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LEHIGH VALLEY INDUS. v. BIRENBAUM

January 29, 1975

LEHIGH VALLEY INDUSTRIES, INC., and Lehigh Colonial Corporation, Plaintiffs,
v.
David BIRENBAUM et al., Defendants


Stewart, District Judge.


The opinion of the court was delivered by: STEWART

MEMORANDUM

STEWART, District Judge:

 This action was commenced by plaintiffs, Lehigh Valley Industries, Inc. ("Lehigh") and its subsidiary Lehigh Colonial Corporation ("Colonial"), two Delaware corporations with principal places of business in New York. These two corporations are the successors in interest to the claims of Colonial Shoe Ornament, Inc. ("Ornament"). *fn1" Defendants are David Birenbaum ("David") and his brother Norman Birenbaum ("Norman") and two Spanish corporations Lydia, S.A. ("Lydia") and International David, S.A. ("International"). Defendant Norman, a Massachusetts resident, now moves pursuant to Rule 12(b)(2) of the Federal Rules of Civil Procedure ("Fed.R.Civ.P.") for an order dismissing the complaint against him for lack of personal jurisdiction.

 The complaint alleges, inter alia, that David served as principal or agent of International and Lydia at the same time that he was an officer of Ornament and thereby breached his employment contract which required him to devote full time to the business of Ornament. In addition, the complaint alleges that David improperly caused Ornament to purchase its shoe supply from Lydia and thereby earned substantial profits at Ornament's expense; that he caused Ornament to pay Lydia the full invoice price for the goods though he knew they were defective; that he abused his expense account and caused the disappearance of certain property of Ornament; and that he breached his termination agreement with Ornament. The allegations against Norman are in large part derivative of the claims against David. Plaintiffs allege that Norman knew of David's alleged wasteful behaviour and failed to take action to correct it; that Norman aided and abetted David in his wrongful acts; and that Norman conspired with David to divert and appropriate the assets and business opportunities of Ornament by inducing Ornament to abandon its leather stripping business and then stepping into that business with David. *fn2" In addition, plaintiffs allege that defendants failed to devote full time to Ornament's business.

 Background

 In 1968, David, Norman and two additional shareholders transferred their stock and control in seven Massachusetts corporations, including Ornament, to plaintiff Lehigh through Colonial, a wholly-owned subsidiary of Lehigh, in exchange for shares of common stock of Lehigh. Pursuant to this agreement, dated July 19, 1968, and characterized as a "reorganization agreement" by the parties, the exchange of stock and transfer of control was effected on October 18, 1968. On that date, both David and Norman entered into employment agreements with Ornament to serve as its officers. These employment agreements are referred to in the reorganization agreement (Exhibit 1, Complaint, para. 14).

 At some unspecified point in time, a dispute arose between the parties to the reorganization agreement concerning the registration provisions (paras. 22-23) of that agreement. Negotiations ensued without success. At this time, the four stockholders who had entered into the reorganization agreement brought suit in Massachusetts against Colonial seeking, inter alia, compensation for breaches of its registration provisions. In a settlement agreement entered into on March 6, 1972, the parties ended this litigation.

 Nearly two years after the Massachusetts case was settled, in January 1974, plaintiffs Lehigh and Colonial brought this action in New York. While David was served with process personally during a business trip to New York, Norman was served with a summons and complaint in Massachusetts on February 15, 1974. It is that foreign service which is contested in the present motion. Defendant Norman contends there was no basis for such service and that therefore this court is without personal jurisdiction over him and must dismiss the action against him.

 Plaintiffs contend that personal jurisdiction over Norman is predicated upon New York's long-arm statute which provides for extraterritorial service of process in certain instances. Civil Practice Law and Rules ("CPLR") § 302. That section is applicable here through Rule 4(e) Fed.R.Civ.P. which provides for extraterritorial service of process in a federal case in accordance with the statutes of the state in which the federal district court sits. The question for decision here, therefore, is whether various provisions of CPLR § 302 allow service of process to be made upon Norman in Massachusetts. Section 302 provides, in relevant part:

 
(a) Acts which are the basis of jurisdiction. As to a cause of action arising from any of the acts enumerated in this section, a court may exercise personal jurisdiction over any nondomiciliary, or his executor or administrator, who in person or through an agent:
 
1. transacts any business within the state; or
 
2. commits a tortious act within the state . . . or
 
3. commits a tortious act without the state causing injury to person or property within the state . . . if he
 
(i) regularly does or solicits business, or engages in any other persistent course of conduct, or derives substantial revenue from goods used or consumed or services rendered, in the state, or
 
(ii) expects or should reasonably expect the act to have consequences in the state and derives substantial revenue from ...

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