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Kaltenbacher v. Dodson

01-2863 (U.S. Dist. Ct. D. N.J. 2004) (Unpublished)

LIMITED LIABILITY COMPANIES; FORUM SELECTION—Forum selection provisions in limited liability company operating agreements are honored unless doing so would violate public policy or would be so gravely difficult and inconvenient so as to deprive a party of its day in court.

Two individuals formed a Delaware limited liability company. The purpose of the company was to bid on specific lots of aircraft that were being auctioned by the United States government. After a dispute over the purchase of several planes, one member brought suit against the other in New Jersey. The District Court discovered that the company’s operating agreement contained a forum selection clause that required that the parties irrevocably subject themselves to the exclusive jurisdiction of the Delaware courts. The Court held that such clauses are presumptively valid and should be enforced unless to do so would be unreasonable.

Enforcement of a forum selection clause is unreasonable if the resisting party can show that the clause was the product of fraud; enforcement would contravene a strong public policy of the forum where the suit was brought; or that enforcement would be so gravely difficult and inconvenient that it would deprive a party of its day in court. The Court held that nothing in the record showed that fraud was involved, or that the public policy would be affected. The member who was sued claimed that the forum selection clause was invalid because it was procured by the overreaching of the other member and the other member’s attorney (who had drafted the agreement). The Court disagreed, holding that the operating agreement resulted from arm’s-length negotiations between the parties. It held that the non-drafting partner was an experienced businessman who was capable of understanding the risks associated with a forum selection clause and it didn’t matter who drafted the agreement. Furthermore, the non-drafting member failed to provide any evidence to support his claim.

The non-drafting member also argued that the venue, the District of New Jersey, was improper, and for that reason the action should have been dismissed. Conversely, the other member argued that if the action was not properly maintained in New Jersey, the forum selection clause required that it be transferred to the District of Delaware, rather than being dismissed.

The Court first held that the complaining member failed to timely object to venue and that constituted waiver of the defense. The issue had been pending for three years prior to this party’s appearance in the District Court. Regardless, the Court held that the venue was proper. The first partner maintained a business office in New Jersey, where many relevant documents from the case were sent and a significant portion of the dispute occurred over the telephone between the members while the one was in his New Jersey office.

The same member argued that the case should be dismissed instead of transferred to Delaware because neither party resided in Delaware. The Court ruled, however, that the proper inquiry was whether continuing litigation in Delaware, as opposed to New Jersey, would be less convenient, “as indicated by [the parties’] relative physical and financial condition.” Nothing in the record suggested such a situation. The second member lived in Kansas. Thus, there would have been no difference between traveling to Delaware or traveling to New Jersey. Although the other member lived and worked in New Jersey, he also maintained residences and businesses in several states and records showed that litigating in Delaware would not have unreasonably impaired his financial well being.

Finally, the Court pointed out that forum selection clauses are entitled to substantial consideration. Here, both parties were sophisticated businessmen, who had agreed to litigate in Delaware. The Court held that the interests of justice and judicial economy would be served by transferring the action, as opposed to dismissing it. Although the parties’ failure to bring the forum selection clause to the Court’s attention resulted in substantial use of the New Jersey court’s resources, discovery was complete and the matter had been “pre-tried” and was “trial-ready.” Therefore, the Court held that to dismiss the case procedural grounds so late in the process would be unconscionable.


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