Free Case Transferred In - District Transfer - District Court of Delaware - Delaware

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IN THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF NORTH CAROLINA Civil Action No. 3:05-CV-256-H A. ARENSON HOLDINGS, LTD., D.A. GARDENS, LTD., J12ALH ASSOCIATES, SELK, LLC and LAUREL EQUITY GROUP, LLC ) ) ) ) ) ) Plaintiffs ) ) v. ) ) SHAMROCK HOLDINGS OF CALIFORNIA, ) INC., SHAMROCK CAPITAL ADVISORS, ) INC., EUGENE I. KRIEGER, GEORGE ) J. BUCHLER and BRUCE J. STEIN ) ) ) Defendants ) ) ______________________________________________)

PLAINTIFFS' OPPOSITION TO DEFENDANTS' MOTION TO DISMISS OR TRANSFER

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Table of Contents INTRODUCTION ............................................................................................................................1 PROCEDURAL HISTORY..............................................................................................................1 FACTS .............................................................................................................................................2 A. The Dismantling of ALH.........................................................................................................6 B. The Present Action..................................................................................................................7 C. The Delaware Action...............................................................................................................8 ARGUMENT....................................................................................................................................9 I. Defendants' Motion to Dismiss For Improper Venue Should Be Denied.......................................9 A. Standard of Review.................................................................................................................9 B. Venue Is Proper Under 28 U.S.C. § 1391(a)(2)....................................................................... 10 II. Defendants' Motion to Transfer Should Be Denied. ................................................................. 14 A. This Case Could Not Have Been Brought In Delaware.......................................................... 14 B. Transfer Under 28 U.S.C. § 1406 Is Not Appropriate............................................................ 18 C. This Case Should Not Be Transferred to Delaware............................................................... 19 1. Special Circumstances Warrant Departure From the First-Filed Rule..............................19 2. The Factors Under § 1404 Weigh Against Transfer to Delaware........................................30 III. Defendants' Motion to Dismiss for Lack of Subject Matter Jurisdiction Should Be Denied..... 33 IV. This Court Has Personal Jurisdiction Over All Defendants..................................................... 37 A. This Court Has Both Subject Matter and Personal Jurisdiction Over Defendants................ 37 B. This Court Has Personal Jurisdiction Over SCA................................................................... 37 C. Limited Discovery Is Warranted. .......................................................................................... 41 V. Plaintiffs State a Claim on All Counts in the Complaint............................................................ 42 A. B. C. D. E. Standard of Review............................................................................................................... 42 By Filing the Delaware Action, Defendants Concede Plaintiffs' Claims Are Viable............... 42 This Court Should Not Rely On The Business Judgment Rule to Dismiss Plaintiffs' Claims.43 The Complaint States a Claim for Breach of Fiduciary Duty. ............................................... 46 The Complaint States a Claim for Breach of the Operating Agreement and the Consulting Agreement.......................................................................................................................... 48 F. The Complaint States A Claim for Gross Negligence............................................................. 51 G. The Complaint States A Claim for Self-Dealing. ................................................................... 52 H. The Statute of Limitations Does Not Bar Plaintiffs' Claims.................................................. 53 CONCLUSION............................................................................................................................... 55

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Plaintiffs, A. Arenson Holdings, Ltd. ("Arenson Holdings "), D.A. Gardens, Ltd. ("D.A. Gardens"), J12ALH Associates ("J12ALH"), Selk, LLC ("Selk") and Laurel Equity Group LLC ("Laurel") (collectively "Plaintiffs "), by their undersigned counsel, file this Opposition to the Motion to Dismiss Or Transfer ("Defendants' motion"),1 filed by Defendants, Shamrock Holdings of California, Inc. ("Shamrock"), Shamrock Capital Advisors, Inc. ("SCA"), Eugene I. Krieger ("Krieger"), George J. Buchler ("Buchler"), and Bruce J. Stein ("Stein") (hereinafter collectively "Defendants "). INTRODUCTION Plaintiffs are the Class B members of ALH Holdings LLC ("ALH"), a Delaware limited liability company. Defendants control ALH through Shamrock's majority control of the Class A members, its majority representation on the Supervisory Board by Krieger, Buchler and Stein and the consulting services provided to ALH by its affiliate SCA.2 This dispute involves Defendants' decision to sell the operating units of ALH in a piecemeal fashion at fire sale prices over the well-reasoned objections of Plaintiffs. Defendants' actions have not been in the best interests of Plaintiffs or ALH and constitute a breach of Defendants' fiduciary duties owed to Plaintiffs as Class B members of ALH. The sole purpose of the dismantling of ALH was to relieve Defendants of their duty to manage ALH which Defendants themselves admitted was too time consuming. Plaintiffs offered to purchase the Class A's interests in ALH but Defendants demanded an unreasonable price and rather than hand over control to Plaintiffs and allow them to strengthen ALH, Defendants acted in bad faith and in a grossly negligent manner by selling ALH's operations in a piecemeal fashion rather than as a whole, which resulted in a depressed value. PROCEDURAL HISTORY This dispute involves two lawsuits, the present action filed on June 2, 2005 and a preemptive, anticipatory decla ratory judgment action filed on September 13, 2004 by Shamrock, SCA, Krieger, Buchler and Stein (collectively referred to in this section as "Shamrock").

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Defendants' Memorandum in Support of Motion to Dismiss or Transfer is docket item 15 and hereinafter shall be cited as "D.I. 15". 2 All of the services provided by SCA to ALH were performed by Krieger, Buchler and Stein. See Declaration of Shalom Lamm attached hereto as Exhibit E.

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While the partie s were involved in settlement negotiations, Shamrock filed a declaratory judgment action in the Delaware Court of Chancery against Abraham (Avie) Arenson ("Arenson"), Selk and Laurel (collectively referred to in this section as "Delaware Defendants "). Thereafter, Delaware Defendants removed the case to the United States District Court for the District of Delaware (the "Delaware Court").3 Arenson filed a motion to dismiss challenging the Delaware Court's exercise of personal jurisdiction over him and Selk and Laurel filed a motion to dismiss for failure to join necessary parties since the remaining Class B members were not named as parties. At Shamrock's request, Delaware Defendants agreed to stay briefing on both motions until Shamrock filed and obtained a ruling on a motion to remand the case back to the Delaware Court of Chancery. On March 22, 2005, the Delaware Court denied Shamrock's motion to remand. Shamrock again requested that Delaware

Defendants agree to an extension to give Shamrock time to respond to the pending motions and Delaware Defendants agreed. On April 22, 2005, instead of responding to the pending motions, Shamrock filed an amended complaint joining as defendants the necessary parties, Arenson Holdings, D.A. Gardens and J12ALH. 4 In response to Shamrock's amended complaint, Delaware Defendants filed several motions to dismiss, which have been fully briefed by the parties and are awaiting decision by the Delaware Court. On June 2, 2005, Plaintiffs filed a Complaint in this Court seeking affirmative relief for Defendants' wrongful conduct (the "Complaint"). 5 FACTS ALH, a Delaware limited liability company, and ALH II, Inc. ("ALH II"), a Delaware corporation and wholly-owned subsidiary of ALH, are both Delaware entities but neither has ever conducted business activities in Delaware. (D.I. at 1-2). ALH was in the homebuilding business in North Carolina, Florida and Tennessee and ALH II was formed as a vehicle to obtain debt financing for ALH's operations and acquisitions.

3 4

The Delaware Action is civil action number 04-1339-SLR. Arenson is not a party to this action. The Complaint in this action is docket item 1 and hereinafter shall be cited as "D.I. 1". 5 The Amended Complaint filed in the Delaware Action and attached as Exhibit B to Defendants' Motion will hereinafter be referred to as " DE Comp.".

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As provided in the ALH Operating Agreement (the "Operating Agreement"), the overall business, operations and affairs of ALH are controlled by a designated manager. (D.I. 15, Exh. D). Lion LLC ("Lion") was originally designated as the manager. Id. The Operating Agreement also created a Supervisory Board (the " Board"), comprised of five members--2 Class A representatives, 1 Class B representative and 2 Class D representatives. At all relevant times, Krieger and Buchler, employees of Shamrock and SCA, were the Class A Representatives and Arenson was the Class B representative. (D.I. 1 ¶ 31). Until July 2001, Shalom Lamm and Jonathan Zich were the Class D Representatives, but in July 2001, when Lion was stripped of its authority, the Class A members designated one of the two Class D representatives and they replaced Jonathan Zich with Stein. (D.I. 1 ¶¶ 31-32). Shortly after its formation, ALH acquired home-building operations in Jacksonville, Florida that operated under the name Atlantic Builders, Inc. ("ABI"). (D.I. 1 ¶ 27). In December 1998, ALH II, Inc. ("ALH II") was formed to act as the parent company for ALH's operating subsidiaries and to provide a vehicle for obtaining debt financing for ALH's operations and acquisitions. In 1999, ALH acquired home-building operations in Memphis, Tennessee that operated under the name Bowden Building Corporation ("BBC"). (D.I. 1 ¶ 28). In 2000, ALH acquired home-building operations in Charlotte, North Carolina, that operated under the name Mulvaney Homes, Inc. ("MHI"). (D.I. 1 ¶ 29). In addition to obtaining financing from outside lenders, several members of ALH loaned funds to the company with the approval of the Board. On April 6, 2000, several members of ALH loaned $2 million to ALH II to finance certain operations of ALH II.6 (D.I. 1 ¶ 41). In May 2002, it became

apparent that ALH needed additional funding. After considering various alternatives, the Board approved a second loan from certain members of ALH. On May 7, 2002, ALH II entered into a loan agreement with certain members for a $4.4 million loan to ALH II to provide working capital. 7 In 2001, as a result of a dispute regarding Lion's performance, ALH entered into a settlement agreement with Lion wherein its authority was limited by, inter alia , requiring the consent of the Board--
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Shamrock loaned ALH II $1,633,334. Arenson Holdings loaned ALH II $166,666. Lion & Lamm Capital LLC loaned ALH II $200,000. 7 D.A. Gardens loaned $312,500 to ALH II and Shamrock loaned $1,964,000, to ALH II.

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then controlled by Defendants--before Lion could make certain decisions. DE Comp. at 37-39. Further entrenching Defendants' control of ALH, Defendant SCA, an affiliate of Shamrock, entered into an agreement with ALH to take over the consulting services for ALH formerly performed by Lamm. (D.I. 1 ¶ 47). Thereafter, ALH was effectively controlled solely by Defendants because they controlled three of the five representatives on the Board; they had the power to remove the nominal manager, Lion; they controlled the outside consultant; and they had the sole power under the Agreement to make major decisions for ALH. In 2001, the Board decided it was a good time to sell the entire company. Defendants had begun expressing a desire to exit their investment in ALH as their management responsibilities were too time consuming. (D.I. 1 ¶ 6). ALH retained Jolson Merchant Partners to provide financial advice and investment banking services in connection with the sale of the entire company. (DE Compl. ¶ 82). Defendants attempted to sell ALH as a going concern but the sale was mishandled because Defendants insisted on selling ALH's balance sheet, which contained an enormous amount of goodwill, rather than selling ALH as a multiple of cash flow and land option inventory. (D.I. 1 ¶ 7). By the summer of 2002, Defendants were unable to sell ALH as a whole so they decided to sell off the operating units of ALH piecemeal rather than continue to look for a buyer for the entire entity. Plaintiffs objected to this and warned Defendants that such a sale would be disastrous. Defendants, however, exploited their control over ALH and began marketing the operating units and negotiating with a buyer for the sale of BBC. On July 30, 2002, Arenson informed Defendants that the Class B members had met and unanimously agreed that the sale of BBC was ill advised and would weaken ALH and make the sale of the remaining operating units more difficult. (D.I. 15, Exh. ZZ) Further, Arenson advised that while the Class B members would like to continue to operate ALH with Defendants, if Defendants were unwilling to continue then the Class B members would consider buying out the Class A's interests in ALH. Id. Defendants expressed an interest in selling the Class A's interests to the Class B members but still continued to pursue a buyer for BBC and ABI. Id.

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Discussions between the parties regarding the Class B members buy out of the Class A equity ensued, but an agreement was not reached. Defendants demanded $12 million for their interest and the Class B members offered $5 million. See Exh. A attached hereto. On December 18, 2002, Arenson sent an email to Defendants stating: [The Class B members] remain gravely concerned that the sale of [BBC] will seriously impair the viability of ALH, as while it might serve some short term end and may fund the Bowden litigation settlement, which we feel is not a "priority", it will hinder and cripple ALH going forward. The "auction" process is busted and it has made ALH look even weaker. The Bs are prepared to fund needed working capital. We appreciate that the As have made a decision to exit and are NOT prepared to invest additional amounts. Since we fear that we have been placed in a liquidation mode, the Bs, in an effort to save their investment and seize an opportunity (that the As either do not believe is there or that they choose not to pursue) have been willing to offer the As a limited sum to exit and it is that amount that we need to agree upon. What the Bs simply can not accept is to allow the As to liquidate ALH in a piecemeal fashion. That said, we need to conclude a buy-out of the As on mutually acceptable terms or recommit ourselves to running ALH in a positive and forward looking manner and abandon, for the time being, the notion of a sale. (Attached hereto as Exh. C). Defendants rejected Plaintiffs' buy-out offer, continued pursuing buyers for the separate divisions and disregarded the reasoned advice to focus on strengthening ALH for the time being and stop trying to sell it. Defendants' goal was clear--sell off ALH regardless of the consequences. In February 2003, the parties agreed to meet in Charlotte, North Carolina to discuss ALH's then current problems, the future problems that would arise if a change of course was not effected and a possible buy-out by the Class B members of the Class A's interests in ALH. (D.I. 1 ¶ 45). At the meeting, Defendants indicated that ALH was consuming too much management time and that they wanted to rid themselves of the time consuming demands of dealing with ALH. Id.. Defendants refused to negotiate a reasonable price for the sale of the Class A's interests in ALH to give Plaintiffs the capability to restructure and strengthen ALH. Instead, Defendants acted in their own self-interest and continued to market the operating units of ALH in furtherance of their efforts to liquidate ALH. Plaintiffs warned Defendants that such action would adversely affect ALH and the members by, inter alia, impairing ALH's ability to obtain necessary financing. With total disregard for the best interests of ALH and its members, Defendants ignored the warnings and vigorously pursued the piecemeal liquidation of ALH.

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A. The Dismantling of ALH Defendants hired Fried, Frank, Harris, Shriver & Jacobson, LLB ("Fried Frank") to represent ALH in the sale of its various operating units. (D.I. 1 ¶ 39). Fried Frank has a longstanding relationship with Shamrock and also represents SCA. Arenson raised the issue that this was a clear conflict of interest and likely to be detrimental to the Class B members. Id. Despite the non-waivable conflict, Fried Frank continued to attend the Board meetings on behalf of ALH and Shamrock throughout the sale of the operating units, maintaining that any potential conflict had been waived by ALH in a signed conflict letter. (D.I. 1 ¶¶ 39-40). On June 26, 2003, a Board meeting was held and Defendants proposed the sale of ABI. (D.I. 1 ¶ 48). Buchler explained that the sale was necessary because of pressing liquidity needs and the need to settle pending litigation. (D.I. 1 ¶ 49). Since Defendants controlled ALH, Arenson could not stop them from selling ABI but he recommended that it would be better for ALH if the members financed another infusion of capital to assist ALH as was previously done with success in 2000 and 2002. (D.I. 1 ¶ 48). After further discussion, and with Defendants firmly in control of the Board, Defendants voted in favor of the sale of ABI despite Arenson's reasoned recommendation to the contrary. It was apparent to Arenson that Defendants intended to act in their own self-interest to liquidate ALH regardless of the consequences to others. Arenson, therefore, suggested that the proceeds from the sale of ABI be used to repay the 2000 and 2002 loans from the members. The proceeds from the sale of ABI were used to repay those loans and to provide working capital for ALH. (D.I. 1 ¶ 43). On March 24, 2004, a Board meeting was held and Defendants presented a proposal for the sale of 100% of the stock of BBC. 8 (D.I. 1 ¶ 51). Arenson again expressed concern that the sale was not in the best interests of ALH and that ALH might obtain a better offer if BBC continued to operate. (D.I. 1 ¶
8

John LaGuardia was the president of Levitt Homes at the time of the letter of intent. (D.I. 1 ¶ 60) . LaGuardia used his insider knowledge about Defendants' mismanagement of ALH and their lack of commitment to ALH to leverage an advantageous deal for the purchase of BBC by Levitt to the disadvantage of ALH. Id.

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52). Further, Arenson challenged the conflict of interest of Fried Frank, counsel for ALH, SCA and Shamrock. (D.I. 1 ¶ 53). Fried Frank claimed that ALH had waived any potential conflict. After further discussion, Defendants voted in favor of the sale of BBC despite Arenson's reasoned objections. Finally, in the summer of 2004, ALH entered into a letter of intent with Levitt Homes for the sale of MHI. (D.I. 1 ¶ 60). On behalf of ALH, William Lanius ("Lanius"), the former CFO of ALH, handled the negotiations with Levitt and negotiated numerous financial matters in connection with the Levitt offer.9 However, on October 6, 2004, Levitt informed ALH that it was no longer interested in purchasing MHI. (D.I. 1 ¶ 63). The circumstances surrounding this rescission are unclear but suspicious, since in the same email notifying Plaintiffs of Levitt's rescission, Buchler informed Plaintiffs that Lanius, on behalf of Mattamy homes, was interested in purchasing MHI on terms and conditions less favorable to ALH than the Levitt deal. (D.I. 1 ¶¶ 63, 66). Since Lanius was intimately familiar with the finances of ALH, he was able to exploit insider information to obtain MHI at a depressed price. (D.I. 1 ¶ 60). Defendants did not attempt to solicit other offers from third parties but voted to accept the Mattamy offer. (D.I. 1 ¶ 66) It was apparent that Defendants were determined to sell off the remaining unit of ALH regardless of the best interests of ALH or their fiduciary duties to the Class B members. Arenson did not travel from Israel to the United States to attend the perfunctory Board meeting where Defendants voted to sell off the final asset of ALH. (D.I. 15 at 16). Defendants attempt to misconstrue Arenson's decision not to attend the meeting as an admission that the sale of MHI was not important. Such an insinuation is ridiculous since all previous attempts by Arenson to prevent Defendants from liquidating ALH had gone unheeded and Defendants had filed suit against Arenson, individually, thereby confirming his belief that any attempt to dissuade Defendants from their final act of dismantling ALH was futile. B. The Present Action

9

After the sale of ABI, Lanius, the CFO of ALH, became the president of Mattamy Homes, the entity that acquired ABI. (D.I. 1 ¶ 58) . Thereafter, Defendants chose to retain Lanius as a consultant to advise Defendants on the management and financial aspects of ALH and to assist in the sales of ALH's remaining operating units BBC and MHI. Id.

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On June 2, 2005, Plaintiffs filed this action against Defendants alleging claims for breach of fiduciary duty in connection with the sale of ALH's operating units, breach of the operating agreement, breach of the consulting agreement, gross negligence, self-dealing and civil conspiracy in connection with Defendants' mismanagement of ALH and the piecemeal sale of its operating units. C. The Delaware Action On September 13, 2004, before the sale of MHI, Shamrock, SCA, Krieger, Buchler and Stein (collectively referred to in this section as "Shamrock") filed a preemptive declaratory judgment action against Arenson, Selk and Laurel (collectively referred to in this section as " Delaware Defendants "). After lulling Delaware Defendants into believing that Shamrock was willing to discuss a settlement in good faith, Shamrock filed an anticipatory declaratory judgment action seeking, inter alia , a declaration of non-liability for their mismanagement in connection with the piecemeal sale of ALH. Delaware Defendants removed the action to the federal district court and Arenson moved to dismiss the claims against him under Federal Rule of Civil Procedure 12(b)(2) for lack of personal jurisdiction and Selk and Laurel moved to dismiss the claims against them under Rule 12(b)(7) for failure to join necessary parties. On April 22, 2005, Shamrock filed an amended complaint joining as defendants Arenson Holdings, D.A. Gardens and J12ALH and requested the following declarations: (1) that they have not breached any fiduciary duty to defendants; (2) that they have not breached any obligations to defendants, or violated any rights of defendants, under the Operating Agreement; (3) that (a) in rendering services pursuant to the Consulting Agreement, they did not commit bad faith, gross negligence or willful misconduct, and (b) they are protected from any liability to defendants by the Consulting Agreement; (4) that they relied in good faith on JMP and on ALH's outside counsel; (5) that they are entitled to indemnification, including advancement of legal fees and other expenses; (6) the extent to which Selk's equity interest is reduced or eliminated due to a shortfall in the Class E Capital Contribution; and (7) declaring whether plaintiffs have violated Arenson's rights as Class B Representative. (DE Comp. ¶¶ 156, 160, 164, 168, 176, 179 and 183). On June 3, 2005, Delaware Defendants filed the following motions and supporting memoranda: (1) Motion to Dismiss or in the alternative For Stay of Proceedings under the Declaratory Judgment Act filed by Defendants, Arenson Holdings, D.A. Gardens, J12ALH, Selk and Laurel; (2) Motion to Dismiss

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for lack of personal jurisdiction filed by Defendants, Arenson, Arenson Holdings, D.A. Gardens and J12ALH and for failure to join necessary parties filed by Selk and Laurel; and (3) Motion to Dismiss under 12(b)(6) filed by Defendant Arenson. Delaware Defendants Arenson Holdings, D.A. Gardens and J12ALH claim that the Dela ware Court lacks personal jurisdiction over them since they have no contacts with Delaware other than their passive ownership of an interest in a Delaware LLC that does not conduct business in Delaware. Arenson claims that the Delaware Court lacks personal jurisdiction over him and that Shamrock has failed to state a claim against him since he has no direct interest in the declaratory relief requested. All Delaware Defendants, except Arenson, moved to dismiss or stay the declaratory judgment action asking that the Delaware Court decline to exercise its jurisdiction since the Delaware Complaint was filed while settlement negotiations were ongoing and in anticipation of a coercive action by Delaware Defendants and, as such, constitutes an inappropriate use of the declaratory judgment procedure and an exception to the first-filed rule . Those motions have been fully briefed and are currently awaiting decision by the Delaware Court. ARGUMENT I. Defendants' Motion to Dismiss For Improper Venue Should Be Denied . A. Standard of Review Defendants have moved for dismissal of this action under Fed. R. Civ. P. 12(b)(3) and 28 U.S.C. § 1406(a) for improper venue. "Where an action is filed in the wrong venue, the district court shall, pursuant to 28 U.S.C. § 1406(a), `dismiss [such action], or if it be in the interest of justice, transfer such case to any district ... in which it could have been brought.'" AC Controls Co., Inc. v. Pomeroy Computer Res., Inc., 284 F. Supp. 2d 357, 359 (W.D.N.C. 2003)(quoting 28 U.S.C. § 1406). Section 1406 "permits courts to dismiss an action if venue is improper, but `in most cases of improper venue ... courts conclude that it is in the interest of justice to transfer to a proper forum rather than to dismiss." Hackos v. Sparks, 378 F. Supp. 2d 632, 634 (M.D.N.C. 2005).

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"[W]here a motion to dismiss is filed pursuant to Section 1406(a) and Fed.R.Civ.P. 12(b)(3) the Court must look to 28 U.S.C. § 1391 . . . `[t]he rationale for this rule appears to be that dismissal for improper venue under Rule 12(b)(3) depends on whether the requirements of venue as set out in Section 1391 are met[.]" AC Controls, 284 F. Supp. 2d at 359. In order to "survive a motion to dismiss for improper venue when no evidentiary hearing is held, plaintiff need only make a prima facie showing of venue[.]" Production Group Int'l, Inc. v. Goldman, 337 F. Supp. 2d 788, 798 (E.D. Va. 2004)(citing Mitrano v. Hawes, 377 F.3d 402, 405 (4th Cir. 2004)). The prima facie requirement may be satisfied if the plaintiff can show that further discovery will reveal that the chosen forum lies in the district in which a substantial part of the events giving rise to the claim occurred. See TBV v. Schey, 2002 WL 1733649, *1 (S.D.N.Y. Jul. 26, 2002). For the reasons that follow, Plaintiffs have done so. B. Venue Is Proper Under 28 U.S.C. § 1391(a)(2). Contrary to Defendants' assertions, venue is proper in the Western District of North Carolina under 28 U.S.C. § 1391(a)(2). Under 28 U.S.C. § 1391(a)(2), a civil action founded on diversity of citizenship may be brought in "a judicial district in which a substantial part of the events or omissions giving rise to the claim occurred." Therefore, this Court must determine whether a substantial part of the events or omissions giving rise to this claim occurred in the Western District of North Carolina. In making that determination, " court should not focus only on those matters that are in dispute or that a directly led to the filing of the action. Rather, it should review `the entire sequence of events underlying the claim.'" Mitrano v. Hawes, 377 F.3d 402, 405 (4th Cir. 2004) (emphasis added); see also Ciena Corp. v. Jarrard, 203 F.3d 312, 315-16 (4th Cir. 2000)(holding that enough closely related business contacts had occurred in a district for venue to be proper there, even though the specific acts giving rise to the suit did not occur in that district). The First Circuit applied the "entire sequence of events" test in Uffner v. Reunion Francaise, S.A., 244 F.3d 38 (1st Cir. 2001) cited in Mitrano, 377 F.3d at 405-06. Uffner involved a contract dispute over an insurance policy on a yacht that sank off the coast of Puerto Rico. The district court held that venue was not proper in Puerto Rico since the claim sounded in contract and the triggering event was the denial

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of the insurance claim, "the occurrence of a fire in Puerto Rican waters was a `tenuous connection at best.'" Id. at 41. On appeal, the First Circuit reversed. In reaching its decision, the court outlined the following sequence of events leading to the claim: (1) a resident of the Virgin Islands obtained an insurance policy for his yacht; (2) the yacht caught fire and sank in Puerto Rican waters; (3) a claim was filed through the yacht owner's insurance broker; and (4) the claim was denied because it was allegedly not covered by the policy. Id. at 42. The court held that "the sinking of [the yacht] was one part of the historical predicate for the instant suit" and "although the sinking of [the yacht] is itself not in dispute, the event is connected to the claim inasmuch as Uffner's requested damages include recovery for the loss." Id. at 42-43 (emphasis added). The court further explained that "an event need not be a point of dispute between the parties in order to constitute a substantial event giving rise to the claim." Id. at 43. Finally,

the court noted that allowing venue in Puerto Rico does not "thwart the general purpose of statutorily specified venue, which is `to protect the defendant against the risk that a plaintiff will select an unfair or inconvenient place of trial'" because the defendant did not allege that Puerto Rico would "confer a tactical advantage" to the plaintiffs or "prejudice" the defendants own case. Id. at 43. In this case, the alle gations in the Complaint defeat Defendants' attempt to minimize the activities in North Carolina. Looking at "the entire sequence of events", a substantial part of the events giving rise to this claim occurred in North Carolina.10 First, the Complaint alleges that Defendants acted in gross negligence in selling MHI--a North Carolina corporation that conducted substantial business in North Carolina--at a fire sale price to a North Carolina company. Second, the Complaint alleges that a n important Board of Directors meeting occurred in North Carolina where the parties discussed, inter alia, the sale of ALH's operating units and the Class B members' proposal to purchase the Class A's interests to prevent the piecemeal sale of ALH's operating units.

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Defendants suggest that the sale of MHI was not important because Arenson, the Class B Representative, did not attend the Board meeting to vote on the sale. Arenson's subjective view on the importance of the sale of MHI has no legal relevance to a determination of whether the sale of MHI is a substantial part of the events or omissions on which Plaintiffs base their claim.

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Defendants' sale of MHI is more related to this action than the sinking of the yacht in Uffner. The essence of this action is that Defendants wrongfully sold off ALH--including MHI, a North Carolina company--in a piecemeal fashion in order to further their own self-interests and in doing so violated their fiduciary duties to Plaintiffs. Just as the sinking of the yacht in Uffner was substantial because the requested damages included recovery for that loss, here Plaintiffs' claims include damages resulting from the sale of MHI to the detriment of the Class B members. In this case, the events are even more substantial because, unlike in Uffner where the sinking of the yacht was not in dispute, the activities in North Carolina--the sale of MHI--is in dispute. Finally, as in Uffner, Defendants here have failed to allege why North Carolina confers a tactical advantage to Plaintiffs or causes prejudice to Defendants. Therefore, as in Uffner, venue is proper in North Carolina because the sale of MHI is one part of the historical predicate to the instant suit. In addition to the sale of MHI, a meeting occurred in Charlotte that is a substantial event giving rise to the claims. In Roncaicoli v. Investec Ernst & Co., 2003 WL 22244936, *3 (D.Conn. Sept. 26, 2003), the court held that venue was proper in Connecticut where a series of meetings and communications regarding the parties' investment relationship took place because the "meetings and communications constituted a `substantial part' of the events that gave rise to the dispute and the subsequent arbitration proceedings[.]" Id. The court further held that "[t]he `substantial part' standard set forth in section 1391(a)(2) is liberal and `may be satisfied by a communication to or from the district in which the cause of action was filed, given a sufficient relationship between the communication and the cause of action." Roncaicoli, 2003 WL 22244936, *3 (quoting TBV Holdings Ltd. V. Schey, 2002 WL 1733649, *4 (S.D.N.Y Jul. 26, 2002)); see also Sacody Technologies, Inc. v. Avant, Inc., 862 F. Supp. 1152, 1157 (S.D.N.Y. 1994)(holding "[t]he standard set forth in § 1391(a)(2) may be satisfied by a communication transmitted to or from the district in which the cause of action was filed, given a sufficient relationship between the communication and the cause of action."); Gruntal & Co., Inc. v. Kauachi, 1993 WL 33345, at *2 (S.D.N.Y. Feb. 5, 1993) (finding venue proper in diversity common-law fraud action

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based on telephone calls during which allegedly fraudulent representations were made, where one party to calls was within district during calls). In February 2003, Plaintiffs along with their counsel met with Shamrock in Charlotte, North Carolina to discuss the problems ALH was currently facing, the future problems that would arise if a change of course was not effected and a possible buy-out by the Class B members of the Class A's interests in ALH. (D.I. 1 ¶ 45). Plaintiffs discussed the potential harm of selling ALH in a piecemeal fashion and Defendants responded by stating that ALH was consuming too much time and that they were ready to dispose of the assets of ALH. Id. Further, Defendants continued to demand an unreasonable amount for a buy-out instead insisting that a piecemeal sale of the operating units was the best resolution. 11 Defendants claim that the sequence of events includes "a host of occurrences (and alleged occurrences) that did not occur in this District--and, to the extent they are addressed in the Complaint, are not alleged to have occurred in this Distric t." (D.I. 15 at 18). This has no bearing on whether substantial events giving rise to the claim occurred in North Carolina because venue may be proper in more than one judicial district. Mitrano, 377 F.3d at 405. Therefore, even if none of the actions or omissions that damaged Plaintiffs occurred in North Carolina, venue is still proper in North Carolina because events closely related to the legal action occurred there. See Brown v. Flowers, 297 F. Supp. 2d 846, 849 (M.D.N.C. 2003)(holding that "[v]enue in a district may be proper where acts or omissions closely related to the legal action occurred, even if none of those acts or omissions were the act or omission that allegedly caused the injury."). Plaintiffs have made a prima facie showing of venue based on the sale of MHI and the February 2003 meetings in Charlotte, both of which are substantial events giving rise to Plaintiffs' claims. If, however, the Court determines that further information is needed, Plaintiffs request that a determination on the issue of venue await further discovery since the information is almost exclusively within
11

Defendants would have been better off if they had accepted a reasonable offer from the Class B members. In the end, Defendants received a lower return on their investment and their grossly negligent decision to retain control for the purpose of liquidating the business resulted in a total loss to the Class B members.

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Defendants' knowledge and control. Nevertheless, Defendants' motion to dismiss under Rule 12(b)(3) and § 1406(a) for improper venue should be denied. II. Defe ndants' Motion to Transfer Should Be Denied. In the alternative, Defendants contend that this action should be transferred under 28 U.S.C. § 1406 or § 1404. 12 The Court should deny Defendants' motion to transfer this case to Delaware. A transfer is impermissible because Delaware is not a district in which this action could have been brought because Delaware is an improper venue. However, even if Delaware were a district in which this action could have been brought, the first to file rule does not apply and therefore, Defendants have failed to establish that a transfer is necessary for the convenience of the parties and in the interests of justice. A. This Case Could Not Have Been Brought In Delaware. Contrary to Defendants' contention, this case should not be transferred to Delaware under either 28 U.S.C. § 1406(a) or § 1404(a), because Delaware is not a forum where this action might have been brought.13 (D.I. 15 at 19). "The first step in addressing a motion to transfer under Section 1404(a) is a determination of whether the proposed transferee court is one in which the action originally `might have been brought.'" Cable -La, Inc. v. Williams Communications, Inc., 104 F. Supp. 2d 569, 574 (M.D.N.C. 1999). "The phrase `where it might have been brought' in section 1404(a) refers to a forum where venue originally would have been proper for the claim and where a defendant originally would have been subject to personal jurisdiction." 14 Kotsonis v. Superior Motor Exp., 539 F. Supp. 642, 645 (D.C.N.C. 1982). This Court may not transfer the case to Delaware because it is not a proper venue under 28 U.S.C. § 1391(a), which provides:
12

Section 1404(a) provides "For the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought." 13 "Whether section 1404(a) or section 1406(a) governs is dependent upon whether there was proper venue in the district in which the plaintiff originally brought the action. When venue exists in the district in which the case was originally filed, section 1404(a) applies; when venue never existed in the district where the suit was filed, section 1406(a) governs." FS Photo, Inc. v. PictureVision, Inc., 48 F. Supp. 2d 442, 449 (D. Del. 1999); see also Zellinger v. Control Services, Inc., 2002 WL 31914695 , *1 (M.D.N.C. Dec. 27, 2002). 14 The meaning of "in which it could have been brought" under § 1406(a) is the same as the meaning attributed to the phrase "might have been brought" in § 1404(a)). FS Photo, Inc., 48 F. Supp. 2d at 449-50.

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A civil action wherein jurisdiction is founded only on diversity of citizenship may, except as otherwise provided by law, be brought only in (1) a judicial district where any defendant resides, if all defendants reside in the same State, (2) a judicial district in which a substantial part of the events or omissions giving rise to the claim occurred, or a substantial part of property that is the subject of the action is situated, or (3) a judicial district in which any defendant is subject to personal jurisdiction at the time the action is commenced, if there is no district in which the action may otherwise be brought. Since all Defendants do not reside in Delaware, § 1391(a)(1) is not applicable. Further, since a substantial part of the events giving rise to the claim occurred in North Carolina,15 a proper venue exists under § 1391(a)(2), therefore § 1391(a)(3) does not apply. See FS Photo, 48 F. Supp. 2d 442 (holding that § 1391(b)(3) is only applicable if (b)(1) and (b)(2) do not apply). Finally, venue does not exist in Delaware under § 1391(a)(2) because Delaware is not a judicial district in which a substantial part of the events or omissions giving rise to the claim occurred because none of the events giving rise to the claim occurred in Delaware.16 Defendants attempt to misconstrue this issue by arguing that the claims arise from the formation, funding and management of ALH, a Delaware LLC. A cursory review of the facts refutes this argument. While the formation of ALH occurred in Delaware in 1998, the Complaint does not allege any claims relating to the formation of ALH. See FS Photo , 48 F. Supp. 2d 442 (ruling that Delaware was not a district where a substantial part of the events giving rise to the suit occurred where the defendant corporation was incorporated in Delaware and had its principal place of business in Virginia); Friedman v. Revenue Mgmt. of New York , 839 F. Supp. 203 (S.D.N.Y. 1993)(holding that New York was not a proper venue even though defendant corporation was incorporated in that state). Although ALH II was formed in Delaware in 1999 as a vehicle to obtain debt financing for ALH's operations and acquisitions, the Complaint does not allege any claim relating to the funding or financing of ALH. At issue is the grossly negligent management of ALH by Defendants and the grossly negligent manner in which Defendants sold the operating units of ALH. There are no allegations that any mismanagement occurred directly or even indirectly in Delaware. Accordingly,
15 16

See supra § I. for discussion on propriety of venue in North Carolina. In the Delaware Action, Plaintiffs decision not to raise improper venue should not be misconstrued as an admission that venue in Delaware is proper. Rather than challenge venue, Plaintiffs chose instead to assert other strong arguments that would result in dismissal of the Delaware Action and relieve Plaintiffs from the burden of litigating their affirmative claims in the awkward procedural position of defendants.

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venue does not exist under § 1391(a)(2) because Delaware is not a judicial district in which a substantial part of the events or omissions giv ing rise to the claim occurred. Moreover, Defendants cannot consent to venue in Delaware. "[T]he power of a District Court under § 1404(a) to transfer an action to another district is made to depend not upon the wish or waiver of the defendant but, rather, upon whether the transferee district was one in which the action 'might have been brought' by the plaintiff." Hoffman v. Blaski, 363 U.S. 335, 344 (1960). For purposes of transfer, personal jurisdiction and venue must be established independent of the consent of Defendants. Accordingly, in this case, transfer under § 1404 or § 1406 is not permissible because venue is not proper in Delaware. Defendants do not maintain that venue and personal jurisdiction are proper in Delaware but contend that "there is no question the Plaintiffs could have brought their claims as counterclaims in the DE Action." (D.I. 15 at 20). Defendants cite no legal authority in support of this contention. 17

Defendants' contention is based on several contingencies--that the Delaware Court has personal jurisdiction over Plaintiffs and that it will not decline to exercise subject matter jurisdiction over Defendants' anticipatory declaratory judgment action or over Plaintiffs'. The hypothetical ability to file a counterclaim does not satisfy the requirement under § 1404 for a district where a suit might have been brought. Foster Wheeler Corp. v. Aqua-Chem, Inc., 277 F. Supp. 382, 384 (D.C. Pa. 1967). In Foster Wheeler, the plaintiff filed suit against Aqua-Chem in the Eastern District of Pennsylvania, concerning the validity of a patent that was the subject of a pending suit in the Eastern District of Louisiana involving infringement of the same patent. The court denied the motion to dismiss holding that "[c]ontrary to defendant's contention, the hypothetical ability of Foster Wheeler to file a counterclaim in the Louisiana suit previously instituted by Aqua-Chem against Gulf Oil in no way qualifies that district under § 1404(a) as one to which suit may properly be transferred." Id.

17

Courts that have permitted a counterclaim to satisfy the requirements of § 1404, have done so only in cases where the defendants in the first-filed action had already filed an answer and did not challenge the court's exercise of jurisdiction. See e.g. A.J. Indus., Inc. v. U.S. Dist. Ct., 503 F.2d 384 (9th Cir. 1974); Leesona Corp. v. Duplan Corp., 317 F. Supp. 290 (D.R.I. 1970).

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Similarly, in the present case, the hypothetical ability of Plaintiffs to file a counterclaim in the Delaware Action does not qualify that district under § 1404(a) as a district in which this action could have been brought. At the time this action was commenced, the Delaware Court lacked personal jurisdiction over Arenson Holdings, D.A. Gardens and J12ALH. Further, currently pending before the Delaware Court is Plaintiffs' motion to dismiss under 12(b) asking the court to decline to exercise subject matter jurisdiction since Defendants' declaratory judgment action is contrary to the policies of the Declaratory Judgment Act. Therefore, Defendants' contention that the action could have been brought as a

counterclaim in Delaware is based upon the presumption that the Delaware Court has personal jurisdiction over Arenson Holdings, D.A. Gardens and J12ALH. Accordingly, since Plaintiffs may never file a responsive pleading including a counterclaim in the Delaware Action because the Delaware Court lacks personal jurisdiction over Arenson Holdings, D.A. Gardens and J12ALH, who are also necessary parties, Plaintiffs' ability to file a counterclaim was hypothetical at the time this action was filed and therefore does not satisfy the requirements of § 1404. Moreover, until the Delaware Court determines that it has personal jurisdiction over all Plaintiffs, Delaware is not a district where the case might have been brought. See Cessna Aircraft Co. v. Brown , 348 F.2d 689 (10th Cir. 1965). In Cessna, the plaintiffs filed two actions in two separate federal courts. The plaintiffs commenced six actions against Cessna in the Western District of Louisiana but Cessna challenged the Louisiana court's exercise of personal jurisdiction. When that motion was

pending, the plaintiffs filed the same six actions in the District of Kansas, where Cessna was subject to personal jurisdiction, as a precaution to protect against limitations. The Louisiana court held that it had personal jurisdiction over Cessna and denied Cessna's motion to transfer venue to Kansas. Subsequently, the Kansas court granted the plaintiffs' motion to transfer venue to Louisiana. Cessna filed an application for mandamus with the Tenth Circuit to set aside the Kansas court's transfer order arguing that Louisiana lacked personal jurisdiction over it and was therefore not a district where the case might have been brought. Cessna, 348 F.2d at 692. The plaintiffs argued that the Louisiana court's decision upholding jurisdiction over Cessna was determinative and satisfied the "where

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it might have been brought" requirement of § 1404. Id. The Tenth Circuit issued the writ of mandamus prohibiting, inter alia, the transfer. In reaching its decision, the court explained: It would have been unseemly for the federal district court in Kansas, and it is unseemly for us, to review the decision of the Western District of Louisiana upholding its jurisdiction. The remedy for Cessna lies in the Court of Appeals for the Fifth Circuit. At the same time we are aware of the vigorous contention [of] Cessna that the Louisiana jurisdiction may not be sustained. The transfer of the Kansas cases to the Western District will add nothing to the jurisdiction of that district. If the cases are transferred and the Court of Appeals for the Fifth Circuit ultimately holds that the Western District does not have jurisdiction over Cessna, the knot of procedural complications will have to be untied in some manner. We see no reason why such complications may not be avoided at this time. Cessna, 348 F.2d at 692. Further, the court issued a stay in Kansas pending a final decision on jurisdiction in Louisiana. In the present case, as in Cessna, a transfer to Delaware before the Delaware Court determines whether it has personal jurisdiction over Plaintiffs would produce procedural complications and does not satisfy the requirement of § 1404. If, as Plaintiffs maintain, the Delaware Court lacks personal

jurisdiction over Arenson Holdings, D.A. Gardens and J12ALH then it will dismiss the claims against them and no counterclaim could be filed. Therefore, until the pending motions in Delaware are resolved, Defendants' motion to transfer must be denied because Delaware is not a forum where the action could have been brought as required under § 1404. B. Transfer Under 28 U.S.C. § 1406 Is Not Appropriate. Even if Delaware is a district in which this action could have been brought, Defendants cannot establish that a transfer under 28 U.S.C. § 1406 is warranted. Section 1406(a) has been interpreted to authorize transfers in cases where venue is proper but personal jurisdiction is lacking or there exists some other impediment that would prevent the action from going forward in that district. See Porter v. Groat, 840 F.2d 255, 258 (4th Cir. 1988)("[W]e adopt as the rule in this circuit the reading of § 1406(a) that authorizes the transfer of a case to any district, which would have had venue if the case were originally brought there, for any reason which constitutes an impediment to a decision on the merits in the transferor district but would not be an impediment in the transferee district.").

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Here, Defendants claim that under § 1406 this action should be transferred because venue is improper here under 28 U.S.C. § 1391(a). For the reasons set forth in detail infra § I., venue is proper in the Western District of North Carolina because the sale of MHI and the February 2003 meetings in Charlotte are substantial events giving rise to Plaintiffs' claims against Defendants. Transfer under § 1406 is therefore, not permitted. In addition, Defendants have not established that transfer should be permitted under 28 U.S.C. § 1404(a). C. This Case Should Not Be Transferred to Delaware . 1. Special Circumstances Warrant Departure From the First-File d Rule . Defendants contend that pursuant to § 1404 and under the first-filed rule this case should be transferred to Delaware. The first-filed rule does not apply in this case because special circumstances exist. Despite clear evidence that the parties were then still engaged in ongoing settlement discussions, Defendants filed the Delaware Action to prevent Plaintiffs from selecting the forum in which to litigate their claims against Defendants. Any doubts this Court may have regarding Defendants' motives for filing the Delaware Action are resolved by the chronology of events that preceded Defendants' filing of the Delaware Action. Moreover, Defendants' declaratory judgment action is contrary to the policies of the Declaratory Judgment Act because it was filed to guarantee their choice of forum and to obtain a declaration of non-liability. 18 In Nutrition & Fitness, Inc. v. Blue Stuff, Inc., 264 F. Supp. 2d 357 (W.D.N.C. 2003), this Court explained the standard for determining whether the first-filed rule is applicable: The determination of whether to apply the first-filed rule is not entirely ungoverned, however; courts have recognized three factors to be considered in determining whether to apply the first-filed rule: 1) the chronology of the filings, 2) the similarity of the parties involved, and 3) the similarity of the issues at stake. Furthermore, even if a court finds
18

See Aetna Cas. & Surety Co. v. Ouarles, 92 F.2d 321 (4th Cir. 1937)(stating the granting of declaratory relief is within this court's discretion, and should be denied when it is invoked to try issues or determine the validity of defenses in a pending action at law); BASF Corp. v. Symington, 50 F.3d 555, 559 (8th Cir. 1995)(holding "where a declaratory plaintiff raises chiefly an affirmative defense, and it appears that granting relief could effectively deny an allegedly injured party its otherwise legitimate choice of the forum and time for suit, no declaratory judgment should issue."); Sun Oil Co. v. Transcon. Gas Pipe Line Corp., 108 F. Supp. 280 (E.D. Pa. 1952), aff'd, 203 F.2d 957 (3rd Cir. 1953)(holding that it is not one of the purposes of the Declaratory Judgment Act to enable a prospective defendant to obtain a declaration of non-liability).

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the first-filed rule applicable, it may still make the discretionary determination that the rule should be ignored as a result of "special circumstances," such as forum shopping, anticipatory filing, or bad faith filing. If a court determines that the suit first filed with it should be disregarded in favor of the later-filed suit, the court may stay its proceedings, dismiss the case entirely, or transfer the case to its sister court. Id. at 360 (internal citations omitted). In this case, the first-filed rule should be ignored because special circumstances exist. Specifically, Defendants filed this action in anticipation of Defendants' suit in North Carolina and in bad faith, knowing that Defendants were attempting to negotiate a settlement. "[C]ircumstances under which an exception to the first-to-file rule will be made include bad faith and anticipatory suit filed for the purpose of forum shopping." Guthy-Renker Fitness, L.L.C. v. Icon Health & Fitness, Inc., 179 F.R.D. 264, 270 (C.D. Cal. 1998); see also McJunkin Corp. v. Cardinal Systems, Inc., 190 F. Supp. 2d 874, 879 (S.D. W. Va. 2002)("Procedural fencing may provide an exception to the first-filed rule, such that [the declaratory judgment plaintiff's] choice of forum is not accorded deference when considering the appropriate venue."); Moore Corp. Ltd. v. Wallace Computer Services, Inc., 898 F. Supp. 1089, 1099 (D. Del. 1995); Williams Gas Supply Co. v. Apache Corp., 594 A.2d 34, 36 (Del. Ch. 1991) (first-filed Delaware action properly dismissed where it was "commenced in anticipation of [the] second filed action in Colorado"). An exception to the first-file d rule exists where the declaratory judgment action is filed in bad faith by prospective defendants when the would-be plaintiffs are attempting settlement talks in good faith. See Columbia Pictures Indus., Inc. v. Schneider, 435 F. Supp. 742, 747-48 (S.D.N.Y. 1977). Courts have held that "[p]otential plaintiffs should be encouraged to attempt settlement discussions (in good faith and with dispatch) prior to filing lawsuits without fear that the defendant will be permitted to take advantage of the opportunity to institute litigation in a district of its own choosing before the plaintiff files a complaint." Capitol Records, Inc. v. Optical Recording Corp, 810 F. Supp. 1350, 1354 (S.D.N.Y.1992) (citation omitted). In Ontel Prod. Inc. v. Project Strategies Corp., 899 F. Supp. 1144 (S.D.N.Y. 1995), the court stated: "[w]here a party is prepared to file a lawsuit, but first desires to attempt settlement discussions, that party should not be deprived of the first-filed rule's benefit simply because its adversary

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used the resulting delay in filing to proceed with the mirror image of the anticipated suit." Id. at 1150. In short, the anticipatory suit exception encourages would-be plaintiffs to attempt settlement talks in good faith, even at a stage in the conflict where the complaint has already been drafted, without fear that the settlement efforts will be punished by the filing of an anticipatory suit. See Columbia Pictures, 435 F. Supp. at 747-48; see also Riviera Trading Corp. v. Oakley, Inc., 944 F. Supp. 1150, 1158-59 (S.D.N.Y. 1996)(transferring first-filed action to district of second-filed action, where plaintiff in second-filed action had been engaged in good faith settlement effort and first-filed action was motivated in part by forum shopping). In this case, Defendants claim that the kind of special circumstances that warrant departure from the first-filed rule are not present because: "(1) there were no ongoing settlement negotiations between the parties when the DE Action was filed, and (2) Defendants were not informed of an imminent lawsuit in North Carolina before the DE Action was filed." (D.I. 15 at 9)(emphasis in original). Defendants' claims that there were no ongoing settlement negotiations between the parties when this action was filed and that they were not informed of an imminent lawsuit is refuted by conversations and correspondence between counsel for the parties. In support of their baseless claims, Defendants have mischaracterized the facts and thus, a review of the events in chronological order demonstrates h disingenuous Defendants' ow claims are: On Thursday, August 26, 2004, a conference call was held between the parties and their counsel. During this call the parties and counsel raised settlement, mediation and litigation against Plaintiffs. On Friday, August 27, 2004, counsel for Defendants, Pamela Jarvis ("Jarvis") responded via email19 to counsel for Plaintiffs, Isaac Neuberger's ("Neuberger") threat of litigation in the previous days conference call: "It occurred to me that you might not be aware that Section 10.2 of the ALH Holdings LLC Operating Agreement provides that "All questions concerning the construction, validity and interpretation of this Agreement and the performance of the obligations imposed by this Agreement shall be governed by the internal law, not the law of conflicts, of the State of Delaware." (Exh. B, at p. 1). On August 27, 2004, in an email to Jarvis, Neuberger responds "We are aware of this provision. . . it does NOT prevent the filing of a suit in North Carolina, does it? . . . Since it appears that Shamrock is unwilling to see its way clear towards an acceptable resolution, I suspect that much of this will be the subject of discovery. As we consider the alternatives, if we were to agree to the
19

All email exhibits are a true and correct copy of the original and are attached hereto as Exhibit B.

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Delaware Mediation that you proposed, would we be afforded the same discovery if we proceed in a different forum. (Exh. B, at p. 2). On Monday, August 30, 2004, in an email to Neuberger, Jarvis responds "In addition to confirming that Delaware law governs, Section 10.2 would weigh in favor of Delaware as the appropriate forum. . . . The Delaware Mediation process (like all other mediation processes I am aware of) does not provide for formal discovery, but the parties could of course agree to exchange whatever information they want to. Also, participation in the mediation would not affect the parties' ability to obtain discovery in future litigation, if any. (Exh. B, at p. 3). On Monday, August 30, 2004, in an email to Jarvis, Neuberger responds "I fully appreciate Shamrock's desire to use a Delaware Mediation process. Please consider it from the B's perspective. . . . Hence, the issue for a trier of fact, to determine, is whether what happened here was a breach of the fiduciary duty that the individual directors and Shamrock owed to the B's or not. Discovery is critical to this type of factual based determination, hence, we need to know the extent of discovery that Shamrock and the individual directors will agree to." (Exh. B, at p. 4). On Thursday, September 2, 2004, in an ema il to Neuberger, Jarvis responds "As you know, Shamrock totally disagrees with your assertions regarding self-interest and the circumstances leading to the sale of ALH's operations, but that is what we would hope to resolve in mediation. Shamrock is certainly open to the idea of discovery in connection with the mediation. As you may know, Delaware Chancery Court Rule 94(d) provides that "The Mediator may request parties to exchange or provide to the Mediator documents or other material necessary to understand the dispute or facilitate settlement. The parties may agree to exchange any document or other materials in the possession of the other that may facilitate a settlement." What specifically did you have in mind? I look forward to hearing from you. (Exh. B, at p. 5). On Friday, September 3, 2004, in an email to Jarvis, Neuberger responded: "This is progress . . . . I will be back to you next week. ." (Exh. B, at p. 8). On Sunday, September 5, 2004, in an email to Jarvis, Neuberger states: "In considering your suggestion that we agree to a Delaware mediation process, as you know, we will require that Shamrock, in advance of the Mediation, agree to the same level of discovery that we think we could achieve if we were to file a lawsuit. I have asked Sam Wood[ 20] to scope that out and to provide you with the outline [sic] a lawsuit that would be the basis of the mediation. In the meantime, we would like to know ASAP how Shamrock valued ALH on its books, from time to time, and how it described this investment in its reports to its investors. When did Shamrock write off its investment (if it did)? We believe that these reports would be discoverable. The answer to this inquiry will reflect how sincere Shamrock is in seeking a resolution through mediation and is willing to provide relevant discovery. (Exh. B, at p. 9). On Wednesday, Sept