UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS, EASTERN DIVISION
December 28, 1989
TORCO OIL COMPANY, Plaintiff
INNOVATIVE THERMAL CORPORATION, JOHN RIVERA, and H. JENKS CALDWELL, Defendants
James B. Moran, United States District Judge.
The opinion of the court was delivered by: MORAN
MEMORANDUM AND ORDER
JAMES B. MORAN, UNITED STATES DISTRICT JUDGE
Plaintiff Torco Oil Company (Torco) brings this action against defendants Innovative Thermal Corporation (ITC) and two of its officers, John Rivera and H. Jenks Caldwell, each 50% owners of ITC,
alleging breach of contract and fraud. Before this court is defendants' motion to dismiss the action based on lack of personal jurisdiction. For the reasons set forth below, the motion is granted in part and denied in part.
In June 1988, Torco and ITC entered into a contract for the sale and purchase of natural gas. Under this contract ITC covenanted to deliver and Torco to purchase "all gas necessary to meet [Torco's] requirements for Natural Gas up to the volumes of gas as are set forth in the Nomination Notice." This nomination notice, appended to the contract, specified that a quantity of 25,000 mmbtu, or one million British Thermal Units, of gas per day for a year be supplied.
No gas was ever delivered under the contract and Torco brought this action seeking damages resulting from the breach.
Supplementing the breach of contract claim is Torco's allegation in its complaint that it was fraudulently induced to enter into the contract by false statements made by Rivera and Caldwell that represented ITC as "adequately capitalized and sound" and "experience[d] in the sale of natural gas" with "access to substantial reserves and supply." To convince Torco of ITC's financial legitimacy and secure their participation in the contemplated transaction, Torco claims, Rivera and Caldwell drew on the financial stability of Caldwell's other business concerns; in addition to his half-ownership interest in ITC, Caldwell owns various other entities, including Charlotte Aircraft Corporation, Charlotte Aerospace Company, and Caldwell Aircraft Trading Company.
ITC now moves to dismiss the counts against all three defendants based on lack of personal jurisdiction. The contacts between ITC and Illinois, it argues, fall short of the level needed to satisfy the Illinois long-arm statute. Even if these contacts are found to be sufficient, ITC continues, they cannot be attributed to Rivera and Caldwell to bring them as individuals within the ambit of Illinois jurisdiction, for the fiduciary shield doctrine, applicable here, according to ITC, serves to protect individuals from amenability to a state's jurisdiction where, as here, the only contacts with that state spring from their activities as representatives.
To the extent the fiduciary shield doctrine does not apply, jurisdiction over Rivera and Caldwell may be proper on the basis of ITC's contacts with Illinois. Because jurisdiction over the individuals is in part derivative of the corporation's amenability, then, we consider first whether ITC is properly before this court.
I. Amenability of Innovative Thermal Corporation to Illinois Jurisdiction3
A federal district court sitting in diversity has personal jurisdiction over a party only if a state court of the forum in which the district court sits could exercise jurisdiction. Turnock v. Cope, 816 F.2d 332, 334 (7th Cir. 1987). It is to Illinois law, therefore, that we turn in determining whether jurisdiction over defendant ITC is proper. In a motion to dismiss for lack of personal jurisdiction, the party asserting the existence of jurisdiction -- the plaintiff -- carries the burden to provide sufficient evidence to support jurisdiction. O'Hare Int'l Bank v. Hampton, 437 F.2d 1173, 1176 (7th Cir. 1971); Caicos Petroleum Service Corp. v. Hunsaker, 551 F. Supp. 152, 153 (N.D.Ill. 1982); Olinski v. Duce, 155 Ill.App.3d 441, 443, 508 N.E.2d 398, 400, 108 Ill.Dec. 237, 239 (1987). A prima facie showing that jurisdiction over the defendant is proper will satisfy this burden. O'Hare Int'l Bank; Ingersoll Milling Machine Co. v. J.E. Bernard & Co., 508 F. Supp. 907, 911 (N.D.Ill. 1981). In deciding the motion, a court may receive and consider affidavits from both parties, O'Hare Int'l Bank; Connolly v. Samuelson, 613 F. Supp. 109, 100 (N.D.Ill. 1985); Caicos Petroleum, 551 F. Supp. at 155, and all factual conflicts between the parties are to be resolved in favor of the plaintiff. Deluxe Ice Cream Co. v. R.C.H. Tool Corp., 726 F.2d 1209, 1215 (7th Cir. 1984); Neiman v. Rudolf Wolff & Co., 619 F.2d 1189, 1190 (7th Cir.), cert. denied, 449 U.S. 920, 66 L. Ed. 2d 148, 101 S. Ct. 319 (1980); Financial Management Services v. Sibilsky and Sibilsky, 130 Ill.App.3d 826, 831, 474 N.E.2d 1297, 1302, 86 Ill.Dec. 100, 105.
A plaintiff may establish jurisdiction over a nonresident defendant in Illinois if it can make a prima facie case that the defendant has performed -- and the cause of action arises from -- one of the jurisdictional acts enumerated in the Illinois long-arm statute, Ill.Rev.Stat. ch. 110, para. 2-209 (1987), or is "doing business" in Illinois, and that jurisdiction over the defendant comports with the prescripts of due process. See Deluxe, 726 F.2d at 1212. Although these inquiries were deemed at one time to be coextensive, see, e.g., Nelson v. Miller, 11 Ill.2d 378, 389, 143 N.E.2d 673, 679 (1957), the Illinois Supreme Court recently liberated long-arm statute analysis from its dependence on due process decisions:
A statute worded in the way ours is should have a fixed meaning without regard to changing concepts of due process, except, of course, that an interpretation which renders the statute unconstitutional should be avoided, if possible.
Green v. Advance Ross Electronics Corp., 86 Ill.2d 431, 436, 427 N.E.2d 1203, 1206, 56 Ill.Dec. 657, 660 (1981). Green thus mandates a bifurcated analysis, requiring a court to consider separately whether jurisdiction over a defendant complies with Illinois statutory requirements and due process standards.
A. Illinois Long-Arm Statute
Torco does not argue that ITC regularly "does business" in Illinois -- nor could it, for ITC's business transactions, with the sole exception of its ill-fated contract with Torco, have been limited to activities outside of Illinois that have neither directly nor indirectly involved that state;
jurisdiction is proper under a "doing business" theory "only when there is some regularity of activities in Illinois." Connolly, 613 F. Supp. at 111 (citing Cook Associates, Inc v. Lexington United Corp., 87 Ill.2d 190, 202-03, 429 N.E.2d 847, 852-53, 57 Ill.Dec. 730, 735-36 (1981)). Our analysis, therefore, will focus on the Illinois long-arm statute and its applicability to the facts in the instant dispute.
The Illinois long-arm statute provides that a defendant submits to jurisdiction in Illinois if it engages in, inter alia,
(1) The transaction of any business within this State; [or]
(2) The commission of a tortious act within this State;
and the "cause of action aris[es] from the doing of . . . such acts." Ill.Rev.Stat. ch. 110, para. 2-209 (1987). Although Torco includes a count of fraud in its first amended complaint, it does not pursue this count as a basis for jurisdiction, and therefore we limit our discussion to the "transaction of business" prong of the long-arm statute.
1. Transaction of Business
Distinct from the common law concept of "doing business," the "transaction of business" for the purposes of the long-arm statute requires no regularity of in-state conduct; "even a single business transaction is sufficient to bring a foreign defendant within the purview of the statute provided that the cause of action arises from the Illinois transaction." Convenient Food Mart v. De Florentis, No. 86 C 1088, (N.D.Ill.Dec. 10, 1986) (citing Empress Int'l, Ltd. v. Riverside Seafoods, 112 Ill.App.3d 149, 445 N.E.2d 371, 67 Ill.Dec. 891, 892 (1983)).
The determination of whether a given transaction qualifies as an Illinois transaction involves a very fact-intensive inquiry that defies bright line rules, but some guiding principles have evolved, and certain factors are consistently invoked. Three factors in particular have figured prominently in transaction-of-business analysis in contract cases: who initiated the transaction, whether any significant act(s) in furtherance of the contract occurred in Illinois, and where the contract was to be performed. See Caicos Petroleum, 551 F. Supp. at 154; Ideal Stencil Machine and Tape Co. v. Merchiori, 600 F. Supp. 185, 189 (S.D.Ill. 1985).
The identity of the party that makes the initial contact leading to the contract is considered a key factual inquiry, see Caicos Petroleum, 551 F. Supp. at 154; Convenient Food Mart, No. 86 C 1088, and has been cited in many cases. See, e.g., O'Hare Int'l Bank, 437 F.2d at 1176; Welles Products Corp. v. Plad Equipment Co., 563 F. Supp. 446, 447 (N.D. Ill. 1983). Where the defendant enters Illinois and actively solicits the business transaction there, courts have easily found the long-arm statute to have been satisfied. See Maurice Sternberg, Inc. v. James, 577 F. Supp. 882 (N.D.Ill. 1984); Caicos Petroleum, 551 F. Supp. at 154. In Caicos Petroleum, we drew a distinction between the situation at issue there -- the plaintiff initiating contact with the defendant outside of Illinois -- and the hypothetical situation of a defendant initiating contact in Illinois; jurisdiction was proper in the latter, we held, but not the former. Caicos Petroleum at 154-55. The two scenarios discussed in Caicos Petroleum, however, omit the possibility of the defendant contacting the plaintiff outside of Illinois. Where contact is made solely through telephone calls and mail communication, the fact that the defendant initiated contact is a significant, but not controlling, factor in determining whether personal jurisdiction is proper, Leonardo's, Inc. v. Greathall, Ltd., 714 F. Supp. 949, 952 (N.D.Ill. 1989);
a court will consider additionally where the contract was signed
and where performance was to take place and will balance these factors if they point in different directions. Id. at 952-53; see also Ideal Stencil, 600 F. Supp. at 189 (jurisdiction found where order initiated by defendant and received in Illinois); U.S. Reduction Co. v. Amalgamet, Inc., 545 F. Supp. 401, 403 (N.D.Ill. 1982) (no jurisdiction where telephone calls made to Illinois but contract was to be performed elsewhere).
The second prominent factor on the transaction-of-business front -- whether any activity in furtherance of the contract has occurred in Illinois -- most often appears in the form of in-state negotiations. Where these negotiations are "of some substance" they clearly rise to the level of transaction of business in Illinois. See Ronco, Inc. v. Plastics, Inc., 539 F. Supp. 391, 396 (N.D.Ill. 1982); First Nat'l Bank of Chicago v. Boelcskevy, 126 Ill.App.3d 271, 274, 466 N.E.2d 1182, 1185, 81 Ill.Dec. 380, 383 (1984). Precisely what is called for by the phrase, "of some substance," however, is less clear. One court has suggested that the relationship of the negotiations to the ultimate contract should comprise part of the substantiality test. In Maurice Sternberg, the court found the negotiations in Illinois to fall short of the threshold necessary to sustain jurisdiction where they did not lead directly to the contract upon which the suit at issue was based. Maurice Sternberg, Inc. v. James, 577 F. Supp. 882, 886 (N.D. Ill. 1984). This test of substantiality, however, seems to draw on factors more appropriately considered as part of the "arising from" inquiry, see infra, and at any rate does not assist us in determining the quantity of negotiations needed to constitute transaction of business.
Negotiations have been found to be adequately substantial in a number of cases where they lead to the in-state signing of a contract. See Jacobs/Kahan & Co. v. Marsh, 740 F.2d 587, 590 (7th Cir. 1984) ("partial" negotiations and signing in Illinois); In Re Oil Spill by Amoco Cadiz off Coast of France on March 16, 1978, 699 F.2d 909 (7th Cir.), cert. denied, 464 U.S. 864, 104 S. Ct. 196, 78 L. Ed. 2d 172 (1983). So too have negotiations resulting in legally binding changes. In Ronco, the parties held a meeting in Illinois at which "details of the transaction were laid out, and legally binding contractual changes were made." In rejecting the defendant's motion to dismiss, the court observed, "if this [conduct] is not 'transacting business in Illinois,' it is difficult to imagine what is." Ronco, 539 F. Supp. at 396; see also Neiman, 619 F.2d at 1194 (brief meetings sufficient where "agreement on important terms of the arrangement" resulted).
Many courts, however, simply find the negotiations in Illinois to support jurisdiction without probing extensively the question of substantiality. See, e.g., Convenient Food Mart, No. 86 C 1088 (jurisdiction found where defendant "came to Illinois to meet with [defendant's] executives about obtaining" the object of the contract).
Finally, courts have frequently looked to the place slated for contractual performance in making personal jurisdiction determinations. In fleshing out this consideration, we noted in Caicos Petroleum that the performance factor alone is sufficient to support jurisdiction where "the 'defendants knew or should have known that the completion of the agreement would be performed exclusively in Illinois.'" Caicos Petroleum, 551 F. Supp. at 155 (quoting Artoe v. Mann, 36 Ill.App.3d 204, 206, 343 N.E.2d 647, 649 (1976)).
Other courts have found jurisdiction where products were shipped in substantial volume to Illinois under the terms of the contract. Ronco, 539 F. Supp. at 397 ("By shipping into Illinois, defendants knew that any defects in their performance would have consequences in Illinois. Shipping items into Illinois in substantial volume therefore suffices to constitute transacting business. . . .").
Applying the law to the facts in the instant dispute, and resolving all conflicts in favor of the plaintiff, we are persuaded that ITC's activities in Illinois rise to the level of "transaction of business." Albeit not in person, ITC, through Rivera, initiated contact with Torco by informing Wilkins, Torco's executive vice-president for gas marketing, that ITC had natural gas available for purchase and by proposing an offer for contractual relations (Verified Complaint paras. 5, 7.)
While not dispositive, this factor is certainly relevant and must be weighed in favor of jurisdiction. Whether ITC's solicitation by telephone is sufficient to support jurisdiction, however, requires us to consider also where the contract was entered into and where performance of the contract was to take place. Although signed in Illinois,
the contract did not provide for any significant performance to take place in that state,
and therefore this issue presents a tricky question of balancing. But because we find jurisdiction to be proper regardless of the outcome of this balancing test, it becomes unnecessary to attempt to weigh and resolve these conflicting factors.
It is the activity of Rivera in Illinois, in furtherance of the contract, that is the most significant jurisdictional fact and that supersedes all other considerations.
Rivera traveled to Illinois in July, 1988 for the exclusive purpose of meeting with Wilkins regarding the gas purchase agreement between ITC and Torco (Rivera Dep. at 64). At this meeting, Rivera discussed the transaction with Wilkins, going over the contract page-by-page (id. at 52, 60), and agreeing to binding changes (id. at 58-63). These negotiations resulted in a revised contract that was then signed by both parties (id. at 39, 51, 60). These facts parallel quite closely the facts in Ronco, and we echo that court's unequivocal characterization of this conduct as "transaction of business." It is irrelevant that the initial contract, the majority of which was incorporated in the amended contract signed in Chicago, was exchanged by way of facsimile machines. That a previous contact with the forum state (here the faxed transmission of the contract to Illinois for the plaintiff to sign) may not rise to the level of a jurisdictionally-cognizable contact, does not condemn a subsequent related contact (the negotiations in Illinois). Were the order of these contacts reversed -- and the final version had been faxed between the parties -- the "arising from" inquiry might be more complicated, but even under those circumstances, Rivera's trip to Illinois would serve as sufficient transaction-of-business to take us to that next step.
Nor do we deem it significant that the contract contained a provision stipulating that the agreement would be governed by Oklahoma Law. Although a choice-of-law provision has been used in the affirmative to support a finding that the defendant invoked the benefits of the specified state, O'Hare Int'l Bank, 437 F. Supp. at 1177; Pathway Financial, No. 86 C 9089, it alone is insufficient to confer jurisdiction. See Northern Trust Co. v. Randolph C. Dillon, Inc., 558 F. Supp. 1118 (N.D.Ill. 1983); Tents, USA, Inc. v. Circus Arts Foundation, No. 89 C 20011 (N.D.Ill., Apr. 20, 1989) [ 1989 U.S. Dist. LEXIS 5802]. Indeed, the concept of choice-of-law is distinct from consent to personal jurisdiction, and it is quite conceivable that a choice-of-law provision might be included in a contract for reasons wholly unrelated to jurisdiction concerns:
Parties to an agreement may elect to have a particular state's law govern the terms of an agreement for any number of reasons. For example, the commercial law of one jurisdiction may be incorporated merely as a contract "gap filler." While the parties may have expressed an intent to abide by the substantive law of one state, such a clause evidences no intent or agreement to be sued and to be forced to defend in that same state.
Northern Trust, 558 F. Supp. at 1123. Moreover, whatever force a choice-of-law provision has in its affirmative application, it is even less convincing that the choice of one state's law excludes the possibility that the defendant may have sufficient contacts with one or more of the remaining 49 states. In at least one case, jurisdiction was sustained despite a choice-of-law provision in the contract specifying an out-of-state forum. Leonardo's, 715 F. Supp. 949.
Here ITC failed to develop the argument that this choice-of-law provision should be construed to preclude Illinois jurisdiction; indeed, it does little more than repeat the language of the contract, which provides merely that "the formation and construction of this Agreement shall be governed by the laws of the State of Oklahoma." Without further explanation or evidence of this provision's purpose or intended effect, we decline to attach to it much jurisdictional significance.
2. Arising Out Of
A determination that a certain contact amounts to the transaction of business, however, is but half of plaintiff's battle. The muscles of the long arm cannot be fully flexed until the cause of action is found to arise out of that transaction. This requirement is uniformly interpreted as demanding only that the action "lie in the wake" of the in-state activity, see Deluxe Ice Cream Co., 726 F.2d at 1215; Jacobs/Kahan, 740 F.2d at 591; Hyatt Int'l Corp. v. Inversiones Los Jabillos, C.A., 558 F. Supp. 932, 935 (N.D.Ill. 1982), and this language, in turn, is liberally construed. See Ameritech Mobile Communications v. Cellular Communications, 664 F. Supp. 1175, 1178 (N.D.Ill. 1987). A cause of action for damages resulting from the breach of a contract negotiated and signed in the forum state clearly satisfies this requirement. See Hyatt v. Inversiones, 558 F. Supp. at 935. Indeed, far more attenuated connections between the in-state transaction and the cause of action have been found to support jurisdiction. See Jacobs/Kahan, 740 F.2d at 591; Deluxe Ice Cream Co., 726 F.2d at 1215-16 (jurisdiction found where in-state discussion led to subsequent negotiations, which in turn led to the contract at issue). But see Maurice Sternberg, 577 F. Supp. at 887 (not arising out of where "offers and rejections [were] interposed between" visit to forum state and the agreement ultimately entered into). Here Torco is complaining that ITC breached the contract negotiated and entered into in Illinois. Even without the benefit of the relatively lenient standard that governs this issue, we would have no trouble finding Torco's cause of action to arise out of ITC's transaction of business in Illinois. We therefore conclude that ITC is amenable to Illinois jurisdiction under the long-arm statute.
B. Due Process
Our inquiry does not end here, however. In addition to demonstrating that the statutory long-arm criteria are fulfilled, Torco must also satisfy us that the constitutional due process requirements are met before jurisdiction over ITC can properly be asserted. The due process analysis emphasizes the fairness and reasonableness of requiring a party to defend a suit in the forum state, see Deluxe Ice Cream, 726 F.2d at 1213 (citing Honeywell, Inc. v. Metz Apparatewerke, 509 F.2d 1137, 1142 (7th Cir. 1975), and as such requires only that the defendant have "certain minimum contacts" with that state so that jurisdiction does not "offend 'traditional notions of fair play and substantial justice.'" International Shoe Co. v. Washington, 326 U.S. 310, 316, 90 L. Ed. 95, 66 S. Ct. 154 (1945) (quoting Milliken v. Meyer, 311 U.S. 457, 463, 85 L. Ed. 278, 61 S. Ct. 339 (1940). To satisfy this requirement, the plaintiff must point to "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." Hanson v. Denckla, 357 U.S. 235, 253, 2 L. Ed. 2d 1283, 78 S. Ct. 1228 (1958).
ITC's contacts with Illinois in this case comfortably reach the "minimum contacts" threshold. Rivera's visit to Illinois in connection with ITC's gas purchase agreement with Torco goes a long way toward satisfying due process requirements; voluntary travel
to Illinois to transact business is considered an activity that "invokes the benefits and protections" of Illinois law. Jacobs/Kahan, 740 F.2d at 592; Deluxe Ice Cream, 726 F.2d at 1213. Especially where, as here, the relationship is initiated by the defendant, it becomes clear that the contact with the forum state is not incidental but intentional and purposeful, and to require him to defend a suit in that state hardly seems unfair. Cf. Welles Products, 563 F. Supp. at 449 ("initial call from [defendant's agent], as well as [his] visit to Illinois, suggest that [defendant] purposefully availed itself of the privilege of conducting business here"); Ronco, 539 F. Supp. at 400 (due process met where defendant "had clear notice that it was dealing with an Illinois corporation, and the instant suit ar[ose] from its efforts to serve a market for its products in Illinois").
We find these contacts to be constitutionally sufficient and consequently hold that ITC is subject to this court's jurisdiction.
II. Amenability of Rivera and Caldwell as Individuals to Illinois Jurisdiction
In its complaint Torco names not only ITC but also its two owners, John Rivera and H. Jenks Caldwell, as defendants. Torco seeks to bootstrap personal jurisdiction for these two individuals from the contacts that we hold above to be sufficient to subject ITC to jurisdiction in Illinois. ITC argues, however, that these contacts cannot be used to establish jurisdiction over Rivera and Caldwell in light of the fiduciary shield doctrine. It is to this issue that we now turn.
A. The Fiduciary Shield Doctrine
Where an individual's contact with a forum state is limited to acts performed in his representative capacity, the fiduciary shield doctrine directs that personal jurisdiction over that individual is improper. Washburn v. Becker, 186 Ill.App.3d 629, 542 N.E.2d 764, 766, 134 Ill.Dec. 418, 420 (1989); Olinski, 155 Ill.App.3d at 443-44, 508 N.E.2d at 400, 108 Ill.Dec. at 239. Clearly recognized under Illinois law, this doctrine has been consistently invoked, either by name, see, e.g., State Security Insurance Co. v. Frank B. Hall & Co., 530 F. Supp. 94, 97 (N.D.Ill. 1981), or at least by theory. See, e.g., Hurletron Whittier, Inc. v. Barda, 82 Ill.App.3d 443, 447, 402 N.E.2d 840, 843, 37 Ill.Dec. 838, 841 (1980).
The doctrine is rooted in the perceived unfairness of forcing "an individual to defend a suit brought against him personally in a forum in which his only relevant contacts are acts performed not for his own benefit but for the benefit of his employer." Marine Midland Bank, N.A. v. Miller, 664 F.2d 899, 902 (2d Cir. 1981);
accord, Washburn, 186 Ill.App.3d at 632, 542 N.E.2d at 766, 134 Ill.Dec. at 420. This rationale suggests that, for the purpose of this doctrine, the distinction between pursuit of the corporate interest and pursuit of one's own interest is crucial; "self-interested actions [should] be considered [one's] own." Marine Midland, 664 F.2d at 903.
It follows from this underpinning that the fiduciary shield doctrine is not applicable when an individual acts on his own behalf. See Club Assistance Program v. Zukerman, 594 F. Supp. 341, 345 (N.D.Ill. 1984); Franks v. Joe Eisenberger & Co., No. 85 C 7097, (N.D.Ill. Feb. 7, 1986). To avoid application of the doctrine a plaintiff need only allege in good faith that the performed acts advanced personal rather than employer interests. See Brainerd & Bridges v. Weingeroff Enterprises, No. 85 C 493, (N.D.Ill. Sept. 16, 1985); Posen v. Marks, 85 C 51, (N.D.Ill. April 18, 1985) (rejection of fiduciary shield defense based on mere allegation in complaint that "defendant acted 'allegedly' on behalf of defendant").
B. Exceptions to Application: Fiduciary Shield Doctrine as an Equitable Principle
But Torco does not make an allegation that Rivera and Caldwell were pursuing interests independent of the company's. Rather, it draws on the equitable nature of the fiduciary shield doctrine in arguing that it should not apply to these two individuals. It is well established that the fiduciary shield doctrine is an equitable principle, see Washburn, 186 Ill.App.3d 629, 542 N.E.2d 764, 134 Ill.Dec. 418 (1989), and as such is meant to be applied with discretion. See id.; Bulova Watch Co., 508 F. Supp. at 1348. That the facts of a particular case seem to fall within the purview of the doctrine does not automatically warrant its application, Washburn, 186 Ill.App.3d at 634, 542 N.E.2d at 767, 134 Ill.Dec. at 421; a court should instead analyze the particular facts in light of the ultimate consideration of fairness before deciding whether the doctrine should bar jurisdiction. See Marine Midland, 664 F.2d at 903; Continental Illinois Nat'l Bank & Trust Co. of Chicago v. Premier Systems, Inc., No. 88 C 7703, (N.D.Ill. March 14, 1989) [ 1989 U.S. Dist LEXIS 2664].
Despite the injunction that application of the fiduciary shield doctrine should be determined on a case-by-case basis according to the particular facts presented, Illinois courts have carved out several standard exceptions to this doctrine. Most commonly discussed and invoked -- and most significant for the purpose of the present dispute -- is the "sham" or "alter ego" exception, relied on by Torco in response to ITC's fiduciary shield defense.
This exception applies "in cases where the plaintiff seeks to pierce the corporate veil by alleging that the corporation was a mere shell utilized by the individual defendant for his own personal benefit," Hyatt v. Inversiones, 558 F. Supp. at 936 (citations omitted), for while it appears on the face that the individual is acting in a representative capacity, he is in fact pursuing self-interest, and thus it "will not advance notions of fairness to allow the owner of the corporation to invoke the protections of the fiduciary shield doctrine." Marine Midland, 664 F.2d at 903. Where the alter ego exception is found to be applicable, therefore, a corporation's contacts are attributed to the individual. Stuart v. Spademan, 772 F.2d 1185, 1197 (5th Cir. 1985); Ameritech, 664 F. Supp. at 1179. To the extent it applies here, then, ITC's contacts, already found to be sufficient to sustain jurisdiction over the corporate defendant, can be used to bring Caldwell and Rivera within our jurisdiction. We consider first whether the exception is applicable and, second, whether it serves to strip Rivera and Caldwell of the protections afforded by the fiduciary shield doctrine.
1. Application of the Sham or Alter Ego Exception
The alter ego exception is in many ways similar to the test used in determining whether to pierce the corporate veil, or disregard the corporate entity, and hold shareholders liable for corporate debts. See Stap v. Chicago Aces Tennis Team, 63 Ill.App.3d 23, 379 N.E.2d 1298, 20 Ill.Dec. 230 (1978) (laying out requirements for piercing the corporate veil). The alter ego inquiry, however, is less demanding: it eliminates the requirement that the sham corporation be used to perpetrate a fraud and questions merely whether the corporation is real or a shell. Marine Midland, 664 F.2d at 903; Club Assistance, 594 F. Supp. at 350 n. 18 (must prove piercing the corporate veil is warranted when a hearing is held). Moreover, as an element of the personal jurisdiction issue, the alter ego test is satisfied with a prima facie showing that the corporation is a sham, at least "where, as here, the issue of personal jurisdiction is to be decided on written submissions before trial on the merits." Kula, 668 F. Supp. at 1130; see also Ameritech, 664 F. Supp. at 1180 n. 3 (A court's review of allegations of a sham corporation "should not entail an extensive inquiry into the substantive merits of [the] claim," which should be challenged through a motion for summary judgment). A plaintiff therefore need only allege that the corporation is a mere shell, see Hyatt v. Inversiones, 558 F. Supp. at 936; Brainerd, No. 85 C 493, and these allegations must meet the very low threshold of "minimally viable" -- which requires only that the allegations not be "patently without merit" -- to support jurisdiction. See Ameritech, 664 F. Supp. at 1180 n.3. In light of this lenient standard, application of the alter ego exception is refused only where no facts are alleged supporting a finding that the corporation is a sham, see State Security, 530 F. Supp. at 98; Veal Associates, No. 86 C 7138 (N.D.Ill. Nov. 19, 1986), or where the supporting evidence is so manifestly insufficient that the alter ego argument is not even minimally viable. See Kula, 668 F. Supp. at 1129-30 (alter ego argument found to be legally insufficient where plaintiff argued only that the individual was chairman of the board, chief executive officer and sole shareholder of the corporation); Hyatt v. Club Regency, No. 85 C 7540 (alter ego argument rejected where only evidence in support was a reference to the vice president of one company as the sales manager of the individual defendant).
There is no definitive enunciation of the components of a "minimally viable" allegation of a sham corporation; as an equitable principle, the alter ego exception embodies a certain fluidity of elements, more responsive to the facts of an individual case than to any overriding set of criteria. Some courts turn to corporation case law and seek to match their facts to the requirements of the "piercing of the corporate veil" doctrine. In Ameritech, for example, the court, quoting Van Dorn Co. v. Future Chemical and Oil Corp., 753 F.2d 565, 570 (7th Cir. 1985), cites four factors considered by Illinois courts when determining whether a corporation is a sham:
"(1) the failure to maintain adequate corporate records or to comply with corporate formalities, (2) the commingling of funds or assets, (3) under-capitalization, and (4) one corporation treating the assets of another corporation as its own."
Ameritech, 664 F. Supp. at 1179; see also Club Assistance, 594 F. Supp. at 351. A significant number of recent cases, however, have diverged slightly -- but unanimously -- from the Ameritech approach. These cases teach that the sham argument will be successful at the personal jurisdiction level if the plaintiff can make out a prima facie case that the corporation is a sham "in that it lacks assets or is defendant's alter ego." Washburn, 186 Ill.App.3d at 633, 542 N.E.2d at 767, 134 Ill.Dec. at 421 (emphasis added); accord, Continental Illinois, No. 88 C 7703; Veal Associates, No. 86 C 7138; Hyatt v. Club Regency, No. 85 C 7540; Brainerd, No. 85 C 493. These various tests cannot be sorted out in the abstract, for the analysis must ultimately rest on fairness in the individual situation; instead, with these articulations in mind, we turn to the facts of the case.
While not nominally alleging in its complaint that ITC was undercapitalized, Torco does allege facts supporting such an argument:
22. On information and belief, Caldwell has put no more than $ 25,000 in capital into ITC over a period of time. Rivera has allegedly contributed the same amount in computer equipment and programs.
23. ITC has never had any income and all of its expenses, including salaries to its officers, have been paid from the capital contribution of Caldwell.
(First Amended Complaint at 5.) Moreover, Torco explicitly lays out the argument in subsequent supporting memoranda. ITC does not contest Torco's representations of its financial history and condition but, rather, argues that, because its obligations under the contract with Torco did not require any financing by ITC, its admittedly limited resources do not amount to under-capitalization. This position is not tenable. Adequate capitalization is measured not against the amount that may be required to fulfill a certain contractual obligation but rather against the business to be done and the risk of loss; the concept contemplates capital reasonably adequate for prospective liability. Stap, 63 Ill.App.3d at 28-29, 379 N.E.2d at 1302, 20 Ill.Dec. at 234; Gallagher v. Reconco Builders, 91 Ill.App.3d 999, 1005, 415 N.E.2d 560, 564, 47 Ill.Dec. 555, 559 (1980); see also ; 1 W. Fletcher, Cyclopedia of the Law of Private Corporations § 44.1 (rev. perm. ed. 1983). ITC's initial $ 50,000 in cash and assets, supplemented by subsequent loans but depleted even more by subsequent withdrawals,
is clearly inadequate when compared to its business undertaking; regardless of whether ITC's role in this transaction was that of broker or actual supplier, its multimillion dollar contract with Torco exposed it to a massive damage claim,
and ITC simply does not have sufficient funds on which to rely should something go wrong.
The Washburn line of cases cited supra suggests that undercapitalization alone is enough to sustain an alter ego argument, and this position gains support from the frequently repeated pronouncement in Illinois opinions that "[a] corporation's capitalization is a major consideration of courts in deciding whether a legitimate separate corporate entity was maintained." Amsted Industries v. Pollak Industries, 65 Ill.App.3d 545, 552, 382 N.E.2d 393, 399, 22 Ill.Dec. 73, 79 (1978); accord, Gallagher, 91 Ill.App.3d at 1005, 415 N.E.2d at 564, 47 Ill.Dec. at 559. Indeed, one court has observed that inadequate capitalization alone is grounds for "'denying the separate entity privilege'" of insulating shareholders from liability. Stap, 63 Ill.App.3d at 29, 379 N.E.2d at 1302, 20 Ill.Dec. at 234 (quoting Ballantine on Corporations 302-03 (rev. Ed. 1946)). This argument is especially forceful where, as here, the plaintiff would be unfairly prejudiced because adherence to the concept of the corporation as a separate entity would prevent full recovery. Cf. Hyatt v. Club Regency, No. 85 C 7540 (no exception to fiduciary shield doctrine where no evidence of unfair prejudice because plaintiff "has not argued that it can obtain full recovery only if [individual] defendants are brought in"); Veal Associates, No. 86 C 7138 (same). But despite this authority, we know of no case that has found a corporation to be a mere shell based solely on its capitalization status. That is not to say that undercapitalization alone is insufficient; rather, in those cases where under-capitalization was a factor, it was supplemented by other factors also weighing in favor of disregarding the corporate entity, and thus the precise question was never forced. So here also do other relevant factors enter into the inquiry, and we choose not to rest our finding on the independent sufficiency of under-capitalization.
While not commingled in a literal sense, ITC's finances appear to be wholly dependent on certain ostensibly unrelated Caldwell enterprises. Taking the place of the income that has, from its inception, eluded ITC are loans from various Caldwell entities. See Edwards Dep. at 39, 41. These loans amounted to $ 149,999.51 in February, 1989, and have since increased ( id. at 54-55). ITC signed no notes for these loans ( id. at 37), although they do appear in the books of the Caldwell entities. Interest on these loans was not agreed upon or calculated at the time the loans are made; rather, at the end of the fiscal year, auditors added interest to ITC's obligation ( id. at 37-38).
In addition to these general loans, Caldwell's other concerns have made a significant number of specific expenditures on behalf of ITC. Rivera's trip to Chicago to discuss the proposed gas contract with Torco and various other ITC business expenses -- adding up to $ 43,541.48 -- were charged to a Diner's Club credit card for which Caldwell Aircraft Trading Company was responsible (Edward's Dep. at 25, 44; Rivera Dep. at 114). Caldwell Aircraft Trading Company additionally paid over $ 8,500 in consulting fees to an oil and gas engineer hired by ITC and $ 10,000 to another company providing consulting ( id. at 43), legal and accounting fees on behalf of ITC ( id. at 32, 45), rent for a house for Rivera ( id. at 33), rent for the office space in Florida used by ITC (Rivera Dep. at 5, 106), a telephone bill corresponding to ITC's number ( id. at 35), over $ 5,000 in freight charges for ITC cargo ( id. at 45), and office supplies and expenses attributable to ITC ( id. at 55). Caldwell entities also made loans to third parties on ITC's behalf (Edwards Dep. at 44-46).
That these loans and expenditures are carried on Caldwell Aircraft's books and are formally not gratuitous does not convince us of ITC's underlying fiscal independence. Although appearing in Caldwell Aircraft books, these obligations are apparently not recorded in ITC's accounting records; indeed, ITC has neither an accountant nor any transaction books (Rivera Dep. at 82). No repayment on this debt has occurred -- indeed, ITC's financial condition would seem to preclude it from fulfilling these "obligations" -- and, apart from the loans, it does not seem that any interest has accrued. Moreover, the sheer comprehensiveness of the expenses covered by Caldwell Aircraft, especially in light of the limited business transacted by ITC, in addition to the fact that the charges were specifically and directly paid by Caldwell Aircraft rather than paid indirectly through a loan to ITC, suggest that, far from an arm's-length transaction, this repeated behavior reflects the total assumption by Caldwell Aircraft of ITC's financial responsibilities.
Finally, Torco points to several examples of ITC's dependence on Caldwell's other enterprises, apart from the financing of ITC's operations, that suggest that ITC is not -- and is not presented as -- an independent entity. In its complaint, Torco alleges:
19. Rivera sent Torco the financial statements of Charlotte Aircraft Corporation and Subsidiaries as evidence that ITC was properly capitalized to engage in . . . [the] transaction with Torco and that Caldwell provided financial substance to ITC.
20. Rivera also suggested to Ken Crow that Torco contact North Carolina National Bank ("NCNB") to confirm Caldwell's financial substance and integrity.
(First Amended Complaint at 4.) While ITC protests that this financial information was used merely "to show the experience of stockholders of ITC in the aviation industry since our cogeneration business is based on aero derivative gas turbines," (Rivera Dep. at 17), Torco's view as expressed in its complaint that this information was intended to impute to ITC the financial stability of other Caldwell corporations is certainly plausible. Indeed, Wilkins, a Torco vice-president, specifically asked for financial information regarding ITC, but none was given. Id.
Bolstering the dependence argument is the fact that certain paper work concerning the transaction between Torco and ITC was mailed to Caldwell's office (First Amended Complaint at 5); although Rivera is allegedly unconnected to Caldwell's other concerns located in North Carolina, he at one point adverts to "my office in Charlotte" (Rivera Dep. at 54). Torco observes additionally that the employees of ITC are also employed by other Caldwell corporations, and although this unity of employees alone does not refute the separate identity of ITC, the fact that they receive only one check -- from Charlotte Aircraft Corporation -- is significant. See Edwards Dep. at 5. Even Rivera, allegedly unconnected to Caldwell's other concerns, receives only advances from ITC -- and those come out of a Caldwell corporation's pocketbook (Edwards Dep. at 36-37). Torco relies finally on an affidavit submitted by Dennis James Cousino, the president of a company with whom ITC-Oklahoma had done business. In this affidavit Cousino states the "all payments we received pursuant to the contract [with ITC] were paid by Caldwell Aircraft, Charlotte Aircraft Corporation or Charlotte Aerospace," and that his company agreed to the contract "because we were led to believe that H. Jenks Caldwell and his companies stood behind ITC" (Cousino Aff. at 2). ITC-Oklahoma is admittedly not the same corporation as the ITC with whom Torco contracted, but they are related and, therefore, Cousino's testimony, while not conclusive on the dependence issue, certainly supports the argument.
We recognize that a slight blurring of the lines or a close relationship between two corporations does not alone warrant a court to disregard the corporate identity of one, see Stuart v. Spademan, 772 F.2d 1185 (5th Cir. 1985), but here the blurring is more than slight, and one could easily conclude that the identity of ITC is subsumed in the other Caldwell corporations. When added to the gross undercapitalization, this evidence of ITC's almost complete dependence certainly amounts to a "minimally viable" allegation that ITC is a mere shell.
We therefore find that the sham exception to the fiduciary shield doctrine is applicable to ITC.
2. Effect on Caldwell and Rivera's Fiduciary Shield Protection
We decline, however, to allow this finding to lower the fiduciary shield with respect to Rivera and Caldwell as individuals. The same facts that support the allegation that ITC may be a shell suggest that it is the alter ego, not of Caldwell himself or of Rivera, but of one of Caldwell's companies. The loans extended to ITC, and the money spent to cover Torco's expenses, were drawn from Caldwell's companies' financial resources, and the financial statements sent to Torco imputed Caldwell's companies' legitimacy to ITC. There is no suggestion that ITC was used for the personal benefit of Caldwell and Rivera, and no evidence that ITC's finances were commingled, even in a loose sense, with personal funds. In short, Torco makes its alter ego argument without regard to whose alter ego ITC actually is, and the allegations and evidence suggest that it is a Caldwell company that is the face behind the mask.
Although prior case law has not considered the possibility of limiting the force of the alter ego exception by inquiring into who is the controlling power behind the sham corporation, we do not believe that this omission is attributable to a belief that the exception is absolute; rather, it is likely due to the fact that the fiduciary shield doctrine is a "thorny jurisdictional issue involving a legal doctrine that continues to evolve." Schubert v. Gay & Taylor, Inc., 716 F. Supp. 1129, 1131 (N.D.Ill. 1989). Certainly the concept of piercing the corporate veil is not limited to those situations where a plaintiff is trying to reach the individuals behind the corporation. See Fletcher, Cyclopedia § 41.10 ("A corporation may be the alter ego of another corporation and where this occurs the distinct corporate entity will be disregarded and the two corporations will be treated as one"); Federal Ins. Co. v. Maritime Shipping Agencies, 64 Ill.App.3d 19, 30, 380 N.E.2d 873, 880, 20 Ill.Dec. 664, 671 (1978). Indeed, in Amsted Industries, the court, in a substantive corporations law context, made precisely the distinction that we find significant here:
the degree of interrelatedness of the two corporate defendants is irrelevant to the issue of this appeal which is the personal liability of Pollak. Evidence that the affairs of the two corporations were interwoven relates to the liability between the two corporations, rather than the personal liability of Pollak. That the two corporations may have been operated as one does not mean that some legitimate corporate entity did not exist to shield Pollak from personal liability.
65 Ill.App.3d at 550, 382 N.E.2d at 397, 22 Ill.Dec. at 77.
Moreover, limiting the force of the alter ego exception makes sense in light of the theory and operation of the exception. The alter ego exception is powered by the rationale that it is unfair to apply the fiduciary shield doctrine where the corporation is a facade for another's interests; this inquiry looks to whose interest is actually promoted by the fiduciary's acts. And the exception serves to attribute contacts of the corporation with the forum state to the alter ego. Here, Torco's showing that ITC is a sham permits us to attribute ITC's contacts with Illinois to Caldwell's other corporations. To reach Caldwell himself or Rivera would require the additional step of showing that these other corporations are themselves mere shells. This Torco has not done. We therefore hold that the fiduciary shield doctrine prevents us from asserting jurisdiction over Rivera and Caldwell in their capacity as individuals.
For the foregoing reasons, defendants' motion to dismiss for lack of personal jurisdiction is denied with respect to defendant Innovative Thermal Corporation and granted with respect to defendants Rivera and Caldwell.