Adams v. Raintree Vacation Exchange, LLC , 702 F.3d 436 ( 2012 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 11-3576
C HARLES A DAMS, et al.,
Plaintiffs-Appellants,
v.
R AINTREE V ACATION E XCHANGE, LLC, et al.,
Defendants-Appellees.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 10 C 3264—Virginia M. Kendall, Judge.
A RGUED O CTOBER 29, 2012—D ECIDED D ECEMBER 20, 2012
Before P OSNER, K ANNE, and R OVNER, Circuit Judges.
P OSNER, Circuit Judge. This appeal requires us to
consider the enforceability of a forum selection clause
by entities not named as parties to the contract in which
the clause appears.
The plaintiffs are 250 purchasers of timeshare interests
in villas at a resort known as Club Regina, or alterna-
tively as the Residence Club at Grand Regina. The resort
2 No. 11-3576
is in San José del Cabo, a resort area on the Pacific Coast
in Baja California (which despite its name is part of Mex-
ico). The plaintiffs bought these interests between 2004
and 2006 from a Mexican company named Desarrollos
Turísticos Regina, S. de R.L. de C.V., which the parties
call DTR. DTR is not a party to the appeal and indeed no
longer exists, having become a Raintree affiliate named CR
Resorts Holding, S. de R.L. de C.V., through a series of
mergers in 2007 and 2009.
Each contract between a timeshare purchaser and DTR
stated that “in case of controversy on the interpretation
and compliance with the rights and obligations of this
Agreement, the parties hereby agree to submit them-
selves to the applicable laws and competent courts of the
City of Mexico, Federal District, expressly waiving any
other forum that may correspond to them by reason
of their present or future domiciles.” (Not very good
English, but DTR is, as we said, a Mexican company.)
Notice that the clause is a choice of law provision as well
as a forum selection clause, implying that the law gov-
erning the enforceability of the forum selection clause
is Mexican law, since the clause is, obviously, a term in
the contract. But neither side has asked either the
district judge or us to apply Mexican law to the clause;
their debate over its enforceability is framed entirely as
a dispute about American law, and so the issue of the
applicable law has been waived. Abbott Laboratories v.
Takeda Pharmaceutical Co. Ltd., 476 F.3d 421, 423 (7th
Cir. 2007); Phillips v. Audio Active Ltd., 494 F.3d 378, 385-
86 (2d Cir. 2007).
No. 11-3576 3
We are mindful that in Yavuz v. 61 MM, Ltd., 465 F.3d
418, 421, 426-31 (10th Cir. 2006), another case in which
the district court and the parties had analyzed the
forum selection clause under American law even though
the contract that contained the clause made foreign law
govern, the court of appeals on its own initiative
remanded the case with directions that the district court
apply the designated foreign law. We’re puzzled by
that outlier decision. We don’t see why the district court
should be put to the bother of investigating foreign
law when no party is asking it to do so. Parties to a
contract are free within broad limits to specify the law
that shall govern its interpretation, and also free to
modify the specification contained in the contract (in
effect amending the contract). By ignoring Mexican law
and citing only federal cases in their briefs, the parties
have disclaimed reliance on any distinctive features of
Mexican law in interpreting their forum selection clause.
In effect they’ve decided that general common law shall
govern that interpretation instead. Phillips v. Audio
Active Ltd., supra, 494 F.3d at 386.
The plaintiffs allege that defendant Raintree Vacation
Exchange, LLC, in cahoots with defendant Starwood
Vacation Ownership, Inc. (together with affiliates of
Raintree and Starwood that we can ignore, along with
other defendants that we can also ignore), defrauded them
by “pretend[ing] to have a Mexican subsidiary
(DTR) take in money for [building the villas that the
plaintiffs thought they were buying interests in] that
would never be built.” Raintree and Starwood are in the
vacation resort business. Raintree operates a “vacation
4 No. 11-3576
club” that consists of multiple timeshare resorts, see
Bloomberg Businessweek, “Raintree Resorts Interna-
tional, Inc.” http://investing.businessweek.com/research/
stocks/private/snapshot.asp?privcapId=1879752, while
Starwood owns and operates a number of hotels and
resorts including the Westin hotel chain. See
Starwood Hotels & Resorts, www.starwoodhotels.com/
corporate/company_info.html. The plaintiffs’ villas were to
be built adjacent to the Westin Resort & Spa Los Cabos. See
www.starwoodhotels.com/westin/property/overview/
index.html?propertyID=1087. (The websites we’ve cited
were all visited on Nov. 17, 2012.)
The plaintiffs filed their suit in an Illinois state court.
The defendants removed it to the federal district court
in Chicago pursuant to the Class Action Fairness Act of
2005, which allows removal to federal district court not
only of any class action in which the stakes exceed
$5 million and there is diversity of citizenship even if it
is not complete, but also of any “mass action,” defined as
a suit by more than 100 plaintiffs that satisfies the
other requirements for removal under the Act. See 28
U.S.C. § 1332(d)(11)(B)(I). Having removed the suit, the
defendants moved to dismiss it on the basis of the
forum selection clause quoted above. The judge granted
the motion after an evidentiary hearing and so dis-
missed the suit for improper venue, precipitating
this appeal.
The plaintiffs’ opening appellate brief cites no
authority for the proposition, fundamental to the ap-
peal, that Raintree and Starwood cannot be allowed to
No. 11-3576 5
invoke the forum selection clause because they are not
parties to the contract in which it appears. When there
are authorities to cite for a key proposition, the party
asserting the proposition must cite them (not necessarily
all of them, of course), Fed. R. App. P. 28(a)(9)(A), and
failure to do so forfeits reliance on the proposition.
Windy City Metal Fabricators & Supply, Inc. v. CIT
Technology Financing Services, Inc., 536 F.3d 663, 668 n. 3
(7th Cir. 2008); Voelker v. Porsche Cars North America,
Inc., 353 F.3d 516, 527 (7th Cir. 2003); Heft v. Moore, 351
F.3d 278, 285 (7th Cir. 2003); Holland v. Gee, 677 F.3d
1047, 1066 (11th Cir. 2012). We could stop there and
affirm, but will trudge on.
Rather than Raintree and Starwood being parties to
the sale contracts that contain the forum selection clause,
DTR was the only party on the selling side (the plaintiffs
being the buyers). But (to simplify a tangled corporate
structure slightly) a Raintree affiliate owns a Spanish
holding company that owns CR Resorts Holding, which
as we noted is DTR’s successor. Raintree argues that
this ownership chain creates a “sufficient relationship”
between it and CR Resorts Holding to authorize
Raintree to enforce the forum selection clause.
A number of cases say that the test for whether a
nonparty to the contract containing such a clause can none-
theless enforce it (and whether the nonparty will be bound
by the clause if, instead of suing, it is sued) is whether the
nonparty is “closely related” to the suit. Hugel v. Corpora-
tion of Lloyd’s, 999 F.2d 206, 209-10 (7th Cir. 1993); Holland
America Line Inc. v. Wärtsilä North America, Inc., 485 F.3d
6 No. 11-3576
450, 455-56 (9th Cir. 2007); Marano Enterprises v. Z-Teca
Restaurants, L.P., 254 F.3d 753, 757-58 (8th Cir. 2001);
Manetti-Farrow, Inc. v. Gucci America, Inc., 858 F.2d 509, 514
n. 5 (9th Cir. 1988); Caperton v. A.T. Massey Coal Co., 690
S.E.2d 322, 347-48 (W. Va. 2009); Ex Parte Procom Services,
Inc., 884 So. 2d 827, 834 (Ala. 2003); Weygandt v. Weco
LLC, C.A. No. 4056-VCS, 2009 WL 1351808 at *5-6 (Del. Ch.
May 14, 2009). This is a vague standard, but it can be
decomposed into two reasonably precise principles,
which we’ll call “affiliation” and “mutuality,” the first
being applicable to Raintree and the second to Starwood.
A forum selection clause is sometimes enforced by or
against a company that is under common ownership
(for example as parent and subsidiary) with—that is, an
affiliate of—a party to a contract containing the clause,
as in American Patriot Ins. Agency, Inc. v. Mutual Risk
Management, Ltd., 364 F.3d 884, 888-89 (7th Cir. 2003), and
the Holland America and Manetti-Farrow cases cited above.
Sometimes—not always. Dayhoff, Inc. v. H.J. Heinz Co.,
86 F.3d 1287, 1295-97 (3d Cir. 1996), refused to enforce
a forum selection clause in a suit by one party to the
contract against the corporate parents of the other party.
It did so on the authority of First Options of Chicago, Inc.
v. Kaplan, 514 U.S. 938 (1995), which refused to enforce
not a forum selection clause, but an arbitration clause,
against a company’s owners who had not agreed to
arbitration, though the company had. The Supreme
Court pointed out that “a party who has not agreed to
arbitrate will normally have a right to a court’s decision
about the merits of its dispute (say, as here, its obligation
under a contract),” id. at 942, and it was unlikely that
No. 11-3576 7
the Kaplans—whom the plaintiff was trying to hold
personally liable for their company’s debt—meant to give
up their right to litigate that highly important personal
issue and instead submit themselves to an arbitrator,
who would be exercising free-wheeling discretion
subject to only very light judicial review.
The stakes are less in the present case, which involves
a choice between courts rather than between a court and
an arbitrator. Still, there has to be a reason, rather than
the mere fact of affiliation, for a nonparty to a contract
to be able to invoke, or to be bound by, a clause in it.
There is a reason when a subsidiary is a party to a
contract that contains a forum selection clause and the
other party to the contract sues the parent under the
contract. The parent should be allowed to invoke the
clause and thus insist that the suit be litigated in the
same court in which, pursuant to the clause, its subsidiary
is being sued.
So courts have ruled in the parallel situation of an
arbitration clause. CD Partners, LLC v. Grizzle, 424 F.3d
795, 798-99 (8th Cir. 2005); JLM Industries, Inc. v. Stolt-
Nielsen SA, 387 F.3d 163, 177 (2d Cir. 2004); E.I. DuPont de
Namours & Co. v. Rhone Poulenc Fiber & Resin Intermediates,
S.A.S., 269 F.3d 187, 199-202 (3d Cir. 2001); Grigson v.
Creative Artists Agency, LLC, 210 F.3d 524, 527-28 (5th Cir.
2000); Thomson-CSF, S.A. v. American Arbitration Associa-
tion, 64 F.3d 773, 779 (2d Cir. 1995); JJ Ryan & Sons, Inc. v.
Rhone-Poulenc Textile, S.A., 863 F.2d 315, 320-21 (4th
Cir. 1988). Having agreed to arbitrate certain issues, a
company shouldn’t be allowed, by the facile device of
8 No. 11-3576
suing an affiliate of the other signatory of the arbitration
agreement, to litigate them instead.
A flat rule against enforcing forum selection clauses
against affiliates of the parties to contracts containing
such clauses would conduce to similar abuses, as we
noted in American Patriot Ins. Agency, Inc. v. Mutual Risk
Management, Ltd., supra, 364 F.3d at 888, rejecting the
argument that “a plaintiff can defeat a forum-selection
clause by its choice of provisions to sue on, of legal
theories to press, and of defendants to name in the suit.”
Suppose A is the parent of B, and B has agreed with C
in a contract (to which A is not a party) that any suit
between B and C arising out of the contract must be
brought in a French court. Such a dispute arises—C accuses
B of a breach of contract and has reason to think that A,
B’s parent, bears some legal responsibility for B’s
breach; maybe A ordered B to break the contract, with-
out justification, thus committing the tort of intentional
interference with contract. C, though committed to
litigate in the French court with B, decides to sue A in
the United States. If A prefers to litigate in France, it
should be allowed to invoke the forum selection clause,
though it is not a party to the contract, and thus make C
litigate its claim against A in France rather than in the
United States so that the two closely related cases are
not split between different courts in different countries.
C had already committed to having to litigate over the
contract in France, so it shouldn’t be heard to complain
that France is an inconvenient forum when A seeks
to defend a suit, based on that same contract, there as well.
No. 11-3576 9
But suppose instead that A and B have unrelated dis-
putes with C. A and B are still “closely related”—they
are parent and subsidiary—but there is now no reason
to allow A to thwart C’s choice of forum by invoking a
contract to which A is not a party. Nor could A, the
parent, be forced to litigate in France just because B, its
subsidiary, had agreed to litigate any dispute with C
there. A had not signed the contract and thus had not
committed itself to litigate in France. C had, and that
is why C couldn’t complain if A insists that C’s suit
against A be litigated there.
Courts in the parallel case involving an arbitration
clause rather than a forum selection clause sometimes
invoke the analogy of piercing the corporate veil. See, e.g.,
Invista S.Á.R.L. v. Rhodia, S.A., 625 F.3d 75, 85 n. 6 (3d
Cir. 2010); E.I. Du Pont de Namours & Co. v. Rhone Poulenc
Fiber & Resin Intermediates, S.A.S., supra, 269 F.3d at 201-02.
If in our first hypothetical case A, the parent, can require
C to litigate against it in France on the basis of the
forum selection clause in C’s contract with B, A is in a
sense piercing its own subsidiary’s corporate veil by
pretending to be a party to the subsidiary’s contract. But
the analogy is imprecise (as argument by analogy so
often is), as well as labored. Piercing the corporate veil
means disregarding the limited liability of a corpora-
tion’s owner or owners (whether corporate or individ-
ual), and thus merging the owner’s assets—which it had
sought to insulate by adopting the corporate form—with
those of its subsidiary. Allowing the owner to enforce
its subsidiary’s forum selection clause merely deter-
mines in what court or court system the liability of the
10 No. 11-3576
owner will be determined. Piercing the veil remains a
possible ground for enforcing a forum selection clause
against a party’s affiliate, cf. Ross v. American Express Co.,
547 F.3d 137, 143 n. 3 (2d Cir. 2008), if for example the
corporation that signed the contract containing the
clause was a mere shell; but it is not the only ground.
Were it not for judicial willingness in appropriate
circumstances to enforce forum selection clauses
against affiliates of signatories, such clauses often could
easily be evaded. For example, a signatory of a contract
containing such a clause might shift the business to
which the contract pertained to a corporate affiliate—
perhaps one created for the very purpose of providing
a new home for the business—thereby nullifying the
clause. Conversely, a signatory who wanted to enforce
the clause might be inhibited from shifting his business
to a corporate affiliate even though the shift made
good business sense.
A literal approach to interpreting forum selection
clauses—an approach that always ignored affiliates of
the signatories—could also undermine the contribution
that such clauses have been praised for making to cer-
tainty in commercial transactions, see, e.g., Carnival
Cruise Lines, Inc. v. Shute, 499 U.S. 585, 593-94 (1991); The
Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 13 and n. 5 (1972),
particularly international transactions, as in this case.
The literal approach provides certainty as to which
parties can invoke the clause (only the signatories), but
creates uncertainty as to the forum itself, because a
party may be able to avoid the designated forum by
No. 11-3576 11
manipulating affiliate relationships. On balance it seems
better to let the parties decide in the contract whether
to limit the forum selection clause to the named entities
than for the law to impose such a limit as a default provi-
sion to govern in the absence of specification of other
entities to be bound. The latter approach would greatly
complicate the negotiation of such clauses because
the parties would have to strain to close all the loop-
holes that would open if only entities named in the con-
tract could ever invoke or be made subject to such a clause.
The application of the affiliation doctrine to Raintree
is straightforward. Raintree is the parent of DTR’s suc-
cessor, CR Resorts Holding, and can therefore enforce
the forum selection clause in DTR’s contracts with the
plaintiffs since the effect is merely to substitute one
party for another (that is, for DTR) bound by the forum
selection clause to which the plaintiffs had agreed. Raintree
is not trying by substituting itself for DTR to change
the forum agreed on in the clause, and so the case is
identical to our first A, B, C hypothetical. The plaintiffs
by signing the contracts containing the forum selection
clause agreed to litigate in Mexico and Raintree is not
trying to alter that agreement. Why should it matter
that DTR can no longer sue or be sued in its own
name, because of its corporate metamorphosis?
The plaintiffs at times claim not to believe that Raintree
is the parent (more likely the great-grandparent, given
the intermediate subsidiaries) of DTR, and at other
times claim that both Raintree and Starwood controlled
DTR from the outset, and they complain that the
12 No. 11-3576
district judge didn’t allow them to conduct discovery
that would have confirmed their dark though contra-
dictory suspicions. She allowed limited discovery,
which neither confirmed any of those suspicions nor
provided grounds for still further discovery—especially
since the plaintiffs’ counsel inexplicably failed to depose
the witnesses for Raintree who had given declarations
concerning the ownership chain linking Raintree to
DTR. Anyway how can the plaintiffs complain about the
substitution of Raintree for a party they agreed to
litigate with (if there were a dispute) in Mexico, when
that party can no longer be sued because it has been
merged into Raintree?
So much for Raintree; what of Starwood? It is not in
the ownership chain that includes CR Resorts Holding,
though it bought a significant part of the assets of the
resort property that DTR had planned to develop.
But it can invoke the forum selection clause on a
different ground from that of affiliation: mutuality. The
gist of the plaintiffs’ complaint is that Raintree owed
Starwood $10 million and that the two firms caused
DTR to use the money it raised from the sales of the
timeshares to pay off Raintree’s debt instead of building
the villas. The plaintiffs are thus alleging a conspiracy
between Raintree and Starwood to defraud them, and the
question is whether an alleged conspirator can invoke
the forum selection clause contained in a contract,
signed by his alleged co-conspirator, that created or
advanced the conspiracy. The answer is yes—maybe not
in every case, but in this one, where the suit accuses
No. 11-3576 13
Raintree and Starwood of being secret principals of DTR,
their agent in dealing with the timeshare buyers and
thus in executing the fraud.
A contract that the agent of secret principals makes
with a third party can be enforced, at the third party’s
option of course (the third party can rescind—get out of
the contract—if he prefers), against the secret principals.
Restatement (Third) of Agency §§ 6.03 and comment b, 6.11(4)
(2006); Clarendon National Ins. Co. v. Medina, 645 F.3d
928, 935 (7th Cir. 2011); Fritsch v. Refco, Inc., 56 F.3d 825,
828 (7th Cir. 1995); SFH, Inc. v. Millard Refrigerated
Services, Inc., 339 F.3d 738, 745 (8th Cir. 2003). So the
plaintiffs, because they alleged that Starwood (together
with Raintree, by virtue of the conspiracy) controlled
DTR, could have held Starwood to the forum selection
clause had they wanted to sue in Mexico—and from this
it follows that Starwood can hold the plaintiffs to the
clause in the opposite situation and thus defend the suit
in Mexico. Were it not for this principle of mutuality,
the plaintiffs would have a choice of forums, and
Starwood would not; and that could not have been the
intention behind a clause that makes Mexico the exclu-
sive forum irrespective of the parties’ domiciles. “All
[Starwood] is doing in invoking the forum selection
clause to which it is not a party is accepting one of the
premises of the plaintiff’s suit—that [DTR is] indeed
simply [a] cat’s paw of [Starwood]—and pointing out
that the implication is that the [timeshare] contracts,
including the forum selection clause, are really between
the plaintiffs and [Starwood].” Fritsch v. Refco, Inc., supra,
14 No. 11-3576
56 F.3d at 828. Because Raintree is alleged to be a secret
principal along with Starwood, it can enforce the forum
selection clause on the same ground as Starwood, as well
as on the affiliation ground that we discussed earlier.
From a practical standpoint it is evident that the
case should be litigated as one case in one court in
one country, and not as two cases in two courts in two
countries. Suppose the plaintiffs wanted to sue both
Raintree and Starwood in Mexico. We said they would
be entitled to sue Raintree there regardless of mutual-
ity—could Starwood insist that it be sued in the United
States? That wouldn’t make sense. And notice that
because Raintree was entitled to remove the case to
Mexico under the forum selection clause irrespective of
Starwood’s rights, the doctrine of forum non conveniens
clicks in and would require the dismissal of the claim
against Starwood as well, even if it weren’t entitled to
enforce the forum selection clause. The suit would then
be refiled in the Mexico court in which the plaintiffs
would refile their claim against Raintree. For with half
the case to be tried in a Mexican court, it would be very
non conveniens to try the other half in Chicago. See U.S.O.
Corp. v. Mizuho Holding Co., 547 F.3d 749, 750 (7th Cir.
2008); Aguas Lenders Recovery Group, LLC v. Suez, S.A.,
585 F.3d 696, 700 (2d Cir. 2009).
The plaintiffs have another string to their bow, however,
though one that makes only a faintly audible twang:
they argue that a forum selection clause does not apply
to a fraud suit. Wrong. Obviously if the clause were
itself a product of fraud it would be unenforceable.
Scherk v. Alberto-Culver Co., 417 U.S. 506, 519 n. 14 (1974).
No. 11-3576 15
But even if the contracts of sale to the plaintiffs that con-
tain the clause are fraudulent, it doesn’t follow that the
clause is. Huffington v. T.C. Group, LLC, 637 F.3d 18, 23-24
(1st Cir. 2011). The clause is not unclear, in illegible
print, in Sanskrit or hieroglyphics, or otherwise sugges-
tive of fraudulent intent. Paper Express, Ltd. v. Pfankuch
Maschinen GmbH, 972 F.2d 753, 757 (7th Cir. 1992); North-
western National Ins. Co. v. Donovan, 916 F.2d 372, 377 (7th
Cir. 1990). And there is no evidence that the defendants
tried to mislead the plaintiffs concerning the meaning of
the clause, or selected a foreign forum to make it difficult
for the plaintiffs to enforce their rights under the con-
tracts—Mexico after all was where the contracts were to
be performed. See Carnival Cruise Lines, Inc. v. Shute, supra,499 U.S. at 595; Liles v. Ginn-La West End, Ltd., 631 F.3d
1242, 1254-55 (11th Cir. 2011) (per curiam); Effron v. Sun
Line Cruises, Inc., 67 F.3d 7, 9-10 (2d Cir. 1995). And as the
clause applies to any “controversy on the interpretation
and compliance with the rights and obligations of” the
contracts of sale, it is broad enough to encompass tort suits
that arise out of the contract. E.g., Scherk v. Alberto-Culver
Co., supra, 417 U.S. at 519 n. 14; American Patriot Ins. Agency,
Inc. v. Mutual Risk Management, Ltd., supra, 364 F.3d at
889; Omron Healthcare, Inc. v. Maclaren Exports, Ltd., 28 F.3d
600, 602 (7th Cir. 1994); Terra Int’l, Inc. v. Mississippi
Chemical Corp., 119 F.3d 688, 695 (8th Cir. 1997); Lambert
v. Kysar, 983 F.2d 1110, 1121-22 (1st Cir. 1993).
The dismissal of the suit is
A FFIRMED.
12-20-12