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Richard Knorr International, Ltd. v. Geostar

March 30, 2010

RICHARD KNORR INTERNATIONAL, LTD., AND RICHARD KNORR, INDIVIDUALLY, PLAINTIFFS,
v.
GEOSTAR, INC., A FOREIGN CORPORATION, MACAO DEVELOPMENT COMPANY, A FOREIGN CORPORATION, ROCO KI MANAGEMENT, INC., A FOREIGN CORPORATION, ROCO KI SERVICES, INC., A FOREIGN CORPORATION, MACAO BEACH RESORT, INC., A FOREIGN CORPORATION, ESTATES AT MACAO BEACH RESORT, INC., A FOREIGN CORPORATION, MACAO BEACH REAL ESTATE, INC., A FOREIGN CORPORATION, HACIENDAS ACQUISITION, INC., A FOREIGN CORPORATION, MACAO ACQUISITION, INC., A FOREIGN CORPORATION, AND RESORT RESOURCES, INC., A FOREIGN CORPORATION, DEFENDANTS.



The opinion of the court was delivered by: Honorable David H. Coar

MEMORANDUM OPINION AND ORDER

Richard Knorr and Richard Knorr International, Ltd. ("RKI") have filed suit against Geostar, Inc. and several of its subsidiary corporations for breach of contract, breach of fiduciary duties, and constructive fraud. Four of the remaining defendants*fn1 -Geostar, Inc.; Resort Resources, Inc.; Macao Development Company; and Macao Beach Real Estate, Inc.-have moved to dismiss the first amended complaint for lack of personal jurisdiction. See Fed. R. Civ. P. 12(b)(2). For the reasons that follow, the court DENIES the motions as to Geostar and Resort Resources and GRANTS the motions as to Macao Development Company and Macao Beach Real Estate.

FACTS

The jurisdictional facts in this case are complex and intricate. To help put them in context, the court begins with a brief overview of the "Roco Ki" project, the relations between the numerous defendants, and the events leading up to this lawsuit. The court will fill in the details, on a defendant-by-defendant basis, as they become relevant to its analysis.

Overview

In 2002, Richard Knorr and RKI, Knorr's Chicago based architectural and real-estate-development firm, RKI (collectively, "Knorr")*fn2 conceived of "Roco Ki," a combination of a destination resort and a residential community to be situated on the Caribbean shore of the Dominican Republic. Knorr engaged Carl Bazarian, an investment banker in Chicago, to find investors. In December 2002, Bazarian approached Richard Dortch, a Seattle based consultant with GMT Group (a subsidiary of defendant Geostar) to see if Geostar might be interested. Dortch recommended the project to Geostar's board of directors, and the board agreed. Geostar executed a bridge loan to Knorr to get the project up and running, and in October 2003, Geostar created an elaborate network of direct and indirect subsidiary companies to handle various aspects of the Roco Ki project.

From 2004-2006, with Knorr at the helm, nearly all aspects of the Roco Ki project were managed out of his Chicago office. Knorr dealt primarily with three individuals who were, in one way or another, associated with Geostar or its subsidiaries: Dortch, Sterling Crum, and Andrew Caldwell. There is no dispute that these individuals spent substantial time in Chicago: Dortch and Crum made upwards of twenty trips each, and Caldwell made upwards of thirty trips, in connection with the Roco Ki project. Knorr contends that their activities in Chicago subject the defendant corporations to personal jurisdiction in Illinois. Further discussion of their role(s) and corporate affiliation(s)-a matter of some dispute among the parties-must await an introduction to the defendant corporations.

Meanwhile, in October 2006, with extensive construction underway at Roco Ki, relations began to break down, and some apparently substantial disagreements arose between Knorr and the defendants concerning "the development, financing, and overall management" of the Roco Ki venture. The parties tried to resolve their differences at a retreat in Washington state, at a home owned by the Crum family, and then at mediation sessions in Toronto, Canada and Toledo, Ohio. On April 2, 2007, in Ohio, the parties reached a settlement agreement at a mediation session conducted by retired federal judge Richard McQuade. The agreement provided, among other things, that Knorr would relinquish his equity and intellectual property in the venture, in exchange for $40,000,000 plus a beachfront estate and one or two marina slips at Roco Ki. Knorr is no longer managing the development of Roco Ki.

In 2008, Knorr filed the present suit. Count I alleges breach of the settlement agreement by various defendants. Count III alleges that all of the defendants committed constructive fraud by falsely representing to Knorr that they had the capacity to perform the agreement and by engaging in a scheme to "deplete[], dilute[], and otherwise waste[] assets" that rendered them incapable of performing the settlement agreement. Count II alleges that defendants Geostar, Macao Development Company, and Haciendas at Macao Beach Resort breached fiduciary duties to Knorr.

Geostar and its Subsidiaries

Geostar and all of its subsidiaries are incorporated in Nevis. They have their main offices, or are otherwise administered, in Guernsey, Channel Islands. They have no offices or other permanent presence in the United States. Each subsidiary maintains its own corporate identity, with separate boards of directors, bank accounts, corporate records, and business purposes.

Geostar describes its business as "identifying hotel, resort, business and commercial property development opportunities." Once it identifies a promising opportunity, "it passes all the responsibilities for initiating, managing, and operating that development to separate, country-specific indirect subsidiary corporations."

Geostar's directors are Michael Underdown and Peter Howe. Underdown claims he has never been to Chicago except for airport layovers; Knorr claims that Underdown came to Chicago once on Roco Ki business. Underdown testified by declaration that Geostar has never granted Caldwell, Crum, or Dortch any authority to act on Geostar's behalf.

Geostar is owned by the Geo Trust, a sub-trust of the Duvall trust. Crum and his family are the beneficiaries of the Duvall trust. Crum participated extensively in the Roco Ki project both in Chicago and elsewhere, despite everyone's insistence-besides Knorr, that is-that Crum has no authority to act on behalf of Geostar or any other defendant corporation. Crum describes himself as an "adviser;" Dortch describes him as an unpaid "consultant" who enjoys helping emerging business in his semi-retirement. Knorr operated under the belief that Crum was authorized to act on behalf of Geostar or, for that matter, on behalf of any of its Roco Ki related subsidiaries.

In any event, after choosing to pursue the Roco Ki project, Geostar "caused the incorporation of a series of direct and indirect subsidiary companies" to carry out the project. Among those subsidiaries were the so-called Roco Ki Operating Companies: Macao Beach Resort ("MBR"), Estates at Macao Beach Resort ("EMBR"), and Haciendas at Macao Beach Resort ("HMBR"). The Operating Companies were formed in October 2003 to carry out the initial phase of the Roco Ki project, which was to include a Westin Resort and residential properties situated next to a Nick Faldo Signature Golf Course, on land owned by the Operating Companies and known as "Parcel A." Among the original directors of the Operating Companies was Dortch. Knorr became a co-director on April 21, 2005. Neither Crum nor Caldwell has served as a director or officer of any of the Operating Companies; Dortch testified by declaration that the Operating Companies have never granted either Crum or Caldwell any authority to act on their behalf.

Since the nuts and bolts of Parcel-A development were in the hands of the Operating Companies, who conducted extensive business with Knorr in Chicago, the Operating Companies have conceded personal jurisdiction. The remaining defendants contend that the Operating Companies were the only defendants to transact any business or have any presence in Chicago.

Macao Beach Real Estate ("MBRE") was incorporated to purchase an option to buy an additional 2000 acres of land adjacent to Parcel A; MBRE exercised that option in September 2006. The MBRE land, also known as "Parcels B-E," is not part of the initial phase of Roco Ki development. Although Knorr designed a "comprehensive master plan" for the MBRE land, that plan was preliminary; there has been no development of the MBRE land except for a main entrance, access road, and Infrastructure Center that services the land owned by the Operating Companies. These costs were billed to the Operating Companies and to the Roco Ki Infrastructure Account, not to MBRE. No contracts have been undertaken in connection with the development of the MBRE land. Dortch was among MBRE's original directors, and Knorr served as a co-director from February 28, 2007 to March 9, 2009. Neither Crum nor Caldwell has served as a director or officer of MBRE; again, Dortch testified by declaration that MBRE has never granted either Crum or Caldwell any authority to act on its behalf.

Macao Development Company ("Macao") is a subsidiary of Dominicana, which is a direct subsidiary of Geostar. Macao was incorporated in October 2003 as a holding company whose purpose is "to facilitate transactions involving the stock of the operating companies rather than their assets." The directors of Macao are Underdown and Peter Howe. Neither Crum nor Caldwell nor Dortch has served as a director or officer of Macao; Underdown testified by declaration that Macao has never granted any of them any authority to act on its behalf.

Resort Resources ("Resources") was incorporated in April 2005 and is now known as Grupo Roco Ki. Resources provides financial and accounting services for the Roco Ki project as a whole, such as managing payroll and allocating soft costs among the other subsidiary corporations. Its directors are Dortch and Nick Tawil. Neither Crum nor Caldwell has served as a director or officer of MBRE, and, according to Dortch's declaration, MBRE has never granted either Crum or Caldwell any ...


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