Opinion
1:98cv274-T.
May 26, 1999
MEMORANDUM AND RECOMMENDATION
THIS MATTER is before the court upon plaintiffs' Motion to Remand, the motion of certain of the defendants to dismiss, and the motion of all defendants to transfer venue. Having conducted a hearing and carefully considered the motions and reviewed the pleadings, supplemental materials submitted by plaintiffs immediately after the hearing, and defendants' response to that submission, the undersigned enters the following findings, conclusions, and recommendation.
FINDINGS AND CONCLUSIONS
I. Background and Procedural History
This action was commenced in the North Carolina General Court of Justice, Superior Court Division, for Buncombe County. Plaintiffs contended in their complaint that defendants had committed state-law torts. Specifically, they claimed that defendants had violated the North Carolina Securities Act, committed fraud-misrepresentation, and engaged in negligent misrepresentations. Defendants timely removed this action to federal court, alleging diversity of citizenship and an amount in controversy exceeding $75,000. Plaintiffs have timely moved for remand, contending that the presence of plaintiff Sterling Trust Company, a Texas corporation, defeats diversity jurisdiction, inasmuch as defendants are also citizens of the State of Texas. Plaintiffs argue that "Sterling Trust, Company, a Texas Corporation and Trustee for IRA Account 34287 of Gregory Patrick Justus" is more than a nominal party and is a Texas corporation, thereby defeating the diversity asserted by defendants. "Certain defendants" have moved to dismiss or transfer venue to Texas, contending that this court lacks personal jurisdiction over them based on a lack of minimum contacts. The contacts of the remaining, nonmoving defendant, they argue, cannot be attributed to them under an agency theory. In the alternative to dismissal, all defendants have requested transfer of the matter to the United States District Court for the Northern District of Texas. Plaintiffs have timely responded to motions of the "certain defendants," who have timely replied. At the hearing, counsel argued the Motion to Remand, but did not argue the motions to dismiss or transfer venue; however, those motions were fully briefed and required no further argument.
II. Plaintiffs' Motion to Remand
A. Analysis Under Plaintiffs' Theory
Plaintiffs argue that in order to decide whether this action was properly removed, the court must look to state law to determine whether the non-diverse plaintiff has a cause of action under that law. In order to ascertain whether the removal of this action was proper, the court must determine whether plaintiff Sterling Trust Company ("Sterling") has a cause of action against any of the defendants. Chevron U.S.A., Inc. v. Aguillard, 496 F. Supp. 1038, 1041 (M.D. La. 1980). If no such claim can be stated, then the presence of that party cannot defeat diversity jurisdiction because such party would be deemed "fraudulently joined"id., which is a term of art in civil procedure and not a term implicating any wrongdoing. In making such determination, this court must look to state law to ascertain whether the non-diverse party would be granted a cause of action under substantive state law Id.; West Virginia v. Morgan Stanley Co., Inc., 747 F. Supp. 332, 337 (S.D.W.V. 1990).
When this court looks to state law and the contract governing the trust relationship, it is clear that Sterling can assert no claim on behalf of the other plaintiffs or itself. As stated at the hearing, it is merely the holding device for assets held in trust for plaintiff — specifically, a self-directed individual retirement account ("IRA"). Throughout the complaint, the only allegations of misrepresentation or fraud have to do with those purportedly perpetrated by defendants on Mr. Justus. For example, at paragraph 33(a)(2) of the Complaint, plaintiffs allege that "Smallwood represented, and Mr. and Ms. Justus reasonably believed, that the seller of said stock was actually Moorhead." As to Sterling, allegations are limited to the following: "Sterling Trust, as trustee of the Mr. Justus' IRA, purchased 11,268 shares of AES stock for $49,995.25." Complaint, ¶ 33(c).
To state a cause of action for fraud under North Carolina law, a plaintiff must allege that (1) a defendant made a false representation or concealed a material fact (2) that was reasonably calculated to deceive, (3) made with the intent to deceive, (4) did deceive, and (5) resulted in damage. Helms v. Holland, 124 N.C. App. 629, 635 (1996). Plaintiff Sterling has not and cannot allege that defendants made a false representation to it or concealed a material fact from it.
Finally, to the extent that Sterling may have derived any rights from Mr. Justus, those rights are governed by the language of the trust agreement. The agreement is unequivocal that the IRA is self-directed and that any suit must be brought by the account holder. In perhaps the most informative document in the record, Exhibit A to Defendants' Opposition, the Vice President of Sterling states in a letter to one defendant that "as of this date [December 3, 1998] Sterling Trust Company has not issued or granted our consent to any litigation regarding Mr. Justus' IRA account, nor have we been contacted to do so. . . . An account holder is not permitted to sue on our behalf without our written consent to litigation." From to pleadings now before the court, the undersigned cannot be sure that Sterling has given its consent to this action. Rather, it appears that plaintiffs are relying upon an inference of authorization under North Carolina law in the context of real property foreclosure brought in the name of a trustee. Inasmuch as Sterling's presence in this action is pivotal to the jurisdictional issue, and due to the fact that such it could be exposed to the payment of defendants' costs if plaintiffs are not successful in prosecuting this action, it is imperative that the court know whether Sterling has been joined properly as a plaintiff. If it has, plaintiffs, during the period for objection, shall provide the court with a letter from Sterling ratifying the filing of this action.
Under North Carolina law, Sterling does not state a cause of action. If it has not consented to be a party to this action, its misjoinder would be further reason to deny remand for lack of subject-matter jurisdiction.
B. Analysis Under Defendants' Theory
Trustees who possess certain "customary powers to hold, manage and dispose of assets" are considered legitimate parties for diversity purposes. Navarro Savings Assoc. v. Lee, 446 U.S. 458, 464 (1980). Both the defendants and the plaintiffs point to the trust agreement in support of their respective arguments.
Applying Navarro to the facts of this case, it is clear that Sterling had the power to hold assets under the trust agreement, but it did not have authority to either manage or dispose of those assets, inasmuch as the IRA was self-directed. Plaintiffs point to a residual provision of the agreement which provides that Sterling is to deposit dividends or interest in a money market account until instructed by the trust's grantor as to how he wants those funds invested. That, however, is neither management nor disposition because the instruction to deposit dividends and interest into a money market account is that of the grantor, and the transfer of proceeds to such an account can only be described as administrative. Finally, the fiduciary duty to keep the assets safe is encompassed in the aspect of "holding" and cannot be used to show "management" or "disposition." The trust does not delegate any discretion to the trustee, and no judgment is exercised where all duties are carried out in accordance with standing orders contained in the trust instrument. A "trust agreement" could be inferred as to almost any account, even a simple passbook savings account at a local thrift. The agreement in this case is what it reports to be — a self-directed IRA account. The citizenship of Sterling cannot be a basis for defeating the diversity jurisdiction of this court under Navarro. Finding that Sterling is, at best, a nominal party to this controversy, the undersigned will recommend that plaintiffs' Motion to Remand be denied.
III. Certain Defendants' Motion to Dismiss or Transfer
With the exception of Defendant Smallwood, all defendants have moved to dismiss this action based on a lack of personal jurisdiction over them. All of the defendants, including Smallwood, have requested that this case be transferred to Texas. With plaintiffs' Motion to Remand and defendants' respective motions to dismiss and transfer, it appears that no one wants to litigate in this forum. Based upon minimum contacts and the long-arm statute, however, the undersigned must find that this is the appropriate forum in which to litigate this action.
A. Motion to Dismiss for Lack of Personal Jurisdiction
1. In Personam Jurisdiction
At the constitutional level, whether to exercise jurisdiction over a defendant is a question of fairness. International Shoe Co. v. Washington, 326 U.S. 310, 317-20 (1945). Determining what is fair, however, requires review of the quantity and quality of the particular defendant's contacts with the forum state. While an individual defendant's contacts with the forum state are readily discernable, special care is taken to determine what constitutes the contacts of a corporation:
[I]f the . . . corporation carries on, in that state, other continuous and systematic corporate activities . . . those activities are enough to make it fair and reasonable to subject the corporation to proceedings in personam in that state, at least insofar as the proceedings in personam seek to enforce causes of action relating to those very activities or to other activities of the corporation within the state.Perkins v. Benquet Mining Co., 342 U.S. 437, 445-46 (1952) Constitutional concerns only arise where jurisdiction is allowed pursuant to a state's long-arm statute. As the Court of Appeals for the Fourth Circuit held:
[W]hen evaluating the propriety of jurisdiction obtained pursuant to a long-arm statute, a two-step analysis is normally required. First, we must determine whether the statutory language applies to the defendant; second, if the statutory language applies, we must determine whether the statutory assertation of jurisdiction is consistent with the due process clause of the Constitution.English Smith v. Metzger, ____ F.2d ____, No. 89-1418, at 4 (4th Cir., April 17, 1990) (citation omitted).
In considering the motion of certain defendants to dismiss, analysis begins with that two-step approach furnished by the circuit court. The North Carolina Supreme Court has held that the state's jurisdictional statute applies to defendants who meet the minimal-contacts requirement of International Shoe Co. v. Washington, supra. See Dillon v. Numismatic Funding Corp., 291 N.C. 674 (1977. See also Western Steer-Mom Pops v. FMT Invs., Inc., 578 F. Supp. 260, 264 (W.D.N.C. 1984). The two-pronged approach approved by the circuit in applying the Virginia statute, "collapses into the question of whether (the Defendants have) the minimum contacts with North Carolina." Fieldcrest Mills, Inc. v. Mohasco Corp., 442 F. Supp. 424, 426 (M.D.N.C. 1977).
On the corporate level, in determining what contacts suffice, the court may consider contacts which constitute "continuous and systematic corporate activities," or other activities, which relate to the causes of action plaintiffs seek to enforce. Perkins v. Benquet Mining Co., supra. Where the corporation has had only limited contacts with the forum state, jurisdiction has not been exercised when those contacts were not "purposeful, systematic or significant enough to warrant the exercise of jurisdiction." Wolf v. Richmond Co. Hosp. Auth., 745 F.2d 904 (4th Cir.), cert. denied, 474 U.S. 826 (1984).
2. North Carolina's Long-Arm Statute
There are five factors used in determing whether the long-arm statute and minimum contacts have been satisfied:
(1) quantity of the contacts;
(2) nature and quality of the contacts;
(3) source and connection of the cause of action to the contacts;
(4) interest of the forum state; and
(5) convenience.
Western Steer-Mom Pops v. FMT Invs., Inc., supra, at 264; see Fieldcrest Mills, Inc. v. Mohasco Corp., supra, at 427; see also N.C. Gen. Stat. § 1-75.4(5) (North Carolina long-arm statute). The burden is on plaintiffs to establish that the long-arm statute provides for jurisdiction over these defendants. Marion v. Long, 72 N.C. App. 585,cert. denied, 313 N.C. 604 (1985). Therefore, the materials and arguments submitted by plaintiffs will be reviewed in light of the five considerations found in Western Steer-Mom Pops v. FMT Invs., Inc., supra, seriatim.
(a) Quantity of Contacts
Plaintiffs have submitted two pages outlining the contacts of the moving defendants with the State of North Carolina. According to plaintiffs, Advanced Envirotech Systems, Inc., ("AES") had the following contact with North Carolina:
Plaintiffs, inadvertently, also submitted the contacts of Defendant Smallwood, who did not join in this particular motion. Those contacts have not been considered.
(a) In 1994, AES filed an exemption notice with the Securities Division of the North Carolina Secretary of State, signifying its intent to sell its unregistered securities in this state.
(b) In 1997, it filed a Second Offering Notice with the Secretary of State.
(c) In 1997, it filed a Uniform Consent to Service with Secretary of State, appointing him as the corporation's agent for service of process in the State of North Carolina. That document specifically provided consent to venue and jurisdiction in North Carolina in connection with the sale of securities or violation of state law; and
(d) By 1997, it had sold almost $300,000 worth of unregistered securities within the State of North Carolina.
As to Cambridge Financial Corporation ("CFC"), the following contacts have been alleged:
(a) In 1995, defendants Moorhead and Smallwood registered with the state as securities salesmen for CFC;
(b) In 1997, CFC was listed as the exclusive placement agent for the unregistered securities offered by AES in North Carolina;
(c) By 1997, CFC had brokered the sale of $300,000 worth of unregistered securities within this state.
As to Defendant Fleeger, it is alleged that he was president of AES, signed the consent to service, was registered with the state as a securities salesman, and sold approximately $100,000 worth of personally owned securities in North Carolina. Similarly, plaintiffs allege that Defendant Moorhead was the president of CFC; was a registered securities salesman in North Carolina; and, through his company, sold nearly $300,000 worth of securities in the state. As to Defendant Rockett, plaintiffs contend that he, as Chief Financial Officer of AES failed to discharge his duty to potential shareholders to disclose information concerning the financial well being of AES upon request and, thereby, facilitated and engaged in the alleged conspiracy in violation of North Carolina securities laws. It is plaintiffs' contention that without Rockett's consent and participation through inaction, the fraud upon them in North Carolina could never have been perpetrated.
The North Carolina long-arm statute specifically requires "substantial activity" within the state. N.C. Gen. Stat. § 1-75.4(d) (1989). It is clear to the undersigned that the quantity of contacts goes well beyond the threshold of "substantial activity."
(b) Nature and Quality of the Contacts
Corporate contacts with a state should be viewed together, not in isolation. Hirschkop Grad. P.C. v. Robinson, 757 F.2d 1499, 1503 (4th Cir. 1985). Viewed together, each of the contacts relates to the other, yielding "systematic" contacts, and each also directly relates to the causes of action asserted. The nature and quality of those contacts appear to favor highly a finding of jurisdiction.
(c) Source and Connection of the Action to the Contacts
The nexus between the contacts and the source of action is direct and unbroken.
(d) Interest of the Forum State
The intent of the North Carolina long-arm statute is to assert in-personam jurisdiction to the full extent permitted by the Due Process Clause of the United States Constitution. Kaplan School Supply Corp. v. Henry Wurst, Inc., 56 N.C. App. 567 cert denied, 306 N.C. 385 (1982). There is a mandate that the North Carolina long-arm statute be given liberal construction, thereby favoring the finding of personal jurisdiction. F.D.I.C. v. Kerr, 637 F. Supp. 828 (W.D.N.C. 1986). As exhibited in the long-arm statute, North Carolina has substantial interest in the execution of contracts within this state, promises of services to be rendered in this state, solicitation of business within the state, and goods or intellectual property being licensed or sold to corporate residents of the state. See N.C. Gen. Stat. §§ 1-75.4(5)(a), et seq. The undersigned finds that the interest of the State of North Carolina in protecting its citizens in the solicitation of the sale and purchase of securities is keen, inasmuch as the state has enacted the North Carolina Securities Act, Chapter 78A-1 of the North Carolina General Statutes, and requires those to whom it extends the privilege of selling securities the obligation to defend their activities in a North Carolina forum.
(e) Convenience
Whether the travel required in this case will be by or on behalf of defendants from Texas to North Carolina, or by or on behalf of plaintiffs from North Carolina to Texas, the court is aware of the considerable distance involved. This district's requirement of local counsel could eliminate much of the inconvenience of travel on behalf of defendants.
3. Minimum Contacts
Plaintiffs having satisfied the requirements of North Carolina's long-arm statute, the court's focus shifts to whether exercise of such jurisdiction would "offend `traditional notions of fair play and substantial justice.'" International Shoe Co. v. Washington, 326 U.S. 310, 316 (1945) (quoting Milliken v. Meyer, 311 U.S. 457, 463 (1940)). The question is not whether the contacts predominate, but whether "enough minimum contacts exist that the district court's assumption of specific jurisdiction satisfied due process." English Smith v. Metzger, supra, at 7.
The "fair warning" requirement is satisfied if the defendant has "purposefully directed" his activities at residents of the forum, and the litigation results from the alleged injuries that "arise out of or relate to" those activities.Burger King Corp. v. Rudzewicz, 471 U.S. 462, 472 (1985).
As discussed supra, the alleged injuries complained of by plaintiffs directly arose from the activities of defendants in this state. Plaintiffs have presented evidence that defendants made contact with plaintiffs in this state, placed numerous calls to this state, posted letters addressed to residents of this state, shipped documents of title to this state, and allegedly promised financial gain to persons in this state. When considered alongside other materials presented, the conclusion that North Carolina's long-arm statute reaches defendants and that traditional notions of fair play are not offended is unavoidable.
Defendants appear to have purposely directed activities towards residents of the State of North Carolina. The contacts were sufficient to have led defendants to "reasonably anticipate being haled into court" in North Carolina. World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 297 (1980). Therefore, the undersigned determines that this court has jurisdiction over the defendants and that the exercise of such jurisdiction would not offend traditional notions of fair play or substantial justice.
B. Motion to Transfer Venue
In Jim Crockett Promotions, Inc. v. Action Media Group, Inc., 751 F. Supp. 93 (W.D.N.C. 1990), this court established a litany of considerations applicable to any motion to transfer. In order to determine whether transfer is proper, a balance must be struck between the competing interests. Unless the balance is tipped strongly in favor of the moving party, Collins v. Straight, Inc., 748 F.2d 916, 921 (4th Cir. 1984), plaintiffs' choice of forum should not be disturbed. Upon a motion to transfer, the moving party carries the burden, 1A Moore's Federal Practice, paragraph 0.345[5] at 4360 (Matthew Bender 1990); and the burden is heavy, Datasouth Computer Corp. v. Three Dimensional Technologies, Inc., 719 F. Supp. 446, 451 (W.D.N.C. 1989).
A defendant carries a particularly heavy burden when it moves pursuant to [Sectionl 1404(a) to transfer an action from a district where venue is proper. As this court has noted previously, it is "black letter law," that "plaintiff's choice of a proper forum is a paramount consideration in any determination of a transfer request, and that choice . . . should not be lightly disturbed."Phillips v. S. Gumpert Co., Inc., 627 F. Supp. 725, 726-27 (W.D.N.C. 1986) (citations omitted) (quoting Western Steer Mom `N' Pop's v. FMT Invs., Inc., supra, at 265. The relevant considerations are, as follows:
1. The plaintiff's initial choice of forum;
2. The residence of the parties;
3. The relative ease of access of proof;
4. The availability of compulsory process for attendance of witnesses and the costs of obtaining attendance of willing witnesses;
5. The possibility of a view;
6. The enforceability of a judgment, if obtained;
7. The relative advantages and obstacles to a fair trial;
8. Other practical problems that make a trial easy, expeditious, and inexpensive;
9. The administrative difficulties of court congestion;
10. The interest in having localized controversies settled at home and the appropriateness in having the trial of a diversity case in a forum that is at home with the state law that must govern the action; and
11. The avoidance of unnecessary problems with conflict of laws.Id. at 7-8. Courts should make both a quantitative and a qualitative analysis of the factors. McDevitt Street Co. v. Fidelity and Deposit Co., 737 F. Supp. 351, 354 (W.D.N.C. 1990).
Having considered these factors both quantitatively and qualitatively, the court finds that a transfer of venue would do nothing but shift the travel burden to plaintiffs. Here, it is fundamentally fair that corporations and their agents who sought out and sold securities within the State of North Carolina should be required to return to North Carolina to defend their activities in front of a court familiar with the laws governing those activities. Further, these defendants or the corporations under whose umbrellas they acted filed with the Secretary of State consents to both jurisdiction and venue in North Carolina. It is simply a price of doing business in this state — a fact of which defendants were apparently well aware at the time they did business with citizens of North Carolina.
RECOMMENDATION
IT IS, THEREFORE, RESPECTFULLY RECOMMENDED that
(1) plaintiffs' Motion to Remand be DENIED;
(2) the motion of certain defendants' to dismiss be DENIED; and
(3) the motion of all defendants' to transfer venue be DENIED.
During the period of objection, plaintiffs shall file with the court a letter from Sterling Trust Company confirming its desire, if it is its desire, to be a party to this action.
The parties are hereby advised that, pursuant to 28, United States Code, Section 636(b)(1)(C), written objections to the findings of fact, conclusions of law, and recommendation contained herein must be filed within ten (10) days of service of same. Failure to file objections to this Memorandum and Recommendation with the district court will preclude the parties from raising such objections on appeal. Thomas v. Arn, 474 U.S. 140 (1985), reh'g denied, 474 U.S. 1111 (1986); United States v. Schronce, 727 F.2d 91 (4th Cir.), cert. denied, 467 U.S. 1208 (1984).
This Memorandum and Recommendation is entered in response to plaintiff's Motion to Remand (#10), the motion of certain defendants to dismiss (#3), and the motion of all defendants to transfer venue (#3).