HMG/Courtland Properties, Inc. v. Gray

Citations: 729 A.2d 300; 1999 Del. Ch. LEXIS 16; 1999 WL 30979Docket: Civil Action 15789

Court: Court of Chancery of Delaware; January 13, 1999; Delaware; State Appellate Court

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HMG/Courtland Properties, Inc. filed a motion to amend its complaint to establish personal jurisdiction over defendants NAF Associates and James Fieber. The Fieber Defendants (Norman Fieber, NAF, and the Jim Fieber Trust) oppose this motion, asserting that the amended complaint fails to demonstrate a sufficient basis for jurisdiction and seek dismissal of HMG's claims against NAF under Chancery Court Rule 12(b)(2). The other defendants, Lee Gray, Martine Avenue Associates, and Betsy Gray Saffell, have not taken a stance on these motions.

HMG, a publicly held real estate investment trust formed in Delaware, is involved in commercial property investments and development. The case arises from two controversial real estate transactions involving former HMG directors Norman Fieber and Lee Gray. In 1986, HMG sought a joint venture partner for properties leased by Grossman's, Inc. Norman Fieber negotiated a joint venture interest in these properties, while Gray represented HMG. 

A key issue is the 'Wallingford Transaction,' where James Fieber purchased a two-thirds interest in a property from HMG, while Gray, who negotiated for HMG, had undisclosed ties to Martine, a partnership with an interest in the deal. The 'HMG-NAF Transaction' involves HMG selling its interest in additional properties to NAF, again with undisclosed interests from Martine. These undisclosed interests raise concerns of conflict and lack of transparency in the transactions.

HMG entered a joint venture with NAF named HMG-Fieber Associates, where HMG held a 65% interest and NAF 35%. HMG discovered Gray’s involvement in these transactions in 1996 during a tax-related inquiry about NAF's partners. Subsequently, HMG initiated legal action against Fieber and Gray, alleging breaches of fiduciary duties. The court previously addressed a personal jurisdiction issue in 1997, where a motion to dismiss by the Fieber Defendants was provisionally granted but allowed HMG to conduct discovery on jurisdictional facts. HMG has since completed its discovery and seeks to amend its complaint, removing the Jim Fieber Trust as a defendant and adding James Fieber, who acted as trustee for real purchasers. HMG argues that its amended complaint provides sufficient grounds for establishing jurisdiction over both NAF and James Fieber.

The court, referencing Chancery Court Rule 15(a), indicates a willingness to grant the amendment provided HMG presents adequate evidence for jurisdiction over NAF and James Fieber. The court will not assess factual conflicts but will evaluate if HMG's evidence, if unchallenged, supports personal jurisdiction. HMG claims jurisdiction over NAF based on two theories: NAF being the 'alter ego' of Norman Fieber, and NAF's regular engagement in business within Delaware under specific statutory provisions. The court emphasizes a two-step analysis for nonresident defendants, requiring both statutory basis and compliance with the Due Process Clause.

Jurisdiction over James Fieber is asserted by HMG based on his role as attorney and trustee for Norman Fieber and Lee Gray, claiming that their consent to jurisdiction under 10 Del. C. § 3114 extends to him. The determination of whether this implied consent can be attributed to others acting as an alter ego hinges on the interpretation of Delaware law. Vice Chancellor Balick previously ruled that NAF and Jim Fieber Trust’s motions to dismiss for lack of personal jurisdiction were granted, indicating that NAF could not be subjected to jurisdiction through Norman Fieber's consent under § 3114 but only through the long-arm statute, § 3104. Balick stayed the dismissal to allow HMG to demonstrate jurisdiction under § 3104, emphasizing that HMG had previously disavowed the alter ego argument and instead relied on the principle that jurisdiction over one general partner confers jurisdiction over the entire partnership. The law of the case doctrine mandates adherence to prior rulings, and the court expresses deference to Vice Chancellor Balick’s decision. Defendants Norman Fieber and Lee Gray are subject to personal jurisdiction under § 3114 due to their roles as nonresident directors, as the statute provides implied consent for civil actions involving their duties. The enactment of § 3114 followed the U.S. Supreme Court's guidance in Shaffer v. Heitner, which criticized previous jurisdictional methods and suggested legislative measures to ensure accountability of Delaware directors.

Delaware law requires directors of Delaware corporations to be aware that they may be subject to jurisdiction in claims related to their directorial duties. The constitutionality of 10 Del. C. § 3114 has been upheld by the Delaware Supreme Court in Armstrong v. Pomerance, which clarified that the statute applies only in cases where directors are necessary parties or are accused of breaching fiduciary duties to the corporation. The court emphasized that jurisdiction under § 3114 is limited to actions closely tied to Delaware law and where the state has a substantial interest in providing a legal forum.

Subsequent interpretations of § 3114 have reinforced its narrow application. For instance, in Hana Ranch, Inc. v. Lent, the court eliminated the statute's provision for jurisdiction over nonresident directors in all cases involving their corporation, finding it potentially unconstitutional. It established that personal jurisdiction over nonresident directors arises only from actions related to their official duties. HMG's lawsuit against directors Norman Fieber and Lee Gray aligns with this interpretation, as it alleges breaches of fiduciary obligations.

However, the court expressed skepticism about HMG's argument that consent for service could extend to individuals considered "alter egos" or agents of the directors. It noted that § 3114 does not indicate any legislative intent to permit service on such individuals. The statute is specifically designed to hold directors accountable for their official actions in light of the U.S. Supreme Court’s guidance on jurisdictional issues, and expanding its application beyond its current scope could pose legal risks. The court cautioned against inferring additional provisions that the legislature did not explicitly include.

Delaware's long-arm statute, 10 Del. C. 3104(c), facilitates jurisdiction over individuals engaging in forum-directed conduct either directly or through agents. The court emphasizes that it lacks the authority to modify the statute's language or to imply consent where none exists, particularly for defendants classified as alter egos or agents of nonresident directors. The principle of implied consent under 10 Del. C. 3114 relies on clear statutory notice for directors that accepting service in Delaware entails defending suits related to their corporate roles, a notice that does not extend to agents or alter egos.

The court argues that adding a theory of consent for alter egos is unnecessary, as Delaware's long-arm statute already effectively holds accountable those involved with Delaware directors in breaches of fiduciary duties. The long-arm statute provides clear notice to nonresidents about the potential for lawsuits arising from specific activities conducted in Delaware through agents. Furthermore, Delaware courts utilize three tests of personal jurisdiction under this statute, including assessing whether an out-of-state defendant conducted business through an agent (e.g., a subsidiary) and applying a conspiracy theory of jurisdiction to hold nonresidents accountable for conspiracies violating Delaware law.

The test for establishing jurisdiction does not rely on the legal fiction of implied consent but instead focuses on the conspirator's meaningful actions related to a conspiracy that produced effects in Delaware. This stringent test is designed to meet due process standards by ensuring jurisdiction is based on significant activities directed at the forum, which the conspirator knew or should have known. The conspiracy framework aligns with Delaware's long-arm statute (3104), as it helps determine if a person has engaged in acts through an agent, including co-conspirators. 

Additionally, the alter ego theory of personal jurisdiction is applied strictly, akin to the standards for piercing the corporate veil. Delaware courts evaluate whether an out-of-state defendant has no real separate identity from a Delaware defendant and whether acts in Delaware can be attributed to the out-of-state defendant, meeting long-arm statute and due process requirements. Relevant cases illustrate that courts have found sufficient grounds to impute jurisdiction based on this analysis, ensuring that only nonresidents with Delaware-directed behavior can be subject to suit in the state. The alter ego test aligns with the language of 3104, confirming that if the entity engaging in Delaware activities is merely an alter ego of an out-of-state defendant, it is appropriate to treat the alter ego as the defendant's agent, thus satisfying statutory criteria for service.

The agency, alter ego, and conspiracy theories of jurisdiction under Delaware law (specifically 3104) do not necessitate their application to 3114, thereby preventing judicial expansion of jurisdictional theories. Utilizing these theories alongside 3104 best serves Delaware's interest in holding aiders and abettors accountable while preserving the constitutionality of direct accountability for nonresident directors. The court acknowledges that the absence of the alter ego theory under 3114 may leave some fiduciary duty violators outside its jurisdiction, but this does not exempt them from liability under Delaware law; it merely restricts the venues for legal action. 

HMG’s motion regarding NAF is denied due to insufficient evidence to support that NAF is merely the alter ego of Norman Fieber. HMG recognizes NAF as a Connecticut general partnership, which can be sued in its own name, and Delaware law considers the entity's separate existence in such situations. No Connecticut authority was provided to support disregarding NAF's separate existence based on Fieber's dominance, and existing Connecticut and Delaware law regarding the alter ego theory does not favor HMG. HMG admits that some NAF partners are independent of Fieber, undermining the alter ego argument. Furthermore, Connecticut law does not require formalities for partnerships, and HMG's assertion about Fieber’s role in transactions does not legally merge NAF with Fieber. Delaware courts cautiously avoid attributing actions of subsidiaries to parent companies without a thorough examination of whether the corporate veil should be pierced or if the subsidiary functioned merely as an agent of the parent.

In Red Sail Easter Limited Partners, L.P. v. Radio City Music Hall Productions, Inc., the court evaluated the jurisdictional claims against NAF under Delaware's long-arm statute, 10 Del. C. 3104(c)(4). The court noted that NAF, an entity formed in Connecticut, was not indistinct from its partner Norman Fieber, as NAF was capitalized and operated independently. HMG's argument for jurisdiction based on NAF's alleged tortious actions was rejected because the necessary criteria under the statute—showing substantial and continuous business activity in Delaware—were not met. The court emphasized that merely having a corporation domiciled in Delaware does not establish jurisdiction based on the actions of its directors that occurred outside the state. HMG's reliance on the actions of Saffell, a Martine partner, was deemed insufficient, as her sporadic involvement did not demonstrate that NAF engaged in regular business activities or derived significant revenue from Delaware. Thus, the court concluded that HMG failed to establish a basis for personal jurisdiction over NAF.

HMG's assertion that Saffell's receipt of distributions from the HMG-NAF Transaction establishes jurisdiction is rejected. The court has previously determined that passive income receipt does not constitute sufficient contacts for jurisdiction. The involvement of Auburn Limited Partnership, a general partner of NAF with a Delaware corporation as its general partner, is deemed insufficient to demonstrate any significant activity in Delaware. The mere presence of a Delaware corporation as a general partner does not satisfy the jurisdictional requirements. Consequently, HMG's motion to amend the complaint is denied due to insufficient legal grounds to establish personal jurisdiction over NAF or James Fieber, leading to the granting of the Fieber Defendants' motion to dismiss. The jurisdictional question regarding Martine is considered moot since it was dissolved prior to the lawsuit, and jurisdiction remains over its successors. HMG has not adequately argued James Fieber's service under Delaware law and has distanced itself from the conspiracy theory of personal jurisdiction. The court emphasizes the importance of Delaware's interest in enforcing its corporation laws and the notification provided to directors regarding potential jurisdiction.

HMG has not provided precedent from Delaware courts utilizing the alter ego theory to establish implied consent for personal jurisdiction over a nonresident director in relation to an out-of-state entity claimed to be that director's alter ego. Although in *Carlton Investments v. TLC Beatrice Int'l Holdings, Inc.*, the court did not affirmatively apply this theory to establish jurisdiction over TLC Beatrice's French subsidiaries, focusing instead on their relationship with the Delaware corporation. There is skepticism regarding whether an alter ego should reasonably expect to be subject to jurisdiction based solely on the fictional consent attributed to its principal under Delaware law (Section 3114), which only subjects directors to jurisdiction for claims related to their official capacity. 

Delaware's long-arm statute is robust, designed to align with federal Due Process requirements while effectively enabling the state to adjudicate significant corporate transactions, like mergers, that require actions within Delaware. The statute supports asserting jurisdiction over nonresidents based on their involvement in activities that are critical to such transactions. HMG acknowledged it could secure personal jurisdiction over defendants in Connecticut but opted to file in Delaware to leverage the state's legal framework for its claims.

The issues regarding the execution of the NAF formal partnership agreement and Norman Fieber's loans from NAF are deemed irrelevant to NAF's standing, as they pertain solely to internal partner disputes. The criteria for piercing the corporate veil do not apply to partnerships, particularly since NAF is capitalized by multiple partners, all benefiting from the profits alongside Fieber. HMG's claim that NAF is subject to personal jurisdiction under 10 Del. C. § 3104(c)(1) lacks merit, as HMG fails to demonstrate any work or service by NAF in Delaware that caused the alleged harm. The HMG-NAF Transaction was negotiated and executed outside Delaware, which further undermines HMG's position. Additionally, a letter from Saffell to James Fieber, cited by HMG as significant evidence, is irrelevant to NAF since it pertains to the HMG-Fieber transaction and does not fulfill the criteria of § 3104(c)(4). Saffell's status as a Delaware resident was established only after the letter was sent, and her involvement with NAF did not begin until after the relevant events. As the requirements for personal jurisdiction are not met, the court does not need to address constitutional issues, but notes the problematic nature of HMG's assertion that NAF should have anticipated litigation in Delaware based solely on contracts executed outside the state. Contracts with a resident do not, by themselves, confer personal jurisdiction over a nonresident for actions arising from those contracts.