The opinion of the court was delivered by: Magistrate Judge Cole
MEMORANDUM OPINION AND ORDER
The plaintiff, Hach Company ("Hach"), seeks to hold the defendants, John Ichiro Takayama and Hakuto Co., Ltd. ("Hakuto Japan"), liable for their claimed breach of an indemnification agreement that Hakuto Japan's purported alter ego, Hakuto America, had with Hach. Hach had purchased a company, Anatel, from Hakuto America (and others) and was promptly sued for patent infringement on the basis of Anatel products. Six months after the infringement suit was filed, Hakuto America was dissolved. Hach eventually settled with the patent holder and wants Hakuto Japan to follow through on its former subsidiary's obligations. It also charges Mr. Takayama, a former Hakuto America director, with violating Illinois law by failing to notify creditors that Hakuto America was being dissolved.
On October 14, 2010, defendants both filed motions to dismiss for lack of personal jurisdiction. (Dkt. # 29, #32). The hearing on the motion was set for October 19, 2010, at which time Hach would have pointed out that the motions were based on the affidavits of defendants Mr.Takayama and Hakuto Japan's vice president, Shinkichi Suzuki*fn1 and, therefore, it needed discovery to respond. Judge Manning canceled the hearing on the motion, however, and ordered Hach to respond to defendants' dismissal motions by November 9, 2010. (Dkt. # 35).
It is important at the outset to emphasize that this is a matter about discovery into the question of personal jurisdiction; it is not about determining whether personal jurisdiction exists, whether Hach has failed to state a claim against either of the defendants, or whether the defendants have a valid motion to dismiss under Fed.R.Civ.P. 12(b)(2). The defendants' 12(b)(2) motion was already denied, although without prejudice, and was never even fully briefed. In other words, the parties' positions have never even had the benefit of a full development. The motion to dismiss and the question of personal jurisdiction are not a part of the referral, nor could they have been. See 28 U.S.C. §636(b)(1)(A); Fed.R.Civ.P. 72. I am without authority to decide those questions and, as it turns out, need not do so to resolve a discovery dispute. It is necessary to take note of the limited nature of my jurisdiction and of Judge Manning's referral because the defendants have focused a good deal of their arguments on these types of extraneous matters, rather than focusing exclusively on the narrower matter at hand.*fn2
1.For the most part, the background facts of this dispute are drawn from Hach's second amended complaint. Hakuto Japan was Hakuto America's parent corporation. Hakuto America was an Illinois corporation with its principle place of business in Illinois. Mr. Takayama was on its board of directors during the period pertinent to the allegations of Hach's second amended complaint. Hach claims that Hakuto Japan fraudulently refused to fulfill contractual indemnification obligations incurred by its wholly owned subsidiary, Hakuto America, after having appropriated to itself the millions of dollars that the subsidiary received in consideration for that obligation. Because Hakuto Japan dissolved Hakuto America over 5 years ago, it could not be served or sued. But as Hach would have it, Hakuto Japan is Hakuto America's alter ego for purposes of the indemnity obligations. As a director of Hakuto America, Defendant Takayama was obligated by Illinois law to notify creditors of Hakuto America's dissolution. He failed to give that notice, perpetuating by omission, so the plaintiff's theory goes, the misleading impression that Hakuto America would meet its obligations.
All this began with a stock purchase transaction between Hach and Hakuto America about ten years ago. On May 20, 2001, Hach acquired Anatel Corporation ("Anatel"), a Colorado high-tech manufacturer, in a stock purchase agreement with the four largest Anatel shareholders. The largest was Hakuto America, which acquired its Anatel stock from its parent corporation, Hakuto Japan. Hakuto America paid no consideration for the stock. The decision to sell to Hach came directly from Hakuto Japan -- Hakuto America played no part in it. (Second Amended Complaint, ¶ 39). As part of the transaction, the four largest Anatel shareholders agreed to indemnify Hach for a variety of claims and liabilities, including patent infringement suits. Hach paid Hakuto America in excess of $6 million for its Anatel stock and its indemnification. Besides Hakuto America, there were three other indemnifying shareholders: Howard Selby, Michael Stranahan, and Jack Yamamori. Hakuto America also entered into a contribution and administration agreement with those three individual shareholders, promising that in the event of an indemnification claim by Hach, Hakuto America would pay its proportionate share of defense costs and any judgment. (Second Amended Complaint, ¶¶ 11-19, 42; Dkt. # 42, Exs. 6-8).
In 2002, Hach was sued in Colorado federal court for patent infringement, along with Anatel. Sievers Instruments, Inc. v. Hach Company et al., Civil Action No. 02-K-0775. The parties eventually settled. (Second Amended Complaint, ¶¶ 28-36). When Hach wrote to the indemnifying shareholders designated representative, James Leidich, requesting they make good on their promises, it was rebuffed. Moreover, although Hakuto America had already been dissolved at the time, Mr. Leidich indicated he was acting on behalf of Hakuto America and the three individual shareholders. He closed his communication by referring Hach to "Thomas McMenamin, special counsel to Hakuto America, for further correspondence." (Dkt. # 42, Exs. 10-11). Hach filed suit against all four of the shareholders in Colorado state court for breach of contract and only then discovered that Hakuto America had been dissolved shortly after the Sievers lawsuit began. Hach had to dismiss Hakuto America as a defendant in the Colorado suit and was left to pursue its remedy against the remaining three shareholders. That suit has since been resolved, but Hach does not indicate the outcome. (Second Amended Complaint, ¶ 33-35).
Hakuto America was dissolved on September 26, 2002, seventeen months after the sale of its Anatel stock. The articles of dissolution were signed by Tokiashi Hirai as president of the corporation. (Dkt. # 42, Ex. 9). Hach alleges that Hakuto Japan's president and founder, Shigeo Takayama, was the ultimate decision-maker as to Hakuto America's activities. (Second Amended Complaint, ¶ 38). According to the testimony of the man who preceded Mr. Hirai as President of Hakuto America, Thomas Kastner -- Hakuto America's president -- Mr. Hirai was, at the same time, the president of Hakuto Japan as well. (Dkt. # 42, Ex. 5, at 35-36). Mr. Takayama, the son of Hakuto Japan's founder and then-chairman, was also a director of Hakuto America at this time. (Dkt. # 42, Ex. 5, at 41).*fn3 Other Hakuto America board members also served on the board of Hakuto Japan, although they were "figureheads." (Dkt. # 42, Ex. 5, at 42-43). In fact, Hach believes that, at the time of Hakuto America's dissolution, all of its directors were directors or officers of Hakuto Japan -- but this is one of the items about which Hach hopes to gain discovery.*fn4
Mr. Kastner also testified that the proceeds from the Anatel sale went to Hakuto America and then were "dividended" to Hakuto Japan. (Dkt. # 42, Ex. 5, at 37).*fn5 Hach hopes to gain discovery regarding this.
The individual shareholders were left in the dark as well. Colorado counsel for the individual indemnifying shareholders had informed Hach's counsel that as late as 2008, Hakuto Japan continued to make payments to a legal defense fund, consistent with Hakuto America's obligations under the Contribution Agreement. (Dkt. # 42, Ex. 14). After Hakuto America's dissolution, some Hakuto entity-presumably Hakuto Japan- had to have been communicating with Masuda Funai in Illinois and directing that these payments be made. Hach predicts that discovery from the Colorado law firm -- Ireland Stapleton -- will confirm that years after Hakuto America's dissolution, Hakuto Japan continued to fulfill Hakuto America's obligations to the other indemnifying shareholders.
Hakuto Japan argues that Hach cannot establish personal jurisdiction over it because: Hakuto Japan does not conduct business in Illinois; it has no place of business in Illinois; it has no employees in Illinois; it owns no property or assets in Illinois; it does not sell goods or services in Illinois; it pays no taxes in Illinois; and it was not a party to or involved in the negotiation of the stock purchase agreement or indemnification provisions that underlie this litigation. (S. Suzuki Declaration). Similarly, they assert that Mr. Takayama: has never lived or worked in Illinois; has resided and been employed exclusively in California; has never owned a business in Illinois; has never owned property in Illinois; conducts no business in Illinois. His claims his last visit to Illinois was in March of 2003 to attend a conference held by the American Academy of Pediatrics; and that his only visit to Illinois concerning the business of Hakuto America occurred in 2001 and was entirely unrelated to the subject Stock Purchase Agreement, the sale of Anatel shares, or the other allegations of Hach's Complaint. (Takayama Declaration). As has been noted, much of this is belied by the allegations of the seconded amended complaint and what little evidence Hach has scraped together without discovery.
In order to obtain discovery regarding the issue of personal jurisdiction, "'[a]t a minimum, the plaintiff must establish a colorable or prima facie showing of personal jurisdiction . . . .'" GCIU-Employer Retirement Fund v. Goldfarb Corp., 565 F.3d 1018, 1026 (7th Cir. 2009). It is left to the court's discretion just what constitutes a "colorable" claim. Id., at 1026. In making that determination, the court must read the plaintiff's allegations liberally, drawing all reasonable inferences in the plaintiff's favor. Central States, Southeast and Southwest Areas Pension Fund v. Phencorp Reinsurance Co., Inc., 440 F.3d 870, 878 (7th Cir. 2006).
In a situation like this one, where the discovery is being sought from a foreign corporation based on its relationship to its American subsidiary, the Seventh Circuit has held that the plaintiff must at least "show that the [parent corporations] exercised an unusually high degree of control over [the subsidiary] or that corporate formalities were not substantially observed, or that [the parent] provided [more than] standard administrative services to [the subsidiary]." Riemer, 230 F.3d at 947. Absent that showing, there is not "a colorable basis for jurisdiction." Id. The court has stressed that "[f]oreign nationals usually should not be subjected to extensive discovery in order to determine whether personal jurisdiction over them exists." Reimer, 230 F.3d at 946. In Reimer, almost all of the plaintiff's evidence showed only that the foreign defendants were affiliated with ITCL, a Canadian corporation doing extensive business in the United States, without any showing that the defendants ...