Danton v. Innovative Gaming Corp. of America

Citations: 246 F. Supp. 2d 64; 2003 U.S. Dist. LEXIS 859; 2003 WL 43335Docket: 02-201-P-H

Court: District Court, D. Maine; January 21, 2003; Federal District Court

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William M. Danton, the plaintiff, filed a lawsuit against Innovative Gaming Corporation of America (IGCA) and Xertain, Inc. in the United States District Court for the District of Maine. The court, presided over by District Judge Hornby, reviewed a motion by IGCA to dismiss the case for lack of personal jurisdiction, which was recommended by Magistrate Judge Cohen. The court found that the plaintiff had not objected to the recommendation, thereby waiving the right to de novo review and appeal. Consequently, the court adopted the recommended decision, granting IGCA's motion to dismiss.

The legal standard for dismissing a case based on lack of personal jurisdiction requires the plaintiff to demonstrate that the defendant has established minimum contacts with the forum state. A prima facie showing is sufficient when no evidentiary hearing is held. The facts relevant to the case include Danton's possession of a promissory note originally held by Fortune Entertainment Corporation, which loaned $910,000 to Xertain. A significant portion of this loan was wired from Fortune's Maine office. The note, with a remaining balance due of $540,118.17 as of June 12, 2002, was assigned to Danton on June 22, 2002. The document also notes IGCA's prior business activities and its decision to divest its gaming assets, leading to the formation of Xertain to facilitate the purchase of those assets.

Xertain and IGCA entered an asset purchase agreement on February 1, 2000, which Xertain extended at IGCA's request. From April to September 2000, Xertain supported IGCA with capital and resources to facilitate the sale of gaming assets and a merger with two corporations. Xertain became the exclusive distributor of IGCA gaming products in California and internationally, with revenue from this distributorship accounting for 26% of IGCA’s sales in Q3 2000. Xertain also made advance payments on purchase orders to help IGCA fulfill them. Capital provided to IGCA by Xertain was significantly sourced from a loan. Roland Thomas, CEO of Xertain, took on management roles at IGCA and facilitated customer engagement.

After Xertain declined further extensions of the asset purchase agreement, merger negotiations commenced, resulting in a letter of intent to merge on September 19, 2000, and a merger plan on October 12, 2000; however, the merger never formally closed. On September 19, 2000, Thomas became chairman and CEO of IGCA while retaining his roles at Xertain until late 2001. Over $700,000 was exchanged between the two companies during this period, and they shared facilities and resources. On October 17, 2001, IGCA began efforts to re-establish itself as an independent entity. Currently, Xertain is unable to repay the associated note.

IGCA argues that the plaintiff cannot establish personal jurisdiction over it, necessitating dismissal of the action. The determination of personal jurisdiction is governed by Maine's long-arm statute, which allows jurisdiction to the extent permitted by the U.S. Constitution's due process clause. The court assesses whether the exercise of jurisdiction violates due process, distinguishing between general jurisdiction (substantial, continuous activities unrelated to the action) and specific jurisdiction (activities related to the cause of action). The Maine statute only supports specific jurisdiction, which the plaintiff claims in his objection to IGCA's motion to dismiss.

The First Circuit establishes that the threshold for general personal jurisdiction is significantly higher than for specific personal jurisdiction, as noted in Noonan v. Winston Co. In this case, the court found insufficient minimum contacts to support general jurisdiction based on: an employee's visit to the forum state sixteen years prior to the allegations; the defendant's solicitation of business through calls and visits over the eighteen months leading to the complaint; and approximately $585,000 in orders from a potential customer. In Sandstrom v. ChemLawn Corp., the court similarly ruled that general jurisdiction could not be established through mere licensure, advertising, or limited litigation activities. The defendant had not conducted business in the forum state and had only advertised for positions outside it. The First Circuit also cited Seymour v. Parke, Davis, Co., which denied general jurisdiction despite the defendant employing salesmen in the forum state. In Glater, insufficient contacts for general jurisdiction included limited advertising and the presence of sales representatives providing information to potential customers.

In the current case, the plaintiff argues for general personal jurisdiction over IGCA by asserting that it is the alter ego of Xertain, allowing Xertain's contacts with Maine to be imputed to IGCA. Additionally, the plaintiff claims IGCA has had substantial and continuous contact with Maine through a Distributorship Agreement with Fortune, which had its headquarters in Biddeford, Maine, until June 2000. The plaintiff provides evidence of communication and interactions involving IGCA and Fortune, including the CEO's visit to Maine and the distributorship agreement for South and Central America.

The distributorship agreement led to the sale of approximately 30 gaming machines to Peru, for which IGCA was not compensated. IGCA contends that the relevant contacts belong to its subsidiary and cannot be attributed to IGCA, arguing that these contacts do not satisfy the criteria for general jurisdiction as established by First Circuit law. The court need not determine if general jurisdiction applies to IGCA based on its subsidiary's actions, since those actions do not meet constitutional standards for general personal jurisdiction under First Circuit precedent. 

Regarding the plaintiff's alter ego theory, IGCA maintains that it and its subsidiary, Xertain, were distinct entities when the complaint was filed. Personal jurisdiction typically relies on the defendant's contacts with the forum state at the time of the lawsuit, with due process requiring an examination of contacts at the time of the events leading to the dispute. The separation of IGCA and Xertain at the time of filing influences whether general jurisdiction can be established based on Xertain's activities in Maine, although it does not completely eliminate the possibility of such jurisdiction.

The plaintiff argues that general jurisdiction over Xertain can be inferred to IGCA, citing the joint CEO, Roland M. Thomas, who traveled to Maine for business discussions and facilitated a loan from a Maine bank. The plaintiff's affidavit details Thomas's frequent trips to Maine in 1999 and 2000 for discussions related to business alliances involving IGCA, Xertain, and Fortune. However, neither the complaint nor the affidavit specifies any business opportunities outside the investment and note related to this case. The court concludes that the plaintiff has not provided a sufficient factual basis to establish general personal jurisdiction over Xertain, rendering the alter ego argument unnecessary to address.

To establish specific jurisdiction, the First Circuit employs a three-part test: (1) the claim must arise from the defendant's activities in the forum state; (2) the defendant must have purposefully availed themselves of the privilege of conducting activities in the state, making their presence in the state's courts foreseeable; and (3) exercising jurisdiction must be reasonable according to the "Gestalt factors." These factors include the burden on the defendant, the forum state's interest in the case, the plaintiff's interest in effective relief, the judicial system's efficiency, and the common interests of sovereigns in promoting social policies. 

The burden initially lies with the plaintiff to show relatedness and minimum contacts, after which the defendant must demonstrate why jurisdiction should not be exercised based on the Gestalt factors. The plaintiff argues for specific personal jurisdiction over Xertain, supported by claims of shared resources, management, and operations between Xertain and IGCA. However, evidence presented indicates that the alleged alter ego relationship began after the relevant note was executed and ended before the lawsuit was initiated. 

IGCA contests the plaintiff's assertions, providing evidence that the two entities maintained separate financial records and legal counsel, and had not merged as anticipated. Federal courts recognize that personal jurisdiction may extend to an individual or corporation that is an alter ego or successor of another corporation that is subject to jurisdiction, even if the former would not normally qualify.

The legal principle discussed involves the concept of alter ego in determining personal jurisdiction over corporations, where the jurisdictional contacts of one entity are attributed to another if they are deemed the same entity. The Fifth Circuit's Patin case highlights that prior rulings primarily pertain to subsidiary, successor corporations, or corporate officers, without addressing two distinct corporations. The First Circuit has acknowledged that personal jurisdiction can extend to a corporate alter ego but typically within parent-subsidiary contexts. Under the alter ego doctrine, a non-resident parent corporation can be subject to jurisdiction in a forum state if it exerts sufficient control over its subsidiary, making them indistinguishable for jurisdictional purposes. Courts assess whether corporate formalities are maintained, including separate incorporation, governance, financial records, and operational independence.

In this instance, the plaintiff has only demonstrated that IGCA and Xertain shared resources for a limited period, which is insufficient to establish specific personal jurisdiction over IGCA. The plaintiff argues for the application of Nevada law based on the note's stipulation for its construction, but this is irrelevant to the jurisdictional question at hand. Jurisdiction in diversity cases relies on the law of the forum state, which in this case is Maine. Maine law does not provide guidance on acquiring jurisdiction via alter ego status, and existing First Circuit standards are likely to prevail. Even if Nevada law were applicable, the cases cited by the plaintiff do not pertain to jurisdiction and are factually distinguishable, such as the Polaris Industries case, which involved liability of a corporate officer rather than jurisdictional issues.

The court outlined three criteria for applying the alter ego doctrine to assess an officer's potential liability: 1) the corporation must be under the control of the individual claimed to be the alter ego; 2) there must be a significant unity of interest and ownership between the individual and the corporation; and 3) maintaining the corporate entity must not sanction fraud or facilitate injustice. In this case, the plaintiff's evidence failed to satisfy the second criterion. Furthermore, jurisdiction over the Innovative Gaming Corporation of America (IGCA) exists in Nevada, indicating that recognizing the corporate structure would not inherently lead to injustice. The court referenced previous cases, including *Bonanza Hotel Gift Shop, Inc. v. Bonanza No. 2* and *Lipshie v. Tracy Inv. Co.*, where similar criteria were applied. Ultimately, the court recommended granting IGCA's motion to dismiss, rendering the alternative motion on forum non conveniens unnecessary. A notice was issued regarding the process for parties to file objections to the magistrate judge's report within ten days, highlighting the consequences of failing to do so, including waiving the right to de novo review and appeal.