United States District Court, N.D. Illinois
April 21, 2004.
DANIEL NELSEN, Plaintiff,
WALDO MORRIS, an individual, Defendant
The opinion of the court was delivered by: WILLIAM HART, Senior District Judge
MEMORANDUM OPINION AND ORDER
Plaintiff Daniel Nelsen, an Illinois resident, alleges that he lost
money investing in limited liability companies ("LLC's") that leased
aircraft. Plaintiff alleges that defendant Waldo Morris, an Iowa
resident, caused these losses by breaching his fiduciary duty as a
managing member of the LLC's and by committing fraud in order to induce
plaintiff's investment. There is complete diversity of citizenship and
the amount in controversy exceeds $75,000. Defendant has moved to dismiss
based on lack of personal jurisdiction.
The burden is on plaintiff to show that personal jurisdiction over
defendant is proper. Purdue Research Foundation v. Sanofi-Synthelabo,
S.A., 338 F.3d 773, 782 (7th Cir. 2003); Steel Warehouse of Wisconsin,
Inc. v. Leach, 154 F.3d 712, 714 (7th Cir. 1998); Chen v. Quark Biotech,
Inc., 2003 WL 22995163 *1 (N.D. Ill. Dec. 15, 2003). For purposes of ruling on the
question of personal jurisdiction, all uncontroverted facts alleged by
plaintiff, all facts adequately supported by any affidavit or other
evidence submitted by plaintiff, and all uncontroverted facts supported
by defendant's affidavits or documentary submissions are assumed to be
true. See Purdue Research, 338 F.3d at 782-83; McIlwee v. ADM
Industries, Inc., 17 F.3d 222, 223 (7th Cir. 1994); Weidner
Communications, Inc. v. H.R.H. Prince Bandar Al Faisal, 859 F.2d 1302,
1306 n.7 (7th Cir. 1988); Turnock v. Cope, 816 F.2d 332, 333 (7th Cir.
1987). The parties were permitted to engage in discovery prior to
completing briefing on defendant's motion. However, since the ruling on
personal jurisdiction is being made on written submissions, not following
an evidentiary hearing, plaintiff is only required to make a prima facie
showing in support of his claimed basis for personal jurisdiction. Purdue
Research, 338 F.3d at 782-83.
According to the allegations of the complaint, defendant was the
managing member of two LLC's known as Interlease IV and Interlease V.
Both LLC's were in the business of leasing aircraft that were owned by
the LLC's. Plaintiff was a 25% member of Interlease IV and a 5% member of
Interlease V. Plaintiff allegedly loaned Interlease V $1,000,000 in
return for a promissory note secured by an aircraft, but later
relinquished the note for his 5% share of Interlease V. Plaintiff
allegedly invested another $1,000,000 and also personally guaranteed a
$5,800,000 loan as part of his purchase price for his interest in
Interlease IV. Defendant allegedly used the loan proceeds to pay off debts defendant would have otherwise owed. Also, defendant allegedly
intermingled funds among various LLC's and used some funds for his own
benefit. After the foreclosure on the loan, defendant allegedly
improperly purchased one of the aircraft that had been security.
Plaintiff lost his $2,000,000 investment and, based on the personal
guaranty, was required to pay $1,451, 250 in principal plus $92,940
interest and incurred $46,060 in attorney fees.
In response to defendant's pending motion, plaintiff does not contend
that defendant directly solicited the investments from him. Instead,
plaintiff contends that the LLC's themselves were based in Illinois and
that defendant conducted his business through the LLC's and through an
agent, Phil Coleman, who was the one who directly solicited plaintiff.
Defendant does not dispute that the LLC's are based in Illinois*fn1 and
that the LLC's themselves engaged in conduct that would be a basis for
personal jurisdiction in Illinois. Defendant does not provide evidence
disputing the allegations of the complaint that he commingled funds among
the various LLC's or that he used assets for his personal benefit.*fn2
Therefore, these allegations must be taken as true for purposes of ruling
on the motion to dismiss. Plaintiff provides evidence supporting that
defendant participated in managing and directing the activities of the
LLC's. Since there is no dispute regarding the activity of the LLC's being a
basis for exercising jurisdiction in Illinois, it is unnecessary to
detail the general rules regarding exercising personal jurisdiction. See
generally Hyatt International Corp. v. Coco, 302 F.3d 707, 713-17 (7th
Cir. 2002); YKK USA, Inc. v. Baron, 976 F. Supp. 743, 745-47 (N.D. Ill.
1997). The LLC's were doing business in Illinois, which would subject
them to general jurisdiction in Illinois, even as to cases that do not
arise from the particular contacts in Illinois. See Hyatt, 302 F.3d at
713. To the extent the conduct of the LLC's is attributable to
defendant, he would also be amenable to suit in Illinois on any claim.
Under the "fiduciary shield" doctrine, however, an individual's acts
performed in a representative capacity generally will not be a basis for
exercising jurisdiction over the individual. YKK, 976 F. Supp. at 747.
One exception to the fiduciary shield doctrine, however, is the "sham" or
"alter ego" exception. "This exception is applicable `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.'" Id. (quoting Torco. Oil Co. v. Innovative Thermal Corp.,
730 F. Supp. 126, 135-136 (N.D. Ill. 1989)). "If the `alter ego'
exception is applicable, the corporation's contacts are attributed to the
individual for the purposes of personal jurisdiction determination." Id.
Defendant contends that plaintiff cannot rely on this theory because no
alter ego, sham, or corporate piercing allegations are contained in the complaint. The complaint only contains
allegations of direct liability on defendant's part. However, here
plaintiff is relying on general jurisdiction. The basis for exercising
personal jurisdiction, therefore, need not be the same as the breach of
fiduciary duty and fraud claims contained in the complaint.
Additionally, although the alter ego exception to the fiduciary shield
doctrine and piercing the corporate veil for liability purposes are
similar concepts, they have differing elements and distinct purposes.
See YKK, 976 F. Supp. at 747; Torco, 730 F. Supp. at 136. Plaintiff may
raise the alter ego doctrine even though he has not alleged a piercing
the corporate veil allegation in his complaint.
In response to the motion to dismiss, plaintiff need only make a
"minimally viable" showing that the LLC's are a sham. YKK, 976 F. Supp.
at 747 (quoting Torco, 730 F. Supp. at 136). It is enough to show that
the allegations are not "patently without merit." Torco, 730 F. Supp. at
136; Van Ru Credit Corp. v. Professional Brokerage Consultants, Inc.,
2003 WL 22462607 *2 (N.D. Ill. Oct. 29, 2003). The alter ego rules
applicable to LLC's are generally the same as those for corporations.
See, Iowa Code § 490A.603(2) (personal liability of LLC member is same as
that of a corporate shareholder except that failure to observe
formalities as to meetings is not a consideration). See also Kaycee Land
& Livestock v. Flahive, 46 P.3d 323, 327-28 (Wyo. 2002); Hollowell v.
Orleans Regional Hospital LLC, 217 F.3d 379, 385 (5th Cir. 2000). Here,
it must be taken as true that funds of the various LLC's were
commingled, that Interlease IV became insolvent in that the guarantors had to pay off
the outstanding balance of its loan, and that defendant used LLC funds
for his own benefit. There is also evidence that defendant managed and/or
directed activities of the LLC's. It cannot be held that plaintiff's
alter ego theory is not viable. Cf. Torco, 730 F. Supp. at 137-39.
Therefore, the conduct of the LLC's is attributable to defendant for
personal jurisdiction purposes and, at this stage of the proceedings, it
is appropriate to continue to exercise personal jurisdiction over
defendant. Because personal jurisdiction is being upheld on this basis,
it is unnecessary to consider whether the fiduciary shield doctrine
should not apply because defendant was acting in his own interest instead
of the interests of the LLC's and whether, on that basis, it would be
appropriate to exercise general and/or specific personal jurisdiction.
IT IS THEREFORE ORDERED that defendant's motion to dismiss pursuant to
Rule 12(b)(2) [4-1] is denied. Within 10 days, defendant shall answer the
complaint. All discovery is to be completed by August 3, 2004. A status
hearing will be held on May 12, 2004 at 11:00 a.m.