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THAYER/PATRICOF EDUCATION FUNDING, L.L.C. v. PRYOR RESOURCES
April 23, 2002
THAYER/PATRICOF EDUCATION FUNDING, L.L.C., AND THAYER/PATRICOF EDUCATION HOLDINGS, L.L.C. PLAINTIFFS,
PRYOR RESOURCES, INC., FRED H. PRYOR, PHILIP R. LOVE, AND MICHAEL B. HAYS, DEFENDANTS.
The opinion of the court was delivered by: John D. Bates, United States District Court Judge.
Thayer/Patricof Education Holdings, L.L.C. and Thayer/Patricof
Education Funding, L.L.C. (collectively "Thayer") bring this action
raising claims of breach of contract, misrepresentation, fraud, and
federal and state securities violations in connection with the purchase
of 80 percent of the stock of defendant Pryor Resources, Inc. ("Pryor
Resources" or "the Company"). Thayer purchased the controlling share of
the Company from defendants Fred H. Pryor, Philip R. Love, and Michael
B. Hays ("defendants") through a Recapitalization Agreement ("the
Agreement") executed on January 25, 1999 at Thayer's offices in
Washington, D.C. The individual defendants are three former owners and
directors of the Company who, after the sale, still retained a 20 percent
stake in the Company's stock.*fn1
In early 2001, the former controller of the Company allegedly confessed
that he had been forcing entries in the Company's books. Thayer entered
discussions with the defendants to determine the extent of financial
problems with the Company, and eventually threatened suit. After
settlement negotiations broke down, on July 3, 2002, Thayer sent a notice
of intent to sue defendants and the Company for indemnification pursuant
to the Recapitalization Agreement. Complaint at ¶ 56. Hours later,
defendants filed suit in the United States District Court for the
District of Kansas, claiming that Thayer breached the Recapitalization
Agreement by attempting to circumvent the remedies provision in it. The
Kansas action challenges Thayer's right to issue the claim letters, seeks
to limit Thayer's recovery, and attacks Thayer's theories of recovery.
This action commenced two weeks later. Thayer claims that the
defendants "cooked the Company's books" and "forced" accounting entries
in its general ledger in an effort to inflate the value of the company
prior to the sale to Thayer. Complaint at ¶¶ 2, 17-18. Thayer
alleges that this "scheme was undertaken with the knowledge, consent, and
participation of Defendants Pryor, Love, and Hays by, at a minimum, their
willful and reckless blindness to the fraud. . . ." Id. at ¶ 21. Thayer
seeks rescission of the Agreement, restitution of an alleged $100 million
loss from the purchase of the Company, and punitive damages.
Presently before the Court is defendants' motion to dismiss or, in the
alternative, to transfer the case to the United States District Court for
the District of Kansas. Together with issues of appropriate
indispensable parties, the thrust of defendants' motion is that, under
28 U.S.C. § 1404(a), Kansas is the more appropriate forum for this
action because the Company, key witnesses, and documents are located in
the Kansas City metropolitan area. Defendants assert that "[t]he
epicenter of this case is, in all aspects, Kansas and the Kansas City
metropolitan area," Defendants' Motion at 2, and urge that because they
filed their complaint in Kansas first, the proper forum to resolve the
parties' competing claims is Kansas. After reviewing the pleadings and
other papers filed, and in consideration of the oral arguments of
counsel, the Court denies defendants' motion to dismiss or to transfer.
Pryor Resources, located in Overland Park, Kansas, conducts educational
and career training seminars throughout the country built around the
well-known Fred Pryor Seminars, and also publishes related catalogues,
books, tapes, and various electronic and e-commerce media. Complaint at
¶¶ 13-14. Before the sale to Thayer, Fred Pryor was the Chairman of
the Board, Philip Love was President and Chief Executive Officer, and
Michael Hays was Vice-President of the Company. Love Affidavit at ¶ 3.
In the fall of 1998, at the height of the Internet boom, Thayer began
considering an investment in the Company. Complaint at ¶ 34. Before the
sale, defendants Pryor, Love, and Hays owned all of the shares of capitol
stock in the Company. Id. at ¶ 35. Pryor and Love both live in Kansas
City, Missouri, and Hays lives in the Kansas suburbs of Kansas City.
Id. at ¶¶ 10-12.
Thayer is a venture capital group incorporated in Delaware and located
in Washington, D.C. Id. at ¶ 8. Several Thayer directors live in
Washington, including Jeffrey Goodman, Christopher Temple, and Frederick
Malek; two Thayer directors, George Jenkins and Salem Schuckman, live in
Pennsylvania and New York, respectively. See Defendants' Motion, Ex. 6.
On January 25, 1999, Thayer and the defendants executed the
Recapitalization Agreement with Thayer purchasing 717 shares of the
Company stock for $65,805,514. Agreement at p. 1, B. Thayer also
assumed most of the company's liabilities, thus providing an overall
total investment of more than $83 million in exchange for roughly 80
percent of the Company. Complaint at ¶ 4. The purchase gave Thayer
control of the Board of Directors, leaving Pryor, Love, and Hays as
minority shareholders. The Agreement was signed and executed in a
closing at Thayer's offices in Washington, D.C. where $80 million in cash
and securities was exchanged for the Company's stock. Temple Declaration
at ¶ 3. The sale was thus negotiated, consummated and finalized in
After closing on the sale, Thayer again hired Ernst & Young to complete
a final audit of the new Company's assets and liabilities, and to prepare
an Audited Closing Balance Sheet. This audit did not find any
discrepancies in the Company's finances. Since the purchase, Thayer has
been in control of the Company, making the day-to-day decisions.
On February 26, 2001 — more than two years after the sale of the
Company to Thayer — Michael Biritz, the Company's controller,
allegedly informed the Company's chief financial officer, Jim Anderson,
that from 1996 through 2000 he had been "forcing" entries on the
Company's general ledger because information from the Company's
proprietary seminar registration software system failed to balance. See
Defendants' Motion, Ex. 3 ("2/28/01 Conversation with Mike Biritz").
Four audits had failed to detect these financial problems, two by Ernst &
Young after Thayer purchased the Company and two by Baird, Kurtz & Dobson
("BKD"), the local accounting firm that audited the Company's financial
statements in 1996 and 1997. Redler Affidavit at ¶ 6.*fn3
Thayer conducted a lengthy investigation in the spring of 2001 after
Biritz came forward, although defendants claim that the investigation
failed to uncover any fraud by them. On March 29, 2001, Thayer sent
defendants a demand letter seeking indemnification. Thayer claimed in
the letter that the Company's financial statements grossly overstated
amounts for prepaid expenses and profitability, understated tax
liabilities, and thus did not fairly represent the true financial
position of the Company.
On June 27, 2001, counsel for defendants sent a letter to Thayer's
counsel offering a $5 million settlement. On July 3, 2001, Thayer faxed
a letter to defendants rejecting the offer as grossly inadequate, and
stating that the requisite notice under the Agreement had been provided
and Thayer was ready to sue. Later that afternoon, defendants filed
their complaint in the District of Kansas. See Fred Pryor, et al. v.
Thayer/Patricof Education Holdings, L.L.C., et al., 01-CV-2327-GTV
(D.Kan.) (hereinafter "Kansas Complaint"). Thayer filed this suit two
weeks later on July 18, 2001. The Complaint in this Court alleges that
the 1996, 1997, and 1998 financial statements did not represent the true
financial health of the Company. Complaint at ¶¶ 29-31. Thayer
claims that the financial statements overstated prepaid postage assets by
more than $21 million. Id. at ¶ 44. Thayer alleges that defendants
conducted a scheme to overstate earnings before interest, taxes,
depreciation and amortization ("EBITDA"), and that the Company overstated
its revenues by $11.2 million and overstated EBITDA by 100 percent. Id.
at ¶¶ 29-31. According to Thayer, the Company's overall net worth
from 1996 through 1998 was misstated by more than $23 million. Id. at
Shortly after defendants received Thayer's Complaint, they amended the
Kansas Complaint, which focuses on breach of contract
claims and seeks
declaratory judgments pursuant to the Agreement. Specifically,
defendants cite Section 8.1 of the Agreement, which lays out the
indemnification remedies defendants agreed to provide for damages,
including those arising out of misrepresentation or breach of contract.
Defendants concede that they agreed to indemnify Thayer and the Company,
but they claim that Section 8.1 does not allow Thayer to seek
indemnification from the Company. Kansas Complaint at ¶ 28.
Moreover, defendants assert that Section 8.6 of the Agreement places a
cap on damages — "in no event shall the aggregate liability . . .
for breach of the representations and warranties exceed the sum of
$15,000,000." Id. at ¶ 30. The cap does not apply, however, if
there is intentional fraud. Agreement at ¶ 8.6. The Kansas
Complaint also contends that Thayer's demand letters seeking
indemnification from the Company and defendants are an attempt to get
around the $15 million damages cap in the Agreement. Kansas Complaint at
¶¶ 56, 70-71.
Defendants seek declaratory judgments to limit damages to $15 million
and to declare that Thayer breached a number of provisions in the
Agreement. Id. at ¶¶ 66-71. They also seek recovery of $2 million
they invested in the Company after Thayer took over, allegedly in
reliance on Thayer and Ernst & Young's audits for 1999 and 2000. Id. at
¶¶ 35-37. Defendants claim that their investment has been lost, and
that Thayer and its directors breached their fiduciary duty to
defendants, the minority shareholders.
I. Defendants' Motion to Dismiss
Defendants raise three issues supporting either dismissal or transfer.
The heart of their argument is the request to transfer this case to
Kansas, which is addressed in Section II below. Defendants also move to
dismiss for improper venue and failure to join indispensable parties.
The Court will address those issues first.
Defendants claim that the District of Columbia is not the proper venue
for this action, arguing that most of the operative events giving rise to
Thayer's claims did not occur here. Under 28 U.S.C. § 1391(b)(2),
however, venue is proper in any "judicial district in which a substantial
part of the events or omissions giving rise to the claim occurred." While
defendants correctly assert that the financial statements were prepared
and audited in Kansas, and that many of the witnesses and documents are
in Kansas, it nonetheless remains the case that the parties negotiated
the purchase in the District of Columbia, the defendants made essential
oral and written representations here, the parties signed and executed
the Recapitalization Agreement at issue here, and the exchange of cash
and securities for Company stock occurred here. Thayer's Complaint is,
at its core, based on the negotiation and execution of the Agreement,
which occurred in the District of Columbia. It is impossible,
therefore, to avoid the conclusion that a "substantial part" of the
relevant events occurred here.
Moreover, Thayer correctly notes that four of the 17 counts asserted in
its Complaint are brought pursuant to the Securities Exchange Act of
1934. Under that Act's liberal venue provision, an action may be brought
in any district where one or more violations of the Act occurred, as well
as in the district where the defendant is found, or in any district where
the defendant has transacted business. 15 U.S.C. § 78aa; see also
Poling v. Farrah, 131 F. Supp.2d 191, 193 (D.D.C. 2001) (venue proper not
only in the district where the defendant is found or transacts business,
but in any district where the transaction constituting the violation
non-resident defendant's phone calls into the District of