Opinion
Case No.: 6:16-CV-03604-DCC-JDA
06-06-2019
The Michelin Retirement Plan; The Investment Committee of the Michelin Retirement Plan, Plaintiffs, v. Chicago Transit Authority Retiree Health Care Trust, Intervenor Plaintiff, v. Dilworth Paxson LLP; BFG Socially Responsible Investments, Ltd.; Burnham Financial Group, Inc.; Burnham Securities, Inc.; COR Fund Advisors, LLC; GMT Duncan, LLC; Thorsdale Fiduciary and Guaranty Company Ltd.; Valor Group Ltd.; Wakpamni Lake Community Corp.; Wealth-Assurance AG; Wealth Assurance Private Client Corporation; Timothy B. Anderson; Jon Michael Burnham; Devon D. Archer; Bevan T. Cooney; Hugh Dunkerley; Jason W. Galanis; John P. Galanis; Gary T. Hirst; and Michelle A. Morton, Defendants,
REPORT AND RECOMMENDATION OF THE MAGISTRATE JUDGE
This matter is before the Court on a motion to dismiss filed by Defendants Dilworth Paxon, LLP ("Dilworth") and Timothy B. Anderson (collectively, the "DP Defendants"). [Doc. 429.] Pursuant to the provisions of 28 U.S.C. § 636(b) and Local Civil Rule 73.02(B)(2)(e), D.S.C., this magistrate judge is authorized to review all pre-trial matters in cases involving litigation by individuals proceeding pro se and to submit findings and recommendations to the District Court.
Michelin Retirement Plan and the Investment Committee of the Michelin Retirement Plan (collectively, "Michelin") filed this action on November 10, 2016, alleging eleven causes of action against the above-named defendants. [Doc. 1.] On June 12, 2017, this Court granted a motion by Chicago Transit Authority Retiree Health Care Trust and the Board of Trustees of the Chicago Transit Authority Retiree Health Care Trust (collectively, "RHCT") to intervene as Plaintiffs. [Doc. 218.] RHCT filed its Intervenor Complaint on June 27, 2017, and filed an Amended Intervenor Complaint (the "Complaint") on January 28, 2019. [Docs. 222; 411.] On February 18, 2019, the DP Defendants filed a motion to dismiss the Complaint for lack of jurisdiction and for failure to state a claim. [Doc. 429.] RHCT filed a response opposing the motion on March 18, 2019. [Doc. 441.] And the DP Defendants filed a reply on April 8, 2019. [Doc. 467.] Accordingly, the motion is now ripe for review.
BACKGROUND
The following facts are taken directly from the Complaint. Plaintiff, the Michelin Retirement Plan ("the Plan"), is an employee welfare benefit plan governed by the Employee Retirement Income Security Act of 1974 ("ERISA"). [Doc. 411 ¶ 15.] The Plan was established and is maintained by Michelin North America, Inc., a corporation with its principal place of business in Greenville, South Carolina. [Id.] Plaintiff, the Investment Committee of the Michelin Retirement Plan (the "Investment Committee"), "is a fiduciary of" the Plan and "is comprised of individuals who reside in Greenville, South Carolina." [Id. ¶ 16.].
"RHCT is a pension fund, and body politic and corporate of the State of Illinois, established under the Illinois Pension Code (40 ILES 5/22-101B), to provide health care benefits to retirees of the Chicago Transit Authority, an independent governmental agency of the City of Chicago, Illinois." [Id. ¶ 12.] "On or about September 9, 2009, RHCT entered an Investment Management Agreement" (the "RHCT Agreement") with Hughes Capital Management, LLC ("HCM"), an institutional investment firm in Alexandria, Virginia. [Id. ¶¶ 7, 37.] "HCM was to manage and invest certain RHCT retirement funds in accordance with the RHCT Agreement, and the investment guidelines attached thereto, which limited the authority of HCM to invest RHCT's funds in high-risk or speculative securities." [Id. ¶ 37.]
Dilworth is a law firm operating as a limited liability partnership organized under the laws of Pennsylvania and has offices throughout the Middle Atlantic States, with no offices in Illinois or South Carolina. [Id. ¶ 27.] None of Dilworth's partners are citizens of Illinois or South Carolina. [Id. ¶ 28.] At all times relevant, Anderson was a Dilworth partner, but he now works for another law firm from its address in Philadelphia. [Id. ¶ 29.]
RHCT alleges that it was one of multiple victims that lost millions of dollars as the result of a fraudulent scheme created by Jason Galanis ("Jason") and John Galanis to misappropriate the proceeds of Wakpamni Lake Bonds ("the Bonds"). The Bonds were issued by Wakpamni Lake Community Corporation ("WLCC"), a tribally chartered corporation associated with the Oglala Sioux Tribe in South Dakota. [Id. ¶¶ 4, 59, 63.] The scheme is described in more detail in the Complaint; however, the essence of the scheme involved the Defendants engaging in the following acts:
• Setting up the Bond transaction to supposedly invest the proceeds in an "annuity" that was entirely fake;[Id. ¶¶ 5, 7, 46, 57, 63-64, 82, 84, 192-211.]
• Placing co-conspirators in control of each entity involved with every aspect of the Bond transaction and carrying out their conspiracy with those persons;
• Acquiring ownership and control of investment management companies in order to steal retirement funds entrusted to those companies by "investing" those funds in fraudulent bonds;
• Using their conspiratorial cooperation to force client funds into the purchase of the issued tribal bonds; and
• Raiding the proceeds from closing the bonds.
Plaintiffs do not allege that the DP Defendants were actually aware of the plan to misappropriate the bond proceeds, but they do allege the DP Defendants played a part in the bond transaction and an unwitting role in the misappropriation. Dilworth served as legal counsel for the placement agent, Burnham Securities, and undertook responsibility for preparing and examining the documents necessary to financing WLCC's project. [Id. ¶¶ 88, 92.] A Dilworth partner with significant experience with tribal bonds, Anderson served as Dilworth's lead attorney in this matter. [Id. ¶¶ 29, 58-60.] The Complaint alleges a laundry list of facts known to the DP Defendants that RHCT alleges should have alerted the DP Defendants that further investigation was needed before they could conclude that the bond purchasers would receive the return on their investment that they were promised. [Id. ¶¶ 94-117, 131-34, 158-60, 175, 180-82, 187-91, 278-80, 283-84, 296-98, 300.]
Between August 22, 2014, and August 26, 2014, HCM agreed to purchase $27,077,436 worth of the Bonds on behalf of nine of HCM's clients, two of which were RHCT and Michelin. [Id. ¶¶ 168, 169, 175.] RHCT's funds were wired on August 25, 2014, from its account in Chicago, Illinois, to the trust account of U.S. Bank, which was serving as indenture trustee. [Id. ¶¶ 91, 169.]
A critical part of Jason's plan to misappropriate the Bond proceeds involved having U.S. Bank send the bond proceeds to a fictitious company under his control. The DP Defendants played a role in that happening. On August 26, 2014, Jason emailed Anderson wire instructions, which Anderson forwarded to U.S. Bank the same day. [Id. ¶¶ 185-86.] U.S. Bank, in turn, responded the same day by wiring over $22 million of the bond proceeds, including over $4 million of RHCT retirement funds and over $8 of Michelin's retirement funds to the account specified in Jason's instructions. [Id. ¶¶ 139, 186.] Once the funds were wired, Jason and his co-conspirator immediately misappropriated the funds by authorizing wires to several other entities. [Id. ¶ 194.]
Michelin filed this action on November 10, 2016, alleging eleven causes of action against multiple defendants. [Doc. 1.] Against the DP Defendants, Michelin alleged a claim of professional negligence based on their failure to recognize the scheme to misappropriate the funds and Michelin also requested damages and attorneys' fees under the Court's equitable powers as defined in ERISA. [Id. ¶¶ 130-39, 206-15.]
On May 13, 2019, the Honorable Donald C. Coggins, Jr. granted the DP Defendants' motion to dismiss the claims Michelin had asserted against them. [Doc. 468; see Doc. 408.]
RHCT alleges six causes of action in the Complaint, three of which they assert against the DP Defendants. [Id. ¶¶ 237-308.] Count 4 alleges that the DP Defendants and others tortiously interfered with the RHCT Agreement by "assist[ing] HCM in preparing an unauthorized and unusual 'Big Boy' letter purporting to authorize the [purchase of the Bonds]." [Id. ¶¶ 263-72.] It alleges that "[w]ithout this letter, the transaction would not have closed as the other participants would not have engaged in a securities offering that may be subject to registration requirements," and that the DP Defendants "knew that if HCM approved an unauthorized investment, it would be a breach of the RHCT Agreement." [Id. ¶¶ 267-68.] Count 5 is a cause of action for negligence that alleges that that the DP Defendants breached a duty of care owed to RHCT by preparing a letter expressing its opinions on various topics related to the transaction. [Id. ¶¶ 273-91.] Count 6 is a claim for aiding and abetting in a breach of fiduciary duty; it alleges that "HCM was acting as a fiduciary to RHCT with respect to the investments it was placing on RHCT's behalf," that "[a]s part of HCM's fiduciary obligations, HCM was obligated to follow RHCT's investment guidelines set forth in the RHCT Agreement," and that the DP Defendants assisted HCM in closing the bond transaction even though they "knew that the pension funds would not be independently authorizing the private placement letter." [Id. ¶¶ 292-308.] In its prayer for relief, the Complaint requests "actual damages, consequential damages, and incidental damages, and if appropriate, punitive damages." [Id. at 57.]
The Complaint explains the purpose served by "Big Boy" letters:
To qualify for an exemption to the securities registration requirements for private securities placements under Regulation D, the Bonds would have to be placed with "accredited investors." In such transactions, investors often provide a letter acknowledging that they are "accredited," that the investor understands the security is being offered as part of a private placement, and that the investor understands there may be material non-public information regarding the security that has not been disclosed. These letters are generally known in the industry as "Big Boy" letters.[Doc. 411 ¶ 122.]
DISCUSSION
The DP Defendants first contend that this Court lacks personal jurisdiction over them. [Doc. 429-1 at 6-10.] Personal jurisdiction in federal courts is typically determined by whether the defendant would be "subject to the jurisdiction of a court of general jurisdiction in the state where the district court is located." Fed. R. Civ. P. 4(k)(1)(A). In determining whether South Carolina state law would authorize personal jurisdiction over these defendants, the Court properly examines both the state long arm statute and the due process requirements of the Fourteenth Amendment. ESAB Grp., Inc. v. Centricut, Inc., 126 F.3d 617, 623 (4th Cir. 1997).
South Carolina's long arm statute provides
(A) A court may exercise personal jurisdiction over a person who acts directly or by an agent as to a cause of action arising from the person's:
(1) transacting any business in this State;
(2) contracting to supply services or things in the State;
(3) commission of a tortious act in whole or in part in this State;
(4) causing tortious injury or death in this State by an act or omission outside this State 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 State;
S.C. Code Ann. § 36-2-803. "South Carolina's long-arm statute has been interpreted to reach the outer bounds permitted by the Due Process Clause." ESAB Grp., 126 F.3d at 623. Therefore, the appropriate question for the Court in considering a personal jurisdiction defense raised by an out-of-state defendant is whether that defendant has "established 'minimum contacts' with [South Carolina] such that the maintenance of the suit does not offend "traditional notions of fair play and substantial justice."'" Id. (quoting Int'l Shoe Co. v. Washington, 326 U.S. 310, 316 (1945)).(5) having an interest in, using, or possessing real property in this State;
(6) contracting to insure any person, property, or risk located within this State at the time of contracting;
(7) entry into a contract to be performed in whole or in part by either party in this State; or
(8) production, manufacture, or distribution of goods with the reasonable expectation that those goods are to be used or consumed in this State and are so used or consumed.
Personal jurisdiction may arise through specific jurisdiction, based on the conduct alleged in the suit, or through general jurisdiction. ALS Scan, Inc. v. Digital Serv. Consultants, Inc., 293 F.3d 707, 711 (4th Cir. 2002). To determine whether specific jurisdiction exists, courts should examine "(1) the extent to which the defendant 'purposefully avail[ed]' itself of the privilege of conducting activities in the State; (2) whether the plaintiffs' claims arise out of those activities directed at the State; and (3) whether the exercise of personal jurisdiction would be constitutionally 'reasonable.'" Id. at 712 (alteration in original). If the defendant's contacts with the state are not the basis of the suit, then jurisdiction must come from more persistent, unrelated contacts with the state; "the defendant's activities in the state must have been 'continuous and systematic.'" Id. (quoting Helicopteros Nacionales de Colombia, S.A. v. Hall, 466 U.S. 408, 414 n.9 (1984)).
A plaintiff has the burden of proving that a court has personal jurisdiction over the a defendant. See In re Celotex Corp., 124 F.3d 619, 628 (4th Cir. 1997). If a court does not hold an evidentiary hearing, a plaintiff need only make a prima facie showing of personal jurisdiction. Mylan Labs., Inc. v. Akzo, N.V., 2 F.3d 56, 60 (4th Cir. 1993). In considering whether a plaintiff has met this burden, the Court draws all reasonable inferences arising from the proof in a plaintiff's favor and resolves all factual disputes to the benefit of the plaintiff. Id. Both sides may present proof on the issue. See id.
The parties agree that the Court lacks general jurisdiction over the DP Defendants. [Docs. 429-1 at 7; 441 at 9-20 (arguing only that the Court may exercise specific jurisdiction over the DP Defendants).] The DP Defendants maintain that the Court also lacks specific jurisdiction over them with regard to RHCT's claims. They argue that RHCT "do[es] not identify a single business transaction, tortious act or contract sufficient to connect the DP Defendants to South Carolina, nor could it." [Doc. 429-1 at 9.] In arguing that the Court possesses specific jurisdiction over the DP Defendants, RHCT primarily asserts that, at the time that the DP Defendants committed some of the actions on which RHCT's claims are based, the DP Defendants knew that those actions, in addition to harming RHCT, which has no connection to South Carolina, would also cause considerable harm to third parties that are located in South Carolina, namely Michelin. [Doc. 441 at 10-11, 17-18.] The Court agrees with the DP Defendants that RHCT cannot establish that specific jurisdiction is conferred over the DP Defendants regarding RHCT's claims against them.
In granting a motion to dismiss by the DP Defendants in regard to Michelin's claims, the Honorable Donald C. Coggins, Jr. ruled that no general jurisdiction was conferred over the DP Defendants because "Defendant Dilworth is a Pennsylvania limited liability partnership organized under the laws of Pennsylvania with its principal place of business in Pennsylvania" and "[n]either of the DP Defendants is alleged to maintain an office, be licensed to practice law, to own bank accounts or property, to transact any business operations, or to provide any services to individuals in South Carolina." Michelin Ret. Plan v. Chicago Transit Auth. Retiree Health Care Tr., No. 6:16-cv-03604-DCC-JDA, 2019 WL 2098843, at *3 (D.S.C. May 13, 2019).
"In order for a court to exercise specific jurisdiction over a claim, there must be an 'affiliation between the forum and the underlying controversy, principally, [an] activity or an occurrence that takes place in the forum State." Bristol-Myers Squibb Co. v. Superior Ct. of Cal., San Francisco, Cty., 137 S. Ct. 1773, 1781 (2017) (quoting Goodyear Dunlop Tires Operations, S.A. v. Brown, 564 U.S. 915, 919 (2011)). "When there is no such connection, specific jurisdiction is lacking." Id.
The Supreme Court's decision in Walden v. Fiore, 571 U.S. 277 (2014), shows why this Court cannot properly exercise personal jurisdiction over the DP Defendants with regard to RHCT's claims against them. In Walden, a police officer working at the Atlanta Hartsfield-Jackson airport seized almost $97,000 in cash that two travelers ("the plaintiffs") had been carrying. Id. at 280. The cash had initially been discovered by Transportation Security Administration Agents, who had searched the plaintiffs and their carry-on bags at the San Juan Airport in Purerto Rico. Id. The plaintiffs explained to agents of the Drug Enforcement Administration ("DEA") in San Juan that they had residences in both California and Nevada. Id. After the plaintiffs were later cleared for departure, an official at the San Juan Airport notified a drug task force in Atlanta that the plaintiffs had boarded a plane for Atlanta, where they intended to catch a connecting flight to Las Vegas, Nevada. Id. Anthony Walden was serving as a member of the task force as a deputized DEA agent. Id. Walden seized the cash when the plaintiffs arrived in Atlanta and advised the plaintiffs that their money would be returned if they later demonstrated a legitimate source for it. Id. The plaintiffs subsequently boarded their plane to Las Vegas. Id. The following day, and on two additional occasions the next month, Walden received requests from the plaintiffs' attorney in Nevada that the funds be returned. Id. At some point after the seizure of the cash, Walden helped draft an affidavit to show probable cause for forfeiture of the money and forwarded the affidavit to a United States Attorney's Office in Georgia. Id. at 280-81. No forfeiture complaint was ever filed and the funds were returned several months after they had been seized. Id. at 281.
The plaintiffs filed suit against Walden in the United States District Court for the District of Nevada, alleging that Walden had violated their Fourth Amendment rights by, among other actions, seizing the cash, not promptly returning it, and drafting and forwarding a probable cause affidavit to support a forfeiture action while knowing that the affidavit contained false statements. Id. The district court granted a motion to dismiss filed by Walden, concluding that the search and seizure in Georgia did not establish a basis for the exercise of personal jurisdiction in Nevada even if Walden caused harm to the plaintiffs in Nevada while knowing they lived there. Id. On appeal, a divided panel of the United States Court of Appeals for the Ninth Circuit reversed. Id. at 282. Assuming that the district court had correctly determined that the search and seizure in Georgia could not support the exercise of jurisdiction in Nevada, the court nonetheless held that the district court could properly exercise jurisdiction over "the false probable cause affidavit aspect of the case." Id. (quoting Fiore v. Walden, 688 F.3d 558, 577 (9th Cir. 2011)). The court reasoned that Walden "expressly aimed" his actions at Nevada by submitting the affidavit knowing that it would affect people with a "significant connection" to Nevada. Id. (quoting 688 F.3d at 581). Because the delay in return of their funds caused "foreseeable harm" in Nevada to the plaintiffs and exercise of personal jurisdiction over Walden was otherwise reasonable, the court held that exercise of personal jurisdiction by the district court would be proper. Id. (quoting 688 F.3d at 582, 585).
The Supreme Court later granted certiorari and reversed. The Court emphasized that the focus of the minimum-contacts inquiry is on "the defendant's contacts with the forum State itself, not the defendant's contacts with persons who reside there." Id. at 285. Thus, "the plaintiff cannot be the only link between the defendant and the forum. Rather, it is the defendant's conduct that must form the necessary connection with the forum State that is the basis for its jurisdiction over him." Id. Because "no part of [Walden's] course of conduct occurred in Nevada," personal jurisdiction could not be properly exercised over him regarding the plaintiffs' claims. Id. at 288-89. The Court noted that even if "the continuation of the seizure in Georgia [were considered] to be a distinct injury, it is not the sort of effect that is tethered to Nevada in any meaningful way" insofar as the plaintiffs "lacked access to their funds in Nevada not because anything independently occurred there, but because Nevada is where [the plaintiffs] chose to be at a time when they desired to use the funds" that Walden had seized. Id. at 290. The Court also noted that the fact that the plaintiffs' attorney contacted Walden from Nevada was simply third-party action, not an action of Walden's. Id. at 291. Additionally, where the plaintiffs claimed that some of the seized cash "originated" in Nevada, that connection was also not one that Walden created through his actions. Id. And while the funds were eventually returned to Nevada, Walden had nothing to do with that return, and it was probably the case in any event that it was the plaintiffs who directed that the funds be returned to Nevada. Id.
The same principles dictate that this Court cannot properly exercise jurisdiction over the DP Defendants regarding the claims RHTC asserts against them. Just as in Walden, the DP Defendants' mere knowledge that their conduct would cause harm to a party with connections to South Carolina is not sufficient by itself to establish personal jurisdiction. Similar to the Walden plaintiffs, RHTC argues that the DP Defendants aimed their activities at the forum state in the sense that they targeted a victim they knew had connections to that state. [Doc. 441 at 13; see also Doc. 411 ¶ 140 (allegation in the Complaint that "nearly a third of the retirement funds stolen in the first transaction were coming from South Carolina, where Michelin, its retirement plan, and its employees were located" and that "Anderson [and other defendants] each knew that they were directing their activities toward victims in the State of South Carolina, among other locations, prior to closing").] As the Walden Court made clear, however, knowledge of the victim's connection to the forum state is insufficient by itself to warrant exercising personal jurisdiction.
RHCT appears to suggest that the fact that Michelin has "at all times relevant, [been] located in South Carolina" somehow distinguishes this case from Walden, [Doc. 441 at 13], but the decision in Walden certainly had nothing to do with the strength of the plaintiffs' connections to the forum state. RHCT also argues that "[t]he practice of law by non-resident attorneys can also give rise to specific jurisdiction where the representation causes injury in the forum state." [Id. at 16 (citing Gracious Living Corp. v. Colucci & Gallaher, PC, 216 F. Supp. 3d 662, 669 (D.S.C. 2016); Bace Int'l, Inc. v. Brentwood Capital Corp., No. 3:04-cv-145-MU, 2006 WL 2460869, at *2 (W.D.N.C. Aug. 22, 2006); Allen v. James, 381 F. Supp. 2d 495, 498 (E.D. Va. 2005)).] It is certainly true that such practice of law can give rise to specific jurisdiction, but whether it does so depends on whether the defendant's actions are directed to the forum state, and, as explained, the DP Defendants' actions were not so directed. Finally, RHCT relies heavily on Calder v. Jones, 465 U.S. 783 (1984), as support for its personal jurisdiction argument [Doc. 441 at 10-13], but the Walden Court clearly articulated the several ways in which the defendant in Calder had created contacts with the forum state such that the Court's determination that personal jurisdiction existed was not based merely on the defendant's knowledge of the plaintiff's connections to that state, Walden, 571 U.S. at 287.
The undersigned notes that this result is consistent with, and supported by, Judge Coggins' ruling, in granting the DP Defendants' motion to dismiss Michelin's state law negligence claim, that Michelin's "allegations that the DP Defendants had constructive knowledge that the brunt of the harm from their conduct would be felt in [South Carolina] is insufficient to confer [specific] jurisdiction." Michelin Ret. Plan, 2019 WL 2098843, at *3.
For these reasons, the Court concludes that RHCT has failed even to make a prima facie showing of personal jurisdiction, and the Court recommends granting the DP Defendants' motion to dismiss.
CONCLUSION AND RECOMMENDATION
Wherefore, based upon the foregoing, the undersigned recommends that the DP Defendants' motion to dismiss [Doc. 429] be GRANTED.
IT IS SO RECOMMENDED.
s/ Jacquelyn D. Austin
United States Magistrate Judge June 6, 2019
Greenville, South Carolina