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Prospect Capital Corp. v. Bender

December 30, 2009


The opinion of the court was delivered by: Hon. Harold Baer, Jr., United States District Judge


Plaintiff Prospect Capital Corporation ("Prospect" or "Plaintiff") brought this multi-faceted action based on a complaint that alleged, at its core, that it was induced to issue a loan to ESA Environmental Specialists, Inc. ("ESA"), an environmental, engineering and construction firm whose officers, directors and employees conspired to siphon off money and whose accountants and other professionals had provided negligent services in connection with procurement of the loan from Prospect. The Amended Complaint, filed on February 11, 2009, alleges a complex web of interrelated and unique causes of actions as follows: (1) fraud and negligent misrepresentation against Defendant Bender; (2) substantive and conspiracy RICO claims against Defendants Bender, Eppling, J. Cole, Mitchell, Smith, Mrs. Cole, Habowski and Molesevich (the "RICO Defendants")*fn1; (3) derivative claims for breach of fiduciary duties and corporate waste against Bender, Eppling, J. Cole, Mitchell and Smith (the "ESA Officers & Directors"); (4) breach of contract against SunTrust Banks, Inc.; and (5) professional negligence against each of Houlihan Smith, Cherry Bekaert & Holland LLP, Elliot & Warren ("E&W"), Adkisson Sherbert & Associates ("AS&A") and Banull (the "Professional Defendants").

All of the Defendants, other than SunTrust and Habowski,*fn2 have moved to dismiss the Amended Complaint as it relates to them, for numerous and varied reasons: (a) the ESA Officers & Directors, Mrs. Cole, Molesevich, Banull and E&W have moved to dismiss for lack of personal jurisdiction under Federal Rule 12(b)(2) and improper venue under Federal Rule 12(b)(3), or in the alternative to transfer venue pursuant to 28 U.S.C. § 1404(a);*fn3 (b) the Professional Defendants move to dismiss for lack of subject matter jurisdiction under Federal Rule 12(b)(1); and (c) all moving Defendants move to dismiss the claims against them for failure to state a cause of action under Federal Rule 12(b)(6). For the reasons set forth below, I find that venue is improper in the Southern District of New York, and thus the motions to transfer this action are granted.*fn4


The facts of this case, as alleged in the Amended Complaint and RICO Case Statement, are complicated and intricate, and need not, for the purposes of these motions, be discussed at great length here. Suffice it to say that at all times relevant to the Amended Complaint, ESA operated as an environmental, engineering and construction firm that specialized in the provision of services to government entities. Prospect alleges that beginning no later than 2005, through a variety of interrelated schemes, Defendants, who together are either officers and directors, employees, or retained professionals of the now-insolvent ESA,*fn5 conspired to siphon funds from ESA for their own benefit.


As noted above, the Defendants have moved to dismiss the causes of action in the Amended Complaint for a variety of reasons, including on both jurisdictional and substantive grounds. Most significant to the Court are the arguments relating to (a) whether this Court may exercise personal jurisdiction over certain of the Defendants, and (b) whether the Southern District of New York is a proper venue in which this action may be heard. The Court acknowledges that in general, the issue of jurisdiction should be resolved before venue. See Team Obsolete Ltd. V. A.H.R.M.A. Ltd., 01-CV-1574 (ILG), 2002 U.S. Dist. LEXIS 10737, at *9 (E.D.N.Y. Mar. 15, 2002) (citing Leroy v. Great Western United Corp., 443 U.S. 179, 180 (1979)). However, a court may nonetheless address the issue of venue "where there are sound reasons to do so." Saferstein v. Mardinly, Durham, James, Falndreau & Roger, P.C., 927 F. Supp. 731, 735 (S.D.N.Y. 1996). Here, because I find that venue is improper in this district with respect to any of the moving defendants, I find that this Court may not hear this case, whether or not it has personal jurisdiction over the defendants.*fn6

A. Motions to Dismiss for Improper Venue (Rule 12(b)(3))

The RICO Defendants (other than Habowski), Banull, E&W and AS&A (the "Venue Defendants") have moved to dismiss the claims against them for improper venue under 28 U.S.C. § 1391(b) or, in the alternative, to transfer this action. All Venue Defendants other than Banull request that if the claims against them are not dismissed, they should be transferred to the Western District of North Carolina, where the vast majority of the acts and occurrences alleged took place and where ESA's bankruptcy proceeding is currently pending. Banull, on the other hand, is a solo practitioner property appraiser whose residence and business are exclusively in Pennsylvania and the allegations with respect to Banull involve his allegedly negligent appraisal of a piece of real property in Pennsylvania. Accordingly, Banull seeks severance of Count XII, the only claim against him, and transfer of that cause of action to the Eastern District of Pennsylvania. Prospect's opposition to the motion, which dedicates a mere one-page discussion to the venue issue, argues that venue is proper in this district because (a) it brought its case here, (b)a substantial portion of the events that give rise to the claims in the Amended Complaint occurred here, and (c)that transfer should be denied because the convenience of the witnesses puts it here.

1. Legal Standard

Prospect bears the burden to show that venue is proper as to each defendant for each cause of action it pleads. City of N.Y. v., Inc., 383 F. Supp. 2d 526, 543 (S.D.N.Y. 2005). To decide whether dismissal pursuant to Rule 12(b)(3) is appropriate, a court must take all allegations in the complaint as true, unless they are contradicted by the defendants' affidavits, "and when an allegation is so challenged, a court may examine facts outside the complaint to determine whether venue is proper." Indymac Mortgage Holdings, Inc. v. Reyad, 167 F. Supp. 2d 222, 237 (D. Conn. 2001) (quoting United States Envtl. Prot. Agency v. Port Auth. of N.Y. & N.J., No. 00 Civ. 0714 (WHP), 2001 WL 333014, at *4 (S.D.N.Y. Mar. 30, 2001)).

The venue provision on which Prospect bases its argument that venue is proper in this district is 28 U.S.C. § 1391(b),*fn7 which applies in all cases such as this where jurisdiction is not based solely on diversity of citizenship. The statute provides that venue is proper in any district (1) where all defendants reside, (2) in which "a substantial part of the events or omissions giving rise to the claim occurred," or (3) in any district in which any defendant may be found, if the action cannot be brought in any other district. 28 U.S.C. § 1931(b). Prospect does not argue that any defendant -- let alone all defendants -- resides in the Southern District of New York, nor does it argue that any defendant can be found here or that the action cannot be brought in any other district. Accordingly, Prospect's venue argument must be premised on § 1391(b)(2), and as such venue will be proper if and only if Prospect shoulders its burden to show that "a substantial part of the events or omissions giving rise to the claim[s] occurred" in this district.

To be sure, venue can be proper in more than one district; that is, venue is not restricted to the district with the "most substantial" connection to the events or omissions related to a claim. See Daniel v. American Bd. of Emergency Med., 428 F.3d 408, 432 (2d Cir. 2005). Nevertheless, the "substantial events or omissions" test limits the number of proper venues"to protect the defendant against the risk that a plaintiff will select an unfair or inconvenient place of trial." Id. (quoting Leroy, 443 U.S. at 183-84) (emphasis in original).

Plaintiff's venue argument is based on the contention that Prospect has its principal office in New York City and that it was solicited to provide the loans and performed its due diligence in this district. Thus, Prospect pulls itself up by its own bootstraps and argues that this district is proper because it is present here. Unfortunately for Prospect, the Second Circuit recently has made clear that when a court examines the question of whether venue in a forum is proper, it must focus on where the defendant's acts or omissions occurred. See, e.g., Daniel, 428 F.3d at 432; see also Woodke v. Dahm, 70 F.3d 983-985 (8th Cir. 1995) (explaining that "by referring to 'events and omissions giving rise to the claim,' Congress meant to require courts to focus on relevant activities of the defendant, not of the plaintiff") (cited ...

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