Forum selection clause in an investment management agreement is valid and enforceable.
Carlyle Investment Management (CIM) served as investment manager for Carlyle Capital Corporation (CCC) pursuant to the terms of an investment management agreement (IMA) the parties entered into in 2006. CCC issued a private placement memorandum to potential investors in September 2006 that described the IMA and informed potential investors that a copy of the IMA would be provided upon request. The final version of the memorandum was published to all potential and actual private investors in December 2006 and contained the same disclosures. CCC also published an offering memorandum for the public sale of Class B shares in June 2007 that described the IMA.
CCC invested primarily in agency residential mortgage-backed securities and, following two declines in the market, CCC defaulted on certain of its financing agreements and was placed into liquidation on March 17, 2008. Joint liquidators were appointed by the Royal Court of Guernsey.
On July 7, 2010, the liquidators filed four substantively identical lawsuits against CIM and CCC in Delaware, the District of Columbia, the Royal Court of Guernsey and New York, alleging causes of action including breach of fiduciary duty, breach of contract, gross negligence and unjust enrichment. Further, the liquidators sought a declaratory judgment that the IMA was void and unenforceable or in the alternative, that the forum selection clause was void and unenforceable against the liquidators. The IMA dictated that its terms be governed by Delaware law and that Delaware courts, federal or state, had exclusive jurisdiction over any dispute with respect to the IMA.
On December 15, 2010, Vice Chancellor Strine held a hearing in the Delaware Court of Chancery at which the liquidators explained that a “de facto” agreement to litigate in Delaware had been reached. After discovery and contrary to the agreement, on December 16, 2010, the liquidators dismissed the Delaware Chancery action and stated their intent to proceed in the Royal Court of Guernsey. The District of Columbia and the New York proceedings were ongoing at that time.
On December 29, 2010, CIM filed a second action in the Delaware Court of Chancery seeking: (1) to enjoin all the liquidators’ lawsuits; (2) a declaration that the forum selection clause contained in the IMA was valid and binding; and (3) seeking money damages suffered as a result of the liquidators’ breach of the forum selection clause. The liquidators removed the action to the federal court on January 7, 2011.
The U.S. District Court found that the liquidators could not rebut the presumption that the forum selection clause contained in the IMA was enforceable and therefore had irrevocably waived the right to remove or object to the plaintiff’s choice of forum. The court noted that to rebut the presumption of enforceability of a forum selection clause, the liquidators were required to make a strong showing that enforcement would be unreasonable by proving that: (1) the forum selection clause was so gravely difficult and inconvenient that the party would for all practical purposes be deprived of its day in court; or (2) the forum selection clause was obtained through fraud or overreaching.
The court noted that absent either showing, contractual forum selection clauses are binding on the parties who agree to them. Further, the court held that the fact that the liquidators did not themselves execute the IMA did not change the analysis. The liquidators stood in the shoes of CCC to enforce CCC’s rights under the IMA. Because the controversy arose out of the relationship between CIM and CCC as governed by the IMA, the liquidators were bound by the forum selection clause contained in the agreement.