West Virginia Laborers Pension Trust Fund v. Caspersen

Case Date: 05/11/2005
Court: 1st District Appellate
Docket No: 1-04-2131 Rel

THIRD DIVISION
May 11, 2005


No. 1-04-2131

 
WEST VIRGINIA LABORERS PENSION TRUST ) Appeal from the
FUND, Individually and on Behalf of All Others ) Circuit Court of
Similarly Situated, ) Cook County, Illinois
  ) County Department
                      Plaintiff-Appellant, ) Chancery Division
  )  
v. )  
  )  
FINN M.W. CASPERSEN, DAVID J. FARRIS, JAMES )  
H. GILLIAM, JR., ANDREW C. HALVORSEN, )  
ROBERT J. CALLANDER, ROBERT C. CLARK, )  
LEONARD S. COLEMAN, JR., ROLAND A. )  
HERNANDEZ, J. ROBERT HILLIER, GERALD L. ) Honorable
HOLM, THOMAS H. KEAN, STEVEN MULLER, ) Patrick E. McGann, Judge
SUSAN JULIA ROSS, ROBERT A. TUCKER and ) Presiding.
SUSAN M. WATCHER, )  
  )  
                     Defendants-Appellees. )  

 

JUSTICE KARNEZIS delivered the opinion of the court:

Plaintiff, West Virginia Laborers Pension Trust Fund, appeals from an order ofthe circuit court granting the motion of defendants, Finn M.W. Caspersen, David J.Farris, James H. Gilliam, Jr., Andrew C. Halvorsen, Robert J. Callander, Robert C.Clark, Leonard S. Coleman, Jr., Roland A. Hernandez, J. Robert Hillier, Gerald L.Holm, Thomas H. Kean, Steven Muller, Susan Julia Ross, Robert A. Tucker and SusanM. Watcher, to dismiss this cause of action pursuant to section 2-619 of the Code ofCivil Procedure (735 ILCS 5/2-619 (West 2002)) for lack of personal jurisdiction. Weaffirm the circuit court's order.

 

BACKGROUND

This is a class action suit brought on behalf of the former shareholders ofBeneficial Corporation (Beneficial) against the former members of the board ofdirectors of Beneficial to recover millions of dollars in damages suffered by Beneficialshareholders in connection with the merger of Beneficial and Household International,Inc. (Household), in July 1998.

Plaintiff is a West Virginia benefit plan administrator and former Beneficialshareholder. Defendants are former members of Beneficial's board of directors, noneof whom resided in Illinois. Prior to the merger, Beneficial was a Delaware corporationwith its principal place of business in Delaware and was engaged in consumer financeand credit-related insurance businesses. Household was a Delaware holdingcorporation with its principal place of business in Illinois and provided consumer loanproducts.

In 1998, Beneficial and Household released a joint statement announcing thatthe boards of both corporations had unanimously approved a merger agreement. Themerged corporation would be headquartered in Illinois. Defendants negotiated andfinalized a merger of Beneficial and Household and sought approval from Beneficial'sshareholders, some of whom resided in Illinois. Shareholders received a packet of"merger materials" that contained information about the merger, some of which plaintiffalleged in its complaint to be false or fraudulent. Defendants recommended in thematerials that Beneficial shareholders should vote in favor of the merger. In connectionwith the merger, defendants authorized their investment bankers, Goldman Sachs andMerrill Lynch, to determine whether the merger was fair from a financial standpoint toBeneficial shareholders. Defendants neither traveled to Illinois to conduct a "duediligence" investigation of Household, nor did defendants have any oral or writtencommunications with anyone in Illinois in connection with the due diligenceinvestigation. Several directors did travel to Illinois, but for the purpose of attending"social" dinners and to meet with the members of the Household board as well as tohelp explain the merger to Household's employees.

Shortly after the merger, it was discovered that Household had misstated itsearnings and had engaged in illegal acts such as "predatory lending." Litigationensued and the value of Household's stock plummeted, which resulted in monetarylosses for former shareholders of Beneficial who had exchanged their shares of stockin Beneficial for shares in Household. This class action was brought on behalf of thoseformer Beneficial shareholders.

Plaintiff filed its complaint against defendants in the circuit court of Cook Countyon June 27, 2003. Count I alleged that defendants breached their fiduciary duty of duecare and loyalty owed to shareholders by failing to conduct a proper due diligenceinvestigation into the financial condition of Household. Count II alleged that defendantsbreached their duty of candor and full disclosure by failing to conduct a reasonable duediligence investigation in connection with the merger, which resulted in defendants'failure to disclose Household's true financial condition.

Defendants filed a motion to dismiss the complaint for lack of personaljurisdiction pursuant to section 2-619. The circuit court granted defendants' motion andplaintiff now appeals.

 

ANALYSIS

On appeal, plaintiff contends the circuit court erred in determining thatdefendants were not subject to personal jurisdiction in Illinois. Plaintiff arguesjurisdiction is proper pursuant to both the Illinois long-arm statute (735 ILCS 5/2-209(West 2002)) as well as the "minimum contacts" required by due process.

Plaintiff has the burden of establishing a prima facie basis upon whichjurisdiction over the defendants can be exercised. International Business MachinesCorp. v. Martin Property & Casualty Insurance Agency, Inc., 281 Ill. App. 3d 854, 857-58 (1996). When the trial court does not hold an evidentiary hearing on defendants'motion contesting the court's jurisdiction, our review is de novo. International BusinessMachines, 281 Ill. App. 3d at 858.

Illinois' long-arm statute contains specific enumerated acts upon whichjurisdiction over a defendant can be properly exercised. Additionally, Illinois extendedthe scope of the statute pursuant to section 2-209(c), to allow jurisdiction "on any otherbasis now or hereafter permitted by the Illinois Constitution and the Constitution of theUnited States." 735 ILCS 5/2-209(c) (West 2002). Therefore, in order to establishpersonal jurisdiction in Illinois over defendants, plaintiff must make a prima facieshowing that defendants' actions satisfied the "minimum contacts" required by the dueprocess analysis. For purposes of clarity, we address plaintiff's contentions in theorder in which they are raised in plaintiff's brief, beginning with jurisdiction based onIllinois' long-arm statute.

 

Illinois' Long-Arm Statute

Illinois' long-arm statute provides in relevant part:

"(a) Any person, whether or not a citizen or residentof this State, who in person or through an agent does any ofthe acts hereinafter enumerated, thereby submits suchperson, and, if an individual, his or her personalrepresentative, to the jurisdiction of the courts of this Stateas to any cause of action arising from the doing of any ofsuch acts:

* * *

(2) The commission of a tortious act within this State;

 

* * *

(7) The making or performance of any contract orpromise substantially connected with this State;

 

* * *

(11) The breach of any fiduciary duty within thisState[.]" 735 ILCS 5/2-209 (West 2002).

 

Section 2-209(a)(2) - Tortious Act

Plaintiff contends that defendants committed a tortious act within Illinois whenthey disseminated the merger materials, which included Household's false financialdata, to Illinois stockholders. Relying on FMC Corp. v. Varonos, 892 F.2d 1308, 1313(7th Cir. 1990), plaintiff argues that "mailings or telephone calls by a nonresident, whencoupled with an intent to affect Illinois interests, are a sufficient basis for jurisdiction." Plaintiff also relies on Janmark Inc. v. Reidy, 132 F.3d 1200, 1202-03 (7th Cir. 1997),which held that jurisdiction is proper in the state where the victim of the tort resides.

Defendants maintain that they did not commit a tortious act in Illinois becausethe mailings were not the type of purposeful or targeted contacts with Illinois requiredunder section 2-209(a)(2). Defendants argue that mailings can only confer jurisdictionif they were specifically targeted at and intended to affect an Illinois interest.

We find the case of Young v. Colgate-Palmolive Company, 790 F.2d 567 (7thCir. 1986) instructive. In Young, the plaintiff shareholder, an Illinois resident, filed aderivative action against the defendant, a Delaware corporation, and its board ofdirectors, none of whom were residents of Illinois. The plaintiff alleged the directorsbreached their fiduciary duty to the corporation by adopting a "poison pill" or anti-takeover plan. The directors filed a motion to dismiss for lack of personal jurisdiction,which the district court granted. The court of appeals affirmed, finding that the plaintiffhad failed to establish a prima facie case that the defendants had committed a tort inIllinois. The court explained that because the anti-takeover plan had been adopted inNew York, that is where the situs of the tort occurred, not in Illinois where the injuredplaintiff shareholder resided. The court stated, "[although] shareholders may havebeen injured by some effect on their interest in the corporation does not mean that thetort was committed wherever they reside." Young, 790 F.2d at 570. The court alsoclarified that an "injurious consequence" in Illinois was not the same as a tortious act inIllinois.

Additionally, where the injury is economic rather than physical or emotional, theplaintiff needs to show more than just that the "harm [was] felt" in Illinois. Real Colors,Inc. v. Patel, 974 F. Supp. 645, 649 (N.D. Ill. 1997), quoting Turnock v. Cope, 816 F.2d332, 335 (7th Cir. 1997). When there is an economic injury, the plaintiff must show "'anintent to affect an Illinois interest'." Real Colors, 974 F. Supp. at 649, quoting HeritageHouse Restaurants, Inc. v. Continental Funding Group, Inc., 906 F.2d 276, 282 (7thCir. 1990).

Here, plaintiff's two-count complaint alleged that defendants failed to conduct aproper due diligence investigation into Household's finances. Plaintiff argues thatdefendants committed a tortious act in Illinois by disseminating the merger materials,which contained fraudulent information, to an Illinois shareholder. The court in Youngheld that the situs of the tort is not where the injured shareholder might reside; rather, itis where the board took action. There is no indication that any of defendants' actionsrelating to the due diligence investigation occurred in Illinois. The merger materialswere not prepared in Illinois and defendants did not travel to Illinois as part of theirinvestigation. Although several defendants traveled to Illinois "in connection with themerger," their travel was not part of the due diligence investigation. The defendantstraveled to Illinois to attend social dinners and receptions and to meet with Household'sboard of directors. Additionally, plaintiff has not shown that by sending out the mergermaterials, defendants intended to affect an Illinois interest. Plaintiff cannot showanything other than that "the harm was felt in Illinois." Therefore, we are unable to findthat defendants committed a tortious act in Illinois.

Plaintiff relies on Janmark v. Reidy, 132 F.3d 1200 (7th Cir. 1997). In Janmark,the plaintiff, a corporation based in Illinois, sued the defendant, a corporation based inCalifornia, for interference with prospective economic advantage. The plaintiff allegedthat the defendant's threat to the plaintiff's customer, who was located in New Jersey,had caused the customer to cancel their order, which resulted in a loss of business tothe plaintiff. The court of appeals held that personal jurisdiction over the defendant inIllinois was proper pursuant to section 2-209(a)(2) of Illinois' long-arm statute, becausethe alleged economic injury, which was the loss of business to the plaintiff, occurredwhere the plaintiff corporation was based. Specifically, the court held, "the state inwhich the victim of a tort suffers the injury may entertain a suit against the accusedtortfeasor." Janmark, 132 F.3d at 1202.

We find plaintiff's reliance on Janmark misplaced. The defendant in Janmarkwas found to have actually committed a tort in the state where the plaintiff was located. Here, defendants' actions did not constitute a tortious act in Illinois; rather, theyamounted to an "injurious consequence" in Illinois, which, following the decision inYoung, is insufficient to establish jurisdiction.

 

Section 2-209(a)(7) - Made or Performed a Contract

Plaintiff contends that defendants made or performed a contract substantiallyconnected with Illinois because the merger agreement involved a corporationheadquartered in Illinois and the merged entity was also headquartered in Illinois. Plaintiff also maintains that because some defendants traveled to Illinois to negotiateand finalize the agreement, their travel conferred jurisdiction over all defendantsbecause each defendant was acting as each other's agent.

Defendants maintain that the merger agreement did not establish personaljurisdiction over them individually because entering into the merger agreement was anact by the corporation, not by the individual directors. Defendants argue that a contractentered into on behalf of a corporation does not establish jurisdiction over its officers ordirectors who are not parties to the agreement. They further argue that each defendantwas not acting as each other's agent.

Here, we find Mergenthaler Linotype Co. v. Leonard Storch Enterprises, Inc., 66Ill. App. 3d 789 (1978), and Young instructive. In Mergenthaler, this court discussedthe distinction between obtaining personal jurisdiction over a corporation and obtainingpersonal jurisdiction over one of the corporation's employees, which in Mergenthalerwas the corporation's president. This court found that "[t]he mere fact that acorporation by which a nonresident is employed, or in which he is a stockholder is itselfsubject to Illinois jurisdiction does not subject that non-resident to jurisdiction." Mergenthaler, 66 Ill. App. 3d at 797. The court also stated that "[a]ny transaction ofbusiness with Illinois residents was by the corporation and not by the employeeindividually." Mergenthaler, 66 Ill. App. 3d at 797. The court further found thatalthough the corporation's president had traveled to Illinois, because the cause ofaction did not arise out of those trips, he was not subject to personal jurisdiction inIllinois. Mergenthaler, 66 Ill. App. 3d at 797.

The Young court also noted that personal jurisdiction must be established by theacts of the individual employee and not by the acts of the corporation. Young, 790 F.2dat 570. The court further stated that "[d]ue process does not allow the directors of anational corporation to be sued by its shareholders anywhere the corporation happensto be present." Young, 790 F.2d at 572.

Here, defendants entered into the merger agreement on behalf of thecorporation, not on behalf of themselves individually. As in Mergenthaler and Young,personal jurisdiction must be established by the individual employee's acts and not theacts of the corporation. Further, plaintiff is unable to cite to any authority, and ourresearch has been unable to uncover any, that would support its proposition that eachdefendant was acting as one another's agent when they traveled to Illinois. Plaintiffhas failed to establish that the individual defendants made or performed a contractsubstantially connected with Illinois.

 

Section 2-209(a)(11) - Breach of Fiduciary Duty

Plaintiff contends that defendants breached their fiduciary duty by: (1) failing toensure the merger materials did not contain material misrepresentations of fact andfalse statements about Household's finances; (2) failing to conduct a reasonableinvestigation; and (3) failing to ensure the merger agreement was structured for thebenefit of plaintiff.

Defendants maintain they did not breach their fiduciary duty within Illinoisbecause the situs of plaintiff's claims for breach of fiduciary duty is where the boardheld its meetings and made its decisions, which were outside of Illinois. Defendantsargue that both Illinois and federal courts have repeatedly held that the situs of a claimfor breach of fiduciary duty is the place where the board took action, not anywhere theinjury is felt. Defendants further maintain that courts have held that a breach offiduciary duty claim cannot be filed anywhere any shareholder resides.

Here, as stated above, the directors of a national corporation cannot be sued byits shareholders anywhere the corporation happens to be present. Young, 790 F.2d at572. None of the acts that plaintiff alleges amounted to a breach of defendants'fiduciary duty occurred in Illinois. The merger materials were neither prepared inIllinois nor was the due diligence investigation conducted in Illinois. Plaintiff has failedto establish that defendants breached their fiduciary duty within Illinois.

 

Due Process

To satisfy federal due process requirements, a nonresident defendant must havesufficient minimum contacts with the forum state, so that the exercise of jurisdictiondoes not offend "'traditional notions of fair play and substantial justice.'" InternationalShoe Co. v. Washington, 326 U.S. 310, 316, 90 L. Ed. 95, 102, 66 S. Ct. 154, 158(1945), quoting Milliken v. Meyer, 311 U.S. 457, 463, 85 L. Ed. 278, 283, 61 S. Ct. 339,343 (1940). In determining whether the defendant had sufficient contacts with theforum state, a court will look to whether the defendant did some act by which itpurposely availed itself of the privilege of conducting activities in the forum state. Burger King Corp. v. Rudzewicz, 471 U.S. 462, 473, 85 L. Ed. 2d 528, 541, 105 S. Ct.2174, 2182 (1985). Where a defendant deliberately reaches out and createscontinuing obligations between himself and residents of the forum state, he has availedhimself of the privilege of conducting business there and invoked the protections andbenefits of the forum's law. Burger King, 471 U.S. at 475-76, 85 L. Ed. 2d at 542, 105S. Ct. at 2184. The "purposeful availment" requirement ensures that a defendant "willnot be haled into a jurisdiction solely as a result of 'random,' 'fortuitous,' or 'attenuated'contacts" or of the unilateral action of a third party. Burger King, 471 U.S. at 475, 85 L.Ed. 2d at 542, 105 S. Ct. at 218, quoting Keeton v. Hustler Magazine, Inc., 465 U.S.770, 774, 79 L. Ed. 2d 790, 797, 104 S. Ct. 1473, 1478 (1984).

In addition to establishing minimum contacts, federal due process requires thatthe action arise out of the defendant's contacts with the forum state and that it bereasonable to require the defendant to litigate in the forum state. Burger King, 471U.S. at 472-77, 85 L. Ed. 2d at 540-44, 105 S. Ct. at 2181-85. An action arises out ofthe defendant's contacts with the forum state where it "lie[s] in the wake of thecommercial activities by which the defendant submitted to the jurisdiction" of the forumstate. Heritage House Restaurants, Inc. v. Continental Funding Group, Inc., 906 F.2d276, 281 (7th Cir. 1990). As to the element of reasonableness, a defendant whoreaches out to create a relationship with a resident of the forum state must present acompelling case that jurisdiction is unreasonable. Burger King, 471 U.S. at 477, 85 L.Ed. 2d at 543-44, 105 S. Ct. at 2184-85.

Plaintiff contends personal jurisdiction is proper under the due process, minimumcontacts analysis because (1) defendants directed the allegedly fraudulent mergermaterials to Illinois stockholders; and (2) several defendants traveled to Illinois inconnection with the allegedly fraudulent conduct.

We find that defendants' acts were insufficient to confer personal jurisdictionunder the due process analysis. Mailing of the merger materials to stockholders andattending several social dinners were not the types of acts by which defendantspurposely availed themselves of the privileges of conducting business in Illinois. Thealleged fraud did not arise from the sending of the merger materials and defendants'visits to Illinois. The alleged fraud arose from the failure to discover the fraudulentfinances of Household. Additionally, due process does not allow the directors of anational corporation to be sued by its shareholders anywhere the corporation happensto be present. Young, 790 F.2d at 572. Further, Illinois has only a limited interest inadjudicating the dispute. Neither plaintiff nor defendants are residents of Illinois. Moreover, it is clear that Illinois law does not apply; rather, Delaware law applies.

Plaintiff relies on Daniel J. Hartwig Associates, Inc. v. Kanner, 913 F.2d 1213,1218 (7th Cir. 1990) (personal jurisdiction comported with due process because thedefendant solicited the plaintiff's Illinois business numerous times and created acontinuing relationship between himself and a resident of Illinois); Deluxe Ice CreamCo. v. R.C.H. Tool Corp. 726 F.2d 1209, 1216 (7th Cir. 1984) (personal jurisdictioncomported with due process because the defendant had an ongoing businessrelationship with an Illinois corporation); and Autotech Controls Corp. v. K.J. ElectricCorp., 256 Ill. App. 3d 721, 725-26 (1993) (due process requirements were metbecause the defendant purposefully directed its activities at Illinois residents, reachedout to create a continuing relationship with Illinois' citizens, and purposefully derivedbenefits from its activities with Illinois).

We find the above cases distinguishable. In each of them, personal jurisdictionwas proper based on the defendants' ongoing business relationships with Illinois, whichgave rise to the cause of action. Here, defendants' alleged fraudulent acts did not ariseout of the limited activities they conducted in Illinois.

The Circuit Court's Order

Lastly, plaintiff contends the circuit court's order contained factual and legalerrors. Plaintiff argues that the court erred in its factual findings when it found thatdefendants had never traveled to Illinois. Plaintiff points to a single sentence in thecourt's order that stated, "there is nothing to suggest that any of the defendantstraveled to Illinois in connection with this transaction." Plaintiff maintains that it is clearfrom the defendants' depositions that several of them traveled to Illinois "in connectionwith the merger."

Although defendants argue the issue is waived because plaintiff failed to raisethe issue in its complaint and before the trial court, we take a moment to address theissue because we find it does not affect our disposition. Although several defendantstraveled to Illinois, the trips were "social" in nature and none of the trips were part ofthe alleged fraudulent acts. As previously stated in this opinion, the fraudulent actsdefendants were alleged to have committed did not arise out of their travels to Illinois. Therefore, we find it unpersuasive that defendants' travel to Illinois was sufficient toconfer personal jurisdiction over them.

Plaintiff also argues the circuit court "legally" erred because it misapplied theconcept of a "fortuitous contact." Plaintiff points to the part of the court's order thatstates "[t]he mailing was to all shareholders one of whom were 'fortuitously' in Illinois." Plaintiff maintains that the court "borrowed the concept of a fortuitous contact" fromWorld-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 62 L. Ed 2d 490, 100 S. Ct.559 (1980) and "misapplied it" to support a distinction between a defendant that sendsmail to one individual and a defendant that sends mail to a group of people. Plaintiffmaintains that the merger materials mailed to all shareholders in Illinois were asufficient basis for establishing personal jurisdiction over each of the defendantsbecause the mailings were "purposeful" and "direct."

In World-Wide Volkswagen, the United States Supreme Court used the term"fortuitous circumstance" to explain why personal jurisdiction in Oklahoma was notproper over the defendants who were located in New York and who had sold a singleautomobile to New York residents, which happened to be involved in an accident inOklahoma. World-Wide Volkswagen 444 U.S. at 295, 62 L. Ed 2d at 500, 100 S. Ct. at566.

Here, we do not believe the circuit court's use of the word "fortuitous" was amisapplication of law. The court was merely indicating that the merger materials hadbeen mailed to all shareholders, some of whom happened to be located in Illinois. Further, as stated previously, the merger materials were not specifically targeted at orintended to affect an Illinois interest, which is not the type of purposeful contact that issufficient to confer jurisdiction over the individual directors.

Accordingly, we affirm the judgment of the circuit court.

Affirmed.

HOFFMAN and SOUTH, J.J. concur.