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LMP B&B Holdings, LLC v. Hannan

United States District Court, E.D. Pennsylvania

September 13, 2019

LMP B&B HOLDINGS, LLC, Plaintiff,
v.
TONY L. HANNAN, MICHELE G. HANNAN, B&B WORLDWIDE HOLDINGS, LLC, and BRUNSWICK SQUARE, LLC, Defendants.

          MEMORANDUM

          DuBois, J.

         I. INTRODUCTION

         This case is a contractual dispute that arises out of the sale of the Burger & Beer franchise system from Tony Hannan, Michele Hannan, B&B Worldwide Holdings, LLC (“B&B Worldwide”), and Brunswick Square LLC (collectively “defendants”) to LMP B&B Holdings, LLC (“plaintiff”). Presently before the Court is Defendants' Motion to Dismiss Complaint or, in the Alternative, to Transfer. For the reasons set forth below, the Court denies the motion.

         II. BACKGROUND

         On January 29, 2016, plaintiff and defendants executed a Membership Interest Purchase and Sale Agreement (“Purchase Agreement”) for the rights to license, franchise, and operate restaurants using the “B&B Burger & Beer Joint” brand. Compl. ¶ 16. Under the Purchase Agreement, plaintiff acquired a 90 percent interest in the B&B Franchise Group, LLC (“the Company”), an entity that licenses the B&B business concept to franchisees. Id.; Pl. Resp. Def. Mot. Dismiss at 2. Separately, plaintiff signed a Promissory Note committing to pay defendant B&B Worldwide an additional two million dollars. Compl. ¶ 18. Together, the Purchase Agreement and the Promissory Note (“Transaction Documents”) governed the terms of the sale.

         Eight months after executing the Transaction Documents, the Company, now controlled by plaintiff, received a demand letter dated September 29, 2016 from its largest franchisees (“FDG Franchisees”) claiming losses from alleged misrepresentations, fraud, and various deceptive practices committed by the Company and Mr. Hannan. Id. ¶ 31. Plaintiff promptly notified defendants of the FDG Franchisees' allegations and demanded indemnification from defendants under the terms of the Purchase Agreement. Id. ¶ 44. Defendants B&B Worldwide and Mr. Hannan agreed to assume the defense of plaintiffs for some of the claims by FDG Franchisees, but defendants refused to fully indemnify plaintiff. Id. ¶ 47. The FDG Franchisee lawsuit progressed, and on January 13, 2017, plaintiff sent another letter demanding complete indemnification. Id. ¶ 48. Defendants refused. Id. ¶ 51.

         The FDG Franchisee suit was eventually settled in December 2018. Id. ¶ 53. On January 2, 2019, plaintiff again demanded indemnification from defendants. Pl. Resp. Def. Mot. Dismiss, Ex. 1. At that time, plaintiff advised defendants that if a compromise was not reached by January 15, 2019 it would file a lawsuit against defendants to recover damages covering the costs from the FDG Franchisee action and a return of the purchase price. Id. One day before plaintiff's January 15 deadline, defendants filed a complaint in Florida state court alleging (1) anticipatory repudiation of the Promissory Note and (2) breach of the Purchase Agreement; defendants also requested (3) declaratory relief regarding the indemnification provision of the Purchase Agreement (“the Florida Action”). Def. Mot. Dismiss, Ex. A; B&B Worldwide Holdings, LLC et al v. B&B Franchise Group, LLC et al, No. 2019-001206-CA-01 (Fla. Cir. Ct. filed Jan. 14, 2019). A motion to dismiss filed on August 12, 2019 is pending in the Florida Action.

         On January 25, 2019, eleven days after defendants filed the Florida Action, plaintiff filed the present civil action in federal court, exclusively alleging breach of the Purchase Agreement (“the Pennsylvania Action”). Compl. ¶¶ 58-94. Plaintiff alleges that the claims by FDG Franchisees show that defendants made false representations and warranties in their sale of the Company to plaintiff and that defendants were unjustly enriched as a result. Compl. ¶ 43. In addition, plaintiff contends that it is entitled to indemnification under the Purchase Agreement for the cost of the subsequent lawsuit brought by FDG Franchisees against the Company. Id. ¶ 60-65.

         On April 1, 2019, defendants filed their Motion to Dismiss Complaint or, in the Alternative, to Transfer (Document No. 12), based on (1) the “first-filed” rule and (2) convenience of the parties. The issue presented in this motion arises in part because the Transaction Documents have conflicting forum selection provisions. The Purchase Agreement requires that all actions “arising out of or relating to this Agreement” be heard in a Montgomery County, Pennsylvania state court or the Eastern District of Pennsylvania. Purchase Agreement § 8.4(b) (“the Pennsylvania forum selection provision”).[1] The Promissory Note requires that all actions arising under the Note be filed in Miami-Dade County, Florida. Promissory Note ¶ 8 (“the Florida forum selection provision”).[2] In addition, both the Purchase Agreement and Promissory Note contain choice of law clauses that provide for Delaware law. Purchase Agreement § 8.4(a); Promissory Note ¶ 8. On April 26, 2019, plaintiff filed a response to defendants' motion (Document No. 17). Defendants' motion is thus ripe for decision.

         III. APPLICABLE LAW

         A. The “First-Filed Rule” vs. Colorado River Abstention

         Defendants ask this Court to dismiss the Pennsylvania Action because the Florida Action was filed first. They argue, inter alia, that rather than litigate in Pennsylvania, plaintiffs should have brought their claims as compulsory counterclaims in the Florida Action. Defendants cite the so-called “first-filed rule, ” which provides that “‘[i]n all cases of federal concurrent jurisdiction, the court which first has possession of the subject must decide it.'” E.E.O.C. v. Univ. of Pa., 850 F.2d 969, 971 (3d Cir. 1988) (quoting Crosley Corp. v. Hazeltine Corp., 122 F.2d 925, 929 (3d Cir. 1941)). A district court applying the first-filed rule “then faces the discretionary choice whether to stay the second-filed action, transfer it, dismiss it without prejudice, or dismiss it with prejudice.” Chavez v. Dole Food Co., Inc., 836 F.3d 205, 216 (3d Cir. 2016). Although the first-filed rule explicitly refers to concurrent pending federal cases, defendants contend that the rule can also apply in situations where “one of the two competing courts is a state court.” Def. Mot. Dismiss at 4. Some courts have applied the first-filed rule in this context, but the Third Circuit has not endorsed this approach. Compare Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Haydu, 675 F.2d 1169, 1174 (11th Cir. 1982) (applying the first-filed rule), with Unitrin Auto & Home Ins. Co. v. Clayton Corp. of Delaware, No. 1:15-CV-02079, 2016 WL 8199315, at *4 (M.D. Pa. Apr. 20, 2016) (refusing to apply the first-filed rule to parallel pending state and federal cases until the Third Circuit clarifies otherwise).[3]

         The Court declines to apply the first-filed rule in this case and instead applies the doctrine set out by the Supreme Court in Colorado River Water Conservation District v. United States, 424 U.S. 800 (1976) and refined in Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1 (1983). In Colorado River, the Court noted that generally “the pendency of an action in the state court is no bar to proceedings concerning the same matter in the Federal court.” Colo. River, 424 U.S. at 817 (internal quotation marks omitted). However, under certain “exceptional circumstances” a stay or dismissal by the federal court in the face of a concurrent and related state case is permitted on the grounds of “[w]ise judicial administration, giving regard to conservation of judicial resources and comprehensive disposition of litigation.” Id. (internal quotation marks omitted). These circumstances are rare given the “virtually unflagging obligation of the federal courts to exercise the jurisdiction given them.” Id. See also Univ. of Md. v. Peat Marwick Main & Co., 923 F.2d 265, 275-76 (3d Cir. 1991) (“The general rule regarding simultaneous litigation of similar issues in both state and federal courts is that both actions may proceed until one has come to judgment, at which point that judgment may create a res judicata or collateral estoppel effect on the other action.”).

         Numerous federal courts have applied Colorado River under circumstances nearly identical to those presented in this case, where defendants argued for dismissal in part on the ground that plaintiffs could have brought their federal claims as counterclaims in a related pending state court action that was filed first. See, e.g., Handy v. Shaw, Bransford, Veilleux & Roth, 325 F.3d 346 (D.C. Cir. 2003); Allied Nut and Bolt, Inc. v. NSS Industries, Inc., 920 F.Supp. 626 (E.D. Pa. 1996). Accordingly, this Court applies the Colorado River standard.

         B. Dismissal or Transfer for Convenience

         Defendants also argue for dismissal, or alternatively, transfer to the Southern District of Florida, on the ground that litigating this dispute in Florida would be more convenient than in Pennsylvania. In evaluating arguments regarding convenience, the Court applies the common law doctrine of forum non conveniens and the standard for transfer of venue under 28 U.S.C. § 1404(a).[4] “[F]orum non conveniens ‘has continuing application [in federal courts] only in cases where the alternative forum is abroad' . . . and perhaps in rare instances where a state or territorial court serves litigational convenience best.” Sinochem Int'l Co. Ltd. v. Malaysia Int'l Shipping Corp., 549 U.S. 422, 430 (2007) (citation omitted). The Supreme Court has held that forum non conveniens applies in the “set of cases calling for a nonfederal forum” and that “the appropriate way to enforce a forum-selection clause pointing to a state or foreign forum is through the doctrine of forum non conveniens.” Atl. Marine Constr. Co. v. U.S. Dist. Court for W. Dist. of Tex., 571 U.S. 49, 60-61 (2013). Nevertheless, when the preferred alternative forum is a state court, federal district courts most often opt to transfer to a more convenient federal district court under 28 U.S.C §§ 1404, 1406. Jaffe & Hough, P.C. v. Baine, No. CIV.A. 09-3000, 2010 WL 844748, at *4 n.43 (E.D. Pa. Mar. 10, 2010).

         In reviewing a motion to dismiss on the basis of forum non conveniens, the Court examines the convenience to the parties, the convenience to the witnesses, and the interests of justice. Stewart Org., Inc. v. Ricoh Corp., 487 U.S. 22, 29 (1988). The moving party bears the “heavy burden” of establishing that these considerations outweigh the strong preference for plaintiff's choice of forum and favor dismissal. Sinochem Int'l., 549 U.S. at 430; see also Piper Aircraft Co. v. Reyno, 454 U.S. 235, 255 (1981). The Third Circuit has held:

A district court may, in the exercise of its sound discretion, dismiss a case “when an alternative forum has jurisdiction to hear the case, and when trial in the chosen forum would ‘establish…oppressiveness and vexation to a defendant…out of all proportion to plaintiff's convenience,' or when the ‘chosen forum [is] inappropriate because of ...

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