Appeal from he United States District Court for the District of South Carolina, at Greenville. Joe F. Anderson, Jr., District Judge. CA-88-636-4-2.
Ervin, Chief Judge, Wilkins, Circuit Judge, and Britt, Chief Judge for the United States District Court for the Eastern District of North Carolina, sitting by designation.
Plaintiffs brought this diversity suit pursuant to the Declaratory Judgment Act, 28 U.S.C. §§ 2201-2202, claiming that, because defendants had breached a stock purchase agreement, plaintiffs were entitled to draw upon letters of credit provided by defendants as an earnest money deposit, and retain the sum of $500,000 so drawn as liquidated damages as provided in the agreement. Defendants' motion to dismiss this case on the basis of improper venue was granted by the court below, and plaintiffs now appeal that decision. Two questions are raised by this appeal: (1) Did the court below err in dismissing this action by applying the "weight of the contacts" test rather than the "substantial contacts" test in determining whether the claim arose in the district for purposes of venue under 28 U.S.C. § 1391(a); and (2) Did the defendants waive their right to object to venue because of their delay and their participation in discovery. For the reasons stated below, we believe that the "weight of the contacts" test is the appropriate test for venue under 28 U.S.C. § 1391(a), and that defendants did not waive their right to object to venue. Accordingly, we affirm the decision of the district court.
Robert A. Schmid ("Schmid"), now deceased, was a resident of New York and Florida. Schmid's executors are also residents of either New York or Florida. Schmid was the sole shareholder of Broadcasting Company of the Carolinas ("Broadcasting"), which was incorporated under the laws of and maintains its principal place of business in South Carolina. Broadcasting owns WESC ("WESC"), an AM/FM radio station located in Greenville, South Carolina.
J. Timothy Harrington ("Harrington") is a resident of New Jersey. John N. Boden ("Boden") is a resident of Connecticut. Boden and Harrington each own fifty percent of the stock in Flair Broadcasting Corporation ("Flair"), now a New Jersey corporation. At the time the complaint in this case was filed, Flair was incorporated under the laws of Delaware, and maintained its principal place of business in Connecticut. Flair was formed to acquire and operate radio broadcast stations.
On September 23, 1987, Schmid and Flair entered into a Stock Purchase Agreement (the "Agreement"), in which Schmid agreed to sell Broadcasting to Flair for approximately $14 million. Boden and Harrington are not parties to the Agreement, and Broadcasting is only a nominal party thereto. Upon execution of the Agreement, Harrington and Boden delivered to Schmid two irrevocable stand-by letters of credit totalling $500,000, which were drawn on Boden's and Harrington's accounts at their respective banks in Connecticut and New Jersey. Under the Agreement, the amount assured by the letters of credit constituted an earnest money deposit for the performance of the Agreement, and was intended to serve as liquidated damages in the event of Flair's breach. The Agreement provided that South Carolina law shall govern any dispute between the parties. All of the preliminary meetings, discussions and negotiations between the parties and their representatives with respect to the transaction, including the Agreement, occurred either in New York City or Washington, D.C. The financing for the acquisition was arranged for Flair in New York by the investment banking department at Chemical Bank. The parties intended to close the deal in New York after receiving federal regulatory approval.
Flair was unable to obtain sufficient financing to close the deal within the period expressly specified in the Agreement. As a consequence, Schmid drew down on both letters of credit. Thereafter, Flair informed Schmid that it was able to secure adequate financing for the purchase, and asked Schmid to either consummate the deal or return the $500,000 drawn from the two letters of credit. Schmid refused Flair's request and filed this action, claiming that he was entitled to retain the money as liquidated damages for Flair's breach of the Agreement. In their answer, which was filed a month and a half after the complaint, defendants objected to venue and counterclaimed for specific performance of the Agreement. Thereafter, both parties participated in limited discovery, primarily the exchange of interrogatories and the noticing of depositions. Approximately six months after the complaint was filed and four and one-half months following the answer, defendants filed a motion to dismiss this suit on the basis of improper venue under 28 U.S.C. § 1406(a). They asserted that the plaintiffs did not all reside in South Carolina, that none of the defendants resided there, and that the claim did not arise in that state. Thus, defendants argued that none of the statutory bases for venue in a diversity case which are found in 28 U.S.C. § 1391(a), were satisfied with respect to the District of South Carolina. In his Order, Judge Anderson first acknowledged that neither all the plaintiffs nor all the defendants resided in the district. Thus, venue depended entirely on whether the claim arose in South Carolina. Applying the "weight of the contacts" test, Judge Anderson found that although "Broadcasting is a South Carolina corporation and its principal asset, radio station WESC, is located [there] . . . [all] of the events leading up to the Agreement and all events associated with the alleged breach occurred in or around New York City." Consequently, Judge Anderson concluded that venue did not lie in the District of South Carolina, and dismissed this action without prejudice. Plaintiffs now appeal that decision, arguing that the district court erred either because it should have applied the "substantial contacts" test in determining where a claim arises for venue purposes, or because defendants had waived their right to challenge venue because of their delay and their participation in discovery.
In diversity cases, venue is appropriate "only in the judicial district where all plaintiffs or all defendants reside, or in which the claim arose." 28 U.S.C. § 1391(a). Prior to 1966, venue in civil actions in the federal courts depended solely on the residences of the parties. In that year, however, Congress amended section 1391, permitting venue in the judicial district where "the claim arose." See Act of Nov. 2, 1966, Pub. L. 89-714, 80 Stat. 1111. This change "closed a gap" which existed in the general venue statutes, providing "a proper venue even in multiple-party situations" where neither all of the plaintiffs nor all of the defendants reside in the same district. See Brunette Machine Works, Ltd. v. Kockum Industries, Inc., 406 U.S. 706, 710 n.8, 92 S. Ct. 1936, 1939 n. 8, 32 L. Ed. 2d 428, 431 n. 8 (1972); 15 C. Wright, A. Miller & E. Cooper, Federal Practice and Procedure § 3806 at 42-43 & n. 13 (2d ed. 1986). The 1966 amendment, however, fails to address the growing problem of multi-party/multi-district cases in which the residency bases for venue cannot be satisfied, and the claim arguably arose in more than one judicial district. In such cases, the courts must identify a single district where a claim arose for purposes of venue, even though venue could be appropriate in more than one district under section 1391.
The Supreme Court first confronted the multi-party/multi-district venue problem in Leroy v. Great Western United Corp., 443 U.S. 173, 99 S. Ct. 2710, 61 L. Ed. 2d 464 (1979). In construing the "claim arose" provision of section 1391(b), which is comparable to the one found in subsection (a), the Court stated:
Without deciding whether this language adopts the occasionally fictive assumption that a claim may arise in only one district, it is absolutely clear that Congress did not intend to . . . give [plaintiffs] an unfettered choice among a host of different districts. . . . In our view, therefore, the broadest interpretation of the language of § 1391(b) that is even arguably acceptable is that in the unusual case in which it is not clear that the claim arose in only one specific district, a plaintiff may choose between those two (or conceivably even more) districts that with approximately equal plausibility -- in terms of the availability of ...