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Case 1:06-cv-00062-SLR Case 3:05-cv-00256

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IN THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF NORTH CAROLINA 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.

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DEFENDANTS' MEMORANDUM IN SUPPORT OF MOTION TO DISMISS OR TRANSFER

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TABLE OF CONTENTS

PRELIMINARY STATEMENT ..................................................................................... 1 STATEMENT OF FACTS .............................................................................................. 2 ARGUMENT...................................................................................................................14 I. The Case Should Be Dismissed or Transferred on Grounds of Improper Venue .............................................................................................14 A. Under 28 U.S.C. § 1391(a), This Case Should Be Dismissed .......................24 B. Alternatively, Under the First to File Rule, This Case Should Be Transferred ................................................................................19 II. The Case Should Be Dismissed For Lack of Subject Matter Jurisdiction........28 A. The Claims Assert Injury to ALH and Are Therefore Derivative .................28 B. The Complaint Does Not Plead Facts Establishing Plaintiffs' Standing .......31 C. If the Derivative Claims Were Properly Pled, There Would Be No Diversity......................................................................................................33 III. This Court Lacks Personal Jurisdiction Over Defendants ................................36 A. This Court Lacks Jurisdiction Over Any Defendants ....................................36 B. This Court Lacks Jurisdiction Over SCA.......................................................37 1. This Court Lacks General Jurisdiction Over SCA...................................37 2. This Court Lacks Specific Jurisdiction Over SCA ..................................38 IV. The Complaint Fails to State Any Claim On Which Relief Can Be Granted .....................................................................................................40 A. Delaware's Business Judgment Rule Presumption........................................42 B. Plaintiffs Have Not Stated a Claim for Breach of the Duty of Loyalty .........43 C. Plaintiffs Have Not Stated a Claim for Bad Faith..........................................45

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D. Plaintiffs Have Not Stated a Claim for Gross Negligence.............................46 E. Plaintiffs Have Not Stated Any Breach of Contract Claim............................47 F. Plaintiffs Have Not Stated an Ultra Vires Claim............................................49 G. Plaintiffs Have Not Stated a Civil Conspiracy Claim.....................................49 H. Plaintiffs' Claims Are Time-Barred...............................................................51 CONCLUSION................................................................................................................55

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PRELIMINARY STATEMENT 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") ("Defendants") respectfully submit this brief in support of their motion to dismiss, or in the alternative to transfer, the Complaint filed by Plaintiffs A. Arenson Holdings, Ltd. ("Arenson Holdings"), D.A. Gardens, Ltd. ("D.A. Gardens"), J12ALH Associates ("J12"), SELK, LLC ("SELK") and Laurel Equity Group, LLC ("Laurel") ("Plaintiffs"). (The Complaint is Exhibit A to the accompanying Declaration of Pamela Jarvis.) Defendants move to dismiss on, inter alia, the following grounds: · Improper Venue. Venue is improper under 28 U.S.C. § 1391(a) because, inter alia: (1) the Complaint mirrors pending claims brought by Defendants against Plaintiffs more than eight months earlier in federal court in Delaware (the "DE Action"), (2) Defendants do not reside in this District, (3) Plaintiffs' claims could and should have been brought as counterclaims in the DE Action, and (4) the Complaint does not and cannot allege that a substantial part of the events or omissions giving rise to Plaintiffs' claims occurred in this District. The case should be dismissed or transferred to Delaware under 28 U.S.C. § 1406(a), or transferred to Delaware under 28 U.S.C. § 1404(a). Lack of Subject Matter Jurisdiction: Entire Complaint. The Complaint asserts only derivative claims on behalf of ALH Holdings, LLC ("ALH"). By contending that Defendants "depressed [the] value of ALH" and "destroyed all [investor] equity" in ALH (Complaint ¶12), Plaintiffs make classic derivative claims that they have no standing to bring directly. Plaintiffs could not properly plead these claims without, inter alia, joining ALH as a party, but that would preclude diversity jurisdiction here, because all parties are members of ALH and ALH's citizenship cannot be diverse from that of its members. Lack of Subject Matter Jurisdiction: Count III. Count III alleges that SCA breached a July 2001 consulting agreement with ALH ("Consulting Agreement"). Plaintiffs are not parties to this agreement and thus lack standing to sue for its breach. Lack of Personal Jurisdiction Over All Defendants. An essential statutory prerequisite to the exercise of long-arm jurisdiction under N.C. Gen. Stat. § 1-75.4 does not exist, namely, subject matter jurisdiction over Plaintiffs' claims. Lack of Personal Jurisdiction Over SCA. The Complaint alleges no jurisdictionally significant contacts between SCA and North Carolina and no claim against SCA that arises from contact with North Carolina.

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Failure to State a Claim for Relief: Individual Counts of the Complaint: All Counts claim breach of fiduciary duty. These claims are barred by ALH's Operating Agreement and the Consulting Agreement, which preclude liability absent fraud, criminal action, bad faith, gross negligence or willful misconduct. The Complaint does not allege fraud or criminal action. Its allegations of bad faith, gross negligence and willful misconduct are wholly conclusory, unsupported by any facts or inferences that could reasonably be drawn. Count II and III allege that Defendants breached ALH's Operating and Consulting Agreements and the implied contractual covenant of good faith and fair dealing, but they identify no express or implied contractual obligation that has been breached. The only breach of contract they allege is breach of fiduciary duty. Count V alleges that the sale of ALH's operations was ultra vires. This claim fails because, inter alia, such sale was not beyond ALH's powers. Count VI pleads civil conspiracy, but fails to state any independent cause of action for civil conspiracy. Failure to State Claim for Relief: Entire Complaint. The Complaint is time-barred. It alleges a scheme by Defendants, beginning in early 2001, to breach fiduciary and other obligations relating to ALH, but was not served until June 2005, after the end of the three-year limitation period. Certain alleged events occurred after June 2002, but at most such events are only aggravation of the original alleged injury.



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Accordingly, there are ample grounds for dismissing the Complaint or transferring the case (with all pending motions) to the Delaware federal court.1 STATEMENT OF FACTS I. Defendants' DE Action On September 13, 2004, Defendants commenced the DE Action by filing their original complaint in the Court of Chancery of the State of Delaware ("Chancery Court"). Jarvis Dec. Ex. C. The DE Action arises from the formation, funding and management of ALH, a Delaware

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Plaintiffs' claims are governed by Delaware law because (1) ALH is a limited liability company ("LLC") formed under Delaware law, so under N.C. Gen. Stat. § 57C-7-01, Delaware law governs, inter alia, its internal affairs and the liability of its members and managers, and (2) ALH's Operating Agreement (Jarvis Dec. Ex. D at § 10.2) provides that "[a]ll 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."

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LLC. (Defendants' current complaint, cited as "DE Complaint ¶ __," is Jarvis Dec. Ex. B.) Shamrock, as a holder of Class A equity in ALH ("Class A Member"), is the single largest investor in ALH, having invested over $9 million. DE Complaint ¶¶ 2, 7. The five Plaintiffs herein (Arenson Holdings, D.A. Gardens, J12, SELK and Laurel) are the five Class B equity investors in ALH ("Class B Members"). Id. at ¶¶ 9-18, 52, 57- 59; Jarvis Dec. Ex. D at Ex. B).2 Plaintiffs invested in the equity of ALH, which was formed in June 1998 to engage in the home-building business. DE Complaint ¶ 2. Shamrock invested millions of dollars more in ALH than did any of the Plaintiffs. Id. Due to no wrongdoing by any of the Defendants, ALH was ultimately unsuccessful, with the result that both Shamrock and Plaintiffs lost most of what they invested in ALH. Id. Under ALH's June 12, 1998 Operating Agreement, as amended (the "Operating Agreement"), the economic rights of the Class A and Class B Members are pari passu. Jarvis Dec. Ex. D at §§ 4.1(b), 8.3(a) (iii), Ex. E at ¶ 20, Ex. MM at 3; DE Complaint ¶¶ 3, 134.3 The Class A Members have no financial priority or preference over the Class B Members. Id. The only difference is that Shamrock's share of ALH's losses is necessarily larger than that of the Plaintiffs, because Shamrock's investment in ALH is larger. DE Complaint ¶ 3. No setback experienced by ALH could hurt Plaintiffs without hurting Shamrock more. Id. Although there was no basis for holding any of the Defendants liable for ALH's disappointing performance, Plaintiffs made spurious accusations and repeatedly threatened to sue. Id. ¶¶ 2-6.

Avie Arenson ("Arenson") is a defendant in the DE Action but not a Plaintiff herein. He owns and controls two of the Plaintiffs herein: Arenson Holdings and D.A. Gardens. See DE Complaint ¶ 11; Jarvis Dec. ¶ 67. Arenson is also a member of ALH's Supervisory Board, on which he serves as the Class Representative of the Class B Members. DE Complaint ¶ 10; see accompanying Declaration of George J. Buchler at ¶ 2. Together, Arenson and the Class B Members are the defendants in the DE Action. The Operating Agreement (Jarvis Dec. Ex. D) and other documents referred to in the Complaint may be considered on a Fed. R. Civ. P. Rule 12(b) motion without converting it into a summary judgment motion. See, e.g., Iconbazaar, LLC v. America Online, Inc., 308 F. Supp. 2d 630 (M.D.N.C. 2004).
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The DE Complaint seeks a declaratory judgment that: (1) Defendants did not breach any fiduciary duty in connection with ALH, particularly the sale of ALH's operations (Count I); (2) they have no liability under the Operating or Consulting Agreements (Counts II & III); (3) they relied in good faith on ALH's outside advisors (Count IV); (4) they are entitled to indemnification (Count V); (5), SELK has released its claims against them (Count VI); (6) SELK's equity interest in ALH should be reduced or eliminated (Count VII); and (7), they have not violated Arenson's rights as Class B Representative (Count VIII). On October 6, 2004, the original defendants in the DE Action (SELK, Laurel and Arenson) removed the original complaint (Jarvis Dec. Ex. C) to the Delaware federal court. Id. at ¶ 64. On October 14, 2004, they moved to dismiss the DE Action, but did not move to dismiss on grounds of improper venue and did not move to transfer the action to North Carolina. Id.4 On April 22, 2005, Defendants filed the DE Complaint in the Delaware federal court. Among other things, the DE Complaint added Arenson Holdings, D.A. Gardens and J12 as defendants. DE Complaint ¶¶ 11, 58-62. On June 3, 2005, in the DE Action, Plaintiffs and Arenson made various motions to dismiss, but they did not move to dismiss on grounds of improper venue and did not move to transfer the action to North Carolina. Jarvis Dec. ¶ 66. II. Plaintiffs' "Mirror Image" Action in this Court On June 2, 2005, the Class B Members filed their Complaint, which is essentially a mirror image of the DE Complaint (except that Arenson is not a party to this action and this action does not address the Defendants' claims for such relief as indemnification). The Complaint purports to state claims against Defendants for: (1) alleged breach of fiduciary duty in
On November 5, 2004, Defendants moved to remand the DE Action on the grounds that the defendants therein had failed to carry their burden of establishing diversity jurisdiction. Jarvis Dec. ¶ 65. The defendants therein provided discovery concerning Plaintiffs' ownership, controlling persons and business activities and made supplemental factual submissions. Id. On March 22, 2005, the Delaware federal court denied the motion to remand. Id.
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connection with ALH, particularly the sale of ALH's operations (Count I); (2) alleged breach of the Operating and Consulting Agreements (Counts II & III); (3) alleged gross negligence in connection with the sale of ALH's operations and hiring of advisors (Count IV); (4) alleged selfdealing/ultra vires action in connection with the sale of ALH's operations (Count V); and (5) alleged civil conspiracy in connection with the sale of ALH's operations (Count VI). This action and the DE Action concern the same alleged breaches of fiduciary duty by the Defendants herein in connection with ALH, the same sales of ALH's operations, the same Supervisory Board decisions, the same Operating and Consulting Agreements, and the same advisors. Compare Jarvis Dec. Ex. A with Jarvis Dec. Ex. B. The claims in this action are compulsory counterclaims in the DE action because they unquestionably arise out of the same transactions and occurrences that are the subject matter of the DE Action. FED. R. CIV. P. 13(a). III. The Exculpation Provisions of the Operating and Consulting Agreements Section 6.2(f) of the Operating Agreement (Jarvis Dec. Ex. D) provides that: Neither the Manager nor any Representative or Deputy Representative shall be liable, responsible, or accountable in damages or otherwise to the Company or any of the Members for any failure to take any action or the taking of any action within the scope of authority conferred on it, him or her by this Agreement made in good faith, except that the Manager, Representatives and Deputy Representatives shall be liable, responsible and accountable for their own fraud, criminal action, bad faith or gross negligence. The Consulting Agreement provides that SCA shall have no liability to ALH or any other person in connection with the services rendered pursuant to the Consulting Agreement, except to the extent that it is finally judicially determined that such liability results primarily from SCA's bad faith, gross negligence or willful misconduct. Jarvis Dec. Ex. J at Ex. A. p. 2. By means of conclusory assertions of "bad faith," "gross negligence," "willful misconduct," "malice," "ill

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will" and the like, the Complaint attempts -- unsuccessfully -- to override these exculpation provisions. The crux of the Complaint is that Defendants conspired to seize control of ALH and then used that control to achieve their "goal to sell off ALH at a loss." Complaint ¶ 37; see also ¶¶ 8, 33, 35, 39, 46, 71. Since the financial interests of Shamrock and Plaintiffs in ALH were at all times fully aligned, there is no conceivable reason why Shamrock would have wanted to "sell off the operating units of ALH [at] depressed values." Id. ¶ 8. Not surprisingly, Plaintiffs plead no facts that support these conclusory and patently illogical claims. Allegations Concerning Loan Repayments. Plaintiffs attempt to explain their position by contending that Defendants' alleged wrongdoing resulted from a desire to receive and retain repayment of loans made to ALH in April 2000 and May 2002, but this contention is based on wholly unreasonable inferences that the Court need not credit, even on a motion to dismiss under Rule 12(b)(6). With regard to these loans, the interests of Shamrock and Plaintiffs were the same: they both made loans to ALH and they both were repaid at the same time. Id. ¶¶ 41-43. The repayments discharged lawful debts of ALH and allowed it to continue to operate. See id. ¶¶ 10, 55. Even assuming arguendo that Defendants caused the sale of ALH's operations at "'fire sale' prices in order to use the proceeds to repay the loans" (id. ¶ 11), any supposed advantage -- or disadvantage -- from this would be the same for both Shamrock and Plaintiffs.5 Plaintiffs do not allege that they objected to the repayment of the loans or sought to return their repayments to ALH. Nor do Plaintiffs allege that, had the loans not been repaid, ALH would have had sufficient funds to continue and grow its operations. Given that Plaintiffs and Shamrock received and retained their loan repayments under exactly the same circumstances,
Plaintiffs speculate that, if ALH had declared bankruptcy within one year of the repayment of the loans, the repayments would have had to be disgorged as preferential. Id. ¶ 44. None of this ever happened, but if it had, Plaintiffs would presumably have had to disgorge their repayments as well.
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Plaintiffs do not appear to claim that such repayments (including their own) are wrongful as such. Rather, Plaintiffs seem to contend that repayment of the loans was the motive for Defendants' alleged scheme. Even if this were Defendants' motive, it would in no way conflict with their interest in maximizing value, and it would not support Plaintiffs' conclusory assertions of self-interest and bad faith. Allegations Concerning Management Responsibilities. The Complaint contends that Defendants sold off ALH's operations at inadequate prices in order to rid themselves of management responsibility for ALH. See, e.g., Complaint ¶¶ 6, 8-9, 11, 45, 57-58, 60, 68, 73. The Complaint pleads no facts that substantiate this contention or from which reasonable inferences substantiating this contention could be drawn. Indeed, the Complaint refers to (but fails to attach for the Court's review) two documents that refute this contention: (1) the July 2001 agreement that Plaintiffs refer to as the "Management Agreement" (the "Lion LLC Settlement Agreement"); and (2) the Consulting Agreement. Id. ¶¶ 33, 37. (The Lion LLC Settlement Agreement and the Consulting Agreement, respectively, are Jarvis Dec. Exs. F and J.)6 These two documents demonstrate that the Defendants could at any time have relinquished any management responsibilities they may have assumed. Plaintiffs' premise that Defendants had to sell off ALH in order to avoid spending time on ALH is thus disproved by the Complaint itself. The Lion LLC Settlement Agreement addressed Defendants' involvement with ALH in three ways: (1) it approved the Class A Members' right to designate an additional Class Representative on ALH's Supervisory Board, but it did not require the Class A Members to exercise this right in any particular manner or for any specified period (Jarvis Dec. Exs. H-I); (2)
Under the Lion LLC Settlement Agreement, the Class A Members were enabled to designate an additional Class Representative on ALH's Supervisory Board, such that the Class A Members could designate three of the five Class Representatives instead of two. Jarvis Dec. Ex. D at § 6.2(b)(i) & Exs. H-I. All of ALH's Members -- including Plaintiffs, acting thorough Arenson as Class B Representative -- approved the Lion LLC Settlement Agreement. See, e.g., Jarvis Dec. Exs. F-L.
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Buchler was added to the boards of ALH's subsidiaries, but was not required to continue for any specified period (id. at Ex. K); (3) ALH and SCA entered into the Consulting Agreement, but SCA could terminate that agreement at any time. Id. at Ex. J § 6; Complaint ¶ 37. 7 Assuming arguendo that Defendants were involved in ALH's management as alleged in the Complaint, the Complaint does not allege (nor can it) that anything prevented the Defendants from ceasing that involvement at any time. According to the Complaint itself, Defendants could have chosen at will to spend less time on the management of ALH, or none at all. They did not need any "scheme" -- let alone a "scheme" that would injure Shamrock more than any other investor in ALH by "depress[ing]" ALH's value. Complaint ¶ 8. In short, the Complaint fails to plead claims permitted by the exculpation provisions of the Operating and Consulting Agreements or rebut the business judgment rule presumption. IV. Plaintiffs Seek to Thwart the First to File Rule On June 3, 2005 -- the day after filing this action -- Plaintiffs moved in the Delaware federal court to dismiss or stay the DE Action in favor of this action (the "Forum Motion").8 In support of their Forum Motion, Plaintiffs argue that, contrary to the well-established "first to file" rule of this Court and the Delaware federal court, the Defendants' choice of Delaware as the forum for this litigation should be disregarded. We expect that, in responding to Defendants'
The Complaint (¶ 33) characterizes the Lion LLC Settlement Agreement as a "management agreement" as if to suggest that it gave Defendants management responsibility for ALH. In fact, it is an agreement between (1) ALH and (2) an entity called Lion ALH Capital, LLC ("Lion LLC") and certain affiliates of Lion LLC (the "Management Persons"). In substance, the Lion LLC Settlement Agreement regulates the conduct of the Managements Persons (who are unrelated to Defendants) in connection with ALH. It requires, inter alia, that the Management Persons: (1) ensure ALH's right to corporate opportunities; (2) obtain approval from ALH's Supervisory Board before causing or permitting ALH to enter into certain kinds of transactions, including related-party transactions; (3) acknowledge the receipt of certain payments from ALH; and (4) make certain payments to ALH and sign confessions of judgment in favor of ALH in the aggregate amount of $1.9 million. Jarvis Dec. Ex. F at §§ 1(d), 1(e), 1(h), 2.0, 3.0; see id. at Ex. G. See also Buchler Dec. ¶ 4. Defendants have filed their papers in opposition to the Forum Motion and Plaintiffs' other motions in the DE Action. Plaintiffs' reply papers are due September 9, 2005.
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present motion to dismiss this action for lack of venue, Plaintiffs will take the same position they have taken made in support of their Forum Motion in Delaware. Plaintiffs' sole argument in support of the Forum Motion is that even though the DE Action was filed in September 2004 -- more than eight months before this action -- Defendants' choice of a Delaware forum is not protected by the first to file rule because the DE Action was filed solely to deprive Plaintiffs of their choice of forum. This argument relies on two false factual premises. Contrary to Plaintiffs' unsupported contentions: (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. Plaintiffs' first false premise is that Defendants filed the DE Action while the parties were engaged in ongoing settlement negotiations. From mid-July through late August 2004, Plaintiffs and Defendants conducted a nearly daily exchange of correspondence to try to set up a meeting at which the parties might discuss and attempt to resolve their differences. Jarvis Dec. at ¶¶ 56-57. It proved to be impossible to get agreement on a face-to-face meeting. Id. at ¶ 57. Even arranging the date and time for a conference call was difficult. Id. & Exs. CC, DD, EE. There was sharp disagreement concerning what might be discussed during the possible conference call. Id. at ¶ 58 & Ex. GG. Plaintiffs sought to discuss the compensation they wanted from the Defendants for ALH's disappointing performance. See Id. Defendants maintained that Plaintiffs had no right to any such compensation, but Defendants were willing to discuss the possibility of a business transaction that would address the future of ALH. See id. at ¶ 58 & Exs. DD, FF, GG. In any event, the call would give the parties an opportunity to assess whether a face-to-face meeting would be worthwhile. See, e.g., id. at Ex. CC.

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Finally, on August 26, 2004, the parties and their counsel held a conference call. See Buchler Dec. at ¶ 13. The parties agreed in advance that the call (in contrast to the parties' correspondence) "will be in the nature of settlement discussions and will be without prejudice and `off the record' and not useable in any context." Jarvis Dec. Exs. HH, II. Following the conference call, Defendants concluded that there was no common ground between the parties that might serve as a starting point for settlement discussions. Buchler Dec. at ¶ 13. Plaintiffs seem to have reached the same conclusion: the day after the conference call, Plaintiffs sent Defendants an email stating that, inter alia, "it appears that Shamrock is unwilling to see its way clear towards an acceptable resolution." Jarvis Dec. Ex. KK at 3. At no time after the conference call did either party attempt to schedule any further discussions. Id. at ¶ 59. Despite the failure of the August 26, 2004 conference call to set in motion any negotiations between the parties, it occurred to Defendants that a respected mediator experienced in the applicable principles of Delaware law might be able to help Plaintiffs see that they had no basis for their claims against Defendants. Buchler Dec. at ¶ 14. Defendants suggested that Plaintiffs consider mediation in the Delaware Chancery Court under Del. Code Ann. tit. 10, § 347, but Plaintiffs did not agree. See Jarvis Dec. Exs. JJ, KK, LL, NN at ¶¶ 8-9, E at ¶ 23. Thus, as of September 13, 2004, when the DE Action was filed, there were no ongoing settlement negotiations between the parties. Indeed, given that Plaintiffs had not agreed to mediation, there was not even a prospect of such negotiations. As of September 13, 2004, Plaintiffs had not explicitly refused to mediate, but neither had they agreed to it. Jarvis Dec. Exs. JJ, KK & LL. It appeared that Plaintiffs were not serious about mediating, but were instead hoping to obtain information that they might at some point try to use in a lawsuit. Buchler Dec.

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¶ 14. In any event, Plaintiffs' noncommittal response to the possibility of mediation can hardly be characterized as ongoing settlement negotiations. Plaintiffs' second false premise is that the Defendants rushed to file the DE Action as a preemptive measure against an imminent tort action that Plaintiffs had informed Defendants they intended to file in North Carolina. In fact, Plaintiffs did not inform Defendants of anything concerning litigation, let alone that they were about to file suit in North Carolina or elsewhere. On August 27, 2004, while Defendants still hoped that Plaintiffs might agree to mediation in Delaware, Defendants' counsel emailed Plaintiffs' counsel, stating that: " 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." Jarvis Dec. at Ex. OO. Plaintiffs responded the same day, asking whether § 10.2 of the Operating Agreement had the effect of a forum selection clause precluding litigation outside Delaware: "We are aware of this provision . . . it does NOT prevent the filing of a suit in North Carolina, does it?" Id. at Ex. KK at 3 (ellipsis in original). This single line in Plaintiffs' August 27, 2004 email is the only thing cited by Plaintiffs in support of their assertion in the Forum Motion that they informed Defendants of their intention to file suit in this Court Plaintiffs' August 27, 2004 email also asked a second question: whether mediation in Delaware would afford the same discovery "that we would be entitled [sic] if we proceed in a different forum." Id.; emphasis added. By email dated August 30, 2004, Defendants responded to Plaintiffs' August 27 email. Id. Ex. KK at 2. Defendants stated that: "In addition to confirming that Delaware law governs, Section 10.2 of the Operating Agreement would weigh in favor of Delaware as the appropriate

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forum." In addition, Defendants stated that: "The Delaware mediation process . . . does not provide for formal discovery, but the parties could of course agree to exchange whatever information they want to." Id. "Also, participation in the mediation would not affect the parties' ability to obtain discovery in future litigation, if any" (emphasis added). Id. Defendants did not understand Plaintiffs' August 27, 2004 email to be a notification of imminent intent to sue in North Carolina or anywhere else. Even assuming that one or both of the questions in' August 27, 2004 email were rhetorical in nature, at most they express Plaintiffs' view that the Delaware choice of law provision in Section 10.2 of the Operating Agreement did not prevent Plaintiffs from suing in North Carolina or "in a different forum." Id. at Ex. KK at 3.9 This could not objectively be understood as notification of an imminent intention to sue. Plaintiffs did not imminently sue. Between August 27, 2004, when Plaintiffs posed their questions, and September 13, 2004, when Defendants filed the DE Action, more than two weeks elapsed, during which Plaintiffs did not sue or threaten to sue. Id. at ¶ 60. During the eight months after Defendants filed the DE Action, Plaintiffs did not sue or threaten to sue. Id. By email dated September 5, 2004, Plaintiffs stated that, before agreeing to a mediation in Delaware, "we will require that Shamrock . . . 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 [a partner in Plaintiffs' counsel's law firm] to scope that out and to provide you with the outline [of] a lawsuit that would be the basis of the mediation" (emphasis added). Id. at Ex. LL. Mr. Wood never provided the "outline of a lawsuit," whether as a basis for mediation or for any other purpose.
Several weeks before the August 26 conference call, Plaintiffs' counsel put the following question to Defendants' counsel: "IF THIS CASE IS BROUGHT IN DELWARE, NORTH CAROLINA OR ELSEWHERE OTHER THAN NYC, WILL YOU PARTICIPATE?" Jarvis Dec. Ex. GG at 5 (upper case in original). This suggested, as had other communications from Plaintiffs, that they were contemplating the possibility of litigation, but it was hardly a notification of imminent intent to sue. In addition, to the extent it indicates any specificity of thought regarding a possible lawsuit, it suggests that Plaintiffs themselves considered Delaware an appropriate forum in which to sue Defendants.
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Id. at ¶ 61. Nor did he provide any other information regarding the discovery that Plaintiffs supposedly wanted as a condition of agreeing to mediation. Id. On September 8, 2004, Plaintiffs sent a further more email asking about "the extent of the discovery that [Shamrock] would consider if we were to agree to the Mediation." Id. at Ex. LL. That same day, Defendants responded by asking for the information from Mr. Wood that was promised on September 5. Id. Defendants provided nothing. Id. at ¶ 62. By this point, it appeared to Defendants that Plaintiffs might merely be toying with the idea of mediation, in the hope of getting extra-judicial discovery to use as the basis for a lawsuit. Buchler Dec. at ¶ 14. See, e.g., Jarvis Dec. Ex. JJ (request that Shamrock provide discovery information to show it is sincere in seeking resolution through mediation). By letter dated September 13, 2004, enclosing a courtesy copy of the original complaint in the DE Action, Defendants advised Plaintiffs that: The commencement of this action reflects no diminution in plaintiffs' desire to engage in the previously discussed mediation with your clients. However, it has been more than two weeks since plaintiffs first proposed the mediation, and you have yet to agree to it. Consequently, plaintiffs thought it prudent to pursue the mediation in the context of a pending action. Id. at Ex. PP. Since then, Plaintiffs have not expressed the slightest interest in pursuing mediation or settlement discussions. Id. at ¶ 63.10 By the time Defendants filed the DE Action, Plaintiffs had intermittently been threatening litigation for months. For example, in a July 12, 2004 letter to Shamrock, Krieger and Buchler, Plaintiffs stated that "we are exploring the rights of the Class B shareholders to seek recovery of their equity and damages, as well," and that "millions of dollars may have been
After the parties' August 26, 2004 conference call proved useless and Plaintiffs did not agree to mediation, Defendants filed their original complaint in the Chancery Court in the hope of obtaining a prompt resolution of the parties' dispute. Id. Ex. E at ¶ 23. As reflected in Defendants' September 13, 2004 letter, Defendants also believed that a pending action in the Chancery Court might be conducive to getting Plaintiffs involved in the mediation process in that court. Id. at Ex. PP.
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lost by what we feel is actionable behavior." Id. Ex. QQ at 2-3. In this letter, Plaintiffs also threatened to try to harm Shamrock's reputation by publicizing their accusations. Id. at 2. For even longer, Plaintiffs had been accusing Defendants of breaches of fiduciary duty. See, e.g., April 1, 2004 email from Arenson to Buchler, stating that Plaintiffs "FEEL VERY STRONGLY THAT SHAMROCK USED ITS CONTROLLING POSITION TO FURTHER SHAMROCK'S ENDS, WITHOUT REGARD TO THE IMPACT ON THE OTHER ALH SHAREHOLDERS." Jarvis Dec. at Ex. BB (upper case in original). Especially in this context, Plaintiffs' August 27, 2004 email asking whether Section 10.2 of the Operating Agreement prevented the filing of a lawsuit in North Carolina is patently inadequate to support Plaintiffs' assertion that they had informed Defendants of their imminent intention to sue in North Carolina. ARGUMENT I. The Case Should Be Dismissed or Transferred on Grounds of Improper Venue A. Under 28 U.S.C. § 1391(a), This Case Should Be Dismissed

Defendants move under Fed. R. Civ. P. Rule 12(b)(3) to dismiss the Complaint on grounds of improper venue. The Complaint (¶ 25) asserts that venue is proper in this District because "Defendants conducted substantial business within this District, and because a substantial part of the events or omissions giving rise to the claim occurred in this District." Since Plaintiffs assert jurisdiction solely on the basis of diversity of citizenship (Complaint ¶ 24), venue is governed by 28 U.S.C. § 1391(a), which states that venue is proper 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.

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Here, venue is not proper under 28 U.S.C. § 1391(a)(1) because Defendants do not all reside in North Carolina. For venue purposes, an individual defendant resides in the state where he or she is domiciled. See, e.g., Nowotny v. Turner, 203 F. Supp. 802, 803-04 (M.D.N.C. 1962); Manley v. Engram, 755 F.2d 1463, 1466 (11th Cir. 1985); Finger v. Masterson, 152 F. Supp. 224, 225 (W.D.S.C. 1957). Krieger, Buchler and Stein are citizens and domiciliaries of California. Complaint ¶¶ 21-23; Buchler Dec. ¶ 16. Shamrock and SCA, as corporations, are deemed to reside in any judicial district where they are subject to personal jurisdiction when the action is commenced. 28 U.S.C. § 1391(c). Krieger, Buchler and Stein do not reside here, so even if Shamrock and SCA were subject to personal jurisdiction in this District, 28 U.S.C. § 1391(a)(1) does not apply. See, e.g., Hart v. Skadden, Arps, Slate, Meagher & Flom, Case No. 1:90CV00437, 1991 U.S. Dist. Lexis 18053, at *7 (M.D.N.C., Aug. 5, 1991) (unpublished); Loeb v. Bank of Am., 254 F. Supp. 2d 581, 586 (E.D. Pa. 2003).11 Venue is also not proper under 28 U.S.C. § 1391(a)(3), because it is not the case that "there is no district in which the action may otherwise be brought." Plaintiffs could have brought their claims in this action as counterclaims in the DE Action. See FED R. CIV. P. 13; U.S. Ship Mgmt., Inc. v. Maersk Line, Ltd., 357 F. Supp. 2d 924, 935; A.J. Indus., Inc. v. U.S. Dist. Ct., 503 F.2d 384, 387 (9th Cir. 1974); Leesona Corp. v. Duplan Corp., 317 F. Supp. 290, 295 (D. R.I. 1970). See also Point II.C infra. Indeed, Plaintiffs do not assert that their claims could only have been brought in this District. Therefore, 28 U.S.C. § 1391(a)(3) does not apply. This leaves only one theoretically possible basis for venue: the occurrence in this District of a "substantial part of the events or omissions giving rise to the claim." 28 U.S.C.

The Complaint (¶ 25) asserts that venue is proper because "Defendants conducted substantial business within this District." The Complaint alleges no facts to support this conclusory assertion, and even if it were true, it is not one of the three bases for venue under 28 U.S.C. § 1391(a).

11

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§ 1391(a)(2). However, notwithstanding Plaintiffs' conclusory allegation in ¶ 25 of the Complaint, there are no facts to support venue on this basis. In determining whether 28 U.S.C. § 1391(a)(2) applies, the Court must review "'the entire sequence of events underlying the claims.'" Mitrano v. Hawes, 377 F.3d 402, 405 (4th Cir. 2004) (citation omitted); Ciena Corp. v. Jarrard, 203 F.3d 312, 318 (4th Cir. 2000) (venue was proper where "many of the events and facts central to this case" occurred); Precept Med. Prods., Inc. v. Klus, 282 F. Supp. 2d. 381, 387-88 (venue proper where "many acts very closely related to the . . . action" occurred). Plaintiffs do not -- and cannot -- allege facts showing that a substantial part of the events or omissions on which Plaintiffs base their claims occurred here. Plaintiffs' claims are, at most, incidentally related to North Carolina. Mulvaney Homes, Inc. ("MHI"), which operated in North Carolina, was the last of ALH's operations to be sold. See Complaint ¶¶ 26, 56, 69. Arenson -- who owns and controls two of the Plaintiffs (Arenson Holdings and D.A. Gardens) and represents all Plaintiffs as Class B Representative of ALH's Supervisory Board -- deemed the sale of MHI to be of no importance. Drafts of the MHI transaction documents were sent to Arenson for his review and comment, but he did not respond. Buchler Dec. ¶ 15. He did not even bother to attend the Supervisory Board meeting at which the proposed sale of MHI was considered. Jarvis Dec. Ex. Z. He explained this by stating that "any further participation [in ALH's affairs] would be a waste of my time." Id. at 1.12 Moreover, although the Complaint (¶¶ 56-69) purports to describe various events in the course of the sale of MHI, it does not allege that any of these supposed events occurred here. The Complaint (¶¶ 45-46) alleges only one specific event in North Carolina: a meeting in February 2003 at which "some of the Plaintiffs and their counsel met with Shamrock (Messrs.
In contrast, the Complaint (¶¶ 48, 52) alleges that Arenson attended the Supervisory Board meetings at which the sale of ALH's Florida and Tennessee operations -- Atlantic Builders, Inc. ("ABI") and Bowden Building Corporation ("BBC") -- were sold.
12

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Krieger and Buchler) in Charlotte." The Complaint (¶ 45) asserts that "[t]he purpose of the meeting was to discuss the problems then-currently facing ALH and the future problems that could arise if a change of course was not effected." Allegedly, Defendants said that "ALH was consuming too much management time" and that they "wanted to rid themselves of the hassle of dealing with ALH." Id. Assuming arguendo that this statement was made, it was nothing new or different: the Complaint (¶ 6) asserts that "Defendants first expressed a desire to exit their investment and management of ALH" in early 2001. The Complaint (¶ 46) further alleges that, at the February 2003 meeting, Plaintiffs "warned Defendants that a piecemeal sale of [ALH's] operating units would be disastrous" and proposed buying out Shamrock's position in ALH. It also alleges that Plaintiffs "concerns and proposals [were] ignored." Id. This was nothing new or different either: since at least as far back as July 2002, Plaintiffs had argued against the sale of ALH's operations. See, e.g., Jarvis Dec. Ex. ZZ. Also, in July 2002, Plaintiffs met with each other in England to discuss making a proposal to buy out ALH's Class A equity, including Shamrock's position. Id. From time to time thereafter, Plaintiffs communicated with Shamrock concerning their interest in making such a proposal, but this never even resulted in a written proposal. Id. at Exs. O, ZZ, AAA, BBB; Buchler Dec. ¶ 12. In any event, the Complaint does not assert (nor could it) that anything related to Plaintiffs' abortive buy-out idea gave rise to any of the claims in this action. Even if these allegations in the Complaint concerning MHI and the February 2003 meeting were true, this would not mean that "a substantial part of the events or omissions giving rise to [Plaintiffs' claims] occurred" in this District. 28 U.S.C. § 1391(a)(2). As set forth above, the Plaintiffs themselves have treated the sale of MHI as an irrelevancy. No decisions were

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made or actions taken at the February 2003 meeting; nothing new or different was said or done. By February 2003, Defendants' alleged scheme was two years old. See, e.g., Complaint ¶ 6. The Fourth Circuit mandates a review of "'the entire sequence of events underlying the claims.'" This 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 District. These encompass, inter alia, the original creation of ALH as a Delaware LLC in 1998, years before ALH acquired MHI, including the parties' entry into the Operating Agreement that governs their relationship under Delaware law (see Jarvis Dec. Exs. D, R, Complaint ¶ 30, DE Complaint ¶¶ 19-21, 68 (a)-(c)); Defendants' alleged formation, in or before early 2001, of a desire and scheme to exit their investment and management of ALH (Complaint ¶ 6); Defendants' alleged efforts in 2001 to force a sale of ALH "under any circumstances" (id.); Defendants' alleged seizure of control of ALH in the summer of 2001 and ALH's alleged entry into the so-called "Management Agreement" (id. ¶ 33); the July 2001 Lion LLC Settlement Agreement and the related changes in the composition of ALH's Supervisory Board (id. ¶ 33-35, Jarvis Dec. Exs. F-L, DE Complaint ¶¶ 36-41, 68(g), 72, 139); the July 2001 Consulting Agreement between ALH and SCA (Complaint ¶¶ 4, 37, DE Complaint ¶¶ 39, 68(l), 74-78); ALH's December 2001 retention of California outside counsel, Fried Frank, in connection with the possible sale of ALH, and Fried Frank's allegedly unwaivable conflicts (Complaint ¶¶ 39-40, Jarvis Dec. Exs. RR, SS, DE Complaint ¶¶ 119-20); the efforts, beginning in March 2002, to sell ALH as a going concern, and defendants' alleged mishandling of that process "from the start" (Complaint ¶ 7); ALH's March 2002 engagement of Jolson Merchant Partners ("JMP"), a California investment banker and financial advisor, in connection with the possible sale of some

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or all of ALH's operations, which was approved by Arenson as Class Representative (Jarvis Dec. Ex. W, DE Complaint ¶¶ 44, 82-86); the April 2000 and May 2002 Member loans to ALH (Complaint ¶¶ 41-42, Jarvis Dec. Exs. V, X, DE Complaint ¶¶ 32-35, 44-48); the repayment of the loans from the proceeds of the sale of ABI (ALH's Florida operation) in 2003, which repayment was suggested and consented to by Arenson as Class B Representative (Complaint ¶ 43, Jarvis Dec. Ex. UU at 10 , DE Complaint ¶ 138); Arenson's June 2003 approval, as Class B Representative, of a litigation settlement for which the proceeds of the sale of ABI were needed (Jarvis Dec. Ex. UU at 2-3, DE Complaint ¶ 96); Arenson's July 2003 approval, as Class B Representative, of a $200,000 bonus payment to Shamrock for services provided in connection with the sale, as an expression of thanks on behalf of all the Class B Members, even though Arenson voted against the sale (Jarvis Dec. Exs. XX and. YY, DE Complaint ¶¶ 68(i), 75, 111); and the Supervisory Board meetings on May 14, 2003, June 26, 2003, March 24, 2004 and April 3, 2004, at which, among other things, ALH's financial and operational condition, liquidity needs, and sale efforts were discussed, and Arenson represented Plaintiffs and purportedly expressed their views concerning the sale of ALH's operations and alternatives thereto (Complaint ¶¶ 47-54, Jarvis Dec. Exs. TT, UU, VV, WW, DE Complaint ¶¶ 12-13, 15, 73, 11231). In the context of this "entire sequence of events," it is beyond question that "a substantial part of the events or omissions giving rise" to Plaintiffs' claims did not occur in this District. B. Alternatively, Under the First to File Rule, This Case Should Be Transferred

Because 28 U.S.C. § 1391(a) provides no basis for venue in this District, the Court has the option of either dismissing the case or transferring it to Delaware, where the DE Action has been pending since last September. 28 U.S.C. § 1406(a). This Court may, "if it be in the interest

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of justice," transfer the case to any district "in which it could have been brought." Id. As set forth in Point I.A, supra, there is no question the Plaintiffs could have brought their claims as counterclaims in the DE Action. Under the first to file rule, if this case is not dismissed, the interest of justice compels its transfer to Delaware. The Fourth Circuit "honor[s] the principle that a plaintiff may ordinarily select his forum unless there are factors of convenience sufficiently important to the parties and the court to occasion denying him that choice." Ellicott Mach. Corp. v. Modern Welding Co., 502 F.2d 178, 180 (4th Cir. 1974). Under the first to file rule, "as a principle of sound judicial administration, the first suit should have priority, absent the showing of balance of convenience in favor of the second action." Id. (citations and internal quotation marks omitted). The case law under the first to file rule demonstrates and underscores the various ways in which the rule promotes the interest of justice, including judicial efficiency, comity, enforcement of the compulsory counterclaim rule (FED. R. CIV. P. 13(a)), avoidance of forum shopping, and plaintiff's presumptive right to select his forum. The courts have consistently rejected attempts by litigants like Plaintiffs here to delay bringing suit and then -- after they have been sued and decide they would prefer a different forum -- bring a mirror image suit to try to thwart the first to file rule. For example, in Learning Network, Inc. v. Discovery Comms., Inc., No. 01-1202, 2001 U.S. App. LEXIS 11881 (4th Cir. June 7, 2001) (unpublished), the plaintiff-appellee ("Network") sued the defendant-appellant ("Discovery") in federal court in Maryland, seeking a declaratory judgment validating Network's use of a particular trademark. Less than two weeks before the Maryland action was filed, Discovery had sent Network a "cease and desist letter" alleging trademark violations, expressing a desire "'to reach a quick and amicable resolution,'" and requesting Network's "'urgent attention.'" Id. at *3-4. Network responded with a letter

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stating that it was "'looking into'" Discovery's allegations and that it would "'promptly'" respond to Discovery. Id. at *4. Five days later, Network commenced the Maryland action. The parties entered into an agreement not to file or serve further pleadings pending the outcome of their settlement negotiations. Id. Eventually, the settlement negotiations broke off. Discovery obtained an extension of its time to answer the Maryland complaint, having given assurances that "it was not intending to `sandbag' Network." Id. at *5. Two weeks later, Discovery sued Network in federal court in New York, alleging trademark violations. Network obtained an order in Maryland enjoining Discovery from proceeding in New York. Discovery appealed to the Fourth Circuit, arguing that there were "special circumstances" warranting departure from the first to file rule, in that the Maryland action "was an improper anticipatory filing because it was made under the threat of imminent litigation." Id. at *8-9. The Fourth Circuit "ha[d] not stated explicitly that special circumstances may warrant an exception to the first-filed rule," but without reaching this question, the Court held that the district court did not abuse its discretion in finding no special circumstances." Id. at *8 n.2.13 The Court was mindful of the need to discourage forum shopping and races to the courthouse, stating that: It has long been established that courts look with disfavor upon races to the courthouse and forum shopping. Such procedural fencing is a factor that counsels against exercising jurisdiction over a declaratory judgment action . . . . However, there can be no race to the courthouse when only one party is running.

The Court pointed out that "[d]eclaratory judgment actions are proper when there is a potential lawsuit," explaining that such an action "'allows the uncertain party to gain relief from the insecurity of a potential lawsuit waiting in the wings.'" Id. at *9 (citation omitted). On the other hand, the Court recognized that "[i]n some cases, there may come a point after which the potential lawsuit . . . has become so certain or imminent, that the declaratory judgment action is merely an improper act of forum shopping, or a race to the courthouse." Id. at *9-10. The Court explained that "'[a]n improper anticipatory filing is one made under the apparent threat of a presumed adversary filing the mirror image of that suit in another court.'" Id. at *10 (citations omitted).

13

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Id. at *10-11 (citations omitted) (emphasis added).14 The Court emphasized that "Discovery's own actions belie its argument that its potential suit against Network was imminent." Id. at *11. Discovery's cease and desist letter had "neither overtly threatened litigation nor threatened to take particular action if Network failed to respond to the letter by a certain date." Id. The Court carefully analyzed the timing of the two actions, noting that even after negotiations had broken off and Discovery was formally was served in the Maryland action, Discovery waited an additional four to six weeks before filing its allegedly imminent New York action. Therefore, the district court had not abused its discretion in finding that the Maryland action "was not an act of procedural fencing, so as to merit an exception to the first-filed rule." Id. at *11-12 (emphasis added). The Court's analysis in Learning Network is both instructive and dispositive here. Plaintiffs' supposed threat of litigation -- in the form of a question about whether the Operating Agreement would prevent a suit in North Carolina -- was far vaguer than Discovery's cease and desist letter. At the time Defendants filed the DE Action, they did not (unlike Network) claim to be looking into Plaintiffs' allegations, and they had not undertaken to respond to Plaintiffs in any way. In fact, the status of the communications as of September 13, 2004, when the DE Action was filed, was that Plaintiffs were delinquent in responding to Defendants concerning the possibility of mediation and the discovery Plaintiffs claimed to want. Most importantly, Plaintiffs' delayed for over eight months in bringing their supposedly imminent lawsuit: many times longer than Discovery's delay in the Learning Network case. Even if the Fourth Circuit recognized a special circumstances exception to the first to file rule -- a question that has yet to be decided -- there are plainly no such circumstances here. See also Ramsey Group, Inc. v. EGS
14

Here, given Defendants' extensive but ultimately unsuccessful efforts to engage Plaintiffs in a constructive dialogue, it cannot fairly be said that even one party was "running." But even if Defendants had been "running," Plaintiffs certainly were not.

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Int'l, Inc., 208 F.R.D. 559, 564 (W.D.N.C. 2002) (although plaintiff filed suit a week after receiving a cease and desist letter threatening litigation, its suit was treated as first-filed). Similarly, in SAS Inst., Inc. v. PracticingSmarter, Inc., 353 F. Supp. 2d 614 (M.D.N.C. 2005), the defendant ("PSI") sent the plaintiff ("SAS") a letter threatening to sue in 30 days if SAS did not agree to mediate or if the mediation was unsuccessful. The letter enclosed copies of PSI's proposed lawsuit. Two days before the end of the 30-day period, SAS brought a declaratory judgment action against PSI. PSI sued in state court on the 30th day and SAS removed the complaint, with the result that both actions were pending in the same federal court. PSI argued that SAS's suit was an improper anticipatory filing -- a "pre-emptive strike" by SAS because it was about to be sued and preferred the procedural posture of being a defendant. Id. at 617. PSI also argued that treating SAS's suit as first-filed would discourage the pursuit of alternative dispute resolution. SAS responded that that its declaratory judgment action was "justified in order to `affirmatively and proactively protect' its intellectual property rights and to stop [PSI] from falsely claiming ownership of these copyrights." Id. at 618. SAS argued that PSI's claims were compulsory counterclaims under Fed. R. Civ. P. Rule 13, because they arose out of the same transaction or occurrence as SAS's claims. The Court agreed with SAS on the compulsory counterclaim point, noting that "[t]he penalty for failing to follow Rule 13(a), such as by filing a new lawsuit with the same claims as the earlier-filed case, is a dismissal or a stay of the later-filed case." Id. (citing 6 C WRIGHT, A. MILLER & M. KANE, FEDERAL PRACTICE AND PROCEDURE: CIVIL 2D § 1418 (2d ed. 1990).) The court also observed that "[t]he fact that one suit is for a declaratory judgment does not change the general rule that the first-filed case should go forward." Id. at 617 (emphasis added). The court concluded that there was no reason to deviate from the first to file rule, even though SAS had

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unquestionably filed in the face of an explicit threat by PSI (including copies of the lawsuit) to sue within a specified period of time. The promotion of the interest of justice by the first to file rule is further underscored by R.J. Reynolds Tobacco Co. v. Star Scientific, Inc., 169 F. Supp. 2d 452 (M.D.N.C. 2001). There, the defendant ("Star") sued the plaintiff ("RJR") for infringement in federal court in Maryland. Approximately three weeks later, RJR sued Star for declaratory judgment in federal court in North Carolina. RJR argued that its second-filed action in North Carolina should be treated as first-filed because the Maryland action was jurisdictionally defective. In rejecting this argument, the court explained that "[t]he `first-filed' rule respects the choice of forum made by the first plaintiff to file, while also acknowledging `considerations of judicial and litigant economy, and the just and effective disposition of disputes.'" Id. at 455 (citation omitted). An important purpose of this rule is to "prevent a court from `trenching on the authority of its sister court,'" and also to avoid "duplicative litigation [that] sap[s] judicial resources." Id. at 455-56 (citation omitted). Because the jurisdictional issue raised by RJR was also before the Maryland court, the court stayed RJR's North Carolina action "pending the course of proceedings" in Maryland. Id. at 456. In Walker Group, Inc. v. First Layer Comms., Inc., 333 F. Supp. 2d 456 (M.D.N.C. 2004), the defendant ("Knutson") sued the plaintiff ("Walker") for declaratory judgment in Colorado. Just over a month later, Walker sued Knutson in North Carolina. Each party sought to have the dispute resolved in its preferred forum, so each moved to stay, dismiss or transfer. Thus, both courts were asked to determine in which court the case should proceed. Relying on the first to file rule, the Colorado court denied Walker's motion to dismiss or transfer. Noting that "this district also follows the "first-to-file rule," the North Carolina court, sua sponte,

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transferred the North Carolina action to Colorado, stating that transferring case, including all pending motions, to the court that had the first-filed case was "the preferred action." Id. at 460. The importance of enforcing the compulsory counterclaim rule was highlighted in Laughlin v. Edwards Bus. Machs., Inc., 155 F.R.D. 543 (W.D. Va. 1994). There, under 28 U.S.C § 1404, the court transferred three later-filed suits to federal court in Pennsylvania, where an earlier-filed suit was pending. The court emphasized that the claims asserted by the plaintiffs in the three later suits were compulsory counterclaims in the earlier one: When a party violates Rule 13(a) by bringing a second action rather than filing a compulsory counterclaim in the first action, "normally, the first suit should have priority, absent a showing of a balance of convenience in favor of the second action." . . . Consolidation and transfer in this situation is appropriate and serves the interests of justice. "To permit a situation in which two cases involving precisely the same issues are simultaneously pending in different District Courts leads to wastefulness of time, energy and money that § 1404(a) was designed to prevent." Id. at 545 (citations omitted). As the foregoing cases demonstrate, transferring this action to Delaware under the first to file rule would amply satisfy the "interest of justice" component of 28 U.S.C. § 1406(a). But even if the Court found a basis for venue in this District and declined to transfer under 28 U.S.C. § 1406(a), the case should be transferred under 28 U.S.C. § 1404(a), which provides that: 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. Transfer pursuant to § 1404(a) is appropriate if the transferring court has subject matter jurisdiction and personal jurisdiction, and if venue in the transferring court is proper, but if there are procedural impediments such as a lack of personal jurisdiction or improper venue, then transfer should be effected pursuant to § 1406(a). Zellinger v. Control Servs., Inc., No. 1:01CV003, 2002 U.S. Dist. LEXIS 24935, at *2 (M.D.N.C., Dec. 27, 2002) (unpublished). See

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Porter v. Groat, 840 F.2d 255, 258 (4th Cir. 1988) (§ 1406(a) allows a court to transfer a case 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). Under 28 U.S.C. § 1406(a) and 28 U.S.C. § 1404(a), the analysis of whether a transfer is in the interest of justice is the same. Landers v. Dawson Constr. Plant, Ltd., No. 98-2709, 1999 U.S. App. LEXIS 28474, at *4 (4th Cir. Nov. 2, 1999) (unpublished). As the Fourth Circuit stated in Landers, district courts faced with motions to transfer "must engage in an analysis of convenience and fairness, weighing a number of case-specific factors." Id. at *5. Factors that are "commonly considered in ruling on a motion to transfer" are: (1) the ease of access to the sources of proof; (2) the convenience of the parties and witnesses; (3) the cost of obtaining the attendance of the witnesses; (4) the availability of compulsory process; (5) the possibility of a view by the jury; (6) the interest in having local controversies decided at home; and (7) the interests of justice. Id. In diversity cases, an additional factor is the "the court's familiarity with applicable law." Verosol B.V. v. Hunter Douglas, Inc., 806 F. Supp. 582, 592 (E.D. Va. 1992). The plaintiff's choice of forum "is accorded substantial weight," but "the deference given to plaintiff's choice is proportionate to the relation between the forum and the cause of action." Parham v. Weave Corp., 323 F. Supp. 2d 670, 673-74 (M.D.N.C. 2004). In Parham, North Carolina was deemed to have little relation to the parties' dispute, because the contract at issue was performed and terminated in New Jersey and was governed by New Jersey law, and defendant's records and witnesses were in New Jersey. Plaintiff resided in North Carolina, and defendant had sufficient contacts with North Carolina to support long-arm jurisdiction, but the court nonetheless transferred the case to New Jersey.15

In an ordinary c