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Lake Treasure Holdings, Ltd. v. Foundry Hill GP LLC

Court of Chancery of Delaware, New Castle

November 21, 2013

Lake Treasure Holdings, Ltd.
v.
Foundry Hill GP LLC,

Submitted: November 19, 2013.

Dear Counsel:

On September 27, 2013, plaintiffs Foundry Hill Holdings, Ltd. and Kajeer Yar (collectively, "Plaintiffs"), individually and derivatively on behalf of nominal defendant Foundry Hill Holdings LP (the "Partnership"), filed a third amended complaint (the "Complaint"), against defendants Ulric Taylor, Christopher Klee, Progressive Packaging Corp., Milton R. Smith III, Three Zero Three Capital Partners, LLC ("Three Zero"), and Triple Line Trading, LLC ("Triple Line"). The Complaint alleges that the defendants participated in a conspiracy to (i) take ownership of the Partnership's intellectual property (the "Partnership IP"), (ii) misappropriate the Partnership IP, and (iii) retain all of the value of the misappropriated Partnership IP for themselves.

On October 28, 2013, defendants Klee, Progressive Packaging, Smith, and Three Zero moved to dismiss pursuant to Court of Chancery Rule 12(b)(2) for lack of personal jurisdiction. On November 4, Plaintiffs moved to conduct discovery and to defer any ruling on the motions to dismiss.

LEGAL ANALYSIS

On a motion to dismiss for lack of personal jurisdiction, "the plaintiff has the burden to show a basis for the Court's jurisdiction over the nonresident defendant." Sprint Nextel Corp. v. iPCS, Inc., 2008 WL 2737409, at *5 (Del. Ch. July 14, 2008) (collecting cases). "[P]leadings, affidavits, and any discovery of record" may be considered. Id. Absent an evidentiary hearing or jurisdictional discovery, "plaintiffs need only make a prima facie showing, in the allegations of the complaint, of personal jurisdiction and the record is construed in the light most favorable to the plaintiff."[1]

Determining "whether a Delaware court has jurisdiction over a nonresident defendant" involves a two-step analysis. Matthew v. Fläkt Woods Gp. SA, 56 A.3d 1023, 1027 (Del. 2012). "First, the court must determine whether Delaware's long arm statute, 10 Del. C. § 3104(c), is applicable." Id. "If so, the court must decide whether subjecting the nonresident defendant to jurisdiction would violate due process." Id. "[A] nonresident defendant must have sufficient 'minimum contacts with [the forum state] such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice.'" Id. (alteration in original) (quoting Int'l Shoe Co. v. Washington, 326 U.S. 310, 316 (1945)).

"Under § 3104(c)(1), a court may exercise personal jurisdiction over a nonresident who, 'in person or through an agent . . . [t]ransacts any business or performs any character of work or service in the State . . . .'" Id. at 1027 (alteration in original) (quoting 10 Del. C. § 3104(c)(1)). Section 3104 is a "single act" statute. Eudaily v. Harmon, 420 A.2d 1175, 1180 (Del. 1980). Therefore, a "single transaction is sufficient to confer jurisdiction where the claim is based on that transaction." Crescent/Mach I P'rs, L.P. v. Turner, 846 A.2d 963, 978 (Del. Ch. 2000) (internal quotation marks and footnote omitted). Making a corporate filing in the state of Delaware has been found sufficient to subject the filer to personal jurisdiction under § 3104(c)(1). See Matthew, 56 A.3d at 1027-28. Because § 3104(c)(1) confers specific, not general, jurisdiction, there must be a nexus between the Delaware filing and the conduct forming the basis of the suit. Compare Solae, LLC v. Hershey Can., Inc., 557 F.Supp.2d 452, 459-60 (D. Del. 2008) (finding filing of UCC financing statement insufficient under § 3104(c)(1) because plaintiff did not assert any nexus between that act and the conduct giving rise to plaintiff's claim), and Sanitec Indus., Inc. v. Sanitec Worldwide, Ltd., 376 F.Supp.2d 571, 574 (D. Del. 2005) (same), with In re Mobilactive Media, LLC, 2013 WL 297950, at *28 (Del. Ch. Jan. 25, 2013) (finding § 3104(c)(1) satisfied where defendant incorporated Delaware entities for the purpose of accomplishing one of the challenged acts), and Conn. Gen. Life Ins. Co. v. Pinkas, 2011 WL 5222796, at *2 (Del. Ch. Oct. 28, 2011) ("[A] single act of incorporation, if done as part of a wrongful scheme, will suffice to confer personal jurisdiction under § 3104(c)(1)." (citing Papendick v. Bosch, 410 A.2d 148 (Del. 1978))).

The Delaware Supreme Court has adopted the conspiracy theory of personal jurisdiction as one framework for analyzing the constitutional sufficiency of a nonresident's contacts with Delaware. Istituto Bancario Italiano SpA v. Hunter Eng'g Co., 449 A.2d 210, 225 (Del. 1982). "[A]ny act by a conspirator in furtherance of the conspiracy which takes place in the jurisdiction is attributable to the other conspirators." Id. at 222. "Consequently, if the purposeful act or acts of one conspirator are of a nature and quality that would subject the actor to the jurisdiction of the court, all of the conspirators are subject to the jurisdiction of the court." Id. In Istituto, the Delaware Supreme Court explained that, for purposes of due process, "a defendant who has so voluntarily participated in a conspiracy with knowledge of its acts in . . . the forum state can be said to have purposefully availed himself of the privilege of conducting activities in the forum state, thereby fairly invoking the benefits and burdens of its laws." Id. at 225. The "participation is a substantial contact with the jurisdiction of a nature and quality that it is reasonable and fair to require the defendant to come and defend an action there." Id.; see Hercules Inc. v. Leu Trust & Banking (Bah.) Ltd., 611 A.2d 476, 482 n.6 (Del. 1992) ("Although termed a 'theory' of jurisdiction, our use of the 'conspiracy theory' merely provides a framework with which to analyze a foreign defendant's contacts with Delaware. We do not view the conspiracy as an independent jurisdictional basis, nor do we simply attribute the acts of one conspirator to another for purposes of the due process analysis.").

The Istituto decision established a five-part test for determining personal jurisdiction under the conspiracy theory:

[A] conspirator who is absent from the forum state is subject to the jurisdiction of the court . . . if the plaintiff can make a factual showing that: (1) a conspiracy . . . existed; (2) the defendant was a member of that conspiracy; (3) a substantial act . . . in furtherance of the conspiracy occurred in the forum state; (4) the defendant knew or had reason to know of the act in the forum state . . .; and (5) the act in . . . the forum state was a direct and foreseeable result of the conduct in furtherance of the conspiracy.

Id. at 225. To allege a conspiracy, a pleading must assert the existence of "(1) two or more persons; (2) an object to be accomplished; (3) a meeting of the minds between or among such persons relating to the object or a course of action; (4) one or more unlawful acts; and (5) damages as a proximate result thereof." Donald J. Wolfe, Jr. & Michael A. Pittenger, Corporate and Commercial Practice in the Delaware Court of Chancery, § 3.04[b], at 3-83 (2012); accord Zirn v. VLI Corp., 1989 WL 79963, at *9 (Del. Ch. July 17, 1989).

The Complaint alleges that the defendants participated in a conspiracy to take ownership of the Partnership IP, misappropriate the Partnership IP, and retain all of the value of the misappropriation for themselves. In support of this theory, the Complaint alleges the following:

• Between January and June 2012, Taylor, Klee, and Progressive Packaging entered into a series of sham security agreements designed to allow Klee and Progressive Packaging to take ownership of the Partnership IP for an amount well below fair market value. As part of these maneuvers, Klee caused a UCC financing statement to be filed with the Delaware ...

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