Third Circuit Holds Non-Signatories May Be Bound By Forum Selection Clause
In Carlyle Investment Management LLC v. Moonmouth Co., the United States Court of Appeals for the Third Circuit concluded that a non-signatory to an agreement can be bound by a forum selection clause where the forum selection clause is valid, the non-signatory is a third-party beneficiary of the agreement or closely related to the agreement, and the claim arises from the non-signatory’s status related to the agreement.
Plaintiff Carlyle Capital Corporation (“CCC”) was an investment fund (a now defunct victim of the financial crisis) that was part of plaintiff Carlyle Investment Management LLC (“Carlyle”) and invested primarily in residential mortgage-backed securities issued by Fannie Mae and Freddie Mac. In December 2006, defendant Moonmouth, an entity controlled by individual defendant Reijtenbagh, purchased three million shares of CCC for $60 million pursuant to a Subscription Agreement. A director of Moonmouth, defendant Plaza Management Overseas SA (“Plaza”), signed the Subscription Agreement on Moonmouth’s behalf. The Subscription Agreement contained a forum selection clause mandating that “[t]he courts of the State of Delaware shall have exclusive jurisdiction” over any action “with respect to [the] Subscription Agreement.”
In the fall of 2009, Reijtenbagh sought Carlyle’s permission to sell portions of investments in Carlyle-affiliated funds that were subject to transfer restrictions. The sales were accomplished through a number of Transfer Agreements, each of which included a release of Reijtenbagh’s claims against Carlyle. In addition, at least one of the Transfer Agreements contained a forum selection clause requiring any litigation to be brought in either English courts, Delaware state court, New York state court, or federal court in the Southern District of New York.
When defendants threatened to sue plaintiffs in connection with the demise of CCC, plaintiffs brought suit in the Delaware Court of Chancery – consistent with the Subscription Agreement – to enforce the Subscription Agreement’s forum selection clause and the releases from liability in the Transfer Agreements. Plaza – which was not a party to the Subscription Agreement – removed the matter to the United States District Court for the District of Delaware. Plaintiffs then moved to remand the case to the Court of Chancery, relying on the forum selection clause, and the District Court granted remand, holding that Plaza was bound by the forum selection clause, even though it was not a signatory.
The Third Circuit applied a three-part test to determine whether a non-signatory to an agreement is bound by a forum selection clause. In particular, the Court analyzed whether: (1) the forum selection clause is valid; (2) the non-signatory is a third-party beneficiary of the agreement or “closely related to the agreement”; and (3) the claim at issue arises “from the non-signatory’s status related to the agreement.”
After finding the forum selection clause to be valid, the Court focused on the second factor and explained that non-signatories may be bound by a forum selection clause “if they are closely related to the agreement in such a way that it would be foreseeable that they would be bound.” In making this determination, courts should look to the non-signatories’ “involvement in the negotiations, the relationship between the two parties and whether the non-signatory received a direct benefit from the agreement.” The Court found that Plaza was closely related to the Subscription Agreement, noting that Plaza was Moonmouth’s director and executed the Subscription Agreement on Moonmouth’s behalf. Moreover, Plaza and Moonmouth were both owned and controlled by Reijtenbagh, and Moonmouth used Plaza’s income to purchase its shares under the Subscription Agreement.
In addition to the forum selection clause in the Subscription Agreement, the Court found an alternative basis to support remand in the forum selection clause contained in one of the Transfer Agreements. While the latter clause did include Delaware state court, it did not include the United States District Court for the District of Delaware. Accordingly, the Court explained that at least one of the counts in the action could not be removed to federal court and that “if one claim is not removable due to a forum selection clause, the other claims may not be severed and removed.”
Because non-signatories to an agreement may be bound by a forum selection clause, practitioners should be mindful of the three-part test outlined above in choosing a forum to commence litigation and/or in determining strategy for responding to litigation commenced against them.