Summary
The Second Circuit affirmed dismissal of AVC Nederland B.V.'s action alleging fraud under Section 10(b) of the Securities Exchange Act and Rule 10b-5 in connection with a partnership interest in a New York real estate venture. The court held that the complaint sufficiently invoked federal subject-matter jurisdiction, but enforced the parties' Dutch forum-selection and choice-of-law provisions requiring disputes to be resolved by the competent court in Utrecht under Dutch law.
Topics
Practice areas
Questions Presented
- Whether the complaint alleged a federal securities claim sufficient to support subject-matter jurisdiction under Section 10(b) and Rule 10b-5, despite the international character of the transaction and uncertainty whether the partnership interest was a security.
- Whether the forum-selection and choice-of-law provisions selecting Utrecht courts and Dutch law were enforceable against AVC's securities-fraud and fraudulent-inducement claims.
- Whether Section 29(a) of the Securities Exchange Act invalidated enforcement of the forum-selection and choice-of-law provisions.
Holdings
- The complaint's allegations were neither immaterial nor insubstantial, so the action could not be dismissed for lack of subject-matter jurisdiction on the ground that the partnership interest might not be a security or that United States securities laws might ultimately prove inapplicable.
- The contractual provisions selecting the competent court at Utrecht and Dutch law applied to AVC's claim that the agreement was induced by fraud and were enforceable.
- Section 29(a) did not invalidate the forum-selection and choice-of-law provisions because the foreign elements of the transaction were sufficiently meaningful to bring the case within the exception recognized in Scherk.
Key quotations
“We answer both questions in the affirmative and therefore affirm the order of the district court.” (740 F.2d at 149)
“Although we do not here determine whether the general partnership interest is a security, AVC's contentions on this score are neither immaterial nor insubstantial for purposes of Hood.” (740 F.2d at 151)
“The correct approach", the Chief Justice wrote, "would have been to enforce the forum clause specifically unless Zapata could clearly show that enforcement would be unreasonable and unjust, or that the clause was invalid for such reasons as fraud or overreaching.” (740 F.2d at 155)
“Such considerations apply a fortiori to a foreign investor, particularly when the asserted injury has been inflicted by his fellow countrymen and the agreement calls for litigation in their own country.” (740 F.2d at 159)
Factual background
AVC, a Dutch corporation owned and managed by Dutch citizen Peter J. Haan, agreed to become a 40 percent partner in Atrium, a Georgia partnership formed by Dutch citizens Pieter Kuik and Robert Lenting to acquire New York real estate. AVC alleged that Kuik and Lenting made misrepresentations in the United States and the Netherlands about the property's purchase price, the promoters' equity contribution, and related terms. AVC signed an agreement in the Netherlands containing a provision selecting the competent court in Utrecht and providing that Dutch law would govern, then paid approximately $3.1 million before refusing to make further payments or sign the revised partnership agreement.
Procedural history
AVC sued Atrium, Kuik, and Lenting in federal district court alleging securities fraud in connection with its purchase of an interest in Atrium. The district court dismissed the action, holding that the forum-selection and Dutch-law provisions fell within the exception recognized in Scherk v. Alberto-Culver Co. to the anti-waiver provision of Section 29(a) of the Securities Exchange Act. The Second Circuit held that federal subject-matter jurisdiction existed for purposes of the motion and affirmed dismissal based on the contractual selection of the Utrecht courts and Dutch law.