Opinion
NO. 2018-CA-001175-MR
10-11-2019
H.E.B., LLC, a Nevada Limited-Liability Company; Benny Ray Bailey; Samax Family Limited Partnership a New York Limited Partnership By and Through Andrew Margulies as General Partner; William Thompson; John Wallace Langley; James M. Renfro; Steven Mitchell Sacks; John Weithman; Ronnie Ward; Commercial Holding AG, LLC; Joy Barker Cheek; Pamela J. Taylor; MLH Investments, LLC; Rusbar Financial Services, Inc.; Innovative Technologies, LLC; Tom Grissom; and Joe Brett Langley, Appellants v. JACKSON WALKER, L.L.P.; Richard F. Dahlson; James Stuckert; Solomon O. Howell, Jr.; P. Richard Risinger; Unknown Doe Individual Defendants 1-10; and Unknown Doe Entity Defendants 11-21, Appellees
BRIEFS FOR APPELLANTS: Thomas W. Miller, Lexington, Kentucky. BRIEF FOR APPELLEES JACKSON WALKER, LLP AND RICHARD F. DAHLSON: Barbara B. Edelman, Jeffrey A. Kaplan, Jr., Lexington, Kentucky, Brian S. Sullivan, Cincinnati, Ohio.
BRIEFS FOR APPELLANTS: Thomas W. Miller, Lexington, Kentucky.
BRIEF FOR APPELLEES JACKSON WALKER, LLP AND RICHARD F. DAHLSON: Barbara B. Edelman, Jeffrey A. Kaplan, Jr., Lexington, Kentucky, Brian S. Sullivan, Cincinnati, Ohio.
BEFORE: CLAYTON, CHIEF JUDGE; MAZE AND NICKELL, JUDGES.
OPINION
NICKELL, JUDGE:
Disgruntled shareholders, led by H.E.B., LLC ("HEB"), a Nevada holding company with its principal place of business in Ft. Worth, Texas, claim Jackson Walker, L.L.P. ("JW"), a Texas law firm headquartered in Dallas, Texas, and Richard F. Dahlson, a partner in the JW law firm who lives and works in Dallas, Texas, committed legal malpractice by helping others dilute the value of stock in VHGI, Inc. ("VHGI"), a Delaware corporation in which all appellants invested. Appellants, some of whom reside in Kentucky, challenge dismissal of JW and Dahlson from a civil suit filed in Fayette Circuit Court. HEB previously filed similar claims against JW and Dahlson in Nevada in both federal and state court where both suits were dismissed. After hearing JW and Dahlson’s motion, the Fayette Circuit Court sustained the motion to dismiss on June 12, 2018, finding neither had sufficient contacts to trigger Kentucky’s long-arm statute, and federal due process considerations would make it unreasonable and burdensome for a Kentucky court to exercise jurisdiction. A motion to reconsider was denied on July 10, 2018. On review of the record, briefs and law, we affirm.
H.E.B., LLC, v. Jackson Walker, LLP, et al., Case No. 2:17-cv-00627 (D. Nev. Apr. 4, 2017) (dismissed for lack of complete diversity).
H.E.B., LLC v. Jackson Walker, L.L.P., Richard F. Dahlson, and Doe Defendants 1-20 , Case No. A-17-753369-B (District Court Clark County, Nevada) (Aug. 25, 2017) (dismissed for lack of personal jurisdiction over JW and Dahlson). HEB was the sole plaintiff in this Nevada state court action pursuing nearly identical claims to those filed in the Kentucky suit under review. For the first time in this ongoing saga, in the Kentucky suit, other VHGI shareholders are named as plaintiffs and James Stuckert, Solomon O. Howell, Jr. and P. Richard Risinger are named as defendants.
FACTS AND PROCEDURAL BACKGROUND
No discovery having occurred in this case, we rely heavily on the complaint to summarize facts pertinent to this appeal. We discuss the complaint in detail because all claims of wrongdoing raised in the complaint must arise from the actions of JW and Dahlson. KRS 454.210(2)(a) and (b).
Kentucky Revised Statutes.
Scott Haire is the "H" in HEB, an entity he launched with others in 1997 to raise capital for business ventures. According to the complaint, JW and Dahlson helped Haire set up HEB and provided legal services to HEB over a fifteen-year period during which more than $60 million was raised and invested in multiple companies, one of which was VHGI. Haire was Chairman and Chief Financial Officer of VHGI. Haire was also Chief Executive Officer ("CEO") of Wound Management Technologies, Inc. ("WMT"), another company he created.
In early 2012, Haire was managing HEB and its controlling interest in VHGI. The complaint alleges through VHGI Coal, Inc., a wholly-owned subsidiary, VHGI acquired Lily Group Holdings, Inc. ("Lily"), an Indiana corporation and owner of the Landree coal mine in Indiana—an asset purportedly valued at more than $100 million. Lily was purchased from Risinger, an Indiana resident who was a VHGI director and shareholder. Risinger, a defendant herein, eventually became VHGI’s CEO and sole director.
Also, in early 2012, JW and Dahlson learned Haire was likely to be indicted in Florida for his role in an FBI sting investigating financial crimes. Haire pled guilty to conspiring to commit securities fraud in April 2013, admitting he schemed "to inflate the volume and stock of VHGI, a publicly traded company." United States v. Scott Haire and Douglas Martin , Case No. 12-CR-60133-Williams(s) (S.D. Fla.).
https://archives.fbi.gov/archives/miami/press-releases/2013/former-ceo-pleads-guilty-to-securities-fraud.
JW and Dahlson helped Haire prepare for his guilty plea and the prison sentence that followed. Dahlson recommended Haire minimize his role in all public companies including HEB, VHGI and WMT. Haire resigned all corporate leadership positions in late May 2012.
Another step was revealing Haire’s impending indictment to his mentor—Stuckert—a Kentucky resident, principal HEB investor and VHGI shareholder. Haire met with Stuckert, a defendant herein, in Stuckert’s office in Louisville, Kentucky, in May 2012 to relay the news. Dahlson attended the meeting at Haire’s request, staying in the Commonwealth less than a day. Dahlson did not bill HEB for time or travel associated with the meeting. The complaint describes the purpose of the meeting as being "to inform Stuckert of the investigation and the potential indictment of Haire and have Dahlson opine on the investigation and its effect not only upon Haire, but upon VHGI, WMT, RedFin and the other affiliates of [HEB]." This is the only meeting alleged to have occurred in Kentucky.
The city of Louisville is located in Jefferson County, Kentucky. Although the May 2012 meeting occurred in Louisville, this case was not filed in Jefferson Circuit Court. Curiously, it was filed in Fayette Circuit Court which has no obvious connection to the case.
The complaint suggests once Haire’s criminal dealings were exposed, JW and Dahlson no longer wanted Haire and HEB as clients so the attorney and his firm abandoned them and began representing Stuckert and Howell—another VHGI investor, Kentucky resident and defendant herein. Both Stuckert and Howell had loaned money to VHGI which was ultimately diverted to Lily Group Holdings Company—not to be confused with Lily—another entity previously owned by Risinger and the means by which VHGI acquired the Landree mine.
In October 2012, Stuckert filed suit against HEB to recoup money he had loaned to the company. Stuckert v. HEB, LLC , Case No. 153 262300 12, (District Court, Tarrant County, Texas). During a hearing in Fayette Circuit Court, appellees indicated HEB had settled with Stuckert but had added HEB’s office manager, Lucy Singleton, as a third-party defendant. Litigation against her continues. Appellees noted JW and Dahlson could have been added as third-party defendants to that suit—in Texas—but chose not to do so.
The complaint further alleges Stuckert met on June 7, 2012—at an unspecified location—with Lucy Singleton and Robert Lutz, Haire’s successor as WMT’s new CEO. According to the complaint, a day later, on June 8, 2012, Stuckert met again with Singleton and Lutz—plus Dahlson—who acted as legal counsel to all three individuals and HEB. The complaint goes on to claim during that meeting—while Dahlson was still representing HEB—a plan was "hatched" for Stuckert to quietly take control of WMT, VHGI and RedFin, a third public company in which HEB was heavily invested, by illegally acquiring a significant number of HEB-owned shares in all three companies.
The firm Frost Brown Todd LLC represented Stuckert in June 2012.
Between September 2012 and February 2013, HEB attempted to either develop or sell the Landree mine to raise capital to strengthen VHGI, WMT and RedFin. Appellants claim Stuckert "thwarted" those attempts and in February 2013, took complete control of VHGI and its assets, including the Landree mine.
The complaint further states in September 2013, Lily filed for bankruptcy causing individual shareholders to lose the value of their entire investment in VHGI. HEB lost more than $7 million when VHGI could not repay a loan.
Appellants allege by endorsing the Stuckert takeover plan, JW and Dahlson violated their fiduciary duty to HEB and failed to protect HEB’s interests. With the foregoing facts in mind we consider whether the Fayette Circuit Court properly determined it lacked specific personal jurisdiction over JW and Dahlson and dismissed the complaint as to both.
ANALYSIS
The complaint alleges multiple entities committed torts. We consider only the claims against JW and Dahlson because only they have been dismissed from this litigation. Allegations against Stuckert, Howell and Risinger, as well as multiple unknown defendants, remain intact.
The torts allegedly committed by JW and Dahlson include: breach of fiduciary duty (aiding Risinger, Howell and Stuckert in a scheme to dilute stock value); legal malpractice (erroneously providing to, then withholding from HEB legal advice, plus acting on HEB’s behalf without authority); breach of covenant of good faith and fair dealing; legal malpractice (breaching fiduciary duties by not disclosing conflict of interest); negligent misrepresentation; respondeat superior /vicarious liability; unjust enrichment; fraud (intentional misrepresentation); and concert of action/aiding and abetting. At its core, this is a legal malpractice action with HEB as the prime appellant. Of the seventeen appellants named in the complaint, HEB is the only one having had an attorney-client relationship with JW and Dahlson. According to the complaint, JW and Dahlson provided legal advice to HEB from 1997 until February 2013.
Because the trial court considered affidavits outside the pleadings and JW and Dahlson sought dismissal under CR 12.02, the matter was treated as a request for summary judgment. CR 56.03 ; Steelvest, Inc. v. Scansteel Serv. Ctr., Inc. , 807 S.W.2d 476, 480 (Ky. 1991). When entertaining such a motion, pleadings are construed liberally in a light most favorable to the nonmovant and all allegations in the complaint are taken as true. Bondurant v. St. Thomas Hosp. , 366 S.W.3d 481, 483 (Ky. App. 2011) (citing Mims v. Western-Southern Agency, Inc. , 226 S.W.3d 833, 835 (Ky. App. 2007) ). Whether personal jurisdiction exists is a legal question we review de novo without deference to the trial court. Appalachian Reg'l Healthcare, Inc. v. Coleman , 239 S.W.3d 49, 53-54 (Ky. 2007) (citations omitted).
Kentucky Rules of Civil Procedure.
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The brief for appellants states their theory of the case as:
JW and Dahlson contracted to provide services in Kentucky to Stuckert. Even as for VHGI and Lily Group, their participation in the Stuckert and Howell loans and related transactions were provided in Kentucky where both Stuckert and Howell resided and acted, and where they were to receive the extraordinary warrants for convertible preferred shares in VHGI. Assisting Kentucky residents in illegal transactions is clearly the provision of services in Kentucky.
This also constitutes transacting business in Kentucky and causing tortious injury in Kentucky.
Appellants rely on Kentucky’s long-arm statute in their quest to convince us Kentucky has and should exercise specific personal jurisdiction over JW and Dahlson, two nonresidents.
[T]he proper analysis of long-arm jurisdiction over a nonresident defendant consists of a two-step process. First, review must proceed under KRS 454.210 to determine if the cause of action arises
from conduct or activity of the defendant that fits into one of the statute’s enumerated categories. If not, then in personam jurisdiction may not be exercised. When that initial step results in a determination that the statute is applicable, a second step of analysis must be taken to determine if exercising personal jurisdiction over the non-resident defendant offends his federal due process rights.
Caesars Riverboat Casino, LLC v. Beach , 336 S.W.3d 51, 57 (Ky. 2011). To prevail on appeal, appellants "must make only a prima facie showing that personal jurisdiction exists in order to defeat dismissal." Carter v. Paschall Truck Lines, Inc. , 388 F.Supp.3d 883, 887 (W.D. Ky. 2019) (quoting AlixPartners, LLP v. Brewington , 836 F.3d 543, 548-49 (6th Cir. 2016) (quoting Air Prods. & Controls, Inc. v. Safetech Int', Inc. , 503 F.3d 544, 549 (6th Cir. 2007) )). See also Hinners v. Robey , 336 S.W.3d 891, 895 (Ky. 2011). Appellants must show "with reasonable particularity" JW and Dahlson have "sufficient contacts" with Kentucky to invoke jurisdiction. Id. (quoting Neogen Corp. v. Neo Gen Screening, Inc. , 282 F.3d 883, 887 (6th Cir. 2002) (citing Provident Nat'l Bank v. Cal. Fed. Sav. & Loan Ass'n , 819 F.2d 434, 437 (3d Cir. 1987) )).
We quote the portions of KRS 454.210 appellants argue apply:
(2) (a) A court may exercise personal jurisdiction over a person who acts directly or by an agent, as to a claim arising from the person’s:
1. Transacting any business in this Commonwealth;
2. Contracting to supply services or goods in this Commonwealth;
....
4. Causing tortious injury in this Commonwealth by an act or omission outside this Commonwealth if he regularly does or solicits business, or engages in any other persistent course of conduct, or derives substantial revenue from goods used or consumed or services rendered in this Commonwealth, provided that the tortious injury occurring in this Commonwealth arises out of the doing or soliciting of business or a persistent course of conduct or derivation of substantial revenue within the Commonwealth[.]
Sometimes overlooked, but no less applicable, KRS 454.210(2)(b) directs, "[w]hen jurisdiction over a person is based solely upon [ KRS 454.210(2)(a) ], only a claim arising from acts enumerated in this section may be asserted against him."
Appellants would have us focus on the harm they suffered as shareholders. Contrary to their view, KRS 454.210 and relevant case law place our focus squarely on JW and Dahlson—the nonresident parties appellants seek to bring before a Kentucky court. We must focus specifically on "the relationship among the defendant, the forum, and the litigation." Keeton v. Hustler Magazine, Inc. , 465 U.S. 770, 775, 104 S.Ct. 1473, 1478, 79 L.Ed.2d 790 (1984) (quoting Shaffer v. Heitner , 433 U.S. 186, 204, 97 S.Ct. 2569, 2579, 53 L.Ed.2d 683 (1977) ).
What we know about JW and Dahlson comes from affidavits they submitted. Patrick R. Cowlishaw, a JW partner and the firm’s general counsel, provided some details. JW has seven offices throughout Texas, but none outside Texas and specifically, none in Kentucky. None of JW’s roster of attorneys—numbering 363 as of March 2018—is licensed to practice in, or works in, Kentucky. JW has paid no taxes in Kentucky and has engaged in no activity it believes would subject it to paying taxes in Kentucky. While some of JW’s clients reside in Kentucky, the work JW performs on behalf of those clients pertains to interests they own in Texas or a state other than Kentucky. Since January 1, 2012, JW has had fourteen clients related to Kentucky—none generating more than a "negligible" amount of work in the Commonwealth. In 2016, JW clients with a Form 1099 Kentucky address generated fees amounting to $475,831—less than two-tenths of one percent of JW’s fee revenue for that year. The figure was $240,543 in 2017—less than one-tenth of one percent of the fee revenue generated for that year. In both years, a single client generated $200,000 in fees for legal services performed in Texas related to construction and real estate activities occurring in Texas.
Dahlson prepared his own affidavit identifying himself as a partner in JW’s corporate and securities group who practices in its Dallas office. He has lived in Texas since 1984. He has never owned property in Kentucky, never held a license in Kentucky, never had a Kentucky bank account, and never been employed in Kentucky. He has neither solicited business from Kentucky companies nor represented a Kentucky company. In the 1990s he began providing legal services to the predecessor of WMT whose principal address is in Arlington, Texas. Thereafter, Dahlson represented WMT in corporate and securities matters. In 2011-2012, VHGI retained Dahlson and JW to perform legal work for the acquisition of Lily. After Lily was acquired, Dahlson did legal work for Lily. We quote the last three paragraphs of Dahlson’s affidavit.
13. In May 2012, on Mr. Haire’s request, I traveled to Louisville, Kentucky to meet with Mr. Haire and James Stuckert. The purpose of the meeting was to inform Mr. Stuckert of the federal criminal investigation of Mr. Haire for securities fraud, its potential resolution (which would include Mr. Haire’s imprisonment), and the impact of these matters on WMT, VHGI, and Mr. Stuckert’s investments in these companies. Although I did describe the business fallout of the criminal matter, I did not discuss H.E.B., LLC. I left Kentucky the next day. I did not bill my time for the Kentucky meeting or my travel to H.E.B.
14. I have not been back to Kentucky since that meeting.
15. Any and all subsequent meetings I or JW had with anyone related to this matter took place outside of Kentucky. The June 8, 2012 meeting that I attended with Mr. Stuckert, Lucy Singleton, and Robert Lutz took place in Texas.
Contrary to the position of appellants, based on the slim record and affidavits, it does not appear JW and Dahlson transacted business in Kentucky; supplied goods or services in Kentucky; or, by acting or failing to act outside Kentucky caused tortious injury inside the state while doing business, soliciting business or deriving substantial revenue inside Kentucky. Therefore, as explained below, appellants have not made the prima facie showing required for Kentucky to exercise personal jurisdiction over JW or Dahlson.
First, it does not appear JW—nor Dahlson as its employee—"transact[ed] any business in Kentucky." JW’s affidavit confirms the firm has acted on behalf of fourteen Kentucky residents who are JW clients, but only on matters pertaining to Texas or some location other than Kentucky. To invoke KRS 454.210(2)(a)(1), appellants must show JW and Dahlson transacted business in Kentucky and the claim against them "arises from" that transaction. That requires proof of "a ‘reasonable and direct nexus’ between the conduct causing injury and [their] activities in the state." Carter , 388 F.Supp.3d at 888 (citing Churchill Downs, Inc. v. NLR Entm't, LLC , No. 3:14-CV-166-H, 2014 WL 2200674, at *5 (W.D. Ky. May 27, 2014) (quoting Caesars , 336 S.W.3d at 59 )).
Based on the information before us, at most, Dahlson attended a single meeting in Louisville, Kentucky, the purpose of which was to reveal Haire’s legal woes to Stuckert. That is the extent of Dahlson’s activity in Kentucky—and by extension, JW’s activity within the state. Just as an insurance adjuster’s single trip to Kentucky to secure a police report, view a damaged vehicle and arrange for the vehicle’s pickup by a salvage company did not constitute "transacting any business" to "confer personal jurisdiction" over the insurer under KRS 454.210(2)(a)(1) in Tenn. Farmers Mut. Ins. Co. v. Harris , 833 S.W.2d 850, 853 (Ky. App. 1992), the brief trip Dahlson made to Kentucky before any alleged takeover plan allegedly took shape did not subject Dahlson and JW to personal jurisdiction in Kentucky.
Making telephone calls, texting, entering into contract negotiations, sending letters, and emailing are all recognized means of transacting business in the forum state. Hall v. Rag-O-Rama, LLC , 359 F.Supp.3d 499, 509 (E.D. Ky. 2019). Appellants have not asserted JW and Dahlson did any of these things or contacted anyone in Kentucky by other specific means to recommend a takeover of VHGI or an acquisition of VHGI shares held by HEB. Appellants merely state, at paragraph 52 of their complaint,
Upon information and belief, Dahlson and [JW] in violation of their fiduciary responsibility to Plaintiff HEB and its members recommended the Plan, including the unlawful taking of the aforesaid shares or, alternatively, tacitly agreed and failed to properly protect the interests of the Plaintiff HEB.
Unspecified "information and belief" does not satisfy Hinners , 336 S.W.3d at 895. JW and Dahlson must be shown "with reasonable particularity" to have "sufficient contacts" with Kentucky. Without the required showing, Kentucky cannot invoke specific personal jurisdiction.
Based on JW’s affidavit, the firm’s practice occurs almost exclusively in Texas and not at all in Kentucky. Coincidently, HEB, JW and Dahlson all have offices in Texas but none has an office in Kentucky. It is suggested appellants perceive JW and Dahlson to be too influential in Texas and are forum shopping to avoid filing suit in the Lone Star State.
Paragraph 13 of Dahlson’s affidavit describes the May 2012 meeting. Paragraphs 41 and 42 of the complaint agree the purpose of the meeting was for Haire to tell Stuckert he was about to be indicted. The complaint further admits Dahlson "acted as attorney for Plaintiff HEB and its affiliates such as VHGI, WMT and Haire." There is no allegation Dahlson represented Stuckert during that meeting. Some of the many salient details missing from the complaint are: when JW and Dahlson began representing Stuckert; the contract confirming JW and Dahlson represented Stuckert; and a description of what JW and Dahlson did on Stuckert’s behalf.
Additionally, the complaint does not allege the plan for Stuckert to wrest control of VHGI—the underlying theme of the complaint and the basis for JW and Dahlson’s supposed conflict of interest—was "hatched" during the May 2012 meeting or was even spawned in Kentucky. The central allegation against JW and Dahlson is they recommended a plan which adversely impacted owners of VHGI stock—some of whom are Kentucky residents. There is no suggestion of how and when JW and Dahlson recommended the plan. Furthermore, merely knowing Kentucky residents who own VHGI stock might be impacted by the takeover plan "is alone insufficient to exercise personal jurisdiction." Bondurant , 366 S.W.3d at 486. As noted by appellees, "it is the defendant, not the plaintiff or third parties, who must create contacts with the forum State." Walden v. Fiore , 571 U.S. 277, 291, 134 S.Ct. 1115, 1126, 188 L.Ed.2d 12 (2014).
Paragraphs 48-53 of the complaint allege the takeover plan was not concocted until June 8, 2012. On that day, Stuckert, Singleton and Lutz met for a second time and were joined by Dahlson who, according to the complaint, acted as legal counsel to all three and HEB. The complaint does not specify where this meeting occurred, but paragraph 15 of Dahlson’s affidavit confirms it occurred in Texas, refuting any suggestion it may have occurred in Kentucky.
Moreover, the response to the motion to dismiss contradicts the allegations contained in the complaint. The response reads in pertinent part:
Defendant Richard Risinger ("Risinger"), an Indiana resident, became the CEO and sole director of VHGI. He worked closely with Kentucky residents Stuckert and Howell. In fact, the three hatched a scheme, aided by JW and [Dahlson], to take ownership of VHGI illegally, and to the detriment of its shareholders.
According to this statement, JW and Dahlson did not create the scheme. Rather, the plot was concocted by Risinger, Stuckert and Howell, but there is no indication of when or where that occurred or how JW and Dahlson assisted—they just "aided." There is no allegation the trio met in Kentucky. There is simply no proof JW and Dahlson transacted business in Kentucky triggering jurisdiction under KRS 454.210(2)(a)(1).
Similarly, there is no proof JW and Dahlson "[c]ontract[ed] to supply services or goods in this Commonwealth" to satisfy KRS 454.210(2)(a)(2). The crux of this statutory provision is not where the alleged contract was executed, but whether the contract provided for "services or goods to be transported into, consumed or used in Kentucky." Hinners , 336 S.W.3d at 896. Here, there is no proof of any contract and no indication of any agreement for JW and Dahlson to supply services or goods in Kentucky related to the claims made in the complaint.
Finally, we consider the applicability of KRS 454.210(2)(a)(4) which contains two parts—both of which must be established. Underlying this provision is a requirement JW and Dahlson "regularly does or solicits business, or engages in any other persistent course of conduct, or derives substantial revenue from goods used or consumed or services rendered in this Commonwealth[.]" Id. Only if the foregoing criterion is established do we look to whether JW and Dahlson committed an act or omission outside Kentucky causing tortious injury inside Kentucky. As described previously, appellants have not shown JW and Dahlson practice in Kentucky to develop "sufficient contacts" with the Commonwealth. Because appellants have not established the first criterion we need not progress to the second.
As noted earlier in this Opinion, convincing a Kentucky court to exercise personal jurisdiction is a two-step hurdle. First, appellants must demonstrate applicability of Kentucky’s long-arm statute under at least one of nine provisions. Appellants argued three, none of which apply. Second, appellants must establish federal due process would not be offended. Caesars , 336 S.W.3d at 57. Appellants have failed to establish a sufficient relationship between JW and Dahlson, Kentucky and the litigation. They have not cleared the first hurdle. Keeton , 465 U.S. at 775, 104 S.Ct. at 1478. Thus, there is no need for us to proceed to the second.
The Fayette Circuit Court did not err in dismissing JW and Dahlson from suit. We affirm the order of dismissal.
ALL CONCUR.