The Martin Act
Plaintiffs' application seeking a declaration that defendants' common law claims are pre-empted by the Martin Act, also seeks an impermissible advisory opinion and is dismissed. The court, nevertheless, notes that the Martin Act regulates the purchase and sale of securities in New York. It "authorizes the Attorney General to investigate and enjoin fraudulent practices in the marketing of stocks, bonds and other securities within or from New York (Kerusa Co., LLC v W10Z/515 Real Estate Ltd. Partnership, 12 NY3d 236, 243 [2009],citing GBL §§ 352, 353).
It is well settled that there is no private right of action for damages under the Martin Act (CPC Int'l.v McKesson Corp., 70 NY2d 268, 276-277 [1987]). However, in CMMF, LLC v J.P. Morgan Inv. Mgt Inc. (78 AD3d 562, 564 [1st Dept 2010]), the First Department stated:
There is nothing in the plain language of the Martin Act, its legislative history or appellate level decisions in this State that supports defendant's argument that the act preempts otherwise validly pleaded common-law causes of action. Indeed, we observed also that where the facts as alleged in a complaint fit within a cognizable legal theory and are not precluded by the Martin Act because they do(internal quotation marks and citations omitted).
not rely entirely on alleged omissions from filings required by the Martin Act and the Attorney General's implementing regulations, such action will be permitted to proceed and a motion to dismiss predicated on a Martin Act preemption theory will be properly denied. The key therefore, is whether the causes of action in question fit within a cognizable legal theory without relying wholly on the provisions of the Martin
Act
Most recently, in Assured Guar. (UK) Ltd. v J.P. Morgan Inv. Mgt. Inc. (__NE2d__, 2011 NY Slip Op 09162, 2011 WL 6338898, 2011 NY LEXIS 3658 [2011]), the New York Court of Appeals affirmed a First Department decision which found that the Martin Act did not pre-empt common law claims for breach of fiduciary duty and gross negligence. In that decision, the Court of Appeals stated that "an injured investor may bring a common-law claim (for fraud or otherwise) that is not entirely dependent on the Martin Act for its viability. Mere overlap between the common law and the Martin Act is not enough to extinguish common law remedies" (id. At *6, **12). Thus, to the extent that the causes of actions in defendants' complaint involve common law claims that are not dependent on the Martin Act, those claims are not preempted by the Martin Act (see Assured Guar. [UK] Ltd. v J.P. Morgan Inv. Mgt. Inc., 80 AD3d 293, 304 [1st Dept 2010], aff'd __NE2d __, 2011 NY Slip Op 09162, 2011 WL 6338898 [2011]). Accordingly. it is
ORDERED that defendants Cousins Chanos Casino, LLC, Lisa Blue Baron and Leslie Diane's motion to dismiss the complaint is granted to the extent of dismissing the application for a declaration that: (1) plaintiffs have fully performed their obligations under the terms of the Subscription Agreements, notes and the law; (2) the common law claims that defendants have asserted against plaintiffs are barred by the Martin Act; and (4) defendants must indemnify plaintiffs to the extent that the claims are based on allegations that they relied on statements made or omitted by plaintiffs when they decided to invest; and it is further
ORDERED that the branch of the motion seeking to dismiss the remainder of the complaint is denied; and it is further
ORDERED that defendants are to answer the complaint within 20 days; and it is further
ORDERED that the parties are to appear in Part 54, 60 Centre St, rm. 228, New York, NY, on February 14. 2012, for a preliminary conference.
ENTER:
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J.S.C.