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Donovan v. Rhodes

Superior Court of Massachusetts, Suffolk, Business Litigation Session

March 6, 2018

Gary DONOVAN et al.
v.
Jason RHODES et al.

          MEMORANDUM OF DECISION AND ORDER ON THE DEFENDANTS’ MOTION TO DISMISS AMENDED COMPLAINT

          Mitchell H. Kaplan, Justice of the Superior Court

         The individual plaintiffs, Gary Donovan, and his son, Ryan Donovan (collectively, the Donovans), formed plaintiffs Road Plates America, LLC and National Steel Plate, LLC (individually, RPA, and NSP, and, collectively, the LLCs) as Massachusetts LLCs to engage in a joint venture with the individual defendant, Jason Rhodes, and a company that he professed to own, Quality Steel Co., Inc. (Quality), which is organized under the laws of Illinois and has a principal place of business in Chicago. The Donovans, through other entities that they control, were in the business of providing heavy steel plates and related equipment to developers and contractors. The plaintiffs allege that Rhodes proposed to supply the Donovans, through Quality, with all their steel plate requirements in return for: an exclusive supplier arrangement; an equity interest in the new LLCs that the Donovans would form to execute the plan; and a percentage of the profits generated by selling or leasing the steel plates to the Donovans’ customers. The venture failed and the plaintiffs brought this action seeking declaratory relief regarding Rhode’s ownership interest in the LLCs and damages allegedly incurred as a consequence of Rhodes’/Quality’s failure to perform and Rhode’s misrepresentations made during negotiations.

         The defendants have moved to dismiss the amended complaint based on a forum selection clause in one of the documents that the parties executed, which requires litigation arising under that contract to be brought in Chicago, Illinois. They also seek dismissal of all claims under the doctrine of forum non conveniens.

         For the reasons that follow, the defendants’ motion is ALLOWED as to Quality but DENIED as to Rhodes.

         ADDITIONAL BACKGROUND

         The following brief summary of the plaintiff’s factual allegations is taken from their amended complaint.

         Rhodes and the Donovans agreed to enter into a joint venture in which Rhodes would supply all of the Donovans’ steel plate requirements and receive a fixed price for the steel, as well as a percentage of the Donovans’ profits. At some point, they also agreed to form new LLCs, in which Rhodes would have an equity interest, to facilitate their venture. Rhodes represented to the Donovans that he had the financing and capability to deliver the steel. Rhodes sent the Donovans draft operating agreements for the two new LLCs[1] (the operating agreements) and an Equipment Lease Agreement (the Lease Agreement). The Donovans gave the agreements to their lawyer to review. The lawyer recommended a number of changes, but Rhodes pressured the Donovans to sign the LLC operating agreements and Lease Agreement in the form Rhodes presented them, with assurances that they could be amended later. The Donovans acquiesced and signed the documents on April 6, 2016.

         In email exchanges, orally, and in the Lease Agreement, Rhodes represented that he could supply 210 steel road plates, approximately 690 tons. These representations were knowingly false. Rhodes was unable to supply the steel because he lacked financing and was being denied credit by steel companies due to unpaid debts. The Donovans were forced to cover their requirements elsewhere and suffered monetary loss as a result.

         The LLC operating agreements and Lease Agreement were not attached to the amended complaint, but have been produced by the parties in the pleadings filed in support of and opposition to this motion. Even a brief review of the documents shows that they are confusing, poorly drafted, and inconsistent with one another. The operating agreements are executed by the Donovans and Rhodes, individually, but not by Quality. The Lease Agreement is only between Quality and RPC. The Lease Agreement calls for Quality to deliver 210 steel road plates and RPC to pay $20, 000 a month for 60 months to Quality beginning on April 15, 2016, although curiously the Lease Agreement contains no delivery date for the steel plates, most of which were apparently never delivered. The operating agreements describe an "Exclusive Purchaser Agreement" between the LLCs (and any other company in which the Donovans have an ownership interest) and Quality. They also call for additional payments, which are referred to as "commissions," to be paid to Quality, which, as noted above, is not a party to the operating agreements, in varying amounts depending on whether the LLCs’ customers purchase or lease the steel plates. These additional payments are not referenced anywhere in the Lease Agreement, which nonetheless recites that: "This lease contains the entire agreement between the parties ..."

         Of particular importance to the pending motion to dismiss, the Lease Agreement includes a forum selection clause which requires that all court proceedings (presumably arising under the Lease Agreement) must "be in Chicago, Illinois" and provides that the Lease Agreement shall be interpreted under the laws of Illinois. It also includes a waiver of jury trial. On the other hand, each of the LLC operating agreements contain a "Member Disputes" provision. This provision requires mediation in Boston of "any dispute or disagreement between members arising out of, or relating to, this Agreement or the [LLC]" and, if that fails, a member "may institute legal proceedings in Boston, Massachusetts." It does not contain a jury waiver clause.

         DISCUSSION

         The defendants have moved to dismiss this action under the forum selection clause in the Lease Agreement. In Jacobson v. Mailboxes Etc. USA, Inc., 419 Mass. 572, 575 (1995), Massachusetts adopted § 80 of the Restatement (Second) of Conflict of Laws (1988 revision) which provides that "the parties’ agreement as to the place of the action will be given effect unless it is unfair or unreasonable." That case also established the principle that when a contract that contains a forum selection clause also provides that the forum’s state’s law will govern the interpretation of the contract, Massachusetts courts will look to that state’s law "to determine the effect of that clause." Id. As noted above, the Lease Agreement has Illinois forum selection and choice of law provisions.

         Forum selection clauses are enforced under Illinois law. See Solargenix Energy, LLC v. Acciona, S.A., 17 N.E.3d 171, 183 (Ill.App. 2014) ("[I]n Illinois, forum selection clauses are presumed valid and enforceable, unless proven otherwise by the party contesting their application. A forum selection agreement reached through arms-length negotiation between experienced and sophisticated businessmen should be honored by them and enforced by the courts absent some compelling and countervailing reason for not enforcing it"). While there appears to be no Illinois case directly on point, Illinois case law suggests that assertions of fraudulent inducement to enter into a contract are insufficient to avoid the application of the clause. Id. at 182 ("forum selection clauses have been held to apply not merely to contract claims involving the terms of the contract in which the clause appears, but also to other claims that are otherwise connected to the contract, such as tort claims arising from the contract"). Moreover, under Massachusetts law, claims of fraudulent inducement to enter into a contract are insufficient to avoid a forum selection clause; rather, to avoid such a clause a party "must show that inclusion of that clause in the contract was the result of fraud." Karty v. Mid-America Energy, Inc., 74 Mass.App.Ct. 25, 29-30 (2009).

         In consequence, the court is constrained to enforce the forum selection clause in the Lease Agreement, at least as it relates to claims asserted by and against the parties to that Agreement-namely, RPA and Quality. This is the only agreement to which these parties are signatories and the only agreement in which Quality promises to deliver a certain quantity of steel plates. However, once again, as with other provisions in the agreements, the forum selection clause in this Lease Agreement is vague and poorly crafted. It states: "Jurisdiction and Venue. The Parties to this agreement agree that the locale and suits of all court proceedings shall be in Chicago, Illinois." The clause does not include language that extends the agreement to any disputes relating to the Lease Agreement or other similarly broad language frequently contained in forum selection clauses that might capture matters not specifically involving the rights and obligations expressly arising out ...


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