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Forsythe v. Black Hills Corp.

March 12, 2007

GERALD R. FORSYTHE, MICHELLE R. FAWCETT, MARSHA FOURNIER, MONICA BRESLOW, MELISSA S. FORSYTHE, AND JOHN W. SALYER, JR., PLAINTIFFS,
v.
BLACK HILLS CORP., DANIEL P. LANDGUTH, EVERETT E. HOYT, DAVID R. EMERY, MARK T. THIES, THOMAS M. OHLMACHER, RICHARD A. OSTBERG, AND STEVEN J. HELMERS, DEFENDANTS.



The opinion of the court was delivered by: Matthew F. Kennelly, District Judge

MEMORANDUM OPINION AND ORDER

In 2000, plaintiffs Gerald Forsythe, Michelle Fawcett, Marsha Fournier, Monica Breslow, Melissa Forsythe, and John Salyer Jr. sold Indeck Capital, Inc. to defendant Black Hills Corp. The merger agreement governing the sale provided for an immediate payment to plaintiffs plus "earn-out" consideration to be issued over the ensuing four years. The earn-out was to be determined based on a percentage of the net income of Black Hills Generation Company ("Generation"), the entity that took over Indeck's operations. Plaintiffs allege that defendants, Black Hills and several of its officers and personnel, artificially depressed Generation's income by saddling it with interest payments on intercompany loans that plaintiffs say did not really exist or, at a minimum, carried artificially high interest rates.

Plaintiffs' original complaint named only Black Hills as a defendant. In their amended complaint, they added Daniel Landguth, who was chairman and chief executive officer of Black Hills and Generation during certain relevant periods; Everett Hoyt, a director, president, and chief operating officer of Black Hills; David Emery, president and chief executive officer of Black Hills and Generation during certain relevant periods; Mark Thies, executive vice president and chief financial officer of Black Hills and Generation; Thomas Ohlmacher, senior vice president of Black Hills and chief executive officer of Generation at relevant times; Richard Ostberg, Black Hills' controller; and Steven Helmers, general counsel and corporate secretary of Black Hills and Generation. All of the individual defendants live and work in South Dakota.*fn1

The amended complaint includes six claims. Count 1 is a claim of fraudulent misrepresentation against all the defendants; plaintiffs allege that the purported intercompany loans did not actually exist. Count 2 is a claim that Black Hills breached its obligation of good faith and fair dealing under the merger agreement by charging Generation interest on debt that did not exist, thereby reducing the amount of the earn-out payments. Count 3 is another claim against Black Hills for breach of good faith and fair dealing, alleged in the alternative to Count 2; in this claim, plaintiffs allege that if the intercompany debt actually existed, the interest rate charged to Generation was exorbitant. Count 4 is a claim against Black Hills for breach of a provision of the merger agreement requiring Black Hills to provide access to records relating to the earn-out determination; plaintiffs allege that after knowing that plaintiffs disputed the earn-out payments, Black Hills destroyed records that it was required to provide to plaintiffs. Count 5 is a claim against Black Hills for breach of good faith and fair dealing based upon the same alleged destruction of evidence. Count 6 is a claim for negligent spoliation of evidence.

Four of the individual defendants (Emery, Hoyt, Ohlmacher, and Ostberg) have moved to dismiss Count 1, the only claim against them, for lack of personal jurisdiction. All of the defendants have moved to dismiss the amended complaint for failure to state a claim.

Discussion

1. Rule 12(b)(2) Mtion

When personal jurisdiction over a defendant is challenged by way of a motion to dismiss under Federal Rule of Civil Procedure 12(b)(2), the plaintiff must make out a prima facie case of jurisdiction. When a motion is, like this one, decided on the basis of paper submissions, disputes in the evidence are resolved in favor of jurisdiction. See, e.g., Purdue Research Foundation v. Sanofi-Synthelabo, S.A., 338 F.3d 773, 782 (7th Cir. 2003).

This Court has personal jurisdiction over the individual defendants if an Illinois court would have jurisdiction over them. Fed. R. Civ. P. 4(k). An Illinois court has jurisdiction over a defendant to the extent permitted by the due process clauses of the United States and Illinois constitutions. 735 ILCS 5/2-209(c). The Seventh Circuit has indicated that there is no significant difference between the limits imposed on personal jurisdiction by the United States and Illinois constitutions, and thus the personal jurisdiction analysis collapses into a single inquiry focused on federal due process requirements. Hyatt Int'l Corp. v. Coco, 302 F.3d 707, 715 (7th Cir. 2002). Under the due process clause, before an out-of-state defendant may be required to defend a case in the forum state, it must have "minimum contacts" with the state "such that the maintenance of the suit does not offend 'traditional notions of fair play and substantial justice.'" Int'l Shoe Co. v. Washington, 326 U.S. 310, 316 (1945) (quoting Milliken v. Meyer, 311 U.S. 457, 463 (1940)).

There are two types of personal jurisdiction: general and specific. Only the latter is at issue in this case. A court may assert specific jurisdiction over an out-of-state defendant when the minimum contacts standard is met and the plaintiff's cause of action arises out of or relates to the defendant's contacts with the forum state. E.g., Helicopteros Nacionales de Colombia S.A. v. Hall, 466 U.S. 408, 414 (1984). The defendant's contacts with the forum state must be of a nature and quality such that the defendant has fair warning that it could be required to defend a suit there. Burger King Corp. v. Rudziewicz, 471 U.S. 462, 472 (1985). This ensures that jurisdiction over a defendant is "not based on fortuitous contacts, but on contacts that demonstrate a real relationship with the state with respect to the transaction at issue" and that "the defendant retains sufficient, albeit minimal, ability to structure its activities so that it can reasonably anticipate the jurisdictions in which it will be required to answer for its conduct." Purdue Research Foundation, 338 F.3d at 780.

Plaintiffs have met the constitutional standard for establishing personal jurisdiction. In particular, they have offered evidence that each of these defendants was involved in preparing the earn-out calculations, knowing or understanding that this information would be sent to plaintiffs in Illinois. A defendant's participation in the transmission of communications to Illinois to carry out a fraudulent scheme against Illinois residents is sufficient to confer this Court with personal jurisdiction over the defendant. See, e.g., Heritage House Restaurants, Inc. v. Continental Funding Group, Inc., 906 F.2d 272, 282 (7th Cir. 1990); FMC Corp. v. Varonos, 892 F.2d 1308, 1313 (7th Cir. 1990). Illinois has a significant interest in allowing its citizens to obtain redress in this state for injuries they suffered within its borders, see Calder v. Jones, 465 U.S. 783, 790 (1984), and defendants have identified no undue burden in having to defend the case here. In sum, plaintiffs have made a prima facie showing of jurisdiction as to defendants Emery, Hoyt, Ohlmacher, and Ostberg. The Court therefore denies those defendants' motion to dismiss for lack of personal jurisdiction.

2. Rule 12(b)(6) Mtion

a. Count 1

To sustain a fraud claim under Illinois law,*fn2 a plaintiff must establish that the defendant made a false statement of material fact, knowing or believing it to be untrue, for the purpose of inducing the plaintiff to act, and that the plaintiff actually and justifiably relied on the statement and was damaged as a result. See, e.g., Cramer v. Ins. Exchange Agency, 174 Ill. 2d 513, 528, 675 N.E.2d 897, 905 (1996).

Defendants make several challenges to Count 1, but the Court need deal with only one of them. The final element of a fraud claim, as summarized above, is proof that the plaintiff was damaged as a result of his reliance on the alleged fraudulent misrepresentations. See Dresser Inds., Inc. v. Pyrrhus AG, 936 F.2d 921, 934 (7th Cir. 1991) (Illinois law); Cramer, 174 Ill. 2d at 528, 675 N.E.2d at 905. At this stage of the case, of course, plaintiffs are not required to prove that they were damaged by their reliance on the alleged misrepresentations; rather, they need only allege it. They have not done so.

The type of causation required in a fraud case is proof that "had it not been for the fraud, [the plaintiff] would have been spared an injury and thus would be better off." Midwest Commerce Banking Co. v. Elkhart City Centre, 4 F.3d 521, 524 (7th Cir. 1993). "The fraud," however, is the misrepresentation itself, not the underlying conduct that was misrepresented or concealed. Any injury that plaintiffs suffered stems from Generation's payment of interest on allegedly phony intercompany debt. Though plaintiffs may well be able to prove that they were lied to about the existence of the debt, their damage resulted from the interest payments, not from the lies. See Am. Compl. ¶ 51 ("These fraudulent reductions in net income, by charging purported interest on non-existent notes, have resulted in payment of a mere fraction of the amount actually owed to the Former Indeck Shareholders . . . .").

To put it another way, plaintiffs have not alleged that, as a result of defendants' misrepresentations, they changed their position in any way that resulted in harm. The only thing that comes anywhere within shouting distance of such an allegation is paragraph 54, in which plaintiffs allege that defendants "took steps to preclude the plaintiffs from being earlier aware of the fraud and the full amount of the Earn-Out Consideration to which they were entitled." Id. ¶ 54. This is not the type of reliance or causation required to sustain a fraud claim. An allegation that a plaintiff might have discovered misconduct sooner absent the defendant's misrepresentation is insufficient, see Do It Best Corp. v. Passport Software, Inc., No. 01 C 7674, WL 1660814, *9 (N.D. Ill. July 23, 2004), unless, perhaps, the plaintiff contends that he was harmed by the delay -- an allegation missing from plaintiffs' amended complaint in this case.

Plaintiffs have not alleged in their amended complaint that there was anything they did not do but would have done, that they did but would not have done, or that they would have done differently, had they known the truth. In their memorandum in response to the motion, plaintiffs suggest that they would not have "accepted" the first year's earn-out calculation absent defendants' alleged misrepresentations, and that one of the plaintiffs would not have persisted in asking for copies of promissory notes evidencing the loans had he known the loans did not really exist. See Pls.' Opp. to Defs.' Non-Jurisdictional Motions to Dismiss at 15-16. But even there, plaintiffs do not hint at any way in which these alleged acts in reliance on the misrepresentations caused them harm. In plaintiffs' brief, they describe their claim of causation by saying they were "damaged to the extent that they have not received their full earn-out consideration." Id. at 17. This is damage caused by Generation's interest payments on allegedly phony debt, not damage caused by reliance on defendants' alleged misrepresentations about that debt. Plaintiffs also make, in a single sentence of their brief, a half-hearted attempt to suggest that they "have alleged that they were independently damaged through the fraud." Id. (citing Am. Compl. ΒΆΒΆ 11, 46, 60). But the paragraphs of the amended complaint that they cite to support ...


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