United States District Court, N.D. Illinois
March 19, 2004.
PHILLIP S. STENGER, et al., Plaintiffs, -v- LEADENHALL BANK & TRUST COMPANY LIMITED; a Bahamian limited partnership; AXXESS INTERNATIONAL LIMITED, a Bahamian limited partnership; and AXXESS INTERNATIONAL BAHAMAS LIMITED, a Bahamian limited partnership; Defendants
The opinion of the court was delivered by: JOHN W. DARRAH, District Judge
MEMORANDUM OPINION AND ORDER
Plaintiffs filed suit alleging claims for aiding and abetting
fraudulent conveyances, breach of fiduciary duty to warn, negligence,
breach of contract, and conspiracy. Currently before the Court are
Defendants' Motion to Strike and Defendants' Renewed Motion for Dismissal
for Lack of Personal Jurisdiction or, in the Alternative, Under the
Doctrine of Forum Non Conveniens.
Phillip S. Stenger and G. James Cleaver were appointed by the Grand
Court of the Cayman Islands, as the joint official liquidators of various
related entities known as Cash 4 Titles ("C4T"), including Morningstar
Ltd., which is an entity incorporated in the Cayman Islands and doing
business in the United States. Stenger is also the receiver, appointed at
the request of the United States Securities & Exchange Commission,
over the beneficial interests of Charles R. Homa, D. Dean Pearson, and
Michael Gause, and their related C4T entities. Stenger's mandate as
receiver is to marshal, conserve, protect, hold funds, and operate and
dispose of any assets constituting
receivership property for the benefit of investors.
Leadenhall Bank & Trust, Ltd is a Bahamian limited partnership that
operates a financial institution in the Bahamian Islands. Leadenhall
provides credit card and other financial services to residents of the
United States, including at least six Illinois residents. Axxess
International Ltd. and Axxess International Bahamas Ltd. (collectively
"Axxess") are limited partnerships formed in the Bahamas and are partners
of Leadenhall, providing credit/debit card services around the world,
including the United States and Illinois.
Homa was a resident of Atlanta, Georgia, and the founder and owner of a
business enterprise called "Cash 4 Titles." Cash 4 Titles operated
exclusively in the United States through C4T Management, Inc. and other
related entities (collectively "C4T US"). Cash 4 Titles provided
short-term, high-interest loans to borrowers who pledged their motor
vehicles as collateral. In 1993, Gause contacted Homa based on a C4T US
advertisement in an Atlanta newspaper and became both an investor in and
a marketing representative of C4T US. After 1993, Homa remained generally
in charge of the C4T US operations, and Gause remained generally in
charge of the investor relations and marketing aspects of C4T US.
Shortly after becoming responsible for C4T US investor relations and
marketing, Gause developed a multiple-tier marketing enterprise, which
eventually used Cayman Island, Bahamian, and United States entities and
individuals in a joint venture to defraud investors in C4T US. The
instruments used to facilitate investor transactions were promissory
notes or bonds issued by second-and third-tier marketing companies owned
by individuals other than Homa and Gause.
Joseph Denson was a second-tier marketer, working directly below Gause.
Denson's marketing and note-issuing companies were Morning Star and Rolls
Royce Ltd., a Bahamian
company. Both Morningstar and Rolls Royce had accounts at Leadenhall.
Morningstar was used to receive investor funds into the scheme and, as
such, was the conduit company for the flow of investments into the scheme
a so called "in" company. Rolls Royce was used to pay interest out to
investors and, as such, was the "out" company.
Homa, Cause, and Denson created a complicated maze of Cayman Islands
and Bahamian companies and corresponding Leadenhall bank accounts,
including Morningstar, to be used in receiving investor funds and
facilitating inter-bank transfers to assist Cause, Homa, and downline
marketers in avoiding the scrutiny of United States regulators while at
the same assisting in the perpetuation of a Ponzi scheme. Despite the
fact that it knew or should have known that these Cayman Islands and
Bahamian companies were being established for fraudulent purposes,
including tax fraud, Leadenhall and Axxess nonetheless established bank
accounts for these entities and assisted many marketers working below
Denson in opening Leadenhall bank accounts and Axxess credit/debit cards
for their offshore "entities."
Leadenhall and Axxess understood the functioning of the multiple-tiered
marketing scheme and assisted Denson in marketing the scheme by vouching
to potential investors regarding the legitimacy of C4T and the
Gause/Denson multiple-tiered marketing scheme and actively encouraging
individuals to invest in C4T US. Leadenhall and Axxess met with Homa and
Cause and fully understood the multi-level marketing scheme. Leadenhall
and Axxess also assisted the Ponzi scheme by directly paying interest on
many of the notes to which Morningstar and C4T US were obligated by
writing checks and making wire-transfer payments to investors from its
corporate account in BAC Florida Bank/Popular Bank ("BAC Bank") in
In October 1999, the SEC initiated a civil securities fraud action
against Gause, Homa, and other marketers involved in the Ponzi scheme. At
the SEC's request, Stenger was appointed as receiver in the SEC action.
Thereafter, the Grand Court of the Cayman Islands appointed Cleaver and
Stenger as joint official liquidators of several Cayman Island companies
involved in the fraud, including Morningstar. The liquidators and the
receiver are pursuing recovery and accountability actions in order to pay
innocent investors and creditors who are owed in excess of one-hundred
million dollars through the notes and bonds issued by the various
companies in the multi-tiered marketing scheme. This action was filed
against Leadenhall and Axxess on behalf of the stockholders in the Gause,
Homa, and Denson companies, for the benefit of the investors to whom
Gause and Homa companies owe promissory notes or bonds that have not been
paid, to hold Leadenhall and Axxess accountable for the damages that
resulted to those companies from Leadenhall's and Axxess's actions and
Plaintiffs allege that this Court has personal jurisdiction over the
Defendants based on: (1) Defendants purposefully marketed their financial
services to citizens of the United States and to residents of the state
of Illinois by providing Leadenhall and Axxess application forms and
marketing materials to Denson, knowing Denson would circulate the
materials to potential investors in Illinois; (2) Defendants purposely and
systematically paid interest on behalf of Morningstar and C4T US
companies to investors in Illinois from Leadenhall's corporate account in
Florida in the form of checks and wire transfers; (3) Defendants
distributed bank credit and debit cards to residents of Illinois, knowing
that such cards would be utilized in banking and other financial
institutions in Illinois; (4) Defendants are part of a conspiracy to
defraud and are, thus, subjected to the personal
jurisdiction of this Court due to the contacts that Denson, Homa,
and Cause had with investors in Illinois; and (5) the receivership
statutes of 28 U.S.C. § 754, 1692.
Initially, Defendants move to strike, pursuant to Federal Rule of Civil
Procedure 37, Plaintiffs' Exhibit No. 5 (the "Gause Transcript") that was
submitted in support of Plaintiffs' Response to Defendants' Motion to
Pursuant to Federal Rule of Civil Procedure 37, a party that, without
substantial justification, fails to disclose information required by
Rule, or to amend a prior response as required by Rule, is not permitted
to use such evidence at trial, at a hearing, or for a motion.
In the instant case, Defendants asked Plaintiffs to identify and
produce statements of "any person regarding any of the jurisdictional
allegations set forth in the Complaint." On May 30, 2003, Plaintiffs
identified James Owen in response to Defendants' request. Pursuant to
Court order, Plaintiffs were given a further opportunity to produce all
documents on the issue of personal jurisdiction by October 22, 2003.
Plaintiffs did not produce any additional statements or amend their
However, in their response to the instant Motion to Dismiss, Plaintiffs
attached excerpts of a May 2, 2002 statement of Michael Gause, which
includes statements regarding the personal jurisdiction allegations. By
letter dated January 8, 2004, Defendants notified Plaintiffs that their
previous answer appeared to be false and requested that Plaintiffs
produce Gause's complete statement. Plaintiffs responded that they
assumed that Defendants were either provided a copy of Gause's transcript
or had access to it during discovery. Plaintiffs did not explain why they
had not previously disclosed Gause. Furthermore, Gause's transcript
reveals that Plaintiffs had taken
Cause's statement on other occasions prior to the close of discovery and
that Plaintiffs failed to inform Defendants of these additional
Based on the above, Plaintiffs failed to timely produce statements by
Gause that related to the personal jurisdiction issue before the Court.
Plaintiffs also failed to offer any justification for their failure to
timely produce or identify Gause and his statements. Accordingly,
Plaintiffs' Exhibit No. 5 is stricken.
A Plaintiff has the burden of establishing a prima facie case of
personal jurisdiction. See Steel Warehouse of Wisc., Inc. v. Leach,
154 F.3d 712, 714 (7th Cir. 1998). When deciding whether the plaintiff
has made a necessary showing, a court can look to affidavits and exhibits
submitted by each party. Turnock v. Cope, 816 F.2d 332, 333 (7th Cir.
1987) (Turnock). When determining whether the plaintiff has met the
burden of establishing a prima facie case of jurisdiction, this Court
must take jurisdictional allegations in the complaint as true, unless
controverted by the defendant. See Turnock, 816 F.2d at 333.
Additionally, all factual disputes must be resolved in favor of the
plaintiff. Turnock, 816 F.2d at 333.
A determination of whether this Court has personal jurisdiction over
the non-resident Defendants requires an examination of three sources of
law: "(1) state statutory law, (2) state constitutional law, and (3)
federal constitutional law." RAR, Inc. v. Turner Diesel Ltd.,
107 F.3d 1272, 1276 (7th Cir. 1997) (RAR).
Under Illinois law, a defendant is subject to the jurisdiction of its
courts if the cause of action arises from several specified acts,
including committing a tortious act within the state. 735 ILCS
5/2-209(a)(2). The statute also provides that an Illinois court may
exercise jurisdiction on any basis permitted by the state or federal
constitution. 735 ILCS 5/2-209(c). Therefore, the statute authorizes
the exercise of personal jurisdiction by the Illinois courts to the
fullest constitutional limit; and the statutory analysis collapses into a
due process inquiry, and whether the defendant engaged in any of the acts
enumerated in the long-arm statute need not be considered by the court.
Indianapolis Colts, Inc. v. Metropolitan Baltimore Football Club
Partnership, 34 F.3d 410, 411 (7th Cir. 1994) (Colts); Euromarket
Designs, Inc. v. Crate & Barrel Ltd., 96 F. Supp.2d 824, 834 (N.D.Ill.
2000) (Euromarket); LaSalle National Bank v. Vitro, 85 F. Supp.2d 857, 860
(N.D. Ill. 2000); LFG.LLC. v. Zapata Corp. 78 F. Supp.2d 731, 735 (N.D.
Ill. 1999) (LFG).
The Due Process Clause permits an Illinois court to exercise
jurisdiction over a non-resident defendant only if the defendant has had
"certain minimum contacts with [the state] such that the maintenance of
the suit does not offend `traditional notions of fair play and
substantial justice.'" International Shoe Co. v. Washington, 326 U.S. 310,
316 (1945), quoting Milliken v. Meyer, 311 U.S. 457, 463 (1940); Neuman
& Assoc. v. Florabelle Flowers, 15 F.3d 721, 725 (7th Cir. 1994). This
determination depends on whether the plaintiff asserts general or
specific jurisdiction against the defendant. RAR, 107 F.3d at 1277.
General jurisdiction requires a showing that the defendant performed
"substantial" or "continuous and systematic" activities in the forum
state, and specific jurisdiction requires a showing of minimum contacts
with the forum state. Helicopteros Nacionales de Colombia, S.A. v. Hall,
466 U.S. 408, 413-16 (1984) (Helicopteros).
"General jurisdiction . . . is for suits neither arising out of nor
related to the defendant's contacts, and it is permitted only where the
defendant has `continuous and systematic general business contacts' with
the forum state." RAR, 107 F.3d at 1277. A defendant with extensive
contacts in a state can be subject generally to the personal jurisdiction
of that state's courts. Helicopteros, 466 U.S. at 414. A finding that a
non-resident defendant is doing business in Illinois
so as to maintain a presence here subjects him to personal jurisdiction
of Illinois courts for all matters. Aetna Cas. & Sur. Co. v. Crowther,
Inc., 581 N.E.2d 833, 835 (Ill.App. Ct. 1991). In order to have general
jurisdiction, the business activities of the defendant cannot be
inadvertent, trivial or sporadic; they must be intentional, substantial
and continuous. Asset Allocation & Management Co. v. Western Employers
Ins. Co., 892 F.2d 566, 570 (7th Cir. 1989).
In the instant case, the Defendants are not subject to the general
jurisdiction of this Court. Defendants' activities in Illinois were not
"substantial" or "continuous and systematic." The only activities by the
Defendants directed at Illinois were the mailing of interest checks and
credit/debit card statements to Illinois residents. However, only 14
account/card holders, or 0.5% of those who invested in C4T, had an
Illinois address. The banking and credit card services provided by the
Defendants took place in the Bahamas and were governed by Bahamian law.
The Defendants did not maintain any accounts in Illinois, perform any
credit card services in Illinois, and did not negotiate any contracts for
such services in Illinois. Defendants' minimal activities with Illinois
fail to establish general jurisdiction. See Federated Rural Elec. Ins.
Corp. v. Inland Power & Light Co., 18 F.3d 389, 395 (7th Cir. 1994)
(Federated) (defendant's activities of sending premium payments to
resident in Wisconsin; backing the sale of bonds, some of which were sold
to Wisconsin residents; and defendant's communications with Wisconsin
resident by mail and phone were insufficient to subject defendant to
personal jurisdiction in Wisconsin); Asset Allocation & Mgmt. Co. v.
Western Employees Ins. Co., 892 F.2d 566, 570 (7th Cir. 1990) (Asset)
(payments into Illinois not sufficient to subject payer to personal
jurisdiction); Tri-Meats, Inc. v. NASL Corp., 2001 WL 292621 (N.D. Ill.
March 26, 2001) (Tri-Meats) (wire transfers into Illinois not sufficient
to subject transferor to personal jurisdiction).
Specific jurisdiction "refers to jurisdiction over a defendant in a suit
`arising out of or related to the defendant's contacts with the forum.
"RAR, 107 F.3d at 1277, quoting Helicopteros 466 U.S. 408 (1984). To
determine whether specific jurisdiction exists, this Court must determine
whether the Defendants have "purposefully established minimum contacts
within [Illinois]" and whether those contacts would make personal
jurisdiction reasonable and fair under the circumstances. Burger King
Corp. v. Rudzewicz, 471 U.S. 462, 474 (1985). Defendants must have
"purposefully availed" itself of the privilege of conducting activities
within the forum state, invoking the benefits and protections of its laws
such that they would "reasonably anticipate being haled into court
there." Asahi-Metal Indus. Co. v. Superior Court, 480 U.S. 102, 109
(1987) (Asahi-Metal). The plaintiff must establish that haling the
defendant into court is consistent with the Fourteenth Amendment's due
process clause. LFG, 78 F. Supp.2d at 734.
The due process requirement is met if: (1) the defendant has sufficient
minimum contacts with the forum state; (2) the claims asserted arise or
result from the defendant's forum-related activities; and (3) the
exercise of jurisdiction is reasonable. Euromarket, 96 F. Supp.2d
A defendant need not be physically present in the jurisdiction to have
sufficient minimum contacts if the defendant does something by which he
purposefully availed himself the privilege of conducting activities in
the forum state. Hanson v. Denckla, 357 U.S. 235, 252-54 (1958).
The critical inquiry is whether "the defendant's conduct and connection
with the forum state are such that he should reasonably anticipate being
haled into court" in the forum state. World- Wide Volkswagen Corp.
v. Woodson, 444 U.S. 286, 297 (1980).
Here, the Defendants allegedly provided materials that could be used to
solicit business to a third party. However, there are no allegations that
such materials were ever distributed or used in
Illinois. Plaintiffs also allege that Defendants mailed interest checks
and credit/debit card statements to Illinois residents. However, as
mentioned above, this involved only 14 account/card holders, or 0.5% of
the those who invested in C4T, who have an Illinois address. These
minimal activities are insufficient bases for jurisdiction. See
Federated, 18 F.3d at 395 (mailing of payments, communication by phone
and mail, and backing of sale of bonds insufficient contacts for purposes
of due process); Asset, 892 F.2d at 570 (payments into Illinois not
sufficient to subject payer to personal jurisdiction); Tri-Meats, 2001 WL
292621 at * 7 (wire transfers into Illinois not sufficient to subject
transferor to personal jurisdiction).
Furthermore, it would be unreasonable to bring the Defendants into
Illinois to defend the litigation.
The only alleged activity by the Defendants related to the present
lawsuit toward Illinois is the payment of interest to about one-half of
one percent of all of the investors injured by the alleged Ponzi scheme.
The Defendants never actively sought any type of business relationship
with residents of Illinois and maintain no offices or personnel in
Illinois. Other than the interest payments to these few investors, no
other activities related to the claims against the Defendants took place
in Illinois or were connected in any manner to Illinois. Furthermore,
none of the parties are residents of Illinois, and none have ties to
Illinois. In addition, the burden of litigating in Illinois would also be
substantial because many of the prospective witnesses and most of the
evidence are located in the Bahamas.
Based on the above, Plaintiffs have failed to demonstrate a prima
facie case that forcing the Defendants to defend a lawsuit in Illinois
does not violate the due process requirement of specific jurisdiction.
Plaintiffs also contend that jurisdiction lies in this Court because
the Defendants were part of a conspiracy.
Under the "conspiracy theory of jurisdiction," the Court may assert
jurisdiction over all co-conspirators based on their involvement in a
conspiracy that occurred within the forum. See Textor v. Board of Regents
of Northern Ill. Univ., 711 F.2d 1387, 1392-93 (7th Cir. 1983) (Textor);
Kohler Co. v. Kohler Int'l, Ltd., 196 F. Supp.2d 690, 696-97 (N.D. Ill.
2002). Under this theory, the plaintiff must make a prima facie showing
of a conspiracy and a substantial act in furtherance of the conspiracy in
the forum state. See Textor, 711 F.2d at 1393. The substantial
conspiratorial act occurring in the forum state must be "sufficient to
establish minimum contacts with and confer jurisdiction over [the]
nonresident defendants." Zivitz v. Greenburg, 1999 WL 984397 (N.D. Ill.
Oct. 25, 1999).
Here, Plaintiffs have pled that the Defendants were in a conspiracy
with Homa, Gause, Denson, and C4T US to defraud investors and
fraudulently convey funds from C4T US to Morningstar. The allegations
summarized above sufficiently plead a conspiracy by these actors. The
Defendants' activities in furtherance of the conspiracy in Illinois are
the repatriating of the Illinois investor's interest through the mailing
of checks or by crediting the credit/debit card accounts of the Illinois
investors. However, these activities, at the most, involved 0.5% of the
investors that were allegedly damaged by Defendants' conduct. These
minimal activities do not constitute a substantial act in furtherance of
the conspiracy. See Zivitz v. Greenburg, 1999 WL 984397 (N.D. Ill. Oct.
25, 1999); Asset, 892 F.2d at 570. Accordingly, personal jurisdiction over
the present Defendants cannot be based on the alleged conspiracy.
Lastly, Plaintiffs contend that personal jurisdiction over the
nonresident Defendants can be based on the receivership statutes because
such statutes authorize extraterritorial service of process in cases
brought by receivers.
Federal Rule of Civil Procedure 4(k) provides, in pertinent part, that
service of summons is effective to establish personal jurisdiction over a
defendant who could be subject to jurisdiction in a court of the forum
state when service is authorized by a federal. See Fed.R. Civ. P.
4(k)(1)(A) and (D). Plaintiffs argue that the receivership statutes
28 U.S.C. § 754 and 1692 provide for nationwide service and, thus,
personal jurisdiction over the nonresident Defendants.
Section 754 provides:
A receiver in any civil action or proceeding involving
property, real or personal or mixed, situated in
different districts> shall, upon giving bond as
required by the court, be vested with complete
jurisdiction and control of all such property with the
right to take position thereof.
Such receiver shall . . . file copies of the complaint
and such order of appointment in the district court
for each district in which property is located. The
failure to file such copies in any district shall
divest the receiver of jurisdiction and control over
all such property in that district,
28 U.S.C. § 754. This statute does not confer extraterritorial in
personam jurisdiction; instead, it permits the receiver to obtain in rem
jurisdiction over receivership property. See Stenger v. World Harvest
Church, Inc., 2003 WL 22048047 (N.D. Ill. Aug. 2, 2003) (World Harvest).
Furthermore, Section 754 does not authorize extraterritorial service of
process; therefore, it is does not confer jurisdiction pursuant to Rule
4(k)(1)(D). See World Harvest, 2003 WL 22048047 at *2. Section 1692,
provides in pertinent part:
[i]n proceedings in a district court where a receiver
is appointed for property, real, personal or mixed,
situated in different districts>, process may issue and
be executed in any such districts> as if the property
lay wholly within one district, but orders affecting
the property shall be entered of record in each of
29 U.S.C. § 1692. This section provides for the issuance and execution of
process; however, it does not mention service of process. Contrary to
Section 1692, other statutes that have been construed to permit
nationwide service of process include language not found in Section
1692. See 18 U.S.C. § 1965(b) ("process maybe served in any judicial
district of the United States"); 28 U.S.C. § 1697 ("process, other than
subpoenas, may be served at anyplace within the United States");
15 U.S.C. § 78aa (process "may be served in any other district of which
the defendant is an inhabitant or wherever the defendant may be found").
Section 1692 provides no similar language providing for nationwide
service of process and, therefore, does not create personal jurisdiction
under Rule 4(k)(1)(D). See World Harvest, 2003 WL 22048047 at *3.
Based on the above, the receivership statutes fail to establish
personal jurisdiction over the Defendants.
For the forgoing reasons, Plaintiffs have not established a prima
facie case for personal jurisdiction.
Accordingly, Defendants' Renewed Motion to Dismiss is granted.
Defendants' alternate Motion to Dismiss for Forum Non Conviens is denied
as moot. Defendants' Motion to Strike is granted.
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