Tenth Circuit holds that Canadian nationals who conspire to commit a breach of fiduciary duty against a Delaware corporation operating exclusively in Oklahoma are subject to personal jurisdiction in Oklahoma despite their lack of physical contact with the state. Canadian law firm alleged to have assisted the conspirators is not, however, subject to personal jurisdiction.
P. David Newsome, Jr., Liquidating Trustee of Mahalo Energy (USA), Inc. v. William Gallacher et al., 722 F.3d 1257 (10th Cir. 2013) [click for opinion]
A bankruptcy trustee, appointed to administer the legal claims of a Delaware energy corporation (Mahalo USA) operating exclusively in Oklahoma, sued seven Canadian citizens and a Canadian law firm for breach of fiduciary duty. The corporation was a wholly owned subsidiary of a Canadian corporation. The trustee alleged that Defendants, most of whom had overlapping roles as directors or officers of both companies, conspired to maximize their profits by shifting debt from the parent company to Mahalo, leading to its insolvency. The court had to determine whether Defendants could be subject to personal jurisdiction in Oklahoma.
An exercise of personal jurisdiction must comport with the Due Process clause of the Fourteenth Amendment, which requires a defendant to have minimum contacts with the forum state. The Tenth Circuit analyzed personal jurisdiction under the rubric of specific jurisdiction (rather than general jurisdiction) and applied the "purposeful direction" test, which considers whether the defendant expressly aimed its wrongful conduct at the forum state knowing the brunt of the injury would be felt there.
Defendants lacked the kind of contacts on which purposeful-direction analysis has traditionally focused: travel to the forum, communication with forum residents, and business dealings with forum residents. Still, the Tenth Circuit would not let the individual defendants off the hook. Under the facts alleged, the individual defendants were members of a conspiracy that took place entirely outside of Oklahoma "but with the conspirators' knowledge that the forum would bear the brunt of the conspiracy's harmful effects."
The court went on to analyze what it saw as the critical question: where did the alleged injury occur? A bankruptcy trustee has a duty to marshal the assets of the bankruptcy estate. This benefits the creditors—the more assets in the estate the more creditors get paid. But it does not give them standing to sue for breach of fiduciary duty. Under Delaware law, which the parties agreed governed the substantive claims, creditors normally lack standing to sue corporate directors and officers for breach of fiduciary duty.
Nevertheless, the Tenth Circuit found harm to the creditors relevant for purposes of personal-jurisdiction analysis. Due process does not require a court "to ignore where the injury was actually felt, even if those who felt it face some impediment to suit on account of substantive corporation law." Since Mahalo USA operated exclusively in Oklahoma and all of the creditors resided there, Oklahoma was "the focal point of any tort committed against the company." The court therefore found that the individual defendants had purposefully directed their misconduct at the forum state.
The court declined to apply the fiduciary-shield doctrine in favor of Defendants. That doctrine, which says that an employee's contacts with a state will not be imputed to the employee if he was acting solely on his corporation's behalf, is a matter of state law, not a matter of due process. And since Oklahoma has not adopted the doctrine, the Tenth Circuit found no reason to apply it.
The court dismissed the law firm Defendant. The suit alleged the firm abetted the individual defendants by performing legal services to facilitate one of the major debt-shifting transactions. The Tenth Circuit sided with the majority view, which is that an out-of-state lawyer working out-of-state on an out-state-matter does not purposefully avail himself of the client's home forum's laws