John J. Mack v. Rev Worldwide, Inc. ( 2020 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
JOHN J. MACK, )
)
Plaintiff, )
)
v. ) C.A. No. 2019-0123-MTZ
)
REV WORLDWIDE, INC., a Delaware )
corporation, )
)
Defendant. )
MEMORANDUM OPINION
Date Submitted: October 12, 2020
Date Decided: December 30, 2020
William M. Kelleher and Phillip A. Giordano, GORDON, FOURNARIS &
MAMMARELLA, P.A., Wilmington, Delaware; Robert A. Giacovas, Lainie E.
Cohen, and Jacob A. Englander, LAZARE POTTER GIACOVAS & MOYLE LLP,
New York, New York, Attorneys for Plaintiff.
Raymond W. Cobb, O’HAGAN MEYER LLP, Wilmington, Delaware; Kevin M.
O’Hagan and Shane M. Bradwell, O’HAGAN MEYER LLP, Chicago, Illinois,
Attorneys for Defendant.
ZURN, Vice Chancellor.
A plaintiff generally has substantial discretion over its choice of venue. But
that discretion may be limited by a valid forum selection clause.1 If a forum selection
clause validly limits a plaintiff to a single forum, that clause renders a court that
otherwise has jurisdiction into an improper venue for the plaintiff to sue.2 In the
present case, the defendant has moved to dismiss for improper venue, contending
that two of the plaintiff’s claims are subject to valid forum selection clauses
mandating adjudication in courts of other states. The plain language of the relevant
agreements forecloses Delaware courts from hearing those claims, and the plaintiff
has failed to demonstrate that enforcement of those clauses would be unreasonable
or unjust under the circumstances. Those claims must be dismissed pursuant to
Court of Chancery Rule 12(b)(3).
I. BACKGROUND3
Plaintiff John Mack is a shareholder and noteholder of Defendant Rev
Worldwide, Inc. (“Rev” or “Defendant”). Plaintiff lent Defendant funds through a
series of notes and corresponding security agreements. Defendant juggled its debt
1
Scanbuy, Inc. v. NeoMedia Techs., Inc., 2014 WL 5500245, at *4 (Del. Ch. Oct. 31, 2014);
Troy Corp. v. Schoon, 2007 WL 949441, at *3 (Del. Ch. Mar. 26, 2007).
2
Simon v. Navellier Series Fund, 2000 WL 1597890, at *6 (Del. Ch. Oct. 19, 2000).
3
These facts are drawn from the Amended and Supplemental Verified Complaint filed on
February 28, 2020 and the documents integral to it. Docket Item (“D.I.”) 28 [hereinafter
“Am. Compl.”]. Citations in the form of “Ex. ––” refer to exhibits attached and integral to
the Amended Complaint.
1
held by private noteholders and its debt held by a commercial lender through terms
and procedures that repeatedly subordinated Plaintiff beneath the commercial lender.
Plaintiff contends Defendant’s recent juggling act was improper and that Defendant
has defaulted on Plaintiff’s debt. Plaintiff seeks relief in this Court, but Plaintiff’s
contractual arrangement with Defendant includes forum selection clauses that
preclude this Court from hearing Plaintiff’s claims.
A. Plaintiff Invests In Defendant And Executes Notes And
Security Agreements.
Plaintiff has been a stockholder of Defendant since August 2011. On
December 12, 2012, Defendant entered into a Loan Agreement with Silicon Valley
Bank (“SVB”), borrowing at least $1.5 million (the “Loan Agreement”). Thereafter,
Plaintiff joined SVB as a creditor and noteholder of Defendant. Between 2013 and
2015, Plaintiff loaned Defendant a total of $2.5 million through a series of
transactions, investing alongside other noteholders in each series. Plaintiff and
Defendant documented Plaintiff’s loans via six Subordinated Secured Convertible
Promissory Notes and Subordinated Secured Convertible Line of Credit Notes
2
(collectively, the “Notes”),4 each of which was accompanied by a corresponding
security agreement (collectively, the “Security Agreements”).5
Aside from differences in principal, each Note contains substantially identical
terms, and each Security Agreement contains identical terms. Under the Security
Agreements, Defendant covenanted to refrain from disposing of, restricting, or
otherwise encumbering Defendant’s collateral without Plaintiff’s prior written
consent, except as otherwise provided in the Notes.6 And of import here, each
Security Agreement is governed by Delaware law and incorporates by reference the
forum selection clause in its corresponding Note:
Governing Law. This Agreement and the Loan Agreement and any
claim, controversy, dispute or cause of action (whether in contract or
tort or otherwise) based upon, arising out of or relating to this
Agreement and the transactions contemplated hereby and thereby shall
be governed by, and construed in accordance with, the laws of the State
of Delaware. The other provisions of Sections JURISDICTION and
WAIVER OF JURY TRIAL of the [corresponding Note] are
incorporated herein, mutatis mutandis, as if a part hereof.7
4
Exs. B, E–I.
5
Ex. C. Only the Security Agreement appearing at Exhibit C has been provided to the
Court, and the parties have proceeded on the assumption that all Security Agreements take
the same form and include the same terms.
6
See id. § 6(d).
7
Id. § 17.
3
In turn, each Note provides that it is governed by Delaware law,8 and contains the
following “Jurisdiction” provision, or forum selection clause, in favor of Texas
courts:
Jurisdiction. EACH PARTY IRREVOCABLY AND
UNCONDITIONALLY AGREES THAT IT WILL NOT
COMMENCE ANY ACTION, LITIGATION OR PROCEEDING OF
ANY KIND WHATSOEVER AGAINST ANY OTHER PARTY IN
ANY WAY ARISING FROM OR RELATING TO THIS
AGREEMENT AND ALL CONTEMPLATED TRANSACTIONS,
INCLUDING, BUT NOT LIMITED TO, CONTRACT, EQUITY,
TORT, FRAUD AND STATUTORY CLAIMS, IN ANY FORUM
OTHER THAN THE US DISTRICT COURT FOR THE WESTERN
DISTRICT OF TEXAS IN AUSTIN, TEXAS OR THE COURTS OF
THE STATE OF TEXAS SITTING IN TRAVIS COUNTY, TEXAS,
AND ANY APPELLATE COURT FROM ANY THEREOF. EACH
PARTY IRREVOCABLY AND UNCONDITIONALLY SUBMITS
TO THE EXCLUSIVE JURISDICTION OF SUCH COURTS AND
AGREES TO BRING ANY SUCH ACTION, LITIGATION OR
PROCEEDING ONLY IN US DISTRICT COURT FOR THE
WESTERN DISTRICT OF TEXAS IN AUSTIN, TEXAS OR THE
COURTS OF THE STATE OF TEXAS SITTING IN TRAVIS
COUNTY, TEXAS. EACH PARTY AGREES THAT A FINAL
JUDGMENT IN ANY SUCH ACTION, LITIGATION OR
PROCEEDING IS CONCLUSIVE AND MAY BE ENFORCED IN
OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN
ANY OTHER MANNER PROVIDED BY LAW.9
In addition, each Note permits amendment or waiver of its terms upon
majority vote of Plaintiff’s fellow noteholders:
8
See Ex. B § 10(h); Ex. E § 10(h); Ex. F § 11(h); Ex. G § 10(h); Ex. H § 11(J); Ex. I §
10(h).
9
Ex. B § 10(J); Ex. E § 10(J); Ex. F § 11(J); Ex. G § 10(J); Ex. H § 11(J); Ex. I § 10(J).
4
Waiver and Amendment. Any provision of this Note may be amended,
waived or modified upon the written consent of the Company and a
Majority in Interest of Investors. Notwithstanding the foregoing, the
written consent of Investor shall be required to reduce the principal
amount of this Note without Investor’s written consent, or reduce the
rate of interest of this Note without Investor’s written consent.10
And under each Note, “‘Majority in Interest of Investors’ shall mean, as of any date,
investors holding more than 50% of the aggregate outstanding principal amount of
the Notes on such measurement date.”11
B. Plaintiff Executes The Subordination Agreement, And
Defendant Capitalizes On Plaintiff’s Secondary Position To
SVB.
In view of Defendant’s obligations to SVB, the Security Agreements and
Notes are expressly subject to the terms and conditions of a Subordination
Agreement between Plaintiff, several of Defendant’s other creditors, and SVB
(the “Subordination Agreement”).12 Pursuant to the Subordination Agreement,
Plaintiff agreed to take a secondary security interest in Defendant’s collateral behind
SVB until Defendant paid SVB in full under the Loan Agreement.
The Subordination Agreement is governed by California law and contains a
forum selection clause in favor of California courts:
10
Ex. B § 10(b); Ex. E § 10(b); Ex. F § 11(b); Ex. G § 10(b); Ex. H § 11(b); Ex. I § 10(b).
11
Ex. B § 6(l); Ex. E § 6(i); Ex. F § 7(j); Ex. G § 6(l); Ex. H § 7(j); Ex. I § 6(l).
12
Ex. D.
5
This Agreement shall be governed by and construed in accordance with
the laws of the State of California, without giving effect to conflicts of
laws principles. Creditor and Bank submit to the exclusive jurisdiction
of the state and federal courts located in Santa Clara County, California
in any action, suit, or proceeding of any kind, against it which arises
out of or by reason of this Agreement.13
Although Defendant was not a formal party to the Subordination Agreement,
it defines “Borrower” as Defendant and contains multiple provisions detailing
Defendant’s payment obligations to Plaintiff and SVB and Plaintiff and SVB’s rights
to collect on Defendant’s collateral in event of default.14 Accordingly, Defendant
signed the Subordination Agreement, evidencing that “[t]he undersigned [Borrower]
approves of the terms of this Agreement.”15
Plaintiff alleges that Defendant exploited Plaintiff’s status behind SVB,
established by the Subordination Agreement, by twice amending the Loan
Agreement to extend the SVB loan’s maturity date and further subordinate
Plaintiff’s Notes. First, with Plaintiff’s knowledge and consent, Defendant entered
into an Amended and Restated Loan and Security Agreement with SVB on February
1, 2014 (the “2014 Loan Agreement”). The 2014 Loan Agreement matured four
years from execution, extending Plaintiff’s status as a secondary subordinated
creditor until February 2018. As alleged, under the Security Agreements, any further
13
Id. § 15.
14
Id. at 1, Recital A.
15
Id. at 7, Signature Page.
6
subordination of Plaintiff’s secured interests beyond that date would require his
consent. Full satisfaction of Defendant’s obligations to SVB pursuant to the 2014
Loan Agreement would prioritize Defendant’s obligations to Plaintiff under the
Notes and Security Agreements.
But in 2017, when full satisfaction under the 2014 Loan Agreement was
imminent, Defendant again extended its obligations to SVB—this time, without
Plaintiff’s knowledge or consent. On December 21, 2017, Defendant entered into a
Second Amended and Restated Loan and Security Agreement with SVB for an
additional line of credit in the amount of $1 million (the “2017 Loan Agreement”).
The 2017 Loan Agreement purports to amend and replace the 2014 Loan Agreement;
to extend the SVB loan’s maturity date and Plaintiff’s status as a secondary
subordinated creditor until June 1, 2021; and to foreclose Plaintiff from collecting
under the Notes and Security Agreements before that date.
C. Plaintiff Commences This Action; Thereafter, Defendant
And A Majority In Interest Of Investors Approve And
Execute The Amendment And 2019 Note.
Defendant has not paid any interest or principal under any of the Notes on the
grounds that the 2014 and 2017 Loan Agreements permissibly extended Plaintiff’s
subordinated status. Plaintiff contends Defendant has defaulted. On February 15,
2019, Plaintiff filed a verified complaint commencing this action (the “Initial
7
Complaint”).16 Relevant to this Motion, Count III of the Initial Complaint alleged
that Defendant breached the Security Agreements by entering into the 2017 Loan
Agreement without Plaintiff’s knowledge and consent.17
On April 17, Defendant moved to dismiss “pursuant to Court of Chancery
Rules 12(b)(3), and 12(b)(6)” (the “Initial Motion”).18 Defendant argued that Count
III should be dismissed pursuant to Rule 12(b)(3) because the Subordination
Agreement contains a forum selection clause in favor of California and “Plaintiff’s
claims in Count III related to breaches of the Security Agreements are all based upon
the Subordination Agreement.”19 The parties fully briefed the Initial Motion as of
July 17.20
With this litigation underway, on October 25, Defendant’s counsel sent
Plaintiff’s counsel three documents affecting Plaintiff’s pending claims: (1) a Note
Amendment Notice (the “Amendment Notice”);21 (2) an Amendment to Secured
Convertible Promissory Notes (the “Amendment”);22 and (3) a Subordinated
Secured Convertible Promissory Note in the amount of $2.5 million, reflecting the
16
D.I. 1.
17
Id. ¶¶ 49–56.
18
D.I. 3.
19
D.I. 6 at 11 (internal quotation marks omitted).
20
D.I. 7; D.I. 9.
21
Ex. J.
22
Ex. K.
8
total amount of the debt owed to Plaintiff under the Notes (the “2019 Note”).23 In
the accompanying correspondence, Defendant’s counsel explained,
We are amending and restating the secured convertible notes . . . As
part of the change, we are granting additional interest (1% and 2%
points) for noteholders that agree to the amendment on or before
October 31, 2019. Moreover, please know that if a majority in interest
of the noteholders approve the amendment, the amended note will apply
to ALL noteholders, regardless of whether they have consented.24
The Amendment Notice explained that the 2019 Note would effectuate the following
“proposed” changes to the existing Notes:
23
Ex. L.
24
Am. Compl. ¶ 44.
9
The “2019 Note” amends and replaces the Oct. 2013, Dec. 2013 and
July 2014 series (the “Original Notes”) which had expired on May 31,
2015, creating a single uniform note which expires on October 1, 2021.
The 2019 Note is binding as to an Investor upon such investor signing
it. In addition, provided that the majority in interest of the noteholders
for each series consents, the change will apply to all noteholders.
The Board has authorized the 2019 Note for $20 million.
Section 1: Neither interest nor principal are reduced. The section
incorporates an incentive for investors who approve and sign the
Amendment and the Note on/before October 31, 2019 . . . . For
Investors that do not sign the Amendment and Note on/before October
31, 2019, the interest remains the same as in the Original Notes: 8%
per annum compounded annually.
...
Section 10: Clarifies that the 2019 Note continues to be subordinated
to the Designated Senior Debt held by Silicon Valley Bank.25
The Amendment Notice afforded Plaintiff four business days to review and
determine whether to execute the accompanying final Amendment and 2019 Note.
On October 31, the last day to accept the Amendment and 2019 Note, Plaintiff
informed Defendant “that he could not and would not agree to such amendment, and
that he believed that this ill-conceived corporate action should be rescinded, and to
the extent it is not rescinded, [he] objected, did not consent, and reserved all of his
rights.”26 On December 20, Defendant notified Plaintiff that as of November 1, the
25
Ex. J.
26
Am. Compl. ¶ 62.
10
requisite majority of noteholders had agreed to the Amendment and 2019 Note.
Defendant contends that with the consent of the “simple majority of all
noteholders,”27 the 2019 Note and Amendment bind Plaintiff, waive Defendant’s
prior default under the Notes, and provide for a new maturity date of October 1,
2021. Defendant afforded Plaintiff another opportunity to consent to the 2019 Note,
which he rejected.
Defendant has issued nearly $14.5 million in notes. Approximately $3.7
million, or 26 percent, of that debt is held by officers of Defendant (the “Related
Parties”). Plaintiff alleges that the majority vote in favor of the Amendment and
2019 Note was secured only through the consent of the Related Parties, and that
Defendant would have been unable to obtain the requisite vote from a majority of
the “disinterested” noteholders alone.28
The Amendment explains that it and the 2019 Note spring from the Notes’
“Amendment and Waiver” provisions, which permit amendment upon consent of
the Majority in Interest of Investors.29 Correspondingly, the Amendment’s recitals
explain that “all of the Original Notes subject to this Amendment may be amended,
waived or modified upon the written consent of the Company and a Majority in
27
Id. ¶ 58; see also id. ¶ 60.
28
Id. ¶¶ 59, 60.
29
See Ex. K at 1, §§ 2(c), 4(a); see also Ex. L §§ 1, 2, 13(m).
11
Interest of Investors (the ‘Requisite Consent’),” and that “the Company and the
parties hereto, which constitute the Requisite Consent, desire to replace, amend and
restate the Original Notes, unifying them into a single Amended and Restated
Secured Convertible Promissory Note (2019 Edition) (the ‘2019 Note’).” 30 The
Amendment further states that “[i]f an investor has not subscribed this Amendment
and the 2019 Note on or before October 31, 2019,” then “this note should be binding
and effective as to such investor either because investor consented to this Note after
such date or because a Majority in Interest of Investors has decided to amend, restate
and unify the Original Notes with the 2019 Note.”31 It goes on to explain that the
Amendment and 2019 Note become effective upon receipt of the Majority in Interest
of Investors’ consent:
Effectiveness of Amendment. As to the amendment and restatement of
the Original Notes, this Amendment shall be effective as to each party
hereto as of the latter date of execution by Investor or Company, and
as to each other patty under the Original Notes, upon the execution of
this Amendment by the Company and a sufficient number of parties to
constitute the Requisite Consent. Additional parties hereto
nonetheless may be added after the effectiveness hereof.32
The 2019 Note mirrors the Notes through several provisions. It contains an
identical “Waiver and Amendment” provision:
30
Ex. K at 1, Recitals.
31
Id. § 2(c).
32
Id. § 4(a).
12
Any provision of this Note may be amended, waived or modified upon
the written consent of the Company and a Majority in Interest of
Investors. Notwithstanding the foregoing, the written consent of
Investor shall be required to reduce the principal amount of this Note
without Investor’s written consent, or reduce the rate of interest of this
Note without Investor’s written consent.33
The 2019 Note also defines “Majority in Interest of Investors” in the same manner
as the Notes.34 And, like the Notes and Security Agreements, the Amendment and
2019 Note are governed by Delaware law and provide for exclusive jurisdiction in
the Texas courts.35 The 2019 Note’s forum selection clause is identical to that of the
Notes, excerpted above.36
D. Plaintiff Files The Amended Complaint.
On January 17, 2020, in view of the Amendment and 2019 Note, Plaintiff
sought leave to file an amended complaint.37 Defendant stipulated to Plaintiff doing
so,38 and Plaintiff filed an Amended and Supplemental Verified Complaint on
February 28 (the “Amended Complaint”).39 The Amended Complaint asserts five
33
Ex. L § 13(b).
34
Id. § 8(h) (“‘Majority in Interest of Investors’ shall mean, as of any date, investors
holding more than 50% of the aggregate outstanding principal amount of the Notes on such
measurement date.”).
35
Ex. K § 4(d), (f); Ex. L § 13(h), (j).
36
Ex. L § 13(j).
37
D.I. 24.
38
D.I. 27.
39
See generally Am. Compl.
13
claims against Defendant. In addition to the four claims asserted in the Initial
Complaint, the Amended Complaint added a claim to address Defendant’s post-
complaint conduct. Relevant here, Count III of the Amended Complaint is identical
to Count III of the Initial Complaint and alleges Defendant breached the Security
Agreements by entering into the 2017 Loan Agreement with SVB.40 Count V, added
in response to the Amendment and 2019 Note, seeks a declaratory judgment that the
Amendment and 2019 Note are invalid in view of the Security Agreements.41
Plaintiff brings Claims III and V solely in his capacity as a noteholder.
On March 13, Defendant moved to dismiss, arguing that Counts III and V
must be dismissed pursuant to Rule 12(b)(3) in view of the forum selection clauses
contained in the relevant agreements (the “Motion”).42 Specifically, Defendant
contends that (1) Count III must be dismissed because the Security Agreements and
Notes’ forum selection provisions mandate adjudication in Texas, or in the
alternative, the Subordination Agreement’s forum selection clause mandates
adjudication in California; and (2) Count V must be dismissed because the
Amendment and 2019 Note’s forum selection clauses mandate adjudication in
Texas.
40
Id. ¶¶ 79–86.
41
Id. ¶¶ 96–101.
42
D.I. 29; D.I. 33.
14
The parties fully briefed the Motion as of June 22.43 I heard argument on
September 16,44 and took the Motion under advisement with respect to Counts III
and V on October 12 after receiving supplemental briefing.45
II. ANALYSIS
“The proper procedural rubric for addressing a motion to dismiss based on a
forum selection clause is found under Rule 12(b)(3), improper venue.”46 When
addressing a motion under Rule 12(b)(3), “the court is not shackled to the plaintiff’s
complaint and is permitted to consider extrinsic evidence from the outset.”47
In Ingres Corp. v. CA, Inc., the Delaware Supreme Court held that “where
contracting parties have expressly agreed upon a legally enforceable forum selection
clause, a court should honor the parties’ contract and enforce the clause, even if,
absent any forum selection clause, the [common law] principle might otherwise
43
D.I. 33; D.I. 37; D.I. 40.
44
D.I. 44; D.I. 53. The Motion has been resolved with respect to Counts I, II, and IV of
the Amended Complaint. At argument, I converted the Motion with respect to Counts I,
II, and IV to a motion for summary judgment and ordered corresponding submissions. I
also stayed the Motion with respect to Count I based on the statute of limitations. See D.I.
53.
45
D.I. 51; D.I. 52.
46
Sylebra Cap. P’rs Master Fund, Ltd. v. Perelman, 2020 WL 5989473, at *9
(Del. Ch. Oct. 9, 2020) (quoting In re Bay Hills Emerging P’rs I, L.P., 2018 WL 3217650,
at *4 (Del. Ch. July 2, 2018)).
47
Id. (quoting In re Bay Hills, 2018 WL 3217650, at *4).
15
require a different result.”48 Such clauses “are presumptively valid and should be
specifically enforced unless the resisting party clearly show[s] that enforcement
would be unreasonable and unjust, or that the clause [is] invalid for such reasons as
fraud and overreaching.”49
Accordingly, the Court subjects presumptively valid forum selection clauses
“to as-applied review . . . in real-world situations to ensure that they are not used
unreasonably and unjustly.”50 The Court “should assess the reasonableness of a
forum selection clause on a case-by-case basis.”51 To escape the reach of a forum
selection clause on grounds that it is unreasonable or unjust, the avoiding party
“bears a heavy burden to demonstrate that enforcement here would place it at an
unfair disadvantage or otherwise deny it its day in court.”52
48
8 A.3d 1143, 1145 (Del. 2010) (citing M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1,
15 (1972)); see also Nat’l Indus. Gp. (Hldg.) v. Carlyle Inv. Mgmt. L.L.C. (Carlyle II), 67
A.3d 373, 381 (Del. 2013).
49
Sylebra, 2020 WL 5989473, at *10 (alteration in original) (quoting Ingres, 8 A.3d at
1146).
50
Boilermakers Local 154 Ret. Fund v. Chevron Corp., 73 A.3d 934, 957 (Del. Ch. 2013)
(alterations and internal quotation marks omitted) (quoting Ingres, 8 A.3d at 1146); see
also id. at 941 (“Under Bremen and its progeny, like our Supreme Court’s recent Carlyle
decision, as-applied challenges to the reasonableness of a forum selection clause should be
made by a real plaintiff whose real case is affected by the operation of the forum selection
clause. If a plaintiff faces a motion to dismiss because it filed outside the forum identified
in the forum selection clause, the plaintiff can argue under Bremen that enforcing the clause
in the circumstances of that case would be unreasonable.” (footnote omitted)).
51
Ingres, 8 A.3d at 1146.
52
Sylebra, 2020 WL 5989473, at *11 (alterations and internal quotation marks omitted)
(quoting Cap. Gp. Cos., Inc. v. Amour, 2004 WL 2521295, at *6 (Del. Ch. Nov. 3, 2004)).
16
If that party fails to carry this burden, “[a] valid forum selection clause must
be enforced.”53 “The enforcement of a forum selection clause is the act of confining
the litigation to the chosen forum. Such enforcement action may take various forms.
For example, the court may dismiss or stay the case, if it is not the forum chosen in
the forum selection clause . . . .”54
Consistent with this framework, the forum selection clauses at issue here “are
considered presumptively, but not necessarily, situationally enforceable.”55 Plaintiff
has failed to carry his heavy burden of demonstrating that enforcement would be
unjust or unreasonable upon as-applied review. Counts III and V must therefore be
dismissed pursuant to Rule 13(b)(3).
A. Count V Is Dismissed Pursuant To Rule 12(b)(3).
Defendant contends that Count V, which seeks a declaratory judgment that
the Amendment and 2019 Note are invalid, must be dismissed. The Amendment
and 2019 Note both contain forum selection clauses that provide the Texas courts
with exclusive jurisdiction over any action or proceeding “in any way arising from
or relating to th[ose] agreement[s] and all contemplated transactions.”56 Under
53
Carlyle II, 67 A.3d at 381.
54
Carlyle Inv. Mgmt. L.L.C. v. Nat’l Indus. Gp. (Hldg.) (Carlyle I), 2012 WL 4847089, at
*6 (Del. Ch. Oct. 11, 2012) (footnotes omitted), aff’d, Carlyle II, 67 A.3d 373 (Del. 2013).
55
Boilermakers, 73 A.3d at 957.
56
Ex. K § 4(f); Ex. L § 13(j).
17
Delaware law, the forum selection clauses in the Amendment and 2019 Note are
presumptively valid and must be enforced unless Plaintiff demonstrates that
enforcement would be unreasonable and unjust, or that the clause itself is invalid for
fraud or overreaching.57 Plaintiff asserts two broad arguments he believes render
enforcement of the clauses unjust and unreasonable in this instance. Each falls short.
1. Plaintiff Consented To The Forum Selection
Clauses In The Amendment And 2019 Note.
Plaintiff argues that the Court should not enforce the clauses in the
Amendment and 2019 Note because he did not execute or otherwise consent to those
documents and therefore is not bound by their terms. But this Court has recognized
that where a party has freely and voluntarily agreed to a contractual scheme in which
his will may be superseded and subsumed by the will of his counterparties, he has
consented to a forum selection clause imposed through that scheme.58 In the absence
of more direct authority, I look to cases interpreting forum selection bylaws, as
Delaware law views such bylaws as “contractual”59 and enforces them “in the same
way [Delaware] enforces any other forum selection clause.”60
57
See, e.g., Sylebra, 2020 WL 5989473, at *9–10.
58
See id. at *10–11; Boilermakers, 73 A.3d at 954–58.
59
Boilermakers, 73 A.3d at 939, 940.
60
Sylebra, 2020 WL 5989473, at *9–10 (alteration in original) (quoting Boilermakers, 73
A.3d at 940); accord Boilermakers, 73 A.3d at 957 (“[B]ecause bylaws are interpreted
using contractual principles, the bylaws will also be subject to scrutiny under the principles
for evaluating contractual forum selection clauses . . . adopted by our Supreme Court . . . .
18
In Boilermakers Local 154 Retirement Fund v. Chevron Corp., then-
Chancellor Strine considered the plaintiffs’ claim that forum selection bylaws were
“contractually invalid, and therefore c[ould not] be enforced like other contractual
forum selection clauses . . . because they were unilaterally adopted by the
[defendant] boards using their power to make bylaws.”61 The plaintiffs “argue[d]
that this method of adopting a forum selection clause is invalid as a matter of contract
law, because it does not require the assent of the stockholders who will be affected
by it.”62 The Court rejected the plaintiffs’ position:
That plaintiffs did not vote on the bylaws at the time of their adoption
is not relevant to the question of whether the bylaws are valid or
contractually binding under Delaware law. Like any other bylaw,
which may be unilaterally adopted by the board and subsequently
modified by stockholders, these bylaws are enforced according to their
terms. Thus, they will be enforced just like any other forum selection
clause.63
The forum selection bylaws will therefore be construed like any other contractual forum
selection clause and are considered presumptively, but not necessarily, situationally
enforceable.”).
61
Boilermakers, 73 A.3d at 938.
62
Id. at 955.
63
Id. at 958 (citing Carlyle II, 67 A.3d at 381–82); see also id. at 957 (“[A] corporation’s
bylaws are part of an inherently flexible contract between the stockholders and the
corporation under which the stockholders have powerful rights they can use to protect
themselves if they do not want board-adopted forum selection bylaws to be part of the
contract between themselves and the corporation. And, as noted, precisely because forum
selection bylaws are part of a larger contract between the corporation and its stockholders,
and because bylaws are interpreted using contractual principles, the bylaws will also be
subject to scrutiny under the principles for evaluating contractual forum selection clauses
. . . adopted by our Supreme Court.” (footnotes omitted)).
19
In reaching this conclusion, the Court turned to fundamental principles of corporate
and contract law, reasoning that “the bylaws of a Delaware corporation constitute
part of a binding broader contract among the directors, officers, and stockholders
formed within the statutory framework of the DGCL” and that “[t]his contract is, by
design, flexible and subject to change in the manner that the DGCL spells out and
that investors know about when they purchase stock in a Delaware corporation.”64
By purchasing stock, the “stockholders contractually assent to be bound by bylaws
that are valid under the DGCL—that is an essential part of the contract agreed to
when an investor buys stock in a Delaware corporation.”65 And “[w]here . . . the
certificate of incorporation has conferred on the board the power to adopt bylaws
[without stockholder approval] . . . the stockholders have assented to that new bylaw
being contractually binding.”66 “Such a change by the board is not extra-contractual
simply because the board acts unilaterally; rather it is the kind of change that the
64
Id. at 939; accord Sylebra, 2020 WL 5989473, at *10; City of Providence v. First Citizens
BancShares, Inc., 99 A.3d 229, 233, 240 (Del. Ch. 2014), superseded on other grounds by
statute, 8 Del. C. § 115.
65
Boilermakers, 73 A.3d at 958; accord id. at 940 (“In other words, an essential part of the
contract stockholders assent to when they buy stock in [the defendant company] is one that
presupposes the board’s authority to adopt binding bylaws consistent with 8 Del. C. § 109.
For that reason, our Supreme Court has long noted that bylaws, together with the certificate
of incorporation and the broader DGCL, form part of a flexible contract between
corporations and stockholders, in the sense that the certificate of incorporation may
authorize the board to amend the bylaws’ terms and that stockholders who invest in such
corporations assent to be bound by board-adopted bylaws when they buy stock in those
corporations.”).
66
Id. at 958.
20
overarching statutory and contractual regime the stockholders buy into explicitly
allows the board to make on its own.”67 And under that same contractual scheme,
“[s]tockholders likewise agree that a requisite majority of other stockholders may
adopt bylaws with which they do not agree. A dissenting stockholder can no more
object to the authority of a board to adopt a bylaw than it could object to the requisite
majority of stockholders adopting a bylaw.”68 Finally, Boilermakers looked to
United States Supreme Court precedent that “reinforce[ed] the conclusion that forum
selection bylaws are, as a facial matter of law, contractually binding.”69
This Court has applied Boilermakers to conclude that protesting plaintiffs still
effectively consented to a forum selection bylaw. In Sylebra Capital Partners
Master Fund, Ltd. v. Perelman, Vice Chancellor Slights considered the plaintiff’s
contention that the plaintiff’s inability to sell its shares precluded its consent to the
subject forum selection bylaw.70 Invoking Boilermakers, the Court concluded that
“[t]his argument rests on a flawed reading of Delaware law,” as “[t]he ability of a
board of directors of a Delaware corporation to adopt binding bylaws is an essential
67
Id. at 956.
68
Id. at 956 n.99.
69
Id. at 957 (considering Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585, 594–95
(1991), which held that a forum selection provision was reasonable and enforceable even
though it was not negotiated).
70
Sylebra, 2020 WL 5989473, at *10.
21
part of the contract stockholders assent to when they buy stock,”71 and “upon
investing in the Company, [the plaintiff] knew that it was subject to” certain
contractual restrictions in the company’s articles of incorporation and bylaws.72
And in City of Providence v. First Citizens BancShares, Inc., Chancellor
Bouchard addressed whether it would be “unjust” to apply a forum selection bylaw
“because the stockholders of [the company] effectively lack[ed] the ability to repeal
it” because of the presence of a controlling stockholder.73 While recognizing that
Boilermakers did not squarely address such an as-applied challenge, the Court
reasoned that while “a board-adopted forum selection bylaw, much like any board-
adopted bylaw, is subject to the most direct form of attack by stockholders who do
not favor them”74—repeal by majority vote—neither the DGCL nor Boilermakers
“mandate that a board-adopted forum selection bylaw can be applied only if it is
realistically possible that stockholders may repeal it.”75 “[T]hat there is currently a
controlling stockholder who may favor a board-adopted forum selection bylaw . . .
71
Id. (quoting Boilermakers, 73 A.3d at 940, and citing City of Providence, 99 A.3d at
240).
72
Id. at *11.
73
City of Providence, 99 A.3d at 241.
74
Id. (alterations and internal quotation marks omitted) (quoting Boilermakers, 73 A.3d at
954).
75
Id.22
does not make it per se unreasonable to enforce the bylaw.”76 Such a plaintiff may
still avoid the forum selection bylaw by demonstrating that its enforcement is
unreasonable because it would be inequitable to require the parties to litigate in the
chosen forum.77
While this case does not involve a forum selection bylaw, Boilermakers,
Sylebra, and City of Providence refute Plaintiff’s contention that the forum selection
clauses in the Amendment and 2019 Note are invalid because he did not consent to
those specific agreements. Just as stockholders assent to an “overarching statutory
and contractual regime” that “explicitly allows the board to make [changes] on its
own”78 and that permits “a requisite majority of other stockholders [to] adopt bylaws
with which they do not agree,”79 Plaintiff assented to the Notes’ contractual
76
Id.77
Id. at 242 (“Reaching this conclusion does not leave minority stockholders of controlled
corporations without recourse. Schnell [v. Chirs-Craft Industries, Inc., 285 A.2d 437, 439
(Del. 1971), which held that “inequitable action does not become permissible simply
because it is legally possible,”] is a powerful lens through which this Court evaluates the
as-applied validity of forum selection bylaws. In the appropriate case, a foreign forum
selection bylaw may not withstand Schnell scrutiny. For reasons previously discussed,
however, Providence has not convinced me that it would be inequitable here to require
Providence to litigate the claims asserted in the Merger Complaint in the United States
District Court for the Eastern District of North Carolina or in a North Carolina state
court.”).
78
Boilermakers, 73 A.3d at 956.
79
Id. at 956 n.99.
23
framework, which explicitly recognizes that dissenting noteholders will be bound by
amendments adopted by a Majority in Interest of Investors.
On six occasions between 2013 and 2015, Plaintiff executed Notes containing
the same “Waiver and Amendment” provision.80 Plaintiff agreed that the Notes
“may be amended, waived or modified upon the written consent of the Company
and a Majority in Interest of Investors.”81 Under that clear contractual framework,
Plaintiff “assent[ed] to not having to assent to” amendments adopted by a
Majority in Interest of Investors.82 The Amendment and 2019 Note indicate that
they, including their forum selection clauses, were enacted by just this mechanism.83
Plaintiff’s argument that he must have consented to the Amendment and 2019 Note,
or had the opportunity to negotiate their terms, for their provisions to bind him “is
an interpretation that contradicts the plain terms of the contractual framework” he
agreed to via the Notes.84
80
See Ex. B § 10(b); Ex. E § 10(b); Ex. F § 11(b); Ex. G § 10(b); Ex. H § 11(b); Ex. I §
10(b).
81
See, e.g., Ex. B § 10(b).
82
See Boilermakers, 73 A.3d at 956. Plaintiff does not argue that use of the Notes’ “Waiver
and Amendment” provisions itself was a wrongful means of adopting the Amendment and
2019 Note: he makes no meaningful challenge that the process renders enforcement of
their forum selection clauses unjust or unreasonable. And having notice of this contractual
process, he cannot disavow it now. See Shute, 499 U.S. at 595 (stating that it is reasonable
to enforce a forum selection clause where the complaining party had notice of it).
83
Ex. K at 1, §§ 2(c), 4(a); Ex. L §§ 1, 2, 13(m); see also Ex. J.
84
Boilermakers, 73 A.3d at 956.
24
As recognized in Boilermakers and Carnival Cruise Lines, Inc. v. Shute, a
forum selection clause may be reasonable although it was not subject to negotiation,
absent evidence of fraud or overreaching with respect to the clause.85 Plaintiff was
on notice of the amendment process via the Notes; presumably could have chosen
to reject that process by foregoing his debt investment; received final versions of the
Amendment and 2019 Note that included the forum selection clauses at issue; and
was aware that his fellow noteholders may consent to those documents such that
they would become binding on Plaintiff. The forum selection clauses in the
Amendment and 2019 Note are not invalid simply because they lack Plaintiff’s
specific and contemporaneous consent or buy-in.
Plaintiff also resists being bound by the Notes’ contractual scheme because
the Majority in Interest of Investors includes Defendant’s Related Parties, and
because the resulting Amendment and 2019 Note foreclosed Plaintiff from
recouping his investment as originally anticipated. Plaintiff contends that nothing
in the Amendment and 2019 Note “prevents Rev from using the purported majority
(which includes related parties) to further extend the October 2021 maturity date to
avoid ever having to pay back the investors (just as the extension of the SVB line of
credit has accomplished).”86
85
See Shute, 499 U.S. at 594–95; Boilermakers, 73 A.3d at 956–58.
86
Am. Compl. ¶ 61.
25
But in City of Providence, the Court enforced a unilaterally imposed forum
selection bylaw over an investor’s complaint that his vote would be continually
subsumed by the vote of an interested majority stockholder.87 Under that principle,
neither the Related Parties’ vote nor its adverse effect on Plaintiff renders the forum
selection clause invalid. As City of Providence instructs, Plaintiff cannot point to an
interested vote to avoid the forum selection clause’s effect. Rather, he must meet
his heavy burden of demonstrating that it would be inequitable to require the parties
to litigate in the chosen forum.88
Accordingly, like the plaintiffs in Boilermakers, City of Providence, and
Sylebra, I conclude that Plaintiff implicitly consented to the forum selection clauses
in the Amendment and 2019 Note, which favor the Texas courts.
2. Plaintiff Has Failed To Otherwise Demonstrate
That Enforcement Of Those Clauses Would Be
Unreasonable Or Unjust.
I now turn to Plaintiff’s argument that litigating the validity of the 2019 Note
in Texas “would not only be an undue burden on Plaintiff, but on the judicial system
as well.”89 Plaintiff contends that this Delaware action “likely cannot proceed
without a determination of the validity of the Amendment and 2019 Note first,” and
87
See City of Providence, 99 A.3d at 240–42.
88
See id. at 242.
89
D.I. 37 at 44.
26
“[t]o force [Plaintiff] to take this claim to Texas for adjudication, thus stalling these
proceedings indefinitely, would undermine the Court’s ability to control its own
docket.”90
Plaintiff has failed to demonstrate that litigation in Texas would be unduly
burdensome on him. “Mere inconvenience or additional expense is not the test of
unreasonableness. In light of present day commercial realities, a forum clause
should control absent a strong showing that it should be set aside.” 91 Such a clause
“is unreasonable only when its enforcement would, under the circumstances then
existing, seriously impair the plaintiff’s ability to pursue his cause of action.”92
Plaintiff has not argued that he would be unreasonably disadvantaged by litigating
Count V in Texas. Plaintiff only cites delay and inconvenience in prosecuting the
rest of his claims in Delaware. Those concerns fail to overcome the Amendment
and 2019 Note’s Texas forum selection clauses.
Plaintiff’s concern for this Court’s docket and judicial economy is also
unpersuasive. “Delaware courts have held that, if there is a forum selection clause
90
Id. (emphasis in original).
91
Ingres, 8 A.3d at 1146 n.9 (quoting HealthTrio, Inc. v. Margules, 2007 WL 544156, at
*3 (Del. Super. Jan. 16, 2007)).
92
Id. (quoting Elia Corp. v. Paul N. Howard Co., 391 A.2d 214, 216 (Del. Super. 1978));
see also id. (stating that the clause “should be respected as the responsible expression of
the intention of the parties so long as there is no proof that its provisions will put one of
the parties to an unreasonable disadvantage and thereby subvert the interests of justice”
(quoting Cent. Contr. Co. v. Md. Cas. Co., 367 F.2d 341, 345 (3d Cir. 1966))).
27
in a contract, even when venue where the suit is filed is proper, the court should
decline to proceed when the parties freely agreed that litigation should be conducted
in another forum.”93 “So long as there is nothing unreasonable in such a provision
there is no basis for viewing it as an affront to the judicial power, which must be
stricken down.”94 With these principles in mind, “judicial economy requires
selection of the proper forum at the earliest possible opportunity.”95
Plaintiff’s lost luxury of adjudicating related claims in a single proceeding
falls short of an affront to the judicial power. Taking his claim to Texas may pose
the risk that this action is stayed pending adjudication in that court. But that risk of
delay is insufficient to overcome this Court’s obligation to afford forum selection
clauses substantial weight. Plaintiff has not shown that enforcement would be
unreasonable, so Delaware law mandates that I dismiss Count V.
93
Id. at 1145 n.8 (quoting HealthTrio, Inc., 2007 WL 544156, at *3); see also Outokumpu
Eng’g Enters. v. Kvaerner EnviroPower, Inc., 685 A.2d 724, 733 (Del. Super. 1996)
(explaining that forum selection clauses are entitled to “substantial weight”); Elia Corp.,
391 A.2d at 216 (“[E]ven though venue is proper where suit is filed and a court of
competent jurisdiction exists, that court should decline to proceed with the cause when the
parties have freely agreed that litigation shall be conducted in another forum and where
such agreement is not unreasonable at the time of litigation.”).
94
Ingres, 8 A.3d at 1145 n.8 (quoting Cent. Contr. Co., 367 F.2d at 345).
95
Simon, 2000 WL 1597890, at *5 & n.22 (holding that a motion to dismiss based on a
forum selection clause should be handled via Rule 12(b)(3) because “judicial economy
requires selection of the proper forum at the earliest possible opportunity” (quoting
Frietsch v. Refco, Inc., 56 F.3d 825, 830 (7th Cir. 1995))).
28
3. Plaintiff Cannot Dislodge The Forum Selection
Clauses By Attacking The Validity Of The
Instruments Containing Them.
In the absence of a specific argument that the forum selection clauses are
unreasonable as applied, Plaintiff alleges that the Amendment and 2019 Note are
invalid, claiming that they were wrongfully procured by the vote of interested
investors and tainted by suspect timing. Plaintiff argues that because Count V
alleges that the Amendment and 2019 Note are invalid, this Court should not enforce
their forum selection clauses.
But this argument is contrary to settled Delaware law. In Carlyle Investment
Management L.L.C. v. National Industries Group (Holding), this Court considered
an argument that the agreement at issue was “void in its entirety, and that the forum
selection clause is void too.”96 The Court rejected the argument, even if the
agreement was, in fact, invalid:
96
Carlyle I, 2012 WL 4847089, at *7.
29
Under Delaware and federal law, a party cannot escape a valid forum
selection clause . . . by arguing that the underlying contract was
fraudulently induced or invalid for some reason unrelated to the forum
selection . . . clause itself. Instead, the party must show that the forum
selection clause itself is invalid. If the forum selection clause, standing
alone, is found to be valid, the court that has jurisdiction over the
dispute is to decide whether the contract is enforceable. Delaware has
embraced the same approach because it sensibly prevents a party from
making an end-run around an otherwise enforceable forum selection
provision through an argument about the enforceability of other terms
in the contract.97
The Delaware Supreme Court affirmed and adopted this reasoning on appeal: “[i]f
the forum selection clause, standing alone, is found to be valid, the court having
jurisdiction over the dispute is to decide whether the contract is enforceable or
void ab initio.”98 Accordingly, this Court cannot adjudicate the overall validity of
the Amendment and 2019 Note in the face of presumptively valid forum selection
clauses therein, in the absence of facts clearly demonstrating that the enforcement of
the clauses themselves, rather than the contracts as a whole, is unjust or
unreasonable.
97
Id. at *10 (alterations, footnotes, and internal quotation marks omitted) (quoting Ashall
Homes Ltd. v. ROK Ent. Gp. Inc., 992 A.2d 1239, 1248 (Del. Ch. 2010)).
98
Carlyle II, 67 A.3d at 380; accord Sylebra, 2020 WL 5989473, at *13 (“Moreover, even
if [plaintiff] had attempted to plead that the Reincorporation Merger was procured by fraud,
that would be irrelevant in determining whether the Forum Selection Bylaw itself was
procured by fraud. If the Forum Selection Bylaw is valid and enforceable in its own right,
then whether there was fraud associated with the Reincorporation Merger . . . is a matter
for the Nevada court to decide.”).
30
Nor can this Court assess the adequacy of the vote resulting in the Amendment
and 2019 Note. To warrant this Court’s attention, the avoiding party’s arguments
must focus on the forum selection clause itself, not the transaction at large.99 Absent
well-pled facts explaining how Defendant and the Related Parties “have advanced
their self-interests by having the claims in the [Amended] Complaint adjudicated in
those courts instead of a Delaware court,” Plaintiff’s allegations that the Amendment
and 2019 Note wrongfully depend on the vote of interested Related Parties do not
foreclose enforcement of the forum selection clauses.100
Neither does the allegedly suspect timing of the vote, Amendment, and 2019
Note. Plaintiff has alleged that “the 2019 Note and Amendment were Rev’s
improper, eleventh hour attempt to erase its existing default under the Notes and
99
See City of Providence, 99 A.3d at 240–41 (holding that enforcement of a forum selection
clause is not unreasonable or inequitable per se because it was adopted in connection with
a self-interested or improperly-motivated transaction, and that the avoiding party must
demonstrate that enforcement is unreasonable because the alleged interestedness pertains
to the forum selection clause itself); see also Carlyle I, 2012 WL 4847089, at *10 (holding
that arguments regarding invalidity must go to the forum selection clause itself, not the
agreement generally).
100
See City of Providence, 99 A.3d at 241; see also Sylebra, 2020 WL 5989473, at *12
(“As the Defendants properly note, in determining whether a stockholder has met his
burden to demonstrate unreasonableness in Delaware, the fundamental inquiry is whether
the stockholder has alleged well-pled facts calling into question the integrity of the court
chosen in the forum selection bylaw, or explained how the defendants have advanced their
self-interests by having the claims adjudicated in those courts instead of a Delaware court.
Sylebra has not alleged, likely because it cannot allege, either fact.” (alterations and
internal quotation marks omitted) (quoting City of Providence, 99 A.3d at 241)).
31
moot Plaintiff’s pending claims.”101 But City of Providence and Sylebra instruct that
suspect timing in imposing a forum selection clause does not render it unenforceable.
Facing a similar argument in City of Providence,102 Chancellor Bouchard turned to
the contractual scheme the plaintiff agreed to; an “essential part” of that contract was
the presupposition that the board could adopt a binding forum selection bylaw
without a stockholder vote.103 Thus, the stockholder should hold the “reasonable
expectation” that the board could adopt such a bylaw at any time, subject to an as-
applied challenge.104 Sylebra adopted the same logic: “a stockholder in a Delaware
corporation gives consent to be bound by current and future bylaws when it buys
stock. Whether or not the alleged wrongdoing comes before or after the adoption of
a forum selection bylaw is irrelevant in determining the reasonableness or overall
101
D.I. 37 at 43; see also Am. Compl. ¶ 48 (“Assuming the Amendment were legitimate,
the Company would no longer be in default on Mack’s Notes and the accompanying
Security Agreements that form the basis for Mack’s claims against Rev as stated in the
original Verified Complaint.”); id. ¶ 49 (“Though, by the stroke of a pen, Rev was
attempting to extinguish Mack’s right to recovery of his investment and moot several
claims of this lawsuit, no notice was made to this Court (even though oral argument on
Rev’s motion to dismiss the extant complaint was scheduled for February 12, 2020).”).
102
See City of Providence, 99 A.3d at 238 (“Providence contends that the timing of the
Board’s adoption of the Forum Selection Bylaw—simultaneous with the adoption of the
merger agreement—renders applying the bylaw to dismiss the Merger Complaint
unreasonable.”); id. at 240 (“Providence argues that enforcing the Forum Selection Bylaw
against it would be unjust because the Board’s adoption of the Bylaw, which occurred
simultaneously with the announcement of the unfair [proposed merger], goes well beyond
its reasonable expectations.” (alterations and internal quotation marks omitted)).
103
Id. at 240.
104
Id.
32
enforceability of the bylaw.”105 Plaintiff has failed to demonstrate that the suspect
timing renders enforcement of the Amendment and 2019 Note’s forum selection
clauses unreasonable or unjust. Nor has Plaintiff demonstrated that the timing of the
vote and 2019 Note forecloses adjudication of his claims.
To paraphrase Carlyle, for now, what is important is that the parties agreed
that issues arising from or related to the Amendment and 2019 Note would be
determined by the Texas courts.106 The fact that Plaintiff may have a claim to
invalidate the Amendment and 2019 Note does not render their forum selection
provisions unenforceable by this Court. That Defendant and the Related Parties
adopted the Amendment and 2019 Note “on an allegedly ‘cloudy’ day . . . rather
than on a ‘clear’ day is immaterial given the lack of any well-pled allegations” in
Plaintiff’s complaint demonstrating impropriety with respect to the chosen forum. 107
The subject forum selection clauses “merely regulate[] where the [noteholder] may
file suit, not whether the [noteholder] may file suit or the kind of remedy that the
[noteholder] may obtain.”108 Accordingly, the conduct of Defendant and the Related
Parties in approving the Amendment and 2019 Note “will not be absolved from
105
Sylebra, 2020 WL 5989473, at *11 (footnotes omitted).
106
See Carlyle I, 2012 WL 4847089, at *10.
107
City of Providence, 99 A.3d at 241.
108
Id. (quoting Boilermakers, 73 A.3d at 952).
33
judicial review.”109 That review simply must occur in a Texas court. Count V is
dismissed.110
B. Count III Is Dismissed Pursuant To Rule 12(b)(3).
With respect to Count III, Defendant contends the claim must be dismissed in
view of one of two forum selection clauses: the Notes’ forum selection clauses in
favor of Texas, which are explicitly incorporated by reference in the Security
Agreements; or the Subordination Agreement’s forum selection clause in favor of
California, as the Security Agreements are subject to the Subordination Agreement.
In response, Plaintiff raises two arguments. Procedurally, Plaintiff asserts that
Defendant waived any improper venue defense based on the Notes and Security
Agreements’ forum selection clauses because Defendant did not raise those specific
clauses in support of the Initial Motion under Rule 12(b)(3). Substantively, Plaintiff
argues that Defendant cannot invoke the forum selection clause in the Subordination
Agreement because Defendant was not a formal party to it. Neither of Plaintiff’s
arguments preclude dismissal. Count III cannot be adjudicated in Delaware.
109
Id.110
Defendant also argued that Count V should be dismissed for failure to state a claim
under Rule 12(b)(6). In view of my determination under Rule 12(b)(3), I do not reach that
issue.
34
1. Defendant Did Not Waive Its 12(b)(3) Defense
And Therefore May Invoke The Forum
Selection Provisions In The Notes And Security
Agreements.
Defendant’s Motion contends Count III must be dismissed based on the Texas
forum selection clause in the Notes and incorporated by reference into the Security
Agreements. Defendant did not present this argument in the Initial Motion; the
Initial Motion sought dismissal based only on the Subordination Agreement’s
California forum selection clause, contending that “Plaintiff’s claims in Count III
related to breaches of the Security Agreements are all based upon the Subordination
Agreement.”111 According to Plaintiff, because Count III of the Amended
Complaint is identical to Count III of the Initial Complaint, Defendant could have
asserted the Security Agreement and Notes’ Texas forum selection clause as the
basis for the Rule 12(b)(3) defense in its Initial Motion, but failed do so and therefore
waived it.
At bottom, Plaintiff contends Court of Chancery Rule 12 requires a
defendant’s first motion to assert not just a Rule 12(b)(3) defense, but also all
potential arguments in support, and forecloses the defendant from asserting new or
more expansive arguments after an amended complaint has been filed. Plaintiff
provides no authority for his view that failure to raise a specific ground for the
111
D.I. 6 at 10 (internal quotation marks omitted).
35
defense constitutes waiver of that ground. Nor has the Court found any. Rather,
Rule 12’s plain language, its underlying policy, and the practicalities of pleading and
motion practice lead to the conclusion that Defendant did not waive its Rule 12(b)(3)
defense based on the Texas forum selection clause.
“[U]nder Delaware law, a waiver is found where a party had actual or
constructive notice of a known right, and that the party voluntarily and intentionally
relinquished that known right.”112 Court of Chancery Rule 12 codifies when a
defendant waives certain defenses. The plain language of Rule 12 deals with raising
and waiving the defense generally. Rule 12 does not mention, let alone mandate,
that the movant raise every specific ground for the defense or waive those arguments.
Under Rule 12(h)(1), the improper venue defense is waived if it is not raised
in the initial motion or responsive pleading. That Rule provides, in pertinent part:
A defense of lack of jurisdiction over the person, improper venue,
insufficiency of process, or insufficiency of service of process is waived
(A) if omitted from a motion in the circumstances described in
paragraph (g), or (B) if it is neither made by motion under this rule nor
included in a responsive pleading or an amendment thereof permitted
by Rule 15(a) to be made as a matter of course.113
Rule 12(g) in turn states:
112
Ashall Homes Ltd., 992 A.2d at 1247 (alterations, footnotes, and internal quotation
marks omitted) (quoting Danvir Corp. v. City of Wilm., 2008 WL 4560903, at *7 (Del. Ch.
Oct. 6, 2008)); see also E. Hedinger AG v. Brainwave Sci., LLC, 363 F. Supp. 3d 499, 506
(D. Del. 2019) (“Waiver is the intentional relinquishment or abandonment of a known
right.” (alterations and internal quotation marks omitted) (quoting United States v. Olano,
507 U.S. 725, 733 (1993))).
113
Ct. Ch. R. 12(h)(1).
36
If a party makes a motion under this rule but omits therefrom any
defense or objection then available to the party which this rule permits
to be raised by motion, the party shall not thereafter make a motion
based on any of the defenses or objections so omitted except as
provided in subparagraph (h)(2) hereof on any of the grounds there
stated.114
Under these provisions, Rule 12 requires an improper venue defense be raised
by a timely Rule 12 motion or, if no motion is filed, in the first responsive
pleading.115 The defendant “[i]s required to expressly raise the defense of lack
[venue] no later than her answer” in order to give the opposing party “sufficient
notice of the Rule 12(b)([3]) defense.”116 If the defendant “fail[s] to expressly raise
a lack of [venue] defense in a timely manner,” then the defense is waived.117
In applying these provisions, it is important to keep in mind that they “are
designed to prevent a litigant from using a series of motions as a dilatory tactic,”118
114
Ct. Ch. R. 12(g).
115
Plummer v. Sherman, 861 A.2d 1238, 1243–44 (Del. 2004); see also Jones v. Peek,
2009 WL 3334913, at *3 (Del. Super. Oct. 14, 2009) (“Rule 12(h) imposes a higher
sanction with respect to the failure to raise the specific defenses of lack of personal
jurisdiction, improper venue, insufficiency of process, and insufficiency of service of
process. If a party filed a pre-answer motion but fails to raise one of the defenses
enumerated above, the party waives the omitted defense and cannot subsequently raise it
in his answer or otherwise.” (emphasis omitted) (quoting Myers v. Am. Dental Ass’n, 695
F.2d 716, 720 (3d Cir. 1983))).
116
Plummer, 861 A.2d at 1244.
117
Id.118
Id. at 1243.
37
to “direct[] a party to take timely action on answers or motions,”119 and “to expedite
litigation and encourage disputes to be resolved on their merits.”120 Failure to timely
raise the defense results in waiver because delay often results in prejudice, and
“[p]rejudice is the touchstone for determining whether [a] right . . . has been
waived.”121 The Court therefore considers whether the opposing party was on notice
of the defense and whether the opposing party had sufficient opportunity to
respond.122
119
Jones, 2009 WL 3334913, at *2.
120
Tuckman v. Aerosonic Corp., 394 A.2d 226, 232 (Del. Ch. 1978) (“The purpose for
[Rule 12(h)] is to expedite litigation and encourage disputes to be resolved on their
merits.”); see also Myers, 695 F.2d at 720–21 (stating that Rule 12 is crafted “to afford an
easy method for the presentation of defenses but at the same time prevent their use for
purposes of delay,” and that “[t]he [analogous] federal rules single out four defenses which
must be raised by the defendant’s initial responsive pleading in order to be preserved,”
which “reflects a strong policy against tardily raising defenses that go not to the merits of
the case but to the legal adequacy of the initial steps taken by the plaintiff in his litigation,
namely . . . his choice of forum for the action,” and “benefits the court as well as the
opposing party by requiring a litigant to raise certain technical objections, the basis of
which should be apparent from the outset of the action, before the litigation has moved
forward”).
121
E. Hedinger AG, 363 F. Supp. 3d at 506 (quoting Hoxworth v. Blinder, Robinson & Co.,
Inc., 980 F.2d 912, 925 (3d Cir. 1992)) (analyzing whether defendant waived its right to
invoke an arbitration clause).
122
Cf. Myers, 695 F.2d at 720–21 (holding that defendant could not “amend” its pleading
to broaden its lack of personal jurisdiction defense raised in an initial motion to dismiss
because “the defense of personal jurisdiction was not raised before the district court until
after argument and after the court rendered its decision on the motion,” and suggesting that
the result may have been different if “a pre-answer motion was amended or supplemented
prior to argument before the district court” so as to afford the opponent an opportunity to
respond (emphasis in original)).
38
This Court’s briefing rules and practices mitigate the risk of unfair surprise
from new or unreasonably expanded arguments. It is well settled that arguments
that were not raised in an opening brief and are beyond the scope of matter asserted
in a responsive brief are deemed waived.123 Thus, considering this common law
principle and Rule 12, on a typical motion to dismiss, the defendant must raise the
improper venue defense to preserve it and avoid waiver under Rule 12. The
defendant then bears the burden of asserting all grounds supporting the defense in
his opening brief, filed either contemporaneously with or shortly after the motion.
At that point, substantive arguments not briefed are deemed waived.
Synthesizing the plain text of Rule 12, its policies, and the coordinating
common law on waiver of arguments, I conclude that because Defendant timely and
“expressly raise[d]” its 12(b)(3) defense in response to the Initial Complaint and
again in response to the Amended Complaint, Defendant gave Plaintiff “sufficient
123
See, e.g., Emerald P’rs v. Berlin, 726 A.2d 1215, 1224 (Del. 1999) (holding that plaintiff
waived arguments by failing to raise them in its opening brief); Murphy v. State, 632 A.2d
1150, 1152 (Del. 1993) (explaining that “[t]he failure to raise a legal issue in the text of the
opening brief generally constitutes a waiver of that claim on appeal” (footnote omitted));
Franklin Balance Sheet Inv. Fund v. Crowley, 2006 WL 3095952, at *4 (Del. Ch.
Oct. 19, 2006) (explaining that, “under the briefing rules, a party is obliged in its motion
and opening brief to set forth all of the grounds, authorities and arguments supporting its
motion” and “should not hold matters in reserve for reply briefs,” which “should consist of
material necessary to respond to the answering brief”); In re Asbestos Litig., 2007 WL
2410879, at *4 (Del. Super. Aug. 27, 2007) (noting that it is “well-settled in Delaware”
that a legal issue not raised in an opening brief is generally deemed waived and “[m]oving
parties must provide adequate factual and legal support for their positions in their moving
papers in order to put the opposing parties and the court on notice of the issues to be
decided”).
39
notice” of the defense and the defense is preserved.124 Defendant’s Initial Motion,
like the instant Motion, raised a 12(b)(3) defense against Count III. Specifically,
Defendant argued that Count III must be dismissed in view of the Subordination
Agreement’s forum selection clause. Thereafter, the parties fully briefed the issue.
Plaintiff had ample opportunity to respond to Defendant’s specific Rule 12(b)(3)
arguments on the Initial Motion. If the Court had adjudicated the Initial Motion,
Defendant would have been held to those arguments alone and would not have been
permitted to invoke the forum selection provisions of the Security Agreements and
Notes.
But the Court did not adjudicate the Initial Motion because Plaintiff elected to
file the Amended Complaint. The Amended Complaint renewed Defendant’s
opportunity to raise the 12(b)(3) defense, along with its supporting arguments.125
Defendant repeated its 12(b)(3) defense and, perhaps perceiving that it had missed
an opportunity on the Initial Motion, asserted an additional argument in support: the
Security Agreements’ forum selection provision, which explicitly incorporates the
Notes’ forum selection clauses by reference. Defendant gave Plaintiff “sufficient
124
Plummer, 861 A.2d at 1244.
125
Cf. Dunfee v. KGL Hldgs. Riverfront, LLC, 2018 WL 5619705, at *1–2 (Del. Super. Ct.
Oct. 30, 2018) (considering whether a “successive Rule 12(b)(6) motion” raising new
ground for the motion was “a violation of Rule 12(g) and Rule 12(h)(2),” concluding it
was, but stating that if plaintiff failed an amended complaint, then defendant “shall be
permitted to file another motion to dismiss pursuant to 12(b)(6) regarding those amended
complaints” inclusive of the grounds raised in the improper motion).
40
notice” of the defense and its supporting basis.126 Plaintiff had every opportunity to
respond in briefing and at argument, and did so in full voice.
Nothing in Rule 12’s plain language foreclosed Defendant’s course of
conduct. In Defendant’s Initial Motion, Defendant fulfilled its “duty” “to appear
and raise his objections” in a timely manner under Rule 12.127 Defendant did not
waive its Rule 12(b)(3) defense by refining it after Plaintiff filed his Amended
Complaint. Plaintiff has not argued nor demonstrated that Defendant used motion
practice or other presentation of the Rule 12 defenses for purposes of delay or as a
dilatory tactic.128 And most importantly, Plaintiff has failed to articulate how he has
been prejudiced by Defendant’s decision to assert the Security Agreements’ forum
selection provision as a basis for the Rule 12(b)(3) defense. I cannot discern any
such prejudice. Defendant did not waive its grounds for its Rule 12(b)(3) defense
by timely raising them and fully briefing them in response to the Amended
Complaint.
126
Plummer, 861 A.2d at 1244.
127
Jones, 2009 WL 3334913, at *2 (quoting U.S. ex rel. Combustion Sys. Sales, Inc. v. E.
Metal Prod. & Fabricators, Inc., 112 F.R.D. 685, 686 (M.D.N.C. 1986)).
128
See Plummer, 861 A.2d at 1243; Myers, 695 F.2d at 720.
41
2. Multiple Forum Selection Clauses Require
Dismissal of Count III.
Count III alleges that Defendant breached the Security Agreements.
Defendant argues that Count III must be dismissed because the Security Agreements
expressly adopt and incorporate the Notes’ forum selection clauses, which provide
for exclusive jurisdiction in the U.S. District Court for the Western District of Texas
in Austin, Texas or the courts of the State of Texas sitting in Travis County. 129
Defendant alternatively argues that Count III must be dismissed because the Security
Agreements and their corresponding Notes are expressly subject to the terms and
conditions of the Subordination Agreement, which contains a forum selection clause
subjecting disputes arising from and related to it “to the exclusive jurisdiction of the
state and federal courts located in Santa Clara County, California in any action, suit,
or proceeding of any kind, against it which arises out of or by reason of this
Agreement.”130 Those clauses “are presumptively valid and should be specifically
enforced unless the resisting party clearly show[s] that enforcement would be
129
See Ex. B § 10(J); Ex. E § 10(J); Ex. F § 11(J); Ex. G § 10(J); Ex. H § 11(J); Ex. I §
10(J).
130
Ex. D § 15.
42
unreasonable and unjust, or that the clause [is] invalid for such reasons as fraud and
overreaching.”131
Plaintiff has not argued or demonstrated that enforcing either the Texas or
California forum selection provision would be unreasonable or that those provisions
were procured by fraud or overreaching. And nothing suggests that enforcement
“would place [Plaintiff] at an unfair disadvantage or otherwise deny it its day in
court.”132 Thus, the forum selection provisions divest this Court of jurisdiction to
hear Count III.
Plaintiff does argue that Defendant cannot invoke the Subordination
Agreement’s forum selection clause because, although Defendant is named as
“Borrower” under that agreement and signed it, Defendant is not a formal party to
the agreement “by and between the [C]reditors . . . and Silicon Valley Bank.”133
Evaluating this argument would require this Court to substantively interpret the
Subordination Agreement, even though its forum selection clause clearly gives
California courts exclusive jurisdiction over that task.134 This Court would be
131
Sylebra, 2020 WL 5989473, at *10 (alterations in original) (quoting Ingres, 8 A.3d at
1146).
132
Id. at *11 (alterations and internal quotation marks omitted) (quoting Cap. Gp. Cos.,
Inc., 2004 WL 2521295, at *6).
133
Ex. D at 1.
134
The Subordination Agreement is expressly governed by California law. Ex. D. § 15.
“When a contract contains a forum selection clause, this court will interpret the forum
selection clause in accordance with the law chosen to govern the contract.” Ashall Homes
43
required to consider the import of Defendant being named as “Borrower” under the
Subordination Agreement, its provisions discussing the parties’ rights and
obligations with respect to Borrower, and the effect of Borrower’s executing the
Subordination Agreement.135 Considering these issues and interpreting the
Ltd., 992 A.2d at 1245. “It is telling, however, that neither party has cited to [California]
law—the law for which they bargained—in its briefing on this motion.” Id. at 1246. “That
illustrates a basic problem with adjudicating this dispute in Delaware: this court does not
have—and cannot pretend to have—the same knowledge of [California] law . . . as the
courts of [California].” Id.135
A California court very well might decide that the Defendant could invoke the
Subordination Agreement’s forum selection clause against Plaintiff. Under Delaware law,
which is consistent with the laws of many other jurisdictions, a non-signatory has standing
to invoke and enforce a forum selection clause where it is “closely related to one of the
signatories such that the non-party’s enforcement of the clause is foreseeable by virtue of
the relationship between the signatory and the party sought to be bound.” Ashall Homes
Ltd., 992 A.2d at 1249 (quoting BNY AIS Nominees Ltd. v. Quan, 609 F. Supp. 2d 269, 275
(D. Conn. 2009), and citing Holland Am. Line Inc. v. Wärtsilä N. Am., Inc., 485 F.3d 450,
456 (9th Cir. 2007) (holding that where the alleged conduct of the non-parties is closely
related to the contractual relationship, a range of transaction participants, parties and non-
parties, should benefit from and be subject to forum selection clauses), and then citing
Ishimaru v. Fung, 2005 WL 2899680, at *17–18 (Del. Ch. Oct. 26, 2005) (holding that a
non-signatory subsidiary could enforce the arbitration provision in an agreement executed
by its parent company), among other cases). A non-signatory is closely related if “(1) [the
party] receives a direct benefit from the agreement; or (2) it was foreseeable that [the party]
would be bound by the agreement.” Neurvana Med., LLC v. Balt USA, LLC, 2019 WL
4464268, at *4 (Del. Ch. Sept. 18, 2019) (quoting Weygandt v. Weco, LLC, 2009 WL
1351808, at *4 (Del. Ch. May 14, 2009)). “In evaluating whether a non-signatory received
a direct benefit for the purpose of the closely-related test, Delaware courts have deemed
both pecuniary and non-pecuniary benefits sufficient to satisfy the test.” Id. “[T]he
foreseeability inquiry seeks to foreclose an end-run around an otherwise enforceable forum
selection provision. On this basis, cases have applied the foreseeability inquiry to bind a
range of transaction participants who did not sign the relevant agreement.” Id. at *5
(alterations, footnotes, and internal quotation marks omitted) (first quoting Ashall Homes
Ltd., 992 A.2d at 1248, and then quoting Weygandt, 2009 WL 1351808, at *5 n.26). It
appears likely that under Delaware law, Defendant would satisfy both the direct-benefit
and foreseeability tests such that it would have standing to invoke the Subordination
Agreement’s forum selection clause although it was not a formal party to that agreement.
44
Subordination Agreement would strip the parties of their bargain and improperly
impose this Court on the power of the chosen forum. “[A]t this stage in the
analysis—where this court is to decide whether it can exercise jurisdiction over a
dispute, and not to decide the outcome of the dispute itself—coming to a conclusion
as to whether” Defendant may invoke the Subordination Agreement would be
improper, as that analysis exceeds a strictly jurisdictional determination and requires
more extensive contractual interpretation.136 Plaintiff’s argument must be rejected
because the forum selection clause tasks California courts with interpreting the
Subordination Agreement.137
My analysis stops at concluding that Delaware is not the place for Count III.
I do not reach where that claim should be heard. Plaintiff’s presentation of Count
III to this Court is thwarted by two dueling mandatory forum selection clauses
providing for exclusive venue in other jurisdictions.138 Because the Security
Agreements’ “Governing Law” provision explicitly incorporates the Notes’ forum
selection clauses,139 that task is arguably the “exclusive” province of Texas courts.140
136
See Ashall Homes Ltd., 992 A.2d at 1248.
137
See id. at 1247.
138
The parties have not argued that any of the forum selection clauses at play are permissive
rather than mandatory.
139
Ex. C § 17.
140
E.g., Ex. B § 10(J); Ex. E § 10(J); Ex. F § 11(J); Ex. G § 10(J); Ex. H § 11(J); Ex. I §
10(J).
45
And in the same breath, because the Security Agreements are “subject to” the
Subordination Agreement,141 that task is arguably the “exclusive” province of
California courts.142
“For a forum selection clause to be strictly binding, the parties must use
express language clearly indicating that the forum selection clause excludes all other
courts before which those parties could otherwise properly bring an action.”143 “If
the contractual language is not crystalline, a court will not interpret a forum selection
clause to indicate the parties intended to make jurisdiction exclusive.”144
Delaware cases interpreting conflicting forum selection clauses generally
involve one in favor of Delaware and the other in favor of a foreign court. And in
those instances, the Court has determined that the conflicting language is not
“crystalline” in indicating exclusive jurisdiction in a non-Delaware court.145 This
141
Ex. C at 1.
142
Ex. D § 15.
143
Troy Corp., 2007 WL 949441, at *2 (internal quotation marks omitted) (quoting
Prestancia Mgmt. Gp., Inc. v. Va. Heritage Found. II, LLC, 2005 WL 1364616, at *7 (Del.
Ch. May 27, 2005)).
144
Id. (internal quotation marks omitted) (quoting Prestancia Mgmt. Gp., Inc., 2005 WL
1364616, at *7); accord Duff v. Innovative Discovery LLC, 2012 WL 6096586, at *11 (Del.
Ch. Dec. 7, 2012).
145
Troy Corp., 2007 WL 949441, at *2.
46
case is a variation on that theme: the Court is faced with conflicting, mandatory
forum selection clauses, but neither regards Delaware as a proper venue.
The parties clearly and expressly contracted to select a venue other than
Delaware. All agreements that allegedly bear on Count III—the Notes, Security
Agreements, and Subordination Agreement—establish the parties’ common
understanding that the claim cannot be heard in Delaware, and a “reasonable person
in the position of either party would have no expectations inconsistent with the
contract language.”146 In this case, the language of the relevant agreements is
“crystalline” that Count III is the province of a foreign court.147
Accordingly, any conflict between the forum selection clauses in the Security
Agreements and Notes on the one hand, and the forum selection clause in the
Subordination Agreement that the Security Agreements and Notes incorporate on
the other, is not for this Court to resolve. This Court would have to interpret the
Subordination Agreement together with the Security Agreements and Notes to
reconcile their conflicting forum selection clauses, but that interpretation has been
assigned to other courts.148 The parties must ask a court facially designated to hear
146
Duff, 2012 WL 6096586, at *11 (quoting Eagle Indus., Inc. v. DeVilbiss Health Care,
Inc., 702 A.2d 1228, 1232 (Del. 1997)).
147
Troy Corp., 2007 WL 949441, at *2; Duff, 2012 WL 6096586, at *11.
148
See Duff, 2012 WL 6096586, at *12 (“Delaware law holds that where a contract
incorporates another contract by reference, the two contracts will be read together as a
single contract.”).
47
Count III to determine which forum selection clause governs the dispute. Doing so
“give[s] effect to the terms of private agreements to resolve disputes in a designated
judicial forum out of respect for the parties’ contractual designation.”149
Accordingly, Count III is dismissed.
III. CONCLUSION
The Motion is GRANTED and Counts III and V of the Amended Complaint
are DISMISSED. The parties shall submit an implementing order within twenty
days of this decision.
149
Troy Corp., 2007 WL 949441, at *2 (quoting Prestancia Mgmt. Gp., Inc, 2005 WL
1364616, at *7).
48