United States District Court, Southern District of New York
April 15, 2003
ROBERT LEWIS, ON BEHALF OF A CLASS OF SIMILARLY SITUATED INVESTORS AND DERIVATIVELY ON BEHALF OF CAPITAL REALTY INVESTORS 85 LIMITED PARTNERSHIP, PLAINTIFFS
C.R.I., INC.; WILLIAM B. DOCKSER; AND H. WILLIAM WILLOUGHBY, DEFENDANTS AND CAPITAL REALTY INVESTORS 85 LIMITED PARTNERSHIP, NOMINAL DEFENDANT
The opinion of the court was delivered by: Michael B. Mukasey, United States District Judge
OPINION AND ORDER
Plaintiff Robert Lewis, on behalf of a class of investors in Capital Realty Investors 85 Limited Partnership ("CRI-85") and derivatively on behalf of CRI-85, brings this action under section 14(a) of the Securities Exchange Act of 1934 against CRI-85, CRI-85's managing general partner C.R.I., Inc. ("CRI"), and William B. Dockser and H. William Willoughby, shareholders of CRI. Lewis challenges a proposal by CRI to liquidate CRI-85's real estate assets pursuant to a Plan of Liquidation detailed in a Consent Solicitation Statement (the "Solicitation") sent to CRI-85 investors. Lewis claims that the Solicitation impermissibly bundles a vote on the liquidation proposal with a vote permitting the payment of a fee to CRI and that the Solicitation misrepresents or omits material facts. CRI moves to dismiss Lewis's claims pursuant to Fed.R.Civ.P. 12(b)(6). In the alternative, CRI moves to transfer the action to the District of Maryland pursuant to 28 U.S.C. § 1404(a). For the reasons set forth below, the motion to transfer is granted.
The following facts are relevant to the transfer motion: Lewis, a New York resident, is an investor in CRI-85, a Maryland limited partnership whose principal place of business is located in Rockville, Maryland. (Compl. ¶¶ 1, 5; Backman Decl. ¶¶ 4, 11) CRI-85, which owns interests in apartment complexes, has approximately 1700 investors who live in all 50 states as well as the District of Columbia, Puerto Rico, Canada, and other countries. (Compl. ¶¶ 5, 9-10; Backman Decl. ¶ 11) CRI, a Delaware corporation whose principal place of business is in Rockville, Maryland and whose corporate records are located in Maryland, is the managing general partner of CRI-85. (Compl. ¶ 6; Backman Decl. ¶¶ 5, 10) William B. Dockser and H. William Willoughby are shareholders of CRI. (Compl. ¶¶ 7-8) Dockser is a citizen of Maryland and Willoughby is a citizen of Virginia. (Backman Decl. ¶¶ 6-7)
On December 30, 2002, CRI disseminated a Consent Solicitation to CRI-85's limited partners. (Compl. ¶ 14) The Solicitation sought approval of both the sale of the Partnership's assets followed by the dissolution of the Partnership and the amendment of the Partnership Agreement to permit the payment to CRI of a fee that would amount to at least $1,565,000. (Compl. ¶¶ 15, 18) The Solicitation states that if the liquidation plan is approved, it is expected to take between a year and 18 months to complete. (Compl. ¶ 19) The deadline for the Solicitation was February 14, 2003. (Compl. ¶ 16) The Solicitation was prepared in Maryland and the decisions concerning its content were made in Maryland. (Backman Decl. ¶ 8) As of February 10, 2003, 14,832 of CRI-85's investors had voted in favor of the Solicitation and 197 investors had voted against the Solicitation or abstained. (Backman Decl. ¶ 12)
Lewis filed this class action on January 18, 2003. The complaint contains two claims. First, Lewis alleges that, in violation of SEC Rule 14a-4(b)(1), the Solicitation bundles a vote on the Liquidation with a vote permitting the payment of a fee to the Managing General Partner. (Compl. ¶¶ 31-36) Second, Lewis alleges that, in violation of SEC Rule 14a-9, the Solicitation misrepresents or omits material facts necessary to allow the limited partners to make an informed decision as to whether they should vote in favor of the Liquidation. In particular, Lewis contends that the Solicitation contains no meaningful discussion of the possible financial ramifications of refinancing the properties rather than liquidating them. (Compl. ¶¶ 37-46) The complaint requests that the court enjoin the liquidation until a proxy statement complying with the requirements of federal securities law is disseminated.
On January 31, 2003, Lewis filed an Order to Show Cause for a Preliminary Injunction and Expedited Discovery seeking to enjoin the limited partner vote and expedite discovery of documents relating to the implications of a refinancing plan. On February 3, the parties informed the court that they had reached a standstill agreement whereby the vote would proceed but CRI would produce certain documents on an expedited basis and take no public action in furtherance of the liquidation pending a decision on the outstanding motion. (Letter of Levit to the Court of 2/26/03, at 1)
On February 18, 2003, CRI cross-moved to dismiss the complaint for failure to state a claim or, in the alternative, to transfer the action to the District of Maryland under 28 U.S.C. § 1404(a).*fn1 Section 1404(a) provides that a district court may transfer any civil action, "for the convenience of the parties and witnesses, in the interest of justice," to any other federal district where it might have been brought. 28 U.S.C. § 1404(a) (2000). Determining whether a transfer is warranted pursuant to § 1404(a) lies within the broad discretion of the district court. In re Cuyahoga Equipment Corp., 980 F.2d 110, 116-17 (2d Cir. 1992). The burden is on the party urging transfer to make a clear and convincing showing that transfer serves the interests of convenience and fairness. E.g. Worldcom Technologies, Inc. v. ICC Inteleca Communications, Inc., 37 F. Supp.2d 633, 638 (S.D.N.Y. 1999). CRI has met this burden. Therefore, I need not address the motion to dismiss. See Eisenberg v. Wachovia Bank, N.A., No. 00 Civ. 7910, 2001 WL 30452, at *1 (S.D.N.Y. Jan. 11, 2001) (granting motion to transfer venue and therefore not reaching merits of Rule 12(b)(6) motion).
The threshold question in deciding a § 1404(a) motion is whether venue would be proper in the transferee forum. See Hoffman v. Blaski, 363 U.S. 335, 342-43 (1960) (venue must be proper in the transferee forum and defendants must be subject to personal jurisdiction). It is undisputed here that venue would be proper in the District of Maryland. The relevant jurisdictional statute provides that an action may be brought "in the district wherein any act or transaction constituting the violation occurred . . . or in the district wherein the defendant is found or is an inhabitant or transacts business." 15 U.S.C. § 78aa (2000). CRI-85 is a Maryland limited partnership with its principal place of business in Rockville, Maryland and CRI is a Delaware corporation whose principal place of business is also in Rockville, Maryland. (Compl. ¶ 5; Backman Decl. ¶ 5) Moreover, William B. Dockser is a citizen of the Maryland, and the challenged Solicitation was prepared in Maryland. (Backman Decl. ¶ 7)
The court must then decide whether a transfer is appropriate in light of the competing interests of the parties. In making the determination, courts in this district consider nine factors: (1) the convenience of witnesses; (2) the location of relevant documents and the relative ease of access to sources of proof; (3) the convenience of the parties; (4) the locus of the operative facts; (5) the availability of process to compel attendance of unwilling witnesses; (6) the relative means of the parties; (7) a forum's familiarity with the governing law; (8) the weight accorded a plaintiff's choice of forum; and (9) trial efficiency and the interests of justice, based on the totality of the circumstances. E.g., Constitution Reins. Corp. v. Stonewall Ins. Co., 872 F. Supp. 1247, 1250 (S.D.N.Y. 1995); 800-Flowers, Inc. v. Intercontinental Florist, Inc., 860 F. Supp. 128, 133 (S.D.N.Y. 1994). These factors do not comprise an exclusive list and they are not applied in a mechanical or formulaic manner; rather, they serve as guideposts to the Court's exercise of discretion. Albert Fadem Trust v. Duke Energy Corp., 214 F. Supp.2d 341, 343 (S.D.N.Y. 2002).
The first factor — the convenience of witnesses — weighs in favor of transferring the action. The individual defendants in this case, William B. Dockser and H. William Willoughby, live in or near Maryland. (Backman Decl. ¶¶ 6-7) Moreover, Rockville, Maryland is the principal place of business of both CRI and CRI-85. (Backman Decl. ¶¶ 4-5) Accordingly, if employees of either entity will be deposed or called as witnesses at trial, Maryland is the superior forum. Unlike defendants, class members live in all 50 states and elsewhere. Thus, even if specific class members must be deposed or called as witnesses at trial, there is nothing in the record to suggest that any specific forum is best. The third factor — the convenience of the parties — weighs in favor of granting the motion to transfer for the same reason: Defendants, who will likely bear the burdens of the discovery process and a potential trial, are concentrated in Maryland. Class members, on the other hand, are widely dispersed.*fn2
The second factor — the location of relevant documents and the relative ease of access to sources of proof — also weighs in favor of transferring the action. Discovery in this case has consisted of and will likely continue to consist of requests for documents from CRI. (See Def.'s Ex. 5, "Plaintiff's First Request for Production of Documents") Those documents are located in Maryland. (Backman Decl. ¶ 10)
The foregoing factors weigh in favor of transfer, but they are not controlling. Under the present circumstances, the convenience of witnesses is not an overriding consideration, because defendants have not listed the witnesses they intend to depose, nor have they informed the court of the potential content of their testimony. Although the convenience of witnesses, as a general rule, is "perhaps the most important consideration of a Section 1404(a) motion," Invivo Research, Inc. v. Magnetic Resonance Equip. Corp., 119 F. Supp.2d 433, 437 (S.D.N.Y. 2000), that factor has limited weight when the party seeking a transfer does not identify witnesses and explain their relevance to the case. Pilates, Inc. v. Pilates Instit., Inc., 891 F. Supp. 175, 183 (S.D.N.Y. 1995). Defendants have also failed to cite specific evidence located in Maryland that will be difficult to transfer to New York. Thus, that factor is of limited significance here as well. See Worldcom Technologies, 37 F. Supp.2d at 638 (discounting the location of evidence where the defendant failed to identify evidence that would be difficult to transfer). Finally, although Maryland does appear to be the more convenient forum for the parties because defendants are concentrated there and plaintiffs are dispersed, the absence of specific evidence regarding the number of limited partners living in or near each forum prevents the court from attaching dispositive weight to that factor.*fn3
On the other hand, the fourth factor — the locus of the operative facts — weighs heavily in favor of transfer. The operative facts in this case have little connection to the Southern District of New York. The decisions regarding the liquidation proposal were made in Maryland and the Solicitation was prepared in Maryland. (Backman Decl. ¶ 8) Based on the existing record, the only apparent connection between Lewis's claims and the Southern District of New York is that CRI's solicitation agent, McKenzie Partners, is located here. (Abraham Aff. Ex. B) Yet this connection to a nonparty performing a particular service for CRI is tenuous compared to the connection between Lewis's claims and the ongoing activities in Maryland that form the basis of this lawsuit. Under the present circumstances, where the operative facts are concentrated in a specific district other than the district in which plaintiff has sued, the action should be transferred to that district, notwithstanding plaintiff's choice of forum. See, e.g., Totonelly v. Cardiology Assocs. of Corpus Christi, Inc., 932 F. Supp. 621, 623 (S.D.N.Y. 1996).
Lewis offers several arguments against transfer. First, he attempts to play down the importance of the location of witnesses and evidence by asserting that the court can adjudicate the first claim based on the Solicitation alone and the second claim based only on the Solicitation and documents relating to the terms of the mortgages on CRI-85's properties. At this stage of the litigation, however, it remains unclear how much evidence and testimony will be required. Depending on the disposition of the outstanding motion to dismiss, Lewis may have to substantiate his allegation of loss causation. Further, assuming that the Solicitation's allegedly inadequate description of a refinancing alternative could serve as a basis for a federal securities claim, plaintiff will have to prove that "`there is a substantial likelihood that a reasonable shareholder would consider [the omissions] important in deciding how to vote.'" Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1090 (1991) (quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 439 (1976)). Finally, a factual issue may also exist with respect to whether plaintiff was justified in failing to satisfy the pre-suit demand requirement imposed by Maryland law. If discovery is needed on these issues or others, the District of Maryland is a better forum for this action than the Southern District of New York. In any event, the main factor compelling transfer is that the locus of operative facts is in Maryland, not that witnesses and evidence are located there.
Plaintiff argues also that, under DiRienzo v. Philip Servs. Corp., 232 F.3d 49, 60-62 (2d Cir. 2000) ("DiRienzo I"), which dealt with a motion to dismiss a fraud action against a Canadian company based on the doctrine of forum non conveniens, substantial weight should be accorded to plaintiff's choice of forum, even when the plaintiff represents a class. However, the section of DiRienzo I cited by Lewis was later vacated by the Second Circuit. In vacating its earlier opinion, the Court suggested that representative plaintiffs are entitled to some deference in their choice of forum, but they are entitled to less deference than other plaintiffs. DiRienzo v. Philip Servs. Corp., 294 F.3d 21, 28 (2d Cir. 2002) ("DiRienzo II") ("Affording less deference to representative plaintiffs does not mean they are deprived of all deference in their choice of forum."). The DiRienzo II Court found that the level of deference to which a plaintiff is entitled depends on the legal basis for the plaintiff's choice of forum; that is, greater deference is entitled to a plaintiff who chooses a forum for reasons that the law recognizes as valid. DiRienzo II, 294 F.3d at 28 (finding that "plaintiffs offered a quite valid reason for litigating in federal court: this country's interest in having United States courts enforce United States securities laws"); see also Iragorri v. United Technologies Corp., 274 F.3d 65, 73 (2d Cir. 2001) (explaining that a plaintiff's choice of forum is to be afforded greater deference when "it was motivated by legitimate reasons, including the plaintiff's convenience . . . and diminishing deference . . . to the extent it was motivated by tactical advantage"). Lewis, who represents a class, offers no reason why he chose to sue in the Southern District of New York. By the logic of DiRienzo II, his choice of forum is entitled to little deference.
Moreover, DiRienzo dealt with a motion to dismiss on forum non conveniens grounds. CSI, on the other hand, seeks to transfer this action under 28 U.S.C. § 1404(a). The burden of establishing that transfer is warranted under section 1404(a) "is less stringent than under the former doctrine of forum non conveniens since transfer under § 1404(a) does not result in dismissal." Wilshire Credit Corp. v. Barrett Capital Mgmt. Corp., 976 F. Supp. 174, 180 (W.D.N.Y. 1997). Yet like the forum non conveniens cases, cases interpreting section 1404(a) have found that representative plaintiffs, as well as plaintiffs bringing derivative actions, are entitled to less deference than other plaintiffs. See Warrick v. General Elec. Co., 70 F.3d 736, 741 n. 7 (2d Cir. 1997) (stating that, for the purposes of section 1404(a), "plaintiff's choice of forum is a less significant consideration in a . . . class action than in an individual action"); IBJ Schroder Bank & Trust Co. v. Mellon Bank, N.A., 730 F. Supp. 1278, 1282 (S.D.N.Y. 1990) (stating that in class actions the "accidental residence of the named plaintiff is discounted in weighing the transfer factors"); Foster v. Litton Indus., Inc., 431 F. Supp. 86, 87 (S.D.N.Y. 1977) ("[T]his factor of plaintiffs' choice of forum is of even less significance in a shareholder's derivative suit."); Shulof v. Westinghouse Elec. Corp., 402 F. Supp. 1262, 1263 (S.D.N.Y. 1975) ("While it is axiomatic that a plaintiff's choice of forum is entitled to great consideration, the adage has little weight in stockholder class actions.").
Finally, Lewis contends that granting CRI's motion will delay the injunctive relief he seeks. Yet section 1404(a) contains no exception for plaintiffs seeking injunctive relief. If Lewis wanted to avoid a transfer motion that might delay the proceedings, he could have filed this action in Maryland. In any event, the parties have represented to the court that they have reached a standstill agreement whereby CRI will, for the present time, refrain from acting in furtherance of the liquidation plan. That standstill agreement will remain in effect at least until the judge assigned to the case in Maryland conducts a status conference or a hearing in this matter.
Thus, after weighing the relevant factors, the sole factor that weighs against transferring the action is the deference accorded to plaintiff's choice of forum. However, in a case in which the operative facts are concentrated in another district and plaintiff sues on behalf of a class, that factor is outweighed by other factors. Based on the totality of the circumstances, I find that transfer to the District of Maryland is warranted.
For the reasons stated, the motion to transfer is granted. Also, the parties' standstill agreement will remain in effect until such time as the transferee court holds a conference or hearing in this matter. The Clerk will transfer the case to the United States District Court for the District of Maryland.