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DEPT. OF ECONOMIC v. ARTHUR ANDERSEN

January 8, 1990

DEPARTMENT OF ECONOMIC DEVELOPMENT, PLAINTIFF,
v.
ARTHUR ANDERSEN & CO. (U.S.A.), ARTHUR ANDERSEN & CO. (REPUBLIC OF IRELAND), AND ARTHUR ANDERSEN & CO. (UNITED KINGDOM), DEFENDANTS-THIRD-PARTY PLAINTIFFS, V. ALEX H. FETHERSTON, C. SHAUN HARTE, RONALD J. HENDERSON, ANTHONY S. HOPKINS, AND JAMES SIM, THIRD-PARTY DEFENDANTS.



The opinion of the court was delivered by: Stewart, District Judge:

    MEMORANDUM DECISION

Defendants/third-party plaintiffs Arthur Andersen & Co. (USA) ("AA-US"), Arthur Andersen & Company (Republic of Ireland) ("AA-Ireland"), and Arthur Andersen & Co. (United Kingdom) ("AA-UK") (hereinafter collectively "AA"), impleaded third-party defendants Alex H. Fetherstone, C. Shaun Harte, Ronald J. Henderson, Anthony S. Hopkins, and James Sim, members at various times of the boards of directors of DeLorean Motor Company ("DMC") and/or DeLorean Motor Cars Limited ("DMCL"), alleging causes of action arising from circumstances involved in the main lawsuit (or "main action") brought by plaintiff Department of Economic Development ("DED") against AA.*fn1 The third-party defendants (the "NIDA Directors") now move to dismiss the complaint for lack of personal jurisdiction and for failure to state a claim upon which relief can be granted pursuant to Rules 12(b)(2) and 12(b)(6) of the Federal Rules of Civil Procedure.*fn2

Factual Background

The main action in this lawsuit was commenced by plaintiff DED, an agency of the British government, against AA in February of 1985. Although we have previously summarized the background to the main action, see Department of Economic Development v. Arthur Andersen & Co., et al., 683 F. Supp. 1463, 1468-70 (S.D.N.Y. 1988) (the "March 8th Decision"), a brief reiteration of the circumstances surrounding the main action is necessary to understand the facts relevant to the instant motion.

DED's predecessors in interest, the Northern Ireland Development Agency ("NIDA") and the Department of Commerce ("DOC") (collectively "DED" or "plaintiffs") were agencies of the British government empowered to extend loans and grants to businesses to promote the industrial development of Northern Ireland. NIDA and DOC entered into a contract (the "Master Agreement") with various corporations controlled by John Z. DeLorean to manufacture a sports car in Dunmurrary, Northern Ireland.

The DMC was incorporated in Michigan in 1975 for the purpose of developing, manufacturing, and marketing the sports car. The manufacturing work on the car was performed at the plant of DMCL, the Northern Ireland subsidiary of DMC. Pursuant to the Master Agreement, NIDA and DOC agreed, inter alia, to purchase all of the 17,757,000 preferred shares of DMCL stock at one British pound per share. NIDA and DOC also agreed to extend a variety of grants, loans, and loan guarantees.

Also pursuant to the Master Agreement, DMC undertook to furnish to NIDA and DOC financial statements encompassing DMC and its subsidiaries, including DMCL. AA, as DMC's auditors, prepared reports certifying these statements. The gravamen of DED's complaint in the main action is that DMC's financial statements were false and misleading, and that by certifying these statements, AA substantially assisted DeLorean and others in the execution of a fraudulent scheme to siphon money from DMC and DMCL.

In addition, the Master Agreement allowed the British government to designate two directors who would sit on the board of DMC and two directors who would sit on the board of DMCL. These directors, third-party defendants herein, also would serve as members of DMC's audit committee and the NIDA monitoring committee which evaluated, inter alia, DMCL's performance.

Amid allegations of mismanagement and fraud, the various DeLorean corporations began to collapse in 1981-82. In 1982, DMCL was placed in receivership, and DMC filed a petition for bankruptcy under Chapter 11 of the Bankruptcy Code. In 1983, the Chapter 11 proceeding was converted into Chapter 7 liquidation proceeding.

The core of defendants/third-party plaintiffs' complaint against the NIDA Directors is AA's allegation that it relied in part upon the NIDA Directors as to the accuracy of the DMC and DMCL financial statements. Third-Party Plaintiffs' Memorandum In Opposition to Motion To Dismiss The Amended Third-Party Complaint ("Third-Party Pltfs' Memo.") at 9-10. AA contends that if DeLorean and others were engaged in unlawful conduct, the NIDA Directors had actual or constructive knowledge of the fraudulent activity and failed to disclose the facts to AA, NIDA, or other board members of DMC or DMCL. Id. at 10. According to AA, the result of this non-disclosure was that AA's audit reports did not reflect the alleged fraudulent scheme, causing injury to its professional reputation and exposing it to liability. Id.

Third-party defendants now move to dismiss the third-party complaint on numerous grounds:

1) there is no contractual or legal right to indemnity in the action;

2) contribution is unavailable in this action under common law as well as under RICO and applicable securities laws;

3) the fraud-based claims fail to satisfy the particularity requirement of Fed.R. Civ.P. 9(b);

4) AA lacks standing to bring the aiding and abetting claims under RICO, the common law fraud and negligence claims;

5) the aiding and abetting claims under RICO and the common law fraud and negligence claims fail to allege cognizable damages;

6) the RICO claim, fraud-based claims, and the negligence claim are barred by the applicable statutes of limitations;

7) lack of personal jurisdiction over the third-party defendants.

For the reasons that follow we grant the third-party defendants' motion to dismiss the second, third, fourth, and fifth causes of action. We also grant the third-party defendants' motion to dismiss individual third-party defendant Ronald J. Henderson for lack of personal jurisdiction. We further partially grant the third-party defendants' motion to dismiss the first cause of action with respect to the third-party plaintiffs' claim for indemnity under RICO, the federal securities laws and common law fraud, and contribution under RICO and the federal securities laws.

Discussion

Personal Jurisdiction Over Third-Party Defendant Henderson

The NIDA Directors argue that no personal jurisdiction exists over third-party defendant Henderson because of the following: (1) he never attended any board meetings in New York; (2) the board meeting at which he approved a certain contract between DMCL and GPD Services, Inc., the root of the third-party plaintiffs' claims, was held in Northern Ireland;*fn3 (3) the GPD contract was negotiated, executed and performed outside of New York.*fn4 See Third-Party Defts' Rebuttal Memo. at 25.

AA counters that personal jurisdiction exists over Henderson pursuant to New York's "long-arm" statute, New York Civil Practice Law and Rules ("CPLR") § 302(a)(1), because: (1) the GPD contract, approved by Henderson, had substantial connection with New York;*fn5 (2) Henderson countersigned a letter addressed to a New York firm; and, (3) the DMCL's transaction of business in New York subjects Henderson, as a member of its board, to personal jurisdiction.*fn6

Under New York law, personal jurisdiction may be had over a non-domiciliary defendant if there is "proof of one transaction in New York . . . even though the defendant never enters New York, so long as the defendant's activities here were purposeful and there is a substantial relationship between the transaction and the claim asserted." Kreutter v. McFadden Oil Corp., 71 N.Y.2d 460, 467, 527 N.Y.S.2d 195, 198-99, 522 N.E.2d 40, 43 (1988) (non-domiciliary defendant who never was physically present in New York was subject to personal jurisdiction since he exercised "some control" over New York company acting as agent for defendant's foreign company); see also Picard v. Elbaum, 707 F. Supp. 144, 145 (S.D.N.Y. 1989) (fact that non-domiciliary never physically present in New York is not controlling for long-arm jurisdictional purposes).

In view of the connections between New York and the GPD contract, it is our view that DMCL could be deemed to have "transacted business" in New York within the meaning of CPLR § 302(a)(1). See Sterling National Bank & Trust Co. of New York v. Fidelity Mortgage Investors, 510 F.2d 870, 873 (2d Cir. 1975) ("transacting business" standard is whether "looking at the totality of defendant's activities within the forum" purposeful acts have been performed in New York). However, since Henderson as an individual board member of DMCL is the third-party defendant and not DMCL itself, it is necessary to determine the parameters of New York's long-arm jurisdiction with respect to corporate officers and directors.

Citing inconsistent holdings of federal and state courts regarding the individual liability of corporate officers acting in a corporate capacity, the New York State Court of Appeals recently unequivocally held that a corporate fiduciary from is not exempt from personal jurisdiction even though his or her activities in the forum are solely in a corporate capacity. See Kreutter, 71 N.Y.2d at 472, 527 N.Y.S.2d at 202, 522 N.E.2d at 46-47 ("fiduciary shield" doctrine unavailable to defeat long-arm jurisdiction). However, the instant circumstance is the converse of the typical "fiduciary shield" situation. That is, we must determine whether New York law will allow the exercise of personal jurisdiction over a non-domiciliary corporate director who never physically was present in the forum, solely on the basis that long-arm jurisdiction exists over the corporation on whose board he sits.

Other circuits have formulated a rule that jurisdiction over the individual officers of a corporation may not be based merely on jurisdiction over the corporation. See Escude Cruz v. Ortho Pharmaceutical Corp., 619 F.2d 902, 906 (1st Cir. 1980) (citing Weller v. Cromwell Oil Co., 504 F.2d 927 (6th Cir. 1974) and Wilshire Oil Co. of Texas v. Riffe, 409 F.2d 1277 (10th Cir. 1969)). The New York Court of Appeals, construing § 302(a)(1) held that a controlling stockholder of a New York corporation, who never was present in New York and whose individual activity took place outside New York, was not subject to personal jurisdiction absent a showing that he, as an individual, engaged in some purposeful activity in New York. See Ferrante Equipment Co. v. Lasker-Goldman Corp., 26 N.Y.2d 280, 283-84, 309 N.Y.S.2d 913, 916-917, 258 N.E.2d 202, 204-05 (N.Y. 1970).

Accordingly, we conclude that defendant Henderson is not subject to personal jurisdiction in New York pursuant to CPLR § 302(a)(1). It is our view that looking at the totality of Henderson's alleged activities relating to New York — his vote to ratify the GPD contract at a Northern Ireland board meeting and his countersignature on a letter addressed to a New York firm — is insufficient to confer long-arm jurisdiction over him since in our view he engaged in no purposeful activity in New York. Cf. Cutco Industries v. Naughton, 806 F.2d 361, 365 (2d Cir. 1986) (the totality of all defendant's contacts with the forum state must indicate that jurisdiction would be proper); McKee Electric Co. v. Rauland-Borg Corp., 20 N.Y.2d 377, 382, 283 N.Y.S.2d 34, 38, 229 N.E.2d 604, 607-08 (N.Y. 1967) (minimum contact for exercise of personal jurisdiction is "some act by which the defendant purposefully avails itself of the privilege of conducting activities within the forum State, thus invoking the benefits and protections of its laws." Id. at 382, 283 N.Y.S.2d at 37-38, 229 N.E.2d at 607 (quoting Hanson v. Denckla, 357 U.S. 235, 253, 78 S.Ct. 1228, 1240, 2 L.Ed.2d 1283 (1958)).

In addition, no personal jurisdiction may be obtained over Henderson pursuant to CPLR § 302(a)(2) which confers jurisdiction over a person who "commits a tortious act within the state" since jurisdiction under this subsection requires that the defendant be physically present within the state while committing the tort. See, e.g., Paul v. Premier Electrical Construction Company, 576 F. Supp. 384, 389 (S.D.N.Y. 1983). Finally, no jurisdiction may be had over Henderson pursuant to CPLR § 302(a)(3) since, even if we accept AA's contention that Henderson's ratification of the GPD contract constituted tortious behavior outside New York which caused AA injury within New York, AA makes no argument that the other requirements for personal jurisdiction over Henderson pursuant to § 302(a)(3) are satisfied.*fn7

Should we find no basis for jurisdiction over Henderson, AA asks that we grant them leave to conduct further discovery as to Henderson's amenability to suit in New York. See Peterson v. Spartan Industries, Inc., 33 N.Y.2d 463, 354 N.Y.S.2d 905, 310 N.E.2d 513 (1974) (discovery as to jurisdiction may be had if plaintiffs have made a "sufficient start" and show their position not to be frivolous). We decline to do so. In Peterson, although articulated in the context of a summary judgment motion, the "sufficient start" necessary to allow further discovery as to the jurisdictional issue was the demonstration by the plaintiff that facts "may exist" to defeat the motion. Id. at 466, 354 N.Y.S.2d at 907-08, 310 N.E.2d at 514. No attempt has been made by AA to articulate jurisdictional facts that "may exist" which further discovery would ...


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