Opinion
No. 1:04-cv-01231-JDT-WTL.
December 7, 2004
This cause comes before the court on Defendant Jefferies' Motion to Dismiss for Lack of Jurisdiction Over the Person (Dkt. No. 16), Defendant House's Partial Motion to Dismiss for Failure to State a Claim (Dkt. No. 18), and Defendant Jefferies' Partial Motion to Dismiss for Failure to State a Claim (Dkt. No. 29.)
These motions were filed before the Plaintiffs' First Amended Complaint ("Amended Complaint") was filed. Thus, they are treated as directed at the Amended Complaint, which supersedes the original complaint. See Flannery v. Recording Indus. Ass'n of Am., 354 F.3d 632, 638 n. 1 (7th Cir. 2004).
I. JEFFERIES' MOTION TO DISMISS FOR LACK OF JURISDICTION
Defendant Jefferies moves to dismiss all claims of the Plaintiffs' Complaint against him, contending that the court lacks personal jurisdiction over him.
A complaint need not allege facts establishing personal jurisdiction. Purdue Research Found. v. Sanofi-Synthelabo, S.A., 338 F.3d 773, 782 (7th Cir. 2003) (quotation omitted). However, if a defendant moves to dismiss for lack of personal jurisdiction, the plaintiff bears the burden of demonstrating jurisdiction. Jennings v. AC Hydraulic A/S, 383 F.3d 546, 548 (7th Cir. 2004); Purdue Research Found., 338 F.3d at 782. But what does this require of a plaintiff? When the court decides a defendant's motion to dismiss based on written materials and without an evidentiary hearing (none has been requested here), "the plaintiff need only make out a prima facie case of personal jurisdiction." Purdue Research Found., 338 F.3d at 782. The court accepts all factual conflicts in favor of the plaintiffs. Id.; Hyatt Int'l Corp. v. Coco, 302 F.3d 707, 713 (7th Cir. 2002).
The Amended Complaint makes the following allegations of personal jurisdiction over Defendant Jefferies: The Plaintiffs reside in Indiana and do business in Indiana. The Defendants did business with the Plaintiffs, whom they knew were residents of Indiana, and invited the Plaintiffs to do business with them. The business the Defendants did with the Plaintiffs ostensibly conveyed to them the exclusive right to represent the Defendants' business in Indianapolis, Indiana.
The Amended Complaint also alleges that Stepfan Jefferies does business as Resonant Consulting. His residence and principal place of business are in Lexington, Kentucky. Defendant Brian T. House referred Plaintiffs to Jefferies ostensibly as a business strategem integrated with the conduct of the Quality Credit Service franchise he sold to Plaintiffs. On December 31, 2003, Jefferies accepted $3,000 from Plaintiffs Douglas and Kelley Huber as payment for a web page that would advertise them as Quality Credit Service representatives. Per the agreement between Douglas Huber and Jefferies, Jefferies was to register the domain name "qcsindy.com" exclusively in the Plaintiffs' names. The Plaintiffs paid for the website because House told them that it would give their new business exposure to the world. Either Jefferies also told them this, or he knew beforehand that House had told them this. Jefferies sold Doug and Kelly Huber a website that could not perform as promised.
Presumably, Jefferies is a citizen of Kentucky as well.
According to the Amended Complaint, since February 23, 2004, Jefferies has been charging the Plaintiffs over $10 a day for a pay-per-click campaign, which is necessary only because search engines cannot pickup the website he created. The Plaintiffs paid the charge because Jefferies told them they needed to.
It is further alleged that on or after April 21, 2004, the Plaintiffs' website was altered so anyone who actually found it and sought a credit cure or mortgage consult with the Plaintiffs automatically would be referred to Defendant House. Jefferies changed the website without the Plaintiffs' knowledge, consent or authority, but with House's consent and at his instruction. As a result of the alteration of the website, Jefferies or House, or both, are stealing the business for which the Plaintiffs pay the daily charge.
The Amended Complaint alleges that all acts complained of done by House and Jefferies were committed outside the scope of their employment with their respective corporate employers and Jefferies is subject to suit in tort under Kentucky law. In the alternative, all acts complained of were done by House and Jefferies acting as individuals under the sham umbrellas of their respective corporate employers. At all relevant times, they operated those companies as their alter egos such that the corporate form may be disregarded and House and Jefferies may be held personally liable for damages due the Plaintiffs.
Jefferies' Affidavit filed in support of his motion to dismiss provides additional facts regarding personal jurisdiction. Jefferies is an agent of Resonant Consulting, "a limited liability corporation registered in Kentucky." (Jefferies Aff. ¶ 8.) Resonant Consulting authorized him to negotiate and enter into an agreement with the Plaintiffs for certain website services. Jefferies did not travel to Indiana to negotiate or sign any agreement with the Plaintiffs, or to provide services under any agreement. All of Jefferies' contacts with the Plaintiffs occurred while he was physically outside Indiana. Jefferies' Affidavit also asserts that all of his contacts with the Plaintiffs were within the scope of his agency with Resonant Consulting.
A court exercising diversity jurisdiction has personal jurisdiction over a nonresident defendant only if the forum state courts would have jurisdiction. Jennings, 383 F.3d at 548; Purdue Research Found., 338 F.3d at 779. An Indiana state court would have personal jurisdiction over a defendant if the exercise of jurisdiction comports with federal due process. Litmer v. PDQUSA.com, 2004 WL 1661043, at *2 (N.D. Ind. July 27, 2004); see also Ind. T.R. 4.4(A) (stating that "a court of this state may exercise jurisdiction on any basis not inconsistent with the Constitutions of this state or the United States."); Richards O'Neil, LLP v. Conk, 774 N.E.2d 540, 550 n. 6 (Ind.Ct.App. 2002) (Najam, J., concurring) (noting that Indiana's long-arm statute was "expanded to the full extent of the law" effective January 1, 2003).
"Due process limits when a state may exercise personal jurisdiction over nonresident defendants." Jennings, 383 F.3d at 549 (citing Asahi Metal Indus. Co. v. Superior Court of Cal., 480 U.S. 102, 108 (1987); World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 291 (1980)). This allows potential defendants to structure their contacts with different states in order to anticipate where they may be liable to suit. Jennings, 383 F.3d at 549 (citing Burger King Corp. v. Rudzewicz, 471 U.S. 462, 472-73 (1985); World-Wide Volkswagen, 444 U.S. at 297).
There are two separate forms of personal jurisdiction: general and specific. Jennings, 383 F.3d at 549. Plaintiffs contend that the court has specific personal jurisdiction. Specific personal jurisdiction exists when the suit arises out of, or is related to, the defendant's minimum contacts with the forum state. See Helicopteros Nacionales de Colombia, S.A. v. Hall, 466 U.S. 408, 414 n. 8 (1984); Hyatt Int'l Corp., 302 F.3d at 716. To establish specific jurisdiction based on "minimum contacts," "a plaintiff must show that the defendant has purposefully availed itself of the privilege of conducting activities within the forum state, and that the exercise of personal jurisdiction over that defendant would comport with traditional notions of fair play and substantial justice." Jennings, 383 F.3d at 549 (citations and quotations omitted).
Jefferies invokes the "fiduciary shield" doctrine under which a court lacks personal jurisdiction over an individual whose contacts with the forum state were on behalf of or at the direction of his principal. See Rice v. Nova Biomed. Corp., 38 F.3d 909, 912 (7th Cir. 1994). Though the doctrine is recognized in some jurisdictions, it has been highly criticized and rejected in others, see id., and the court agrees with other judges in this district that the Indiana Supreme Court would not recognize the doctrine. See, e.g., Int'l Med. Group Inc. v. Am. Arbitration Ass'n, 2001 WL 984808, *6 (S.D. Ind. Jul. 26, 2001); Health Mgmt. Prof'ls, Inc. v. Diversified Bus. Enterp., Inc., 882 F. Supp. 795, 799 (S.D. Ind. 1995) (concluding after a thorough and well-reasoned analysis that the Indiana Supreme Court would not adopt the doctrine). The court also agrees that Calder v. Jones, 465 U.S. 783 (1984), implies that the fiduciary shield doctrine is no longer a viable doctrine. See Health Mgmt. Prof'ls, 882 F. Supp. at 799. In Calder, the Supreme Court noted that "[p]etitioners are correct that their contacts with [the forum state] are not to be judged according to their employer's activities there. On the other hand, their status as employees does not somehow insulate them from jurisdiction. Each defendant's contacts with the forum State must be assessed individually." Id. at 790. Thus, the court concludes that the fiduciary shield doctrine does not shield Jefferies' from the court's exercise of personal jurisdiction.
Jefferies, however, also argues that his contacts with Indiana are too minimal to comport with due process. While some of the allegations against Jefferies could support a breach of contract claim, other allegations purport to state a claim sounding tort. ( See Am. Compl. ¶¶ 81, 84, 87, 88, 94, 95, 96 (alleging fraudulent inducement, constructive fraud, fraud and theft)). Under the so-called "effects doctrine," specific personal jurisdiction over a nonresident defendant is appropriate when the defendant's intentional tortious actions aimed at the forum state cause harm to a plaintiff in the forum state, and the defendant knows such harm is likely to be suffered. Calder, 465 U.S. at 788-90. The doctrine is interpreted broadly in the Seventh Circuit. See Janmark, Inc. v. Reidy, 132 F.3d 1200, 1202 (7th Cir. 1997); Indianapolis Colts, Inc. v. Metro. Baltimore Football Club, 34 F.3d 410, 411 (7th Cir. 1994). Janmark held that "the state in which the victim of a tort suffers the injury may entertain a suit against the accused tortfeasor," even if all other relevant conduct took place outside of the forum state. 132 F.3d at 1202 (citing Indianapolis Colts, 34 F.3d at 411-12).
In Janmark a seller of mini shopping carts brought an action against a competitor and its operator for a declaratory judgment that it had not infringed on the defendants' copyright, as well as for tortious interference with prospective economic advantage. Id. at 1201. The district court found that a single phone call from the defendant in California to one of the plaintiff's customers in New Jersey could not be a tort "within" Illinois and dismissed the defendant for lack of personal jurisdiction. Id. The Seventh Circuit reversed, reasoning that without an injury there is no tort, and that because a wrong does not become a tort until an injury has occurred, the location of the injury is vital to understanding where the tort occurred. Id. at 1202. Because the injury took place in Illinois, the tort occurred in Illinois, and thus was actionable in Illinois. Id.; see also Indianapolis Colts, 34 F.3d at 411-12 (Maryland defendant may be sued in Indiana for the tort of trademark infringement based on the name of a football team because the injury would be felt mainly in Indiana and someone who commits a tort in Indiana should be amenable to suit in that forum).
The Amended Complaint and the exhibits to the original Complaint, which are incorporated into the Amended Complaint, support the conclusion that Jefferies' intentional tortious conduct aimed at Indiana caused harm to the Plaintiffs in Indiana and that Jefferies knew that harm was likely to occur in Indiana. The Amended Complaint alleges tortious conduct such as fraud by Jefferies and that the Plaintiffs are residents and do business in Indiana. Thus, the Amended Complaint alleges the tortious injury occurred in Indiana. The receipt for payment from the Hubers allegedly initialed by Jefferies reflects that the purchaser's business address is in Indiana and shows that the services for which the charge was made include an "Indy Web Site." The Amended Complaint itself alleges that Defendants knew Plaintiffs to be residents of Indiana. These allegations support the conclusion that Jefferies knew that the Plaintiffs did business in Indiana and thus that the injury from his alleged tortious acts would occur in Indiana. Therefore, it is determined that under the effects doctrine as broadly interpreted by the Seventh Circuit the court can exercise personal jurisdiction over Jefferies.
The court has personal jurisdiction over Jefferies based on the allegations which sound like breach of contract as well. The Amended Complaint alleges sufficient minimum contacts with Indiana. It is alleged that Jefferies accepted $3,000 from Douglas and Kelly Huber as payment for a website; that he was to register a domain name "qcsindy.com" exclusively in their names; and that the website cannot perform as promised. It also is alleged that Jefferies has charged Doug and Kelly Huber daily for a pay-per-click program. As stated, the allegations and exhibits support the conclusion that Jefferies knew the Plaintiffs did business in Indiana. Even though the Plaintiffs may have been referred to Jefferies by House, these allegations support the conclusion that Jefferies purposefully established "minimum contacts" in Indiana and should reasonably anticipate being haled into court there. Accordingly, Jefferies' motion to dismiss for lack of personal jurisdiction is DENIED.
II. HOUSE'S PARTIAL MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM
Defendant House moves the court to dismiss under Rule 12(b)(6) the claims for breach of contract, violation of Indiana's Franchise Act, Indiana Code §§ 23-2-2.5-1 et seq., for cancellation of contracts which violate Kentucky law, and for violation of the federal regulation respecting disclosure requirements for franchises and business opportunity ventures, 29 C.F.R. § 436.
The Amended Complaint makes the following relevant allegations respecting Defendant House: Brian T. House is a resident of Kentucky and does business in Marion County, Indiana. He is an insider and officer of the corporate defendants, Quality Credit Services, Inc., and QCS, Inc. ("QCS"). The corporate defendants are organized under the law of the Commonwealth of Kentucky. They are separate and distinct, having been organized and incorporated at different times. At all relevant times, QCS maintained its principal place of business in Kentucky. One or the other or both of the corporate defendants offers franchise contracts to Indiana residents through interstate commerce. They employ House as salesman, director, and/or officer.
He presumably is a citizen of Kentucky also.
On or about April 18, 2002, the Plaintiffs John and Douglas Huber and House d/b/a QCS entered into a Purchase Agreement (the "2002 contract") pursuant to which the Hubers purchased a franchise, Credit Correction Consulting Business, for the geographic areas around Indianapolis and Terre Haute, Indiana. In exchange, House d/b/a QCS agreed to provide the Hubers with all the information needed to perform the business. John and Douglas paid House d/b/a QCS $45,000 under the 2002 contract. The contract was signed by House and John and Douglas Huber. House failed to perform his obligations under the 2002 contract.
On May 7, 2002, QCS formally incorporated in the Commonwealth of Kentucky. At or about the time of the organizational meeting of QCS, House contributed the 2002 contract and cash he received to the new corporation in exchange for shares of its stock.
In April 2003, Defendant House filed for protection under Chapter 7 of the United States Bankruptcy Code as "Brian T. House, dba Quality Credit Services Inc." When House reported to the bankruptcy court that he was "doing business as" QCS, QCS, organized by House, was a corporation in good standing in Kentucky. QCS has never filed bankruptcy, and if it has dissolved since April 2003, then its assets and obligations were distributed to its shareholder, House, and were distributed after House filed bankruptcy.
Defendant House persuaded Douglas Huber to enter into another contract. On January 12, 2004, QCS by and through its agent House and Douglas entered into a written Purchase Agreement ("2004 contract") pursuant to which QCS/House agreed to sell and Huber agreed to buy the exclusive rights to conduct a certain Credit Correction and Consulting Business serving the areas around Indianapolis and Terre Haute, Indiana. Pursuant to the 2004 contract, QCS/House also agreed to provide certain information and training to the Hubers. House represented to the Hubers that he would create or assist them in creating an Indiana limited liability company as a vehicle for their business. The 2004 contract states that it will be governed by and construed in accordance with Kentucky law. The 2004 contract was executed by QCS "By: Brian T. House/President." (Compl., Ex. 1 at 4.)
The 2004 contract was amended by a subsequent written agreement between QCS by and through House and Douglas Huber. The addendum was executed by QCS "By: Brian T. House/President." (Compl., Ex. 2 at 2.)
The 2004 contract credited Douglas Huber with the $45,000 paid to House by Douglas and John Huber in 2002. By this credit, the Defendants admitted either that Plaintiffs' payment obligated the corporate defendant QCS and not House, or House voluntarily reinstated the debt after and despite his discharge. The Defendants breached the 2002 contract and 2004 contract and as a result have damaged the Plaintiffs.
It is further alleged as follows: The acts complained of were done by Defendant House within the scope of his employment as agent and executive officer for QCS. QCS is obligated to compensate the Plaintiffs for the damages done by the wrongs of its agent. Alternatively, all of the acts complained of were done by House acting as an individual under the sham umbrella called QCS. At all relevant times, House operated QCS as an alter ego of himself such that the court may disregard the corporate form and hold him personally liable for damages despite his prior discharge in bankruptcy. In the third alternative, all of these acts complained of which breached the contracts were committed by House ultra vires, without the authority of his corporate employer, and therefore bind House to personal liability to the Plaintiffs.
Because the Defendants' Answer to the Amended Complaint was filed before House's motion to dismiss, the motion is more properly considered a motion for judgment on the pleadings under Rule 12(c) and may be treated as one. See Schy v. Susquehanna Corp., 419 F.2d 1112, 1115 (7th Cir. 1970). The standard for Rule 12(c) motions and Rule 12(b)(6) motions are the same. Thus, a Rule 12(c) motion may be granted only if "it appears beyond doubt that the plaintiff cannot prove any facts that would support his claim for relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957); N. Ind. Gun Outdoor Shows, Inc. v. City of South Bend, 163 F.3d 449, 452 (7th Cir. 1998). When considering the motion, the court views the facts in the complaint in the light most favorable to the plaintiff, id., and accepts pleaded conclusions as true. Early v. Bankers Life Cas. Co., 959 F.2d 75, 79 (7th Cir. 1992).
House first alludes to an argument that certain counts against him fail to state a claim because his debts were discharged in bankruptcy. Neither his motion, supporting memorandum, nor reply memorandum makes any substantive argument that the Plaintiffs have failed to state a claim against him because of his bankruptcy discharge. No case law or other authority is cited to support such an argument. Thus, House has waived the argument. See, e.g., United States v. Jones, 224 F.3d 621, 626 (7th Cir. 2000) ("Arguments that are not adequately developed or supported are waived"); Central States, Southeast Southwest Areas Pension Fund v. Midwest Motor Exp., Inc., 181 F.3d 799, 808 (7th Cir. 1999) ("Arguments not developed in any meaningful way are waived.") (citing Bratton v. Roadway Package Sys., Inc., 77 F.3d 168, 173 n. 1 (7th Cir. 1996)); Williams v. Eastside Lumberyard Supply Co., 190 F. Supp. 2d 1104, 1114 (S.D. Ill. 2001) ("A [party's] recital of the facts of the case triggers no duty on the part of the judge to research, construct, and further research the best legal arguments he can for that fact-reciting party").
Defendant House next argues that all the claims against him premised on a contract should be dismissed because he was not a party to the contracts, but rather, was acting as an agent for QCS when he signed the contracts at issue. The Plaintiffs respond that House can be held liable because an agent may be held liable for (1) violations of state and federal law, (2) acts committed outside the scope of his agency, and (3) his tortious conduct even if committed within the scope of his agency.
It is well-established that a principal cannot authorize its agent to violate the law so that when an agent does so, the agent is not acting for the principal. See, e.g., Pennhurst State Sch. Hosp. v. Halderman, 465 U.S. 111, 113 (1984); Pool v. Adkisson, 1833 WL 2433, at *2-4 (Ky.App. Apr. 17, 1833). It is also well-established that an agent who commits a tortious act is equally liable with the principal. Pool, 1833 WL 2433, at *2-4; accord Hill v. Ebbets Partners Ltd., 812 N.E.2d 1060, 1064 (Ind.Ct.App. 2004). More specifically, under Kentucky law an agent is personally liable for his tortious conduct even if performed within the scope of his employment and under conditions which impose liability on the principal. See, e.g., Winburn v. Liberty Mut. Ins. Co., 933 F. Supp. 664, 666-667 (E.D. Ky. 1996) (citing Carr v. Barnett, 580 S.W.2d 237, 240 (Ky.Ct.App. 1979)).
House argues that under Indiana law an agent is not personally bound by a contract unless the agent fails to disclose the identity of the principal or agrees to be personally bound. The reliance on Indiana law is curious given the provision in the 2004 contract which expressly states that the contract "shall be governed by and construed in accordance with the Laws of the Commonwealth of Kentucky[.]" (Compl., Ex. 1 at 4.)
In effect, the Plaintiffs argue that the court should pierce the corporate veil and hold House personally liable on the contracts because QCS was a sham corporation and House's alter ego. They also allege in the alternative that the acts of House about which they complain were ultra vires, such that he may be held personally liable. House responds by relying on a decision from an Indiana court, applying Indiana law, and arguing that Plaintiffs need to offer proof to show that the corporate veil should be pierced. He relies on a summary judgment case. House, however, seeks dismissal for failure to state a claim and, the standard applied to Rule 12 dismissal motions is broader than that applied on summary judgment. As long as a plaintiff can prove some facts consistent with the complaint which would state a claim, the motion to dismiss should be denied. Conley v. Gibson, 355 U.S. 41, 45-46 (1957). Though some Seventh Circuit cases say that a court is not required to accept legal conclusions and unsupported factual conclusions in a pleading, see, e.g., Hickey v. O'Bannon, 287 F.3d 656, 658 (7th Cir. 2002), numerous others state that even on appeal a plaintiff can hypothesize facts to show that dismissal was inappropriate. See, e.g., Dawson v. Gen. Motors Corp., 977 F.2d 369, 372 (7th Cir. 1992). This latter line of cases is more consistent with the Supreme Court's decision in Conley. 355 U.S. at 45-46 ("a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief"). The well-respected commentators, Professors Wright and Miller, have interpreted Conley v. Gibson as allowing dismissal "only in the unusual case in which plaintiff includes allegations that show on the face of the complaint that there is some insuperable bar to relief," or, where in other words, "only when the allegations of the complaint itself clearly demonstrate that plaintiff does not have a claim." 5A Charles Alan Wright Arthur R. Miller, Federal Practice and Procedure § 1357 (2d ed. 1990).
Thus, the court concludes that if it does not appear beyond doubt that the Plaintiffs can prove no set of facts consistent with their allegations, the motion to dismiss should be denied. The Amended Complaint's allegations come within the standard which allows a complaint to withstand a motion to dismiss for insufficiency. Nothing in the complaint or exhibits attached to the original complaint clearly show the Plaintiffs have no claim against Defendant House. They allege he operated QCS as an alter ego such that the corporate veil should be pierced and, alternatively, that his acts were ultra vires. Kentucky law recognizes the alter ego theory as a basis for piercing the corporate veil. See United States v. WRW Corp., 986 F.2d 138, 143-44 (6th Cir. 1993) (affirming district court's holding that individual defendants could be held liable for civil penalties by piercing the corporate veil under Kentucky law). In addition, under Kentucky law, an agent may be held personally liable on a contract made where the contract exceeded the scope of the agent's authority. See, e.g., Oliver v. Wyatt, 418 S.W.2d 403, 406 (Ky. 1967); Mueller v. Nugent, 218 S.W. 730, 731-32 (Ky. 1920). Whether the Plaintiffs can produce sufficient proof to support their allegations may be tested by a summary judgment motion.
In a last gasp, House contends that Plaintiffs failed to sufficiently plead fraud. This argument, raised for the first time in House's reply brief, was not properly made and the Plaintiffs have not had an opportunity to respond to it. House also argues that Plaintiffs failed to plead facts supporting the "scienter" fraud component of a fraudulent misrepresentation claim. Again, he cites an Indiana summary judgment decision; as stated, the Rule 12 standard is much broader.
Accordingly, House's motion to dismiss for failure to state a claim should be DENIED.
III. JEFFERIES' PARTIAL MOTION TO DISMISS
Finally, the court turns to Defendant Jefferies' partial motion to dismiss for failure to state a claim upon which relief can be granted (Docket No. 29). The Plaintiffs have not responded to this motion because it seeks only to dismiss Counts I through V and VII through VIII (of the original complaint). Jeffries is only named as a party in Count VI of the Complaint and therefore is not a party to any of the other counts of the Complaint. Thus, the partial motion to dismiss is DENIED as moot.
IV. CONCLUSION
For the foregoing reasons, Defendant Jefferies' motion to dismiss for lack of personal jurisdiction (Dkt. No. 16) is DENIED, Defendant House's motion to dismiss for failure to state a claim (Dkt. No. 18) is DENIED, and Defendant Jefferies' partial motion to dismiss for failure to state a claim (Dkt. No. 29) is DENIED as moot.
ALL OF WHICH IS ENTERED.