Opinion
No. X05 CV 09 60027474S
September 24, 2010
MEMORANDUM OF DECISION ON DEFENDANTS' MOTION TO STAY (#101)
Introduction
Before the court is the defendants' motion to stay these proceedings pending the outcome of a related case brought by the defendants against these same plaintiffs in the courts of New York State. Competing claims and litigation over a problematic joint venture have been filed both here in Connecticut and in New York courts. A hearing was held before this court following an exchange of briefs by the parties on the issues. This memorandum of decision is the result.
The plaintiffs in the present case are an entity called Krell Industries, Inc. ("Old Krell"), and the two individuals who were its owners, Rondi D'Agostino and Daniel D'Agostino. The plaintiffs initiated this action against a number of defendants consisting of several individuals and entities. These entities are KP Acquisition Partners, LLC, and KP Capital Partners, LLC (collectively, "KP Partners"), and the eponymously named limited liability company Krell Investor, LLC ("KI Investor"). The remaining defendants are five individuals allegedly affiliated in some form or another with one or more of these entities: Ling Kwok, Noah Smith, Charles Finelli, Walter Schneider and John Verbeek. On April 3, 2009, Old Krell, a twenty-nine-year-old manufacturer of high-end audio equipment, entered into a joint venture with KI Investor to create a new entity to be called Krell Industries, LLC ("New Krell"). Several agreements were executed on that date to memorialize the terms of this joint venture. Pursuant an LLC Agreement ("LLC Agreement") that divided up the ownership of the new venture, Old Krell retained a 60% equity stake in New Krell, while KI Investor held the remaining 40% equity. Pursuant to a Contribution Agreement ("Contribution Agreement"), KI Investor contributed the sum of $1,200,000 to New Krell, which assumed substantially all of the assets of Old Krell, along with certain specified liabilities of Old Krell. To ensure some continuity in the management team, the D'Agostinos, Rondi and Daniel, also executed individual Employment Agreements ("Employment Agreements") with New Krell. In addition, KP Acquisition Partners and New Krell entered into a Management Agreement ("Management Agreement") that detailed the working relationship between the parties and set forth their respective responsibilities.
Krell Investor LLC, however, is the controlling member in New Krell in that it may appoint three of the five managers on the Board of Managers, while Old Krell may only appoint two managers.
The joint venture between the parties that gave rise to this "New Krell" did not prove to be a harmonious one. In addition to the instant matter, several lawsuits were also brought by various factions in October and November of 2009, both here in Superior Court, as well as in the State of New York. On November 5, 2009, the present action was commenced by service of process. The plaintiffs allege that the defendants used fraudulent, overreaching and unconscionable tactics to usurp the assets of Old Krell at a discount. They also allege a plan by the defendants to exercise improper control over New Krell, despite having purchased only a minority interest in the company.
The plaintiffs make a number of allegations, including fraud; fraudulent concealment; fraud in the inducement; professional negligence; gross negligence; breach of fiduciary duties; aiding and abetting breach of fiduciary duties; civil theft; conversion; violations of the Connecticut Unfair Trade Practices Act, breach of contract, tortious interference with contractual relations and business expectancies, unjust enrichment, conversion, civil theft pursuant to General Statutes § 52-564. They also seek an accounting, imposition of a constructive trust and professional liability.
In early October 2009, Michael Bellas, the husband of the plaintiff Rondi D'Agostino, commenced an action in New York against New Krell, seeking to recover some $200,000 allegedly due and payable to him under the terms of a note. On October 20, 2009, the plaintiff Daniel D'Agostino commenced an action in Connecticut against New Krell and the defendant Ling Kwok, seeking to recover wages allegedly owed to him pursuant to his Employment Agreement. On November 5, 2009, both KI Investor and New Krell commenced an action in New York against the named plaintiffs in this case, as well as Michael Bellas and another individual. That New York suit alleges breach of the Employment Agreements and the Contribution Agreement, breach of fiduciary duty, tortious interference with contract and prospective business relations, conversion. It also seeks indemnification.
The defendants have filed a motion to stay the present proceedings here in Superior Court, pending the outcome of certain New York litigation captioned, Krell Investor LLC v. KI, Inc., (Index No. 650652/200). The plaintiffs are opposed to the stay. The court will discuss the applicable legal standards for the granting of stays in light of the claims of the parties, and the language of the joint venture agreements between them.
I The Legal Standard
"[W]here an action is pending in one state, the court of another state in which another action, involving the same parties and subject matter, is brought, may grant a stay of proceedings in the latter action." Sauter v. Sauter, 4 Conn.App. 581, 585 (1985). "In the absence of a statutory mandate, the granting of an application or a motion for a stay of an action or proceeding is addressed to the discretion of the trial court . . . [T]he power to stay proceedings is incidental to the power inherent in every court to control the disposition of the causes on its docket with economy of time and effort for itself, for counsel, and for litigants. How this can best be done calls for the exercise of judgment, which must weigh competing interests and maintain an even balance." (Citation omitted; internal quotation marks omitted.) Lee v. Harlow, Adams Friedman, P.C., 116 Conn.App. 289, 311-12, 975 A.2d 715 (2009).
In making a determination as to whether to issue a stay, the court is therefore required to balance the equities. Both sides rely upon Griffin Hospital v. Commission on Hospitals Health Care, 196 Conn. 451, 458, 493 A.2d 229 (1985), which counsels the court to apply "familiar equitable principles in the context of adjusting the rights of the parties during the pendency of the litigation until a final determination on the merits." While approving a general `balancing of the equities' test as the benchmark for granting or denying a motion for stay, Griffin Hospital also recites a list of non-exclusive factors that a court may consider, including the likely outcome on appeal, whether the movant faces irreparable prospective harm from the enforcement of the judgment, and the effect of the delay occasioned by a stay upon the non-moving parties. Host America Corp. v. Ramsey, Superior Court, judicial district of New Haven, Docket No. CV 064019497 (March 7, 2007, Lager, J.).
In the absence of a single, all-inclusive test, Connecticut courts have taken note of at least six factors in ruling on motions to stay. They are as follows: (i) similarity of subject matter between actions; (ii) promotion of judicial economy; (iii) possibility of causing injustice or prejudice to the plaintiff; (iv) whether the foreign suit was initiated to the forestall domestic suit; (v) possibility of conflicting judicial decisions; and (vi) ability of the court to monitor parallel litigation. See Lincoln Life Annuity Co. of NY v. Lockwood Pension Services, Inc., supra, Docket No. CV 08 5019142. The court will discuss each of these considerations in turn.
Discussion Similarity of Parties and Subject Matter
The defendants argue that the parties involved in this action and the New York action are substantially similar. Although the defendants concede that there is not complete congruity between the parties, they note that all of the plaintiffs in the present action are also defendants in New York, and that KI Investor, a defendant in the present action, is a plaintiff in New York. In response, the plaintiffs argue that at least seven parties to this action are not parties to the New York action. The plaintiffs further argue that several of those parties may not be subject to jurisdiction in New York, and that adding them to that action would require the expenditure of significant resources.
A motion to stay is appropriate when a domestic action involves "the same parties and subject matter" as a foreign action. Sauter v. Sauter, supra, 4 Conn.App. 584. However, a stay does not require that each action — the foreign and domestic — have identical claims and parties. "It is within this [court's] discretion to grant a stay of proceedings when there are some parties named in a latter action that are not named in a previous action involving the same issues." (Citations omitted; internal quotation marks omitted.) Lincoln Life Annuity Co. of NY v. Lockwood Pension Services, Inc., Superior Court, judicial district of Hartford, Docket No. CV 08 5019142 (November 28, 2008, Domnarski, J.). In Lewis v. Primerica Corp., 1990 WL 271150 (Conn.Super. 1990), the court granted a stay, even though at least four defendants to a Connecticut action were not parties in similar proceeding in New York state and federal court. The court stated, "[T]he issues for resolution in the New York actions are virtually the same and/or have as their lynchpin the resolution of the issues in the instant case. The court finds that any stay ordered in this case will postpone the instant action, and not usurp any claims, if actionable, which the plaintiff may have against any individuals not named in the New York actions, but who are named in this action." Id.; see also Christophersen v. Christophersen, Superior Court, complex litigation docket at Stamford, Docket No. X05 CV 085009597 (March 24, 2009, Blawie, J.) (granting a motion to stay a Connecticut proceeding that included two defendant banks, in addition to others litigating a trust in New York).
The lack of congruity as to all parties in this action and the New York action is not dispositive. See Lincoln Life Annuity Co. of NY v. Lockwood Pension Services, Inc., supra, Docket No. CV 08 5019142. Despite the plaintiffs' assertion that a stay should be denied on account of the difference in the parties, the plaintiffs have not demonstrated to this court's satisfaction that the difference in parties makes the issues for resolution in each action sufficiently distinct. Additionally, since at least five of the seven parties that are not litigants in the New York action are either residents of New York, or have their principle place of business in New York, the difficulty of adding the majority of those parties to the New York action should not be overstated.
It is worth noting that in the plaintiffs' memorandum in support of their motion to dismiss the New York action, it has been brought to the court's attention that the plaintiffs themselves represent to the New York court that "[t]he parties to the New York Action are substantially similar to the parties in the Connecticut actions." (Mem. of Law in Supp. of Pre-Answer Mot. to Dismiss at 28.)
KP Acquisition Partners, LLC, and KP Capital Partners, LLC, have their principal place of business in New York; Ling Kwok, Charles Finelli and Noah Smith are New York Residents. Walter Schneider and John Verbeek are Connecticut residents. (CT Compl. ¶ 8-15.)
The defendants also argue that the subject matter of the present action and the New York action are substantially similar. Although some different theories of recovery are asserted, the defendants argue that the same material facts are alleged in both complaints, and that the dispute between the parties arises from the same facts, events and contracts. In response, the plaintiffs claim that although the Connecticut complaint asserts a wide array of claims, the New York complaint is fairly limited. The plaintiffs further argue that if this action is stayed, it is likely that some causes of action, particularly those that the plaintiffs assert under Connecticut statutes, will be lost.
It is not required that two actions have identical issues or theories of recovery, as a stay may be granted where "the issues for resolution . . . are virtually the same and/or have as their lynchpin the resolution of the issues in the instant case." Lewis, supra, 1990 WL 271150 at 4. Although each complaint may assert different causes of action, the plaintiffs have not demonstrated to the court's satisfaction that the central issues underlying the New York and Connecticut actions differ substantively. Again, contrary to their arguments before this court, the plaintiffs represent in their memorandum seeking to dismiss the New York action that "both suits arise out of the same transaction and involve substantially similar issues." (Mem. of Law in Supp. of Pre-Answer Mot. to Dismiss at 28.) Further, the plaintiffs' concern that some of their causes of action will be "lost" if this action is stayed is misplaced. New York state courts are obligated to apply Connecticut law to the extent it is relevant. See CPLR § 4511(a) ("Every court shall take judicial notice without request of the common law, constitutions and public statutes of the United States and of every state"). Additionally, imposing a stay will not usurp any claims that the plaintiffs are unable to assert in a New York forum, as any actionable claims will be preserved in this court pending the resolution of the New York action. See Lincoln Life Annuity Co. of NY v. Lockwood Pension Services, Inc., supra, Docket No. CV 08 5019142.
Promotion of Judicial Economy and Avoidance of Inconsistent Judgments
The defendants allege that simultaneous litigation of the Connecticut and New York actions will create tremendous inefficiencies for both the courts and the parties. They argue that since both actions involve substantially similar factual and legal issues, litigation in more than one forum is unnecessary. Although the plaintiffs do not disagree that litigating this dispute in one forum would improve judicial economy, and reduce the risk of inconsistent judgments, they maintain that if litigation is to proceed in only one forum, that forum should be Connecticut.
It is no mystery why the promotion of judicial economy was listed as first and foremost by the court in Lincoln Life Annuity, supra, as judicial economy "is overarching and must control. It would allow the parties to concentrate their time and energies in one forum, thereby avoiding unnecessary expense, duplications of pleadings and discovery, confusion, and perhaps inconsistent rulings. Single forum litigation will also discourage races to the courthouse and thereby avoid the dissipation of the resources of all concerned." Travelers Ins. Co. v. Homwet Corp., Superior Court, judicial district of Hartford, Docket No. CV 95 0550685 (September 27, 1997, Teller, J.) (granting a motion to stay for judicial economy with similar actions in Connecticut and New Jersey).
Another articulated goal is the desirability of avoiding inconsistent judicial decisions. Where two actions are similar, "there is a potential for conflicting judicial decisions, conflicting decisions which create a confused and unsettled state of law [that] should be avoided if possible." (Citations omitted; internal quotation marks omitted) Lincoln Life Annuity Co. of NY v. Lockwood Pension Services, Inc., supra, Docket No. CV 08 5019142. Another court phrased the issue in more colorful terms. Permitting parallel actions to go forward in different jurisdictions, without a stay as to either, puts both courts in "a continuous Alphonse-Gaston mode, and invites the litigants to remain on a perpetual Sysiphus type round trip between the two states . . . [and can] encourage forum shopping and condone procedural gamesmanship at the expense of the interests of justice." (Citations omitted; internal quotation marks omitted.) Travelers Ins. Co. v. Homwet Corp., supra, Docket No. CV 95 0550685.
It goes without saying that a stay should be denied where an injustice or prejudice would be caused to the non-moving party. Sauter v. Sauter, supra, 4 Conn.App. 585. However, any prejudice a plaintiff may arguably suffer as a result of a stay is limited, because "a stay, unlike a dismissal, leaves the court in a position to monitor the progress being made in the parallel litigation, and to reassert its jurisdiction over the parties' dispute if the interests of justice so dictate." Travelers Ins. Co. v. Homwet Corp., supra, Docket No. CV 95 0550685.
Single forum litigation "[allows] the parties to concentrate their time and energies in one forum, thereby avoiding unnecessary expense, duplications of pleadings and discovery, confusion, and perhaps inconsistent rulings." Id. As previously stated, the parties agree that both actions require interpretation of the same contracts and course of dealings between the parties. It appears that all of the parties prefer the litigation of this dispute in a single forum, albeit they disagree as to which forum is more appropriate. Granting a stay will help to ensure that result, while denying a stay undercuts judicial economy, and creates the genuine risk of dual litigation.
Timing of the Actions
The respective dates that each parallel action was commenced is an additional factor used by our courts in evaluating the merits of a motion to stay. A stay is often inappropriate where a Connecticut action has preceded a foreign action. "[T]he court in which the first action is commenced cannot be ousted of, nor will it yield, jurisdiction by reason of the subsequent commencement of another action between the same parties for the same cause of action in another state or country." Neutrocrete Systems, Inc. v. Everett Corp., Superior Court, judicial district of New Haven, Docket No. CV 05 4009574 (November 3, 2005, Lopez, J.) ( 40 Conn. L. Rptr. 288) (denying a motion to stay where the Connecticut action commenced prior to the New York action). A stay, however, is often appropriate if the Connecticut action commences after the foreign action. See Sacks Distributors Corp. v. Advanced Digital Data, Superior Court, judicial district of Hartford, Docket No. CV 06 5004113 (December 13, 2006, Wagner, J.T.R.) (granting a stay in part stating that because the Connecticut proceeding was commenced after the foreign proceeding). However, the winner of a "race to the courthouse" is not necessarily always the winner of any disputed motion to stay. A stay should not be granted if under the circumstances "it appears that the foreign suit was instituted merely to forestall the domestic suit." Sauter v. Sauter, supra, 4 Conn.App. 585.
The New York action was fully commenced there on November 5, 2009, when the summons and complaint in that action were filed. See CPLR § 304. Although the plaintiffs maintain that the Connecticut action was also commenced on November 5, 2009, the date of service upon the defendant Walter Schneider, the defendants argue that the action was not fully commenced until all of the remaining defendants were served several days later.
In Connecticut, "an action is commenced on the date of service of the writ upon the defendant." Valley Cable Vision, Inc. v. Public Utilities Commission, 175 Conn. 30, 33 (1978). As the defendant Walter Schneider was served on November 5, 2009, this action commenced on that date. Although the defendants claim that this action was initiated later, they have not provided any authority for the assertion that a Connecticut action is not considered properly commenced until all defendants have been served. But cf. Skaggs v. Cline, Superior Court, judicial district of New London, Docket No. 528122 (July 15, 1995, Hurley, J.) ( 15 Conn. L. Rptr. 100) (where one defendant was served three days before a second defendant, finding that the action commenced on the date that the first defendant was served).
The plaintiffs further allege that the defendants initiated the New York action merely to forestall the present action, making a stay inappropriate. A motion to stay should not be granted if "it appears that the foreign suit was instituted merely to forestall the domestic suit." Sauter v. Sauter, supra, 4 Conn.App. 585. However, the court finds that contrary to the plaintiffs' argument, New York is an entirely reasonable and expected forum in which to resolve any disputes between these parties. Four of the contracts signed by the plaintiffs each contain a forum selection clause (more fully discussed, infra.). These terms were agreed to by the plaintiffs themselves in creating this joint venture. Exclusive jurisdiction is vested in the state of New York by the explicit terms of those agreements. (Employment Agreements ¶ 15; Contribution Agreement ¶ 17; Management Agreement ¶ 14.) In addition, the LLC Agreement that established New Krell also contains a forum selection clause that gives non-exclusive jurisdiction to the state of New York. (LLC Agreement ¶ 8.12.) In light of the foregoing, the court finds that the defendants named in the Connecticut case had a plausible and reasonable basis for proceeding as plaintiffs in a New York forum. It has not adequately been demonstrated that the New York action was commenced merely to forestall the present case. In light of this, the timing of the respective actions clearly cannot play a dispositive role in granting or denying the motion to stay.
Contractual Forum Selection Clauses
The defendants maintain that the Employment Agreements, Contribution Agreement and Management Agreement signed by the plaintiffs each contain an exclusive New York forum selection clause that warrants the granting of the stay they are seeking. In contrast, the plaintiffs maintain that the LLC Agreement should be considered the controlling contract, and further argue that the LLC Agreement's forum selection clause is both non-exclusive as well as unenforceable. Therefore, it is permissible for the plaintiffs to file suit in a Connecticut forum.
As previously stated, the Employment Agreements, Contribution Agreement and Management Agreement each contain a New York choice of law provision. It states as follows: "This Agreement and the legal relations among the parties hereto will be governed by and construed in accordance with the internal substantive laws of the State of New York . . . as to all matters, including without limitation matters of validity, construction, effect, performance and remedies." (Employment Agreements ¶ 15; Contribution Agreement ¶ 17; Management Agreement ¶ 14.)
The Connecticut courts have applied the Section 187 of the Restatement (Second) of Contracts (1981) to assess the validity of a choice of law provision: "Parties to a contract generally are allowed to select the law that will govern their contract, unless either: (a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties' choice, or (b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which, under the rule of § 188, would be the state of the applicable law in the absence of an effective choice of law by the parties."
Since multiple parties to each of the various agreements are residents of New York, or have their primary place of business in New York, it cannot be concluded that the defendants had no reasonable basis for selecting a New York forum. Further, no persuasive argument has been presented that upholding a New York choice of law would contradict fundamental Connecticut policy. The choice of law provision is not unenforceable on such grounds. Therefore, for purposes of this motion to stay, the court gives weight to the New York choice of law provisions found in the agreements.
The plaintiffs suggest that the choice of law provisions contained in the Agreements are unenforceable under New York Gen Oblig. Law § 5-1401, which states that the parties to any agreement covering in the aggregate two hundred and fifty thousand dollars or more may agree that New York law governs their respective rights and duties, regardless of whether the contract bears a reasonable relation to New York. As the plaintiffs note, the statute states: "this section shall not apply to any contract, agreement or undertaking (a) for labor or personal services . . ."; a clause they argue makes the choice of law provisions contained in the Employment Agreements unenforceable. However, New York Gen Oblig. Law § 5-1401, also states: "Nothing contained in this section shall be construed to limit or deny the enforcement of any provision respecting choice of law in any other contract, agreement or undertaking." As the application of New York Gen Oblig. Law § 5-1401 makes clear, although the statute may require New York courts to enforce choice of law provisions where they meet the criteria detailed in the statute, the statute has no affect on the validity of choice of law provisions that do not meet such criteria. See Radioactive, J. V. v. Manson, 153 F.Sup.2d 462, 470 (S.D.N.Y. 2001) (rejecting the defendants' argument that New York Gen Oblig. Law § 5-1401 created an exception that personal service contracts containing a choice of law provision should be governed by a center of gravity test and stating: "[t]he exclusion of personal service contracts from that law's purview merely establishes that the older reasonable basis standard still applies to choice of law clauses in those contracts"). Accordingly, New York Gen Oblig. Law § 5-1401 does not render the choice of law provisions contained in the Employment Agreements per se unenforceable.
Although there is little authority on the precise weight to be given a contractual forum selection clause when analyzing a motion to stay, at least one court has considered such a clause to be a significant factor, and granted a stay. In Sacks Distributors Corp. v. Advanced Digital Data, supra, Docket No. CV 06 5004113, the court granted a motion to stay where the controlling contract contained a forum selection clause of that foreign state, and an action had been commenced there. The presence of "a forum selection clause does not operate to strip the court of jurisdiction when jurisdiction is otherwise proper," but instead, "presents the question of whether it is reasonable for the court to exercise its jurisdiction in the particular circumstances of the case." (Citations omitted.) Colemont Ins. Brokers of Connecticut, LLC v. Byrne, Superior Court, judicial district of New Britain, Docket No. CV 074015231 (February 25, 2008, Pittman, J.) ( 45 Conn. L. Rptr. 52). A forum selection clause is unreasonable and unenforceable if it is shown to have been procured through fraud, undue influence, or overweening bargaining power, or if "the moving party can `clearly' show that enforcing the clause `would be unreasonable or unjust' . . . [by showing] the court that litigating in the selected forum is so inconvenient and difficult that it would be denied its day in court." Id.
II Enforceability of the Agreements The Employment Agreements, Management Agreement Contribution Agreement
The court will now examine the language of the agreements themselves. The Employment Agreements, Contribution Agreement and Management Agreement each contain the same New York forum selection clause. The clause states: "Each of the parties hereto irrevocably submits to the exclusive jurisdiction of the federal and state courts located in the State of New York, New York County, for the purposes of any such action or proceeding arising out of this Agreement or any transaction contemplated hereby. (Employment Agreements ¶ 15; Contribution Agreement ¶ 17; Management Agreement ¶ 14). Several of the allegations, prayers for relief and remedies sought in the plaintiffs' complaint make explicit reference to these agreements.
The parties to the Management Agreement are New Krell and KP Acquisition Partners, LLC. Since none of the plaintiffs in the present action is a party to the Management Agreement, the plaintiffs argue that the forum selection clause in the Management Agreement is inapplicable to the present case. However, this argument is undermined by the plaintiffs' own pleadings. The plaintiffs have alleged that that KP Acquisition Partners, LLC, breached a duty of care owed to the plaintiffs pursuant to the Management Agreement. (Complaint ¶ 156-58.) Since the plaintiffs have made allegations arising out of the Management Agreement and New Krell and KP Acquisition Partners, LLC, are both parties to the Management Agreement, the forum selection clause remains applicable as to those parties, and accordingly, the present action.
For example, the complaint alleges that Ling Kwok, in his capacity as manager, improperly terminated the employment of the D'Agostinos without cause "in violation of the Founders' respective employment agreements with the company." (Complaint ¶ 62.) In count one for fraud, fraudulent inducement and fraudulent concealment, it is alleged that the defendants made "material misrepresentations to the Plaintiffs . . . [that] were not expressly stated or contradicted in the Employment Agreements and other transactional documents." (Complaint ¶ 70.) In the claim for relief as to count one, it is requested that the court order the Employment Agreements null and void. (Complaint ¶ 45). In counts two, three and five for tortious interference with contractual relations, it is further alleged that the defendants "acted separately and in concert to intentionally interfere with Plaintiffs' contracts, including procuring breaches of some, all without any justification." (Complaint ¶¶ 76, 80, 88.) In count nineteen for professional liability, it is alleged that KP Acquisition Partners, LLC, breached a duty of care owed to the plaintiffs pursuant to the Management Agreement. (Complaint ¶¶ 156-58.)
Before the court addresses the parties' arguments regarding the exclusivity of the forum selection clauses, it must first address whether the forum selection clauses themselves are enforceable. The plaintiffs argue, inter alia, that the forum selection clauses contained in the Employment Agreements, Management Agreement and Contribution Agreement are unenforceable, as the complaint alleges fraud with respect to these agreements and the events arising from them. The defendants, however, maintain that the forum selection clauses remain enforceable because the plaintiffs have alleged fraud only generally, and not with respect to the forum selection clauses themselves.
Since a determination of whether fraud invalidates a forum selection clause requires an examination of the substantive allegations in the complaint, the court will apply New York law in its analysis. New York generally applies the severability concept of contract construction to forum selection clauses. This means that where a contract is contested on the grounds of fraud, the fraud must be shown with respect to the clause itself. See Studebaker-Worthington Leasing v. New Concepts, 887 N.Y.S.2d 752, 759 (N.Y. App. Term 2009). However, the New York courts have recognized an exception that "where a party alleges that a contract is void ab initio, the doctrine of separable contracts is inapplicable," such that if the "plaintiff's allegations of fraud pervading the entire Agreement would render the entire Agreement void, the forum selection clause contained therein is unenforceable." Desola Group v. Coors Brewing Co., 199 A.D.2d 141, 605 N.Y.S.2d 83 (App. Div. 1993) (declining to enforce a Colorado forum selection clause where the plaintiff alleged that the agreement was not intended to constitute a binding contract and the defendant fraudulently misrepresented the sole purpose of the agreement); see also Armco Inc. v. North Atlantic Ins. Co. Ltd., 68 F.Sup.2d 330, 340 (S.D.N.Y. 1999) (declining to enforce a forum selection clause where the alleged fraud predates the sale contract at issue).
Although no Connecticut authority has directly stated that choice of law should be applied when determining the enforceability of a forum selection clause, one court has suggested that where there is a choice of law provision, a court should apply the law selected by the parties: "Barring choice of law provisions courts apply Connecticut law to address the issue of whether a forum selection clause is unenforceable, not the law of the state of the selected forum." Powell v. Spruce Peak Realty, LLC, Superior Court, judicial district of Middlesex, Docket No. CV 09 5006181 (September 27, 2009, Jones, J.).
In Shalam v. KPMG, 2006 NY Slip Op 51697 (N.Y. Sup. Ct. 2006), aff'd 843 N.Y.S.2d 17 (N.Y. App. Div. 2007), the Supreme Court of New York, Commercial Division, found a forum selection clause unenforceable where the plaintiff alleged that the defendant had issued false and misleading statements and conspired in advance to execute transactions in such a way as to deprive the plaintiff of the benefit of his bargain. Judge Fried stated, "[A]lthough there are no allegations that the clause itself was the subject of adhesion or fraud, plaintiff has alleged sufficient facts from which to infer that [defendant] engaged in a scheme, that included a number of pre-contract activities, and that the contracts it drafted on his behalf were a ruse, or part of a deception or sham transaction, which is enough, at the pleading stage, to deny enforcement of the forum selection clause." Id.
In the present case, the plaintiffs allege that defendant, KP Partners, "using fraudulent, overreaching and unconscionable tactics . . . launched a scheme to usurp the assets of Old Krell at a discount, and exert complete control over New Krell . . . culminating a classic lockout of the Plaintiffs from the business they founded." (Complaint ¶ 2.) The plaintiffs further allege that the defendant Kwok knew that KP Partners was providing inadequate consideration for the deal, but was willing to take advantage of the financial condition of Old Krell and execute the deal. (Complaint ¶ 41.) Additionally, the plaintiffs allege that prior to the execution of the agreements, the defendants KI Investor, Smith and Kwok represented that Daniel and Rondi D'Agastino would continue to run New Krell after it was formed, but had the contrary intent to secure the deal, and then kick the plaintiffs out of their company. (Complaint ¶ 31.) It is further alleged the defendant KP Partners' falsely represented that it was a fully funded private equity fund; falsely represented that it would provide further financing when necessary after the closing of the transaction; constructively discharged the D'Agostinos as officers and managing members of New Krell, and locked them out of New Krell's business and premises. (Complaint ¶ 3.)
In their claims for relief, the plaintiffs have also sought complete rescission of the agreements as an alternate remedy pursuant to their fraud claim. (Complaint ¶ 45.) Based on the aforementioned allegations, the complaint alleges sufficient facts that if proven, would demonstrate that the contracts executed in connection with the transaction were part of a fraudulent scheme to take over New Krell. Similar to the plaintiffs in Shalam, the plaintiffs have alleged that the contracts were drafted and reviewed by counsel that did not represent their interests, that insufficient consideration was offered for the transaction, and that the defendants misled them as to the "nature or purpose of the contract[s] containing the choice of forum provision[s]" by fraudulently asserting that the D'Agostinos would continue to manage New Krell and then subsequently ousting them from the company. See Shalam, supra, 2006 NY Slip Op 51697 at 7; (Complaint ¶¶ 31, 41, 42.) Thus, given the plaintiffs' allegations of pre-contract fraudulent acts and that each agreement was permeated with fraud, the court finds that the forum selection clauses contained in the agreements are of little weight, if any, in its present analysis. See Desola Group v. Coors Brewing Co., supra, 605 N.Y.S.2d 83-84. As such, the court will not address the parties' arguments regarding the exclusivity of the forum selection clauses in these three agreements.
The propriety of giving little weight to the Agreements' forum selection clause on the basis of fraud while still giving effect to a choice of law provision contained in same contract is worth mentioning. In briefing and arguing this motion, the plaintiffs' have not alleged that fraud invalidates the choice of law provisions contained in the agreements, and the parties have addressed the issues using both Connecticut and New York law. As it is not the province of this court to formulate arguments for the parties, this court will not address the choice of law issue, as in deciding this motion, it would not have altered the outcome.
The LLC Agreement
The LLC Agreement contains a forum selection clause that states: "Each party also hereby irrevocably submits to the non-exclusive jurisdiction of the courts of the State of New York County and of the United States of America located in New York county for any and all actions, suits or proceedings arising out of or relating to this Agreement or any of the matters referred to herein." (LLC Agreement ¶ 8.12.)
The plaintiffs correctly state that the LLC Agreement contemplates forum selection that is non-exclusive to the state of New York. "Absent clear language, a court will not interpret a forum selection clause to indicate the parties intended to make jurisdiction exclusive." (Citations omitted; internal quotation marks omitted.) Prestancia Management Group, Inc. v. Virginia Heritage Foundation, 2005 WL 1364616 at 7 (Del. Ch. 2005). When a forum selection clause is non-exclusive, the parties have the option of litigating in the selected forum, but are also permitted to litigate elsewhere. See Republic Environmental Systems, Inc. v. RESI Acquisition, 1999 WL 464521 at 2 (Del.Super.Ct. 1999); see also IDV North America, Inc. v. Saronno, Superior Court, judicial district of Hartford, Docket No. CV 99 058059 (September 9, 1999, Teller, J.) ("the clause will generally not be enforced without some further language indicating the parties' intent to make jurisdiction exclusive"). Thus, based on the forum selection clause found in the LLC Agreement, the parties have the non-exclusive option of litigating in New York.
LLC Agreement contains a choice of law provision that states: "This Agreement shall be governed by and construed in accordance with, the laws of the State of Delaware, without giving effect to contrary choice of law principles of such State." (LLC Agreement ¶ 8.12.) Although Delaware choice of law may be applicable to the construction and enforceability of the forum selection clause contained in the LLC Agreement, Delaware and Connecticut law do not differ significantly on the matters discussed herein, and certain references to the law of both states are included for illustrative purposes.
The plaintiffs argue that there is a substantial nexus between this action and Connecticut that renders the forum selection clause contained in the LLC Agreement unjust. A forum selection clause may be held unenforceable if "the moving party can `clearly' show that enforcing the clause `would he unreasonable or unjust' . . . [by showing] the court that litigating in the selected forum is so inconvenient and difficult that it would be denied its day in court." Colemont Ins. Brokers of Connecticut, LLC v. Byrne, supra, 45 Conn. L. Rptr. 52; see also Capital Group Companies, Inc. v. Armour, 2004 WL 2521295 (Del. Ch. 2004).
Although several of the parties to the LLC Agreement reside in Connecticut, and many of the acts alleged in the complaint purportedly took place in Connecticut, the plaintiffs have failed to demonstrate that a stay would deny them their day in court. The presence of a non-exclusive forum selection clause, moreover, is not dispositive of the issues before the court. It is only one factor of many that the court must weigh in its analysis.
Injustice or Prejudice Caused to Plaintiff
The plaintiffs further argue that granting a stay will create injustice because several causes of action and theories of recovery asserted in this action may be "lost." The defendants `counter that the plaintiffs' claims will be preserved with a stay. The plaintiffs also argue that it will be difficult and costly to add certain named Connecticut defendants to the ongoing New York action, while the defendants maintain that the burden of adding such parties should not be overstated. Finally, the plaintiffs argue that because of the nexus of these claims to Connecticut, a stay would be unjust. The defendants argue that this matter in fact bears a substantial relationship to New York.
As previously noted, it is within the discretion of the court to determine whether granting a stay will cause injustice. Sauter v. Sauter, supra, 4 Conn.App. 585. With regard to the possibility that certain claims or theories of recovery may be lost, New York may apply Connecticut law to the extent that it is relevant; CPLR § 4511. More importantly, any actionable claims that a party is unable to assert in the New York litigation would also be preserved here in Connecticut, pending the resolution of the New York action. See Lincoln Life Annuity Co. of NY v. Lockwood Pension Services, Inc., supra, Docket No. CV 08 5019142. Regarding the difficulty that may arise by adding parties to the New York action, as also previously discussed, at least five of the defendants not named in this action are residents of New York, and/or have their principal place of business there. Although two of the defendants that would need to be added are Connecticut residents, any claims the plaintiffs may have against them are preserved with a stay. See Lincoln Life Annuity Co. of NY v. Lockwood Pension Services, Inc., supra, Docket No. CV 08 5019142.
The plaintiffs' argue that since Connecticut's prejudgment remedy statute has been considered to be procedural, the New York courts will be unlikely to apply it, thereby causing them prejudice. See Pursuit Partners v. UBS AG, Superior Court, complex litigation docket at Stamford, Docket No. X05 CV 08 4013452 (September 8, 2009, Blawie, J.) [ 48 Conn. L. Rptr. 557]; CPLR ¶ 101. However, the plaintiffs have not moved for issuance of any prejudgment remedy against the defendants. Although it is possible that the inability to obtain a prejudgment remedy might prejudice the plaintiffs, merely alleging that the plaintiffs may or might seek a prejudgment remedy is insufficient to demonstrate that any actual injustice would be caused by granting a stay. Since this court can and will reassert jurisdiction over this action if justice so requires, granting a stay will also not prevent the plaintiffs from seeking a lifting of the stay, and perhaps moving for issuance of a prejudgment remedy at a later date. See Travelers Ins. Co. v. Homwet Corp., Superior Court, judicial district of Hartford, Docket No. CV 95 0550685 (September 27, 1997, Teller, J.).
With regard to the nexus between this action and Connecticut and New York, the pleadings indicate that both states share a significant connection to this action. The parties allegedly met in New York during pre-contract negotiations, and also signed the agreements associated with the transaction in New York. (Kwok Aff. ¶ 3, 5.) Most of the assets, liabilities and employees of New Krell are allegedly located in the state of Connecticut. (Plaintiffs' Mem., p. 27.) The plaintiffs and two of the defendants are Connecticut residents, and although not a party to this action, New Krell is a Delaware LLC with its principal place of business in Connecticut. (Complaint ¶ 5-7; LLC Agreement ¶ 1.4a.) Conversely, five of the defendants are located or have their principal place of business in New York, including a majority of the management board of New Krell. (Complaint ¶¶ 7-15.) Given that this action also has a substantial nexus to New York, the court finds that no injustice is visited upon either side by the granting of a stay.
Finally, to the extent that any injustice may conceivably arise due to events that might transpire after the granting of this stay, the aggrieved party has a remedy. A stay "leaves the court in a position to monitor the progress being made in the parallel litigation, and to reassert its jurisdiction over the parties' dispute if the interests of justice so dictate." (Internal quotation marks omitted.) Travelers Ins. Co. v. Homwet Corp., supra, Docket No. CV 95 0550685.
III Conclusion
A stay pending the outcome of similar litigation in another state is simply recognition of the fact that the several courts of the 50 states of this Union simply have too many cases that need to be tried once, without the need to try any case twice.
The court finds that the parties and the issues for resolution in both this action and the New York action are substantially similar. Staying the present case makes judicial economic sense, as it will save considerable judicial resources, and avoid the risk of inconsistent judgments. In granting this motion to stay, the court has balanced the equities, and is not necessarily inferring that either the New York claims or the defendants' allegations in that forum are, in some legal sense, "better" than any Connecticut pleadings by these plaintiffs. It is merely that all lawsuits, by their nature, contain contested issues of fact. These cases are no different, and there is no doubt it will help dispose of this Connecticut case if those questions of fact raised in the New York cases are first resolved in that forum. That is the doctrine of judicial economy in practical operation.
The plaintiffs' position in opposing this stay is not enhanced by the fact that the plaintiffs are currently without Connecticut counsel, the court having recently granted that counsel's motion to withdraw. The plaintiffs did not appear at the hearing on that motion. Counsel's withdrawal occurred after the court had already heard oral argument on this motion to stay. It was represented to the court by counsel at the hearing on the motion to withdraw that the plaintiffs had retained different counsel for the New York litigation. As of the date of this opinion, no new Connecticut counsel has filed an appearance for the plaintiffs here in Superior Court.
In ordering a stay, and in order for this court to better fulfill its obligation to monitor the parallel litigation in New York, counsel for the defendants are further ORDERED to file with this court (under this Connecticut docket number) copies of any written decisions on dispositive motions or judgments rendered in Krell Investor LLC v. KL Inc., (Index No. 650652/200) in the courts of the state of New York. These are to be filed in Superior Court by counsel for the defendants within ten (10) days of the date of issuance of notice thereof by the New York court then having jurisdiction over those proceedings.
Note that by this order to file here in Superior Court such New York court documents as and when issued by those courts while this stay is pending, this court is limiting its order to those New York courts' rulings and opinions on dispositive motions, and/or a judgment. This court does not intend or desire to be put on the distribution list for all of the various and sundry briefs, motions and filings of any of the parties or their counsel as to the New York litigation.
The court having found that there is no significant risk that a stay of this action will create an injustice or prejudice the parties, the defendants' motion to stay these proceedings is hereby GRANTED.
IT IS SO ORDERED.