Opinion
G062210
10-29-2024
ADAM R. KIDAN, Plaintiff and Appellant, v. CHARTWELL STAFFING SERVICES, INC., et al., Defendants and Respondents.
Diamond McCarthy and Damion D. D. Robinson for Plaintiff and Appellant.
NOT TO BE PUBLISHED
Appeal from an order of the Superior Court of Orange County, No. 30-2021-01186369 John C. Gastelum, Judge. Reversed and remanded with directions.
Diamond McCarthy and Damion D. D. Robinson for Plaintiff and Appellant.
No appearance by Defendants and Respondents.
OPINION
O'LEARY, P. J.
Adam R. Kidan appeals from the trial court's order granting a motion to quash service of summons on Leonard Tierney and Richard Chipman (sometimes collectively respondents), which was preceded by discovery orders made on motions filed by the parties. The court granted the motion based on a conclusion that Kidan failed to show respondents had purposefully availed themselves of California benefits, one of two conditions for the exercise of specific personal jurisdiction.
On our independent review of undisputed facts, we conclude the trial court erred as to respondents' purposeful availment. As for the next prong of analysis, relatedness, which the court did not reach, we conclude further proceedings are necessary because the court erroneously limited Kidan's ability to conduct discovery for his opposition to respondents' motion to quash. Accordingly, we reverse the order granting the motion as well as three of the court's discovery orders, with directions for further proceedings.
FACTS
I.
CHARTWELL
Kidan founded Chartwell Staffing Services, Inc. (Chartwell), a "temporary staffing company," in 2011. Although Chartwell is a New York corporation deemed to have its principal place of business in Pennsylvania, it is undisputed that "Chartwell d[id] more business in California than any other state" at all times relevant to this appeal.
In 2018, Kidan resigned from his position as Chartwell's chief executive officer. That year, "Chartwell issued 40,000 W-2s to temporary workers and over 35,000 of them were issued to California residents."
In "early 2019," as he puts it, Kidan began living in California and ended his executive role at Chartwell in March 2019. At that time, Pennsylvania divorce proceedings he had initiated two years earlier were ongoing and his then-spouse, Tracy, owned all shares of Chartwell "as marital property for [their] joint benefit."
II.
THE OPTION AGREEMENT
In July 2019, Tracy, who does not appear to have any connection to California, entered into a "Stock Option Purchase Agreement" (option agreement). According to Kidan, it "gave . . . actual and effective control of Chartwell" to a New Hampshire limited liability company named Madison Resource Funding, LLC (the LLC), which had a principal place of business in New Hampshire. At all relevant times, respondents were its only two officers: New Hampshire resident Tierney was the LLC's president and chief executive officer, and Massachusetts resident Chipman was the LLC's vice president and chief financial officer.
Kidan alleges Tracy entered the option agreement "without Kidan's knowledge or consent and without approval from the" Pennsylvania court adjudicating his divorce. After the agreement, Chartwell's board of directors became Tracy, Tierney, Chipman.
Tracy's counterparty to the option agreement was a Delaware entity with a principal place of business in New Hampshire that we will refer to as Coast. Kidan characterizes Coast as "a shell company formed by the principals of [the LLC], solely to acquire Chartwell." At all relevant times, Tierney was the only director of Coast, which held no asset other than ownership interest in Chartwell.
III.
THIS CONTROVERSY
It is undisputed that the LLC conducted business in California for years. For example, it opened a branch office in West Covina in 2015, and relocated the office the following year, within the same city, where it continued to operate as of 2022. Chipman oversaw the branch opening, which he explained (in his deposition) was accomplished by the LLC "assum[ing] the lease that Chartwell [had] had at the time."
Even before the operating agreement, the LLC had provided operational "funding" to Chartwell as well as "'back office'" services that included charging Chartwell fees for "accounts receivable management, treasury services for tax payments, payroll, essential software, and management of all of Chartwell's proprietary data." Kidan alleges that the LLC opened its above-mentioned West Covina office solely to provide "'back office' services to Chartwell's California branches," which numbered 16 in 2021, and was connected to "more than 5,000 employees in this state."
According to Kidan, "Tierney and Chipman orchestrated the destabilization and takeover of Chartwell." Kidan alleges that, "[b]eginning in late 2017, after Chartwell became a large and successful company, and an attractive target," the LLC "threatened to withdraw funding without valid grounds" and "insisted that Chartwell either get rid of Kidan or find a new funder, which Chartwell could not do." After Kidan resigned, Chartwell's general counsel, W. Holmes Lilley, became the new chief executive officer.
Kidan alleges that after the option agreement was signed, "Chipman and Tierney, in their dual roles as officers of [the LLC] and directors of Chartwell, effectively operated Chartwell for [the LLC]'s benefit with Lilley's assistance." For example, Kidan asserts that in 2020, "Chartwell obtained more than $10 [million] in forgivable [federal government] loans due to the COVID-19 pandemic," but that Tierney and Chipman "did not use these funds for Chartwell's benefit or cause Chartwell to pay its outstanding obligations, including those subjecting Kidan to personal liability." Kidan also asserts allegations about a private bank loan that was secured for the LLC by using Chartwell's assets as collateral. Some of the details about his allegations are discussed further below.
PROCEDURAL HISTORY
The third (breach of fiduciary duties), sixth (economic duress), and seventh (negligence) causes of action in Kidan's operative second amended complaint are asserted against Tierney and Chipman, among other defendants. Respondents specially appeared and filed the underlying motion to quash, asserting, inter alia, that there was "no California nexus to any of Plaintiff's claims against Tierney and Chipman."
There were seven causes of action alleged total: "(1) breach of contract; (2) breach of the implied covenant of good faith and fair dealing; (3) breach of fiduciary duties; (4) aiding and abetting breach of fiduciary duties; (5) intentional interference; (6) economic duress; and (7) negligence." (Capitalization omitted.)
To oppose the motion, Kidan conducted discovery. The parties filed multiple discovery motions that the trial court ruled on as follows: (1) it granted, in part, respondents' motion for a protective order regarding their depositions noticed by Kidan (Code Civ. Proc., § 2025.420); (2) it denied in part and granted in part Kidan's motion to compel further responses to interrogatories (§ 2030.300); (3) it denied in part and granted in part Kidan's motion to compel further responses from respondents to requests for the production of documents and things (§ 2031.310); and (4) it denied in its entirety Kidan's motion to compel further responses from the LLC to requests for the production of documents and things (§ 2031.310).
All further undesignated statutory references are to the Code of Civil Procedure.
To oppose respondents' motion to quash, Kidan submitted several declarations including his own, as well as transcript excerpts of Tierney's and Chipman's depositions, and multiple exhibits. Ten months after the motion to quash was filed, the trial court held a hearing and granted the motion. The court concluded that Kidan had failed to carry his burden to show respondents had purposefully availed themselves of the benefits of California, the first prong of three that govern analysis for specific personal jurisdiction. Kidan timely appealed.
DISCUSSION
Kidan contends the trial court's granting of respondents' motion to quash was error because its findings are not supported by substantial evidence. He argues in the alternative that the court abused its discretion in deciding the parties' discovery motions. For the reasons discussed below, we conclude the court's conclusion on purposeful availment was incorrect as a matter of law and that the court impermissibly limited Kidan's discovery.
I.
STANDARD OF REVIEW
An appeal from an order granting a motion to quash based on lack of personal jurisdiction usually implicates two standards of review. "If the facts giving rise to jurisdiction are conflicting, we will not disturb the trial court's express or implied factual determinations where supported by substantial evidence. [Citation.] 'When no conflict in the evidence exists, however, the question of jurisdiction is purely one of law and the reviewing court engages in an independent review of the record.' [Citation.]" (Rivelli v. Hemm (2021) 67 Cal.App.5th 380, 393 (Rivelli).) For the reasons discussed below, we will conduct an independent review only for the first of three prongs that apply to analyzing specific "(sometimes called case-linked)" personal jurisdiction. (Ford Motor Co. v. Montana Eighth Judicial Dist. Court (2021) 592 U.S. 351, 358 (Ford Motor Co.).) We will then analyze the court's discovery rulings under the abuse of discretion standard of review. (Goehring v. Superior Court (1998) 62 Cal.App.4th 894, 911.)
II.
RELEVANT LEGAL PRINCIPLES
California's long-arm statute, section 418.10, authorizes the exercise of personal jurisdiction over defendants "'to the fullest extent consistent with due process.'" (Gilmore Bank v. AsiaTrust New Zealand Ltd. (2014) 223 Cal.App.4th 1558, 1567.) "When a defendant moves to quash service of process on jurisdictional grounds, the plaintiff has the initial burden of demonstrating facts justifying the exercise of jurisdiction. [Citation.]" (Vons Companies, Inc. v. Seabest Foods, Inc. (1996) 14 Cal.4th 434, 449; cf. ibid. ["Once facts showing minimum contacts with the forum state are established, however, it becomes the defendant's burden to demonstrate that the exercise of jurisdiction would be unreasonable"].)
The plaintiff must demonstrate the jurisdictional facts by a preponderance of the evidence. (Ziller Electronics Lab GmbH v. Superior Court (1988) 206 Cal.App.3d 1222, 1232-1233.) "The relevant time period for measuring the nature and quality of a nonresident defendant's contacts with the forum for purposes of specific jurisdiction is at the time the plaintiff's cause of action arose." (Strasner v. Touchstone Wireless Repair &Logistics, LP (2016) 5 Cal.App.5th 215, 226, abrogated on another ground in Bristol-Myers Squibb Co. v. Superior Court of Cal., San Francisco Cty. (2017) 582 U.S. 255, 264 (Bristol-Myers).)
"Under well-established case law specific jurisdiction exists when (1) the defendant has 'purposefully availed' himself or herself of forum benefits; (2) the controversy is related to or arises out of the defendant's contacts with the forum; and (3) the assertion of personal jurisdiction would comport with '"fair play and substantial justice."' [Citations.]" (Brue v. Al Shabaab (2020) 54 Cal.App.5th 578, 589-590; cf. Ford Motor Co., supra, 592 U.S. at pp. 358-359 [contrasting specific and general personal jurisdiction].) Courts apply the minimum contacts test on a case-by-case basis, focusing on the nature and quality of the defendant's activities in the state or with state residents. (Burger King Corp. v. Rudzewicz (1985) 471 U.S. 462, 474-475.)
III.
ANALYSIS
While the facts overlap, we analyze the first prong separately from the second prong. That is, we first assess whether a defendant either purposefully availed itself of the privilege of conducting activities in California, or purposefully directed its activities toward California.
A. Purposeful Availment
"'The purposeful availment inquiry . . . focuses on the defendant's intentionality. [Citation.] This prong is only satisfied when the defendant purposefully and voluntarily directs his activities toward the forum so that he should expect, by virtue of the benefit he receives, to be subject to the court's jurisdiction based on' his contacts with the forum. [Citation.]" (Pavlovich v. Superior Court (2002) 29 Cal.4th 262, 269.) The "'purposeful availment' requirement ensures that a defendant will not be haled into a jurisdiction solely as a result of 'random,' 'fortuitous,' or 'attenuated' contacts, [citations], or of the 'unilateral activity of another party or a third person,' [citation]." (Burger King Corp. v. Rudzewicz, supra, 471 U.S. at p. 475.)
Kidan sufficiently demonstrated respondents' purposeful availment of forum benefits. Both respondents became directors of Chartwell, which condcuted the majority of its business in California during the relevant time frame. Indeed, Chipman estimated during his deposition, that 70 percent of Chartwell's "staffing" in 2022 occurred in California.
Kidan demonstrated that Chipman took intentional actions to conduct the LLC's business in California with regard to the West Covina office. Within this context, Kidan presented undisputed evidence that Chipman was "the point person" for the private bank loan secured for the benefit of the LLC that used Chartwell's California assets as collateral. Chipman confirmed that he "overs[aw]" a group of managers employed by the LLC that handled collecting on accounts receivable from Chartwell's customers, consistent with the earlier described services the LLC provided Chartwell. Chipman also confirmed that he conducted a 2021 analysis about the projected profitability of selling Chartwell branches-those within as well as outside of California-and presented it to Chartwell's board and counsel.
Similarly, Tierney confirmed during his deposition testimony that, as its director, he approved of Chartwell "posting its California receivables as part of the collateral for the [private bank] loan." Tierney also testified about directing his activities toward Chartwell's California operations. He was asked: "[W]hat efforts did you take to make Chartwell profitable relating to the California operation?" He answered: "Changed their whole business model that they weren't used to."
These undisputed facts sufficiently support purposeful availment as an issue separate and apart from the question of whether the underlying controversy is sufficiently related to respondents' California contacts. (See LG Chem, Ltd. v. Superior Court (2022) 80 Cal.App.5th 348, 362-364 [on doing business in California]; see Rivelli, supra, 67 Cal.App.5th at p. 398 [defendant "forged a 'substantial economic connection'" with the forum].)
The trial court's findings on other points, discussed in its ruling, are immaterial to our conclusion on purposeful availment. For example, we need not and do not express an opinion on whether Chipman knew or did not know that Lilley was a California resident during their dealings. Neither answer would influence our conclusion that Kidan sufficiently showed respondents' purposeful availment of benefits.
B. Relatedness
We next conclude, for the reasons stated below, that there is an insufficient factual basis to independently decide whether the connection between the alleged controversy and respondents' contacts with California was sufficient to support specific personal jurisdiction. "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 [s]tate.' [Citation.] When there is no such connection, specific jurisdiction is lacking regardless of the extent of a defendant's unconnected activities in the [s]tate." (Bristol-Myers, supra, 582 U.S. at p. 264; see Ford Motor Co, supra, 592 U.S. at pp. 361-362 ["proof of causation" not essential to show required "'connection'"].)
In Bristol-Myers, the United States Supreme Court disapproved of California case law on relatedness that used a "'sliding scale approach to specific jurisdiction,'" where "'more wide[]ranging . . . forum contacts'" could compensate for a weak connection between the contacts and controversy at issue. (Bristol-Myers, supra, 582 U.S. at pp. 260, 264; ibid. [rejecting as "relax[ing]" of requirement].) For that matter's facts, the high court concluded that specific personal jurisdiction in California should not be exercised because no "in-state" injuries were involved for the at-issue plaintiffs (id. at pp. 264, 266), who were not California residents (id. at p. 259 [relevant class plaintiffs were 592 residents of 33 states other than California].)
In this matter, Kidan asserts that "Tierney[] and Chipman [among others] breached their fiduciary duties . . . by raiding Chartwell following the [o]ption [a]greement." As examples, Kidan alleges that respondents "caus[ed] Chartwell to pay exorbitant and above-market premiums and fees to" the LLC and "convert[ed]" a significant part of the $10 million government loan secured for Chartwell during the pandemic.
We agree with Kidan that the gravamen of his allegations rests on "a derivative action" theory because he claims injuries resulting from breaches of fiduciary duties owed to Chartwell. (See Heshejin v. Rostami (2020) 54 Cal.App.5th 984, 994, fn. 10, ["'"a shareholder cannot bring a direct action for damages against management on the theory their alleged wrongdoing decreased the value of his or her stock"'"; instead, the "'"corporation itself must bring such an action, or a derivative suit may be brought on the corporation's behalf"'"].) We do not scrutinize his standing to bring a derivative action. (See Nelson v. Anderson (1999) 72 Cal.App.4th 111, 127 [on statutory requirements for derivative action standing].)
Applying Bristol-Myers's focus on injury to the allegations shows that gaps of information exist between respondents' contacts with California and the controversy Kidan asserts against them: causes of actions for breach of fiduciary duties, economic duress, and negligence. For example, Kidan's theory of liability about the government loan proceeds supports a conclusion that a lack of information about what the money was used for precludes an independent finding on whether injuries to Chartwell occurred "in-state." (Bristol-Myers, supra, 582 U.S. at p. 266.)
We do not imply that injury is the only aspect of relatedness implicated in this matter. (See Rivelli, supra, 67 Cal.App.5th at p. 392 [specific personal jurisdiction "analysis is intensely fact-specific" and "'"not susceptible of mechanical application"'"].)
Kidan sought information about what the money was used for, but Chipman refused to provide it, for example, because he followed his attorney's instruction to not answer a deposition question based on the protective order that the trial court had granted. The net result is a gap between Kidan's allegation of money conversion and information that could reasonably support or negate the allegation-a point material to whether instate injury occurred and therefore material to the relatedness prong of specific personal jurisdiction analysis.
The question asked was: "What did [Chartwell] use the proceeds of the [government] loan to pay for?" Chipman's counsel's instruction was as follows: "Again, I'm going to object on the scope of the deposition as set forth by the [c]ourt to the extent this question has nothing to do with California in particular and certainly not . . . Chipman's individual contacts with California. Again, unless you can explain to me how this is going towards . . . Chipman's contacts with California, I'll instruct him not to answer."
C. Discovery
Chipman's refusal to answer the deposition question exemplifies the erroneous prejudice that resulted from the trial court's orders on Kidan's written discovery requests that were propounded ahead of respondents' depositions. "A plaintiff is generally entitled to conduct discovery with regard to a jurisdictional issue before a court rules on a motion to quash." (Goehring v. Superior Court, supra, 62 Cal.App.4th at p. 911.)
Five months before respondents' depositions, Kidan filed motions to compel further responses, by Tierney, Chipman, and the LLC, to his respective requests for production of documents and things. As noted earlier, the trial court denied Kidan's motion in its entirety for the LLC, concluding that no responses were required because the LLC had not moved to quash service of summons. As to respondents, the court granted partial relief for Kidan's motions in that respondents were ordered to provide further responses for five of the requests at issue. But the court declined to order respondents to provide further responses to nine other requests.
We limit our discussion of those nine requests to an illustrative example: Kidan's request for production no. 12, which sought "documents relating to any transfers of funds among [the LLC], Coast, and/or Chartwell from 2019 through the present." (Capitalization omitted.) The request was followed by three others (requests nos. 13 through 15) seeking financial documents such as bank account statements and cash flow statements for the entities.
Respondents' written response to request no. 12 contained only objections. When the trial court made its ruling on Kidan's motion to compel further responses, the court explained its decision that respondents should not be ordered to provide anything further: "the objections stated [by respondents] are valid as the [nine] requests [by Kidan] are overly broad and seek documents unrelated to the issue of whether there is a basis to exercise personal jurisdiction over Chipman and Tierney." (Some capitalization omitted.)
Tierney and Chipman's responses were identical, as follows: "Objection. This Request is overbroad, outside the scope of jurisdictional discovery, and the burden, expense, or intrusiveness of this discovery outweighs the likelihood that the information sought will lead to the discovery of admissible evidence pertaining to the narrow issue raised by Mr. Tierney's and Mr. Chipman's Motion to Quash Service for Lack of Personal Jurisdiction. The Request is not tailored to the discovery of connections, if any, between Mr. Chipman or Mr. Tierney and the State of California related to this action. Madison's, Coast's, and Chartwell's contacts with California are immaterial to whether Mr. Chipman and Mr. Tierney have the requisite contacts with California, out of which Plaintiff's claims arise, and this Request does not even seek documents identifying those entities' contacts with California. The responding party further objects because this Request, to the extent it seeks information about Madison, Chartwell or Coast is more properly directed to those entities. The responding party further objects because this Request seeks the disclosure of confidential and commercially sensitive information to Plaintiff, a business competitor."
Kidan contends the trial court erroneously "precluded discovery into [respondents'] direct participation in the acquisition or management of Chartwell" and "documents 'sufficient to show' funds paid by Chartwell to" the LLC, among other topics. We agree the preclusion of the discovery was erroneous and resulted in prejudice, as illustrated by respondents' earlier noted deposition testimony refusing to answer what Chartwell's money from the government loan had been used to pay for, under respondents' directorships of Chartwell.
Without the benefit of documents to cross-reference during the depositions, Kidan was severely limited in his ability to test respondents' answers on issues material to respondents' connections (or lack thereof) to the controversy he alleges. The limitation was compounded by the LLC's total lack of production of documents and things authorized by the trial court's erroneous denial of Kidan's motion to compel further responses. It was of no moment that the LLC had not filed a motion to quash because that was not a valid bar to Kidan's right to conduct discovery on jurisdictional facts. Kidan's at issue requests for production were reasonably calculated to lead to the discovery of admissible evidence relevant to respondents' motion to quash. (§ 2017.010 [general provision on scope of discovery].)
Section 2017.010 states that: "Unless otherwise limited by order of the court in accordance with this title, any party may obtain discovery regarding any matter, not privileged, that is relevant to the subject matter involved in the pending action or to the determination of any motion made in that action, if the matter either is itself admissible in evidence or appears reasonably calculated to lead to the discovery of admissible evidence. Discovery may relate to the claim or defense of the party seeking discovery or of any other party to the action. Discovery may be obtained of the identity and location of persons having knowledge of any discoverable matter, as well as of the existence, description, nature, custody, condition, and location of any document, electronically stored information, tangible thing, or land or other property."
Based on the above, we conclude gaps in information regarding respondents' California contacts and the claimed controversy prevent us from independently determining whether Kidan demonstrated sufficient relatedness consistent with Bristol-Myers, supra, 582 U.S. 255. We further conclude that the gaps were sufficiently caused by erroneous discovery orders on the parties' motions, including Kidan's motions to compel further responses, by respondents and the LLC, to his requests for production of documents and things. (MacQuiddy v. Mercedes-Benz USA, LLC (2015) 233 Cal.App.4th 1036, 1045.)
IV.
DIRECTIONS FOR FURTHER PROCEEDINGS
In sum, we conclude three of the trial court's rulings must be reversed with directions for further proceedings. In addition to our disposition below, the court is directed to allow the parties a reasonable opportunity for additional discovery to be conducted according to the applicable provisions of the Civil Discovery Act (§ 2016.010 et seq.) and relevant caselaw, including Kidan's option to conduct additional depositions, prior to any further hearing on respondents' motion to quash service of summons on them.
DISPOSITION
The trial court's November 16, 2022, order granting respondents' motion to quash service of summons is reversed. The court's September 6, 2022, order denying in its entirety Kidan's motion to compel the LLC's further responses to requests for the production of documents is reversed. The court's September 6, 2022, order granting in part and denying in part Kidan's motion to compel Chipman's further responses to requests for the production of documents is reversed. The court's September 6, 2022, order granting in part and denying in part Kidan's motion to compel Tierney's further responses to requests for the production of documents is reversed. The matter is remanded for further proceedings consistent with this opinion. Kidan shall recover his costs on appeal.
WE CONCUR: GOETHALS, J. MOTOIKE, J.