Antitrust Law Daily Wrap Up, RICO—D. N.J.: Forum selection clause in investment firm’s operating agreement did not bar investor’s claims, (Jul 15, 2015)

By Linda O’Brien, J.D., LL.M.

A forum selection clause in an operating agreement between a real estate investor and a private investment firm did not apply to the investor’s claims for Racketeer Influenced and Corrupt Organizations Act (RICO) violations against the firm over a failed real estate development project, the federal district court in Trenton, New Jersey has held. Thus, the firm’s motion to dismiss was denied (Fagan v. Fischer, July 14, 2015, Wolfson, F.).

In 2006, Tina and Michael Fagan made debt and equity investments in a real estate development project in North Carolina through private equity firms, Fischer Investment Capital and Byana, LLC. In the course of their investment with Byana, Tina Fagan signed the Byana operating agreement that purported to govern the organization and activity of Byana. The operating agreement also contained a forum selection clause that provided “all actions brought to interpret or enforce this agreement shall be brought in the courts located in the state of Delaware.”

After the development project financially collapsed, Fischer Capital and Byana defaulted on the loans made by the Fagans. In November 2014, the Fagans filed suit against Fischer Capital, Byana, and various individuals and corporate entities, asserting claims, in part, for violations of the Racketeer Influenced and Corrupt Organizations Act (RICO) and fraud. The defendants moved for dismissal on the basis of the forum selection clause.

Operating agreement. The court determined that the forum selection clause did not cover actions for RICO violations, fraud, or any claims asserted in the plaintiffs’ complaint. The defendants’ argument that the forum selection clause, regardless of contractual wording, should encompass any and all claims related to the contract in which the clause is found was rejected. The court noted that a review of cases interpreting Delaware law revealed the importance of contractual language in forum selection clauses and almost universally involved far broader language that the forum selection clause in the present case. Although Delaware courts have deferred to forum selection clauses, even the most deferential courts would not consider a forum selection clause relating to “actions to interpret or enforce” an agreement to include claims for RICO violations, fraud, or other illegal business practices unrelated to contractual obligations.

The narrow language of the forum selection clause in the operating agreement applied only to “actions to interpret or enforce” the agreement. However, none of the plaintiffs’ claims require interpretation or enforcement of that agreement. The operating agreement only governed the business operations of Byana and the plaintiffs did not allege that the provision was breached. Thus, the clause did not apply to the plaintiffs’ claims in the present case, the court concluded.

The case is No. 3:14-cv-07013-FLW-TJB.

Attorneys: Jennifer Mara (Baldassare & Mara, LLC) for Tina Fagan. Christopher J. Marino (Giordano Halleran & Ciesla, PC) for K. Scott Fischer, Fischer Investment Capital, LLC, Byana, LLC, Private Capital, LLC, Funder, LLC, and Bowder, LLC.

Companies: Fischer Investment Capital, LLC; Byana, LLC; Private Capital, LLC; Funder, LLC; Bowder, LLC

Cases: RICO NewJerseyNews