Kaufman and Hays, Circuit Judges, and Timbers, District Judge.*fn* Timbers, District Judge (concurring in part and dissenting in part).
The question before us on this appeal is akin to those repeatedly presented to federal and state courts ever since the Supreme Court's decision in International Shoe Co. v. State of Washington, 326 U.S. 310, 66 S. Ct. 154, 90 L. Ed. 95 (1945), opened the door to continually widening assertions of state-court jurisdiction by means of "long-arm" service of process statutes. On this appeal, we are asked to determine whether the deceased Isidor J. Klein "transacted" sufficient business within New York to subject the executor of his estate to the jurisdiction of the New York courts, and, by virtue of the incorporative provisions of Federal Rules of Civil Procedure 4(e),*fn1 4(f) and 4(i), to the jurisdiction of the District Court for the Southern District of New York.
The government brought this action to recover income taxes, interest and penalties aggregating $9,862,053.34, allegedly owed by Klein for the years 1944, 1945 and 1946. Pursuant to Section 302,*fn2 of New York's Civil Practice Law and Rules, service was made upon Klein's executor,*fn3 the Montreal Trust Company ("Montreal"), by personal delivery of process in Canada. Challenging this method of invoking the jurisdiction of the District Court, Montreal asserted that service upon it was unauthorized under § 302 because Klein's corporate activities did not amount to the personal transaction of business by him in this state. After a preliminary hearing, Judge McLean accepted this contention and ruled that the District Court did not have jurisdiction to hear the merits of the government's claim, finding that Klein did not transact business in New York within the meaning of § 302. On the government's motion, we granted leave to appeal pursuant to 28 U.S.C. § 1292(b). We reverse and remand because, at this juncture of the case, we conclude that the facts as found by the District Judge demonstrate that New York had sufficient contacts with the transactions which are the subject matter of this case to justify asserting its jurisdiction.
The facts upon which this appeal is based are susceptible of brief exposition. During the relevant taxable years, Klein was the managing director of United Distillers Ltd. ("United"), a publicly owned Canadian company which operated a distillery at Vancouver, B.C. United's function in the corporate hierarchy was to produce whiskey for its subsidiaries, John Dunbar & Company, Ltd. ("Dunbar") and Duncan Harwood & Company, Ltd. ("Harwood"). The "exclusive agent for the entire world" for the distribution of Harwood and Dunbar whiskey was Agencias Distilladores, S.A. ("Agencias"), a Cuban corporation with which Klein's brother-in-law, H.H. Klein, was connected in some undetermined capacity.
Judge McLean's opinion discloses that in April 1944, R. C. Williams & Company, Inc. ("Williams"), a New York corporation, and Agencias entered into a contract by which Williams became the exclusive sub-agent for the distribution of Harwood whiskey in the United States. Under this contract, Williams purchased substantial quantities of Harwood whiskey from Agencias at $19.05 per case and sold the whiskey throughout the country. Since Agencias purchased Harwood whiskey at $8.05 per case, it made a profit of $11.00 on each sale. The District Court made no finding as to the manner in which Agencias distributed this profit, but did determine that as a condition to the making of the contract with Agencias,
"* * * Klein insisted that Williams * * * agree to put on its payroll as salesmen various relatives and friends of Klein. Williams did so and paid them a 'commission' of 60 cents per case of whiskey sold."
Moreover, Judge McLean's opinion reveals that substantial amounts were paid to these designees of Klein and that "they did little or nothing to earn them." And we discover from an examination of the hearing transcript, that Klein, on several occasions, wrote to Irving A. Koerner, Williams' liquor division manager in New York, instructing him as to the method of distributing the 60 cents per case commission and giving him the names of the recipients of these payments. Such commissions, ultimately, were paid by checks drawn on Williams' account at the Chase National Bank in New York City.
The District Judge found, furthermore, that in 1944 and 1945, Murray A. Schutz, operating in San Francisco as Distillers Distributing Company, commenced purchasing Dunbar whiskey from United. Schutz purchased this whiskey for shipment to American military posts in the Far East and Europe. As a pre-condition to the contract between Schutz and United, Judge McLean found that Klein
"insisted that Schutz agree to give two-thirds of Schutz's profits to Samuel Sager of New York City, Klein's brother-in-law."
In this connection, the transcript discloses that Schutz visited Klein in Vancouver, Canada where negotiations were commenced. At Klein's request, Schutz then went to New York City for further negotiations and the drafting and execution of a contract giving Sager two-thirds of Schutz's profits.
On these facts, the government contends that the funds earned by Williams and Schutz and paid as "commissions" to Klein's relatives and friends were properly the income of Klein for tax purposes, under the familiar attribution of income rules of Helvering v. Horst, 311 U.S. 112, 61 S. Ct. 144, 85 L. Ed. 75 (1940). In response, Montreal argues, as a matter of substantive law, that the government's application of the Horst doctrine to these facts is erroneous and that, in any event, as a matter of procedure, Klein did not "transact" business in New York within the meaning of the "long-arm" statute. On this appeal, we restrict ourselves to the jurisdictional issue and do not pass on the merits of the government's claim for taxes.
Since Pennoyer v. Neff, 95 U.S. 714, 24 L. Ed. 565 (1877), the area in which states are constitutionally permitted to assert their jurisdiction has undergone great expansion. International Shoe Co. v. State of Washington, supra, and McGee v. International Life Ins. Co., 355 U.S. 220, 78 S. Ct. 199, 2 L. Ed. 2d 223 (1957), are among the landmarks pointing the way in this direction. And New York, like many other states, enacted its "longarm" statute with the intention of taking advantage of the "new enclave" opened by these cases. New York Advisory Comm. Rep. (N.Y. Legis. Doc., 1958, No. 13), 39-40; 1 Weinstein-Korn-Miller, New York Civil Practice § 302.06.
There is no serious challenge on this appeal to the constitutional power of New York to enact § 302. International Shoe Co. v. State of Washington, supra, authorizes a state to assert its jurisdiction over non-domiciliaries with whom it has sufficient minimum contacts, "such that the maintenance of suit does not offend 'traditional notions of fair play and substantial justice.'" 326 U.S. at 316, 66 S. Ct. at 158. To meet this requirement, New York in enacting § 302 has not sought to obtain full in personam jurisdiction over non-domiciliaries who transact business within its boundaries. Rather, New York has limited itself to jurisdiction only in those "causes of action" arising out of activity conducted within the state. Since such a limitation of jurisdiction complies with the mandate of International Shoe Co., supra, we are not here presented with a constitutional issue but with a narrow question of statutory interpretation -- did Klein, within the meaning of the "long-arm" statute, transact business in New York.
The District Court, in dealing with this issue at the preliminary hearing, we believe, placed a too heavy burden on the government in requiring it to establish a strong factual basis upon which jurisdiction is predicated in this case. At this early stage of the proceedings, the government should not have been required to submit proof which would, in effect, establish the validity of its claim and its right to the relief sought. Rather, to bring § 302 into operation, and thereby invoke the jurisdiction of the District Court, the government was required to establish only prima facie tax-related transactions of Klein in New York. Cf. Bell v. Hood, 327 U.S. 678, 66 S. Ct. 773, 90 L. Ed. 939 (1946).*fn4 We must, therefore, determine whether on the allegations and facts before Judge McLean, Klein was transacting sufficient business within New York so as to bring him within the reach of the "long-arm" statute and require a trial on the merits.
Montreal's position on this appeal is that if Klein had any contacts at all with New York, they were limited to conduct in his capacity as general manager of United. And, it urges, that when one engages in activity within New York in a fiduciary capacity, jurisdiction cannot be obtained over him in his individual capacity. Cf. Boas and Associates v. Vernier, 22 A.D. 2d 561, 257 N.Y.S. 2d 487 (1st Dept. 1965). But, we find, the premise of this argument untenable. While it is true that Williams and Schutz were the contractual agents of the corporations Klein managed, the government has charged that they were also his personal agents in a scheme to divert funds to Klein's designees. Based on the allegations and findings, Klein could not have been acting in his role as a corporate officer when he allegedly directed a course of payments to his relatives and friends. It would be ironic, indeed, if the very corporations whose funds Klein is charged with diverting were to supply him with a shield against suit for tax liability allegedly incurred in connection with this purported breach of his fiduciary duty.
Since for jurisdictional purposes, we find that Klein's contacts with this state were thus not insulated by a fiduciary shield, we proceed to determine if the activities conducted by Klein's personal agents*fn5 constitute the transaction of business within this state. In this regard, we note that the execution of a contract, such as the Schutz-Sager agreement in New York is considered by the New York Courts a vital contact with this state. Thus, in Patrick Ellam, Inc. v. Nieves, 41 Misc. 2d 186, 245 N.Y.S. 2d 545 (1963), the Supreme Court, Westchester County, decided that the making of a contract in New York to transport a vessel from New York City to St. Thomas was sufficient to give the court jurisdiction over a breach of that contract. For a similar result by the Supreme Court, New York County, see Iroquois Gas Corp. v. Collins, 42 Misc. 2d 632, 248 N.Y.S. 2d 494 (1964).
We are aware, however, that the formal act of executing a contract in New York, by itself, may not be wholly determinative of the question of jurisdiction. For example, we held in Agrashell, Inc. v. Bernard Sirotta Co., 344 F.2d 583, 587 (2d Cir. 1965), that "merely * * * negotiating and concluding goods contracts through the mails and by telephone with persons residing in New York" are insufficient to give New York personal jurisdiction over non-domiciliaries. But, Judge Waterman, writing for the Court, recognized that if negotiations had taken place in New York in furtherance of the contract, New York would then be justified in asserting its jurisdiction. In the instant case, however, the contract between Schutz and Sager was not executed by mail nor negotiated by telephone, but signed by the parties personally in New York after extended negotiations here. And, further evidence of the substantiality of Klein's contacts with New York can be found in the fact that New York was the center from which Williams, in its capacity as Klein's personal agent, disbursed the 60 cents per case commission to Klein's designees. Indeed, as we have noted, the Williams' checks in payment of these commissions were drawn in New York on a New York bank.
We believe that these activities demonstrate more than a remote connection with New York. In deciding, under New York law, the substantiality of contacts with this state for purposes of § 302, we must be satisfied, before that section is properly invoked, that a non-domiciliary over whom jurisdiction is sought, purposefully availed himself of the privilege of conducting activities within New York. Longines-Wittnauer Watch Co. v. Barnes & Reinecke, Inc., 15 N.Y. 2d 443, 261 N.Y.S. 2d 8, 209 N.E. 2d 68 (1965). We are satisfied here, that Klein, through the activities conducted by his agents in New York, transacted sufficient business in this state to justify the government's service of process upon his estate pursuant to the provisions of New York's "long-arm" statute.
Other contentions advanced on this appeal have been examined and found without merit.
TIMBERS, District Judge (concurring in part and dissenting in part):
The question presented on this appeal is whether the United States government, in an action to recover income taxes, interest and penalties aggregating $9,862,053.34 based on tax liabilities assessed in absentia 11 years ago and claimed to have arisen 20 years ago by reason of the alleged constructive receipt in Canada of income from United States sources, may, under the New York long arm statute, invoke the jurisdiction of the District Court for the Southern District of New York, by process served in Vancouver, British Columbia, Canada, over a Canadian banking institution as executor of a Canadian citizen and resident who died 10 years ago, neither the Canadian executor nor the Canadian decedent having been at any time a domiciliary of New York or of the United States, the Canadian executor concededly having no assets in New York and never having transacted business in New York, and the decedent concededly not having transacted business in New York in person but allegedly through agents.
The majority holds, pursuant to C.P. L.R. § 302(a)(1) and Rules 4(e), 4(f) and 4(i), Fed. R. Civ. P., that the district court has personal jurisdiction over The Montreal Trust Company, executor of Isidor J. Klein, deceased, a non-domiciliary, as to a cause of action arising from the transaction of business within the State of New York by Klein acting, not in person, but through agents.
Since I concur with the majority upon those issues hereinafter specified, I would agree with the conclusion reached by the majority if I could accept its premise that Klein was engaged in the state through agents in the transacting of any business out of which the alleged cause of action arises. I find no basis either in the findings of the district court or in the evidence before the district court to support such a premise. I am of the opinion, therefore, that, absent evidentiary support for the conclusion reached by the majority, our direction to the district court to assert personal jurisdiction pursuant to § 302 over Montreal Trust violates the due process requirements of the United States Constitution and renders § 302 unconstitutional, as applied. Upon that issue, accordingly, I respectfully but emphatically dissent.
The district court held two hearings on the jurisdictional issues raised. Following the first hearing, it filed an opinion May 1, 1964 holding that service of process pursuant to § 302 upon Montreal Trust was valid provided that Klein in the years in question transacted business within the State of New York. 35 F.R.D. 216. Four months later, pursuant to notice given to counsel in its May 1 opinion, the district court held a two day hearing, at which testimony and documents were received in evidence, to determine that fact, following which it filed an opinion October 20, 1964 embodying detailed findings of fact and holding that the government's cause of action did not arise from the transaction of any business by Klein within the State of New York during the years in question. 235 F. Supp. 345. In my opinion, both decisions of the district court are correct.
The district court's May 1, 1964 decision that under § 302 personal jurisdiction may be exercised over Montreal Trust as executor of a non-domiciliary, with respect to a cause of action arising out of the transaction of business within the state by Klein, if he transacted any such business, and that out of ...