The opinion of the court was delivered by: William M. Skretny Chief Judge United States District Court
Plaintiffs Laszlo Meszaros and Robert H. Fritzinger bring suit against Defendants Stephen Klick, Douglas Kegler, and CollaborateMD, Inc. ("CollaborateMD") claiming violations of 17 C.F.R. § 240.10b-5, as well as state law claims for fraud and deceit, breach of fiduciary duty, breach of implied covenant of good faith and fair dealing, unjust enrichment, indemnification, breach of contract, and quantum meruit. Plaintiffs' claims arise out of Defendants' purchase of Plaintiffs' stock and Defendants' failure to disclose negotiations that resulted in a significant increase in that stock's value. Presently before this Court are Defendant Klick's Motion to Dismiss or Transfer Venue, as well as Defendant Kegler and CollaborateMD's Motion to Dismiss for Improper Venue or, in the Alternative, to Transfer Venue.*fn1 For the reasons discussed below, Defendants' motions are granted to the extent they seek transfer and denied as moot to the extent they seek dismissal.
In adjudicating Defendants' motions to dismiss, this Court assumes the truth of the following factual allegations contained in the complaint. See Hosp. Bldg. Co. v. Trs. of Rex Hosp., 425 U.S. 738, 740, 96 S. Ct. 1848, 1850, 48 L. Ed. 2d 338 (1976); see also Hamilton Chapter of Alpha Delta Phi, Inc. v. Hamilton Coll., 128 F.3d 59, 63 (2d Cir. 1997). Plaintiffs Meszaros and Fritzinger are residents of Erie County, New York and former minority shareholders and directors of CollaborateMD. (Complaint ("Comp."), Docket No. 1, ¶¶ 2, 12.) CollaborateMD is a closely-held Florida corporation with its principal place of business in Orlando Florida, engaged in the business of providing clients with medical billing software. (Id. ¶ 3; Memorandum of Law in Support of Defendant Stephen Klick's Motion to Dismiss or for Transfer of Venue ("Klick Mem."), Docket No. 10, 2.) Defendant Stephen Klick is a resident of Minnesota and stockholder, director, and officer of CollaborateMD. (Comp. ¶ 5.) Defendant Douglas Kegler is a resident of Florida and is also a stockholder, director, and officer of CollaborateMD. (Id. ¶ 4.)
In March or April of 2009, Defendants ordered an appraisal of CollaborateMD's assets and stock. (Comp. ¶ 15.) Following this appraisal, Defendants offered to purchase Plaintiffs' stock at a price of $1.15 per share. (Id. ¶ 16.) The stock was valued at $.95 per share as of May 2009. (Id. ¶ 41.) Plaintiffs accepted Defendants' offer and completed the sale on June 11, 2009. (Id. ¶¶ 17, 19.) The same day, a press release by CollaborateMD announced the signing of an agreement between it and 3M Health Information Systems ("3M"). (Id. ¶ 20.) This agreement would make certain coding content available to CollaborateMD and would allow its customers to access current and historic Medicare and select Medicaid datasets. (Id. ¶ 26.) As a result of this agreement, CollaborateMD's share price tripled to approximately $3.00 per share. (Id. ¶ 47.)
Plaintiffs allege that throughout the sale negotiations between Plaintiffs and Defendants, Defendants were aware of, and withheld information relating to, the agreement between CollaborateMD and 3M. (Id. ¶¶ 38-39.) Defendants allegedly did so in order to acquire Plaintiffs' shares at a reduced price, prior to the expected increase in the stock's value as a result of the agreement with 3M. (Id. ¶ 45.)
On the basis of these events, Plaintiffs commenced this action on August 28, 2009 by filing a complaint in the United States District Court for the Western District of New York. On October 21, 2009 both Defendant Klick, and Defendants Kegler and CollaborateMD, separately filed the present motions to dismiss or transfer venue.
A. Defendants' Motion to Dismiss for Improper Venue
Plaintiffs bear the burden of showing that venue in this district is proper. City of New York v. Cyco.net, Inc., 383 F. Supp. 2d 526, 543 (S.D.N.Y. 2005). In their complaint, Plaintiffs allege that venue is proper pursuant to 28 U.S.C. § 1391(b) because the claims arose in the Western District of New York. Defendants move to dismiss.
28 U.S.C. § 1391(b) states that for any civil action wherein jurisdiction is not founded solely on diversity of citizenship, venue will be proper in:
(1) a judicial district where any defendant resides, if all defendants reside in the same State, (2) a judicial district in which a substantial part of the events or omissions giving rise to the claim occurred . . ., or (3) a judicial district in which any defendant may be found, if there is no district in which the action may otherwise be brought.
Defendants argue that they neither reside nor transact business in New York. Defendants also argue that no acts or transactions relating to Plaintiffs' claims were performed in the forum jurisdiction because, although Plaintiffs' received the alleged misrepresentations in New York, the misrepresentations were actually made in Florida or Minnesota, the respective residences of Defendants Kegler and Klick. Plaintiffs respond that receiving communications constituting violations of Securities Exchange law is sufficient to satisfy venue requirements. Plaintiffs also argue that Defendants Kegler and CollaborateMD transacted business in New York by developing and testing a medical billing system and because CollaborateMD has various customers throughout New York, including the Western District of New York.
At the outset, the Court notes that where, as here, security law claims are brought under the Securities Exchange Act, venue is exclusively controlled by 15 U.S.C. § 78aa. SST Global Tech., LLC v. Chapman, 270 F. Supp. 2d 444, 452 (S.D.N.Y. 2003). "Where there are state claims asserted in addition to securities law claims governed by the venue provisions of § 78aa, a finding that venue is appropriate with regard to the securities law claims is sufficient to establish venue with regard to all claims." Id. (citing Greenwood Partners v. New Frontier Media Inc., No. 99-9099, 2000 WL 278086, at *8 (S.D.N.Y. Mar. 14, 2000). Under 15 U.S.C. § 78aa, "venue lays in any district where (1) 'the defendant is found,' (2) the defendant 'is an inhabitant,' (3) the defendant 'transacts business,' or (4) 'any act or transaction constituting the violation occurred.'" Blass v. Capital Int'l Sec. Group, No. 99-CV-5738, 2001 WL 301137, at *3 (E.D.N.Y. Mar. 23, 2001) (quoting 15 U.S.C. § 78aa). As to the last, "any non trivial act in the forum district which helps to accomplish a securities law violation is sufficient to establish venue." SST Global Tech., LLC, 270 F. Supp. 2d at 453 (quoting Greenwood Partners, 2000 WL 278086, at *6 ).
Here, the parties do not dispute that the alleged violations occurred during various telephonic meetings of CollaborateMD's Board of Directors. During these conversations, Plaintiffs were in the Western District of New York, while Defendants were in Florida and Minnesota. Although Defendants argue that misrepresentations occur only where they are made, not where Plaintiffs hear or see them, numerous courts have found that "any act or transaction constituting the violation" is broad enough to include the place where communications are received. See, e.g., In re Geopharma, Inc., No. 04 Civ. 9463(SAS), 2005 WL 1123883, at *1 n.12 (S.D.N.Y. May 11, 2005) ("[B]ecause GeoPharma was a publicly traded company on the NASDAQ National Market and the alleged misstatements were widely disseminated and defrauded a nationwide class, plaintiffs could theoretically have brought suit under section 27 in any district in the United States."); SST Global Tech., LLC, 270 F. Supp. 2d at 453-54 (venue proper in district where plaintiff received phone calls and participated in meetings); Ethanol Partners Accredited v. Wiener, Zuckerbrot, Weiss & Brecher, 617 F. Supp. 308, 310-11 (E.D. Pa. 1985) (correspondence and telephone calls received in Pennsylvania office constituted acts or transactions for venue purposes under § 78aa).
Although courts routinely transfer cases to the forum where the principal events occurred, especially in the context of securities litigation, this is not enough to render venue improper. See In re Nematron Corp. Sec. Litig., 30 F. Supp. 2d 397, 404 (S.D.N.Y. 1998) (finding locus of operative facts where contract was entered, rather than where stocks were purchased, but noting that §78aa would permit suit in any such district). Because Plaintiffs allege they received communications containing misrepresentations or omissions in violation of Securities Exchange law, they have properly pled facts sufficient to find venue in this district.
In their Reply Memorandum, Defendants Kegler and CollaborateMD raise a new argument to the effect that venue is improper because all alleged misrepresentations occurred after Plaintiffs accepted offers to sell their shares for $1.15 per share. (Reply Memorandum of Law in Further Support of the Motion of Defendants Douglas Kegler and CollaborateMD, Inc. to Dismiss for Improper Venue or, in the Alternative, to Transfer Venue, Docket No. 23, 5-6.) Defendant Klick made an offer to purchase shares of CollaborateMD stock at $1.15 per share on April 12, 2009. (See Amended Affidavit of Robert H. Fritzinger ("Fritzinger Aff."), Docket No. 19, ¶ 10.)*fn2 Plaintiffs conveyed their intent to accept this offer on April 28, 2009. (See id. ¶ 12.) The affidavits go on to describe several meetings after this date at which Defendants allegedly withheld information from Plaintiffs.
As a preliminary matter, this Court rejects Defendants' efforts to frame the sale as closed as of April 12, 2009. Corporate minutes from meetings after Plaintiffs' alleged acceptance of Defendants' offer reflect continuing discussions including, for example, whether the corporation would exercise its right of first refusal. (Id. Ex. F.) Other exhibits show that Defendants also conducted an appraisal of the fair market value of the stock following Plaintiffs' acceptance. Consequently, the fact that a number of the meetings occurred after April 28, 2009 is not sufficient for this Court to find venue improper. This Court also notes that Defendants and 3M had allegedly been in negotiations for several months prior to the announcement of the agreement on June 11, 2009. Defendants knew the deal would conclude successfully, and at no point prior to completing the purchase of Plaintiffs' shares did Defendants ...