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In re First Farmers Financial Litigation

United States District Court, N.D. Illinois, Eastern Division

January 10, 2017



          Hon. Amy J. St. Eve, District Court Judge:

         The matter before the Court concerns the claims of Patrick Cavanaugh, not individually, but in his capacity as receiver of the Overall Receivership Estate (the “Overall Receiver”), against Defendant Shamir Patel (“Shamir”).[1] Shamir has moved to dismiss the Overall Receiver's complaint for lack of personal jurisdiction, improper venue, forum non conveniens, and failure to state a claim. (R. 1289, Def.'s Mot. Dismiss, at 1); see Fed. R. Civ. P. 12(b)(2), (3), (6). For the following reasons, the Court denies Shamir's motion.


         This case arises from a fraud Nikesh Patel (“Nikesh”) and Timothy Fisher (“Fisher”) committed through First Farmers Financial, LLC (“First Farmers”), an entity they owned and controlled. (Compl., at ¶¶ 1, 9-10.) Nikesh and Fisher used First Farmers “to fraudulently obtain millions of dollars from the sale of fictional loans that were purportedly guaranteed by the U.S. Small Business Administration or the U.S. Department of Agriculture Rural Development Program.” (Id.) The Overall Receiver alleges that, among other things, Nikesh used First Farmers “to improperly transfer millions of dollars to insiders, relatives and employees of entities that he owned and/or controlled, such as Alena Hospitality, LLC (‘Alena'), ” which “directly or indirectly owned several hotel properties and often served as the manager of those hotel properties.” (Id. at ¶ 1.)

         Nikesh and Fisher operated First Farmers solely to perpetuate their fraudulent scheme. (Id. at ¶ 16.) Consequently, First Farmers “was never legally solvent or otherwise able to pay its debts and liabilities as they became due.” (Id.) Any money that First Farmers held derived from the fraudulent scheme “rather than actual profits resulting from a legitimate business enterprise.” (Id.) According to the Overall Receiver, “[b]ecause of the fraudulent activity, substantial assets were quickly diverted from [First Farmers].” (Id. at ¶ 17.)

         Alena hired Shamir in December 2013 as its Chief Operating Officer/Managing Partner. (Id. at ¶ 18.) He was responsible for, among other things, “operational management, development and asset management.” (Id. at ¶¶ 2, 18.) Alena was based in Florida, Shamir lived and continues to live in Florida, and, according to Shamir, he has no connection to Illinois (e.g., he has no property in Illinois, has never lived here, and has never conducted business here). (R. 1289-1, Shamir Decl.; see Compl. at ¶¶ 5, )

         A copy of the employment agreement between Alena and Shamir, which the Overall Receiver attached to his complaint, indicates that Shamir would receive a salary of $150, 000 per year and start in his position “no later than January 6, 2014.”[3] (Id., Ex. A at 1-2.) The employment agreement also says that Shamir would receive a 34% membership interest in Alena. (Id. at ¶ 19, Ex. A at 2.) Per the agreement, “[m]ember distributions would be calculated on a semi-annual basis (July and January) and upon distribution, [Shamir] will receive [his] proportionate share of the net proceeds.” (Id., Ex. A at 2.) The employment agreement provided a projected, but not guaranteed, calculation of Shamir's distribution over an 18-month period of $1, 327, 065.

         On June 20, 2014, the two managing members of Alena-Nikesh and William Huseman-signed a Certificate of Resolution that added Shamir as a member of Alena. (Id., Ex. B.) On June 30, 2014, “at [Shamir's] request and with Nikesh's authority, [First Farmers] wire transferred $850, 000 from its account at BMO Harris Bank to an account held by Shamir at Suntrust Bank.” (Id. at ¶ 21, Ex. C.) The Overall Receiver alleges that this transaction was the “fraudulent transfer.” (Id. at ¶ 21.) The “payment details” in the wire transfer form, which the Overall Receiver attached to the complaint, say, “S Patel - Portfolio Fee.” (Id. at ¶ 21, Ex. C.) According to the Overall Receiver, Shamir “asked for the advance of $850, 000 on a yet to be earned ‘Portfolio Fee' because he needed the money to fund a down payment on a new home that he wanted to purchase for himself.” (Id. at ¶ 22.) The Overall Receiver alleges, however, that “as of June 30, 2014, Alena had not yet earned any Portfolio Fees, asset management fees, development fees or hotel management fees that would be sufficient to generate any type of distribution to Patel or to any of Alena's other Members.” (Id. at ¶ 21.) Indeed, the Overall Receiver alleges that “Alena never legitimately generated any asset management, development, portfolio or hotel management fees to warrant any type of distribution to any of its members.” (Id. at ¶ 24.) The Overall Receiver also claims, on information and belief, that no other members of Alena received any distribution in 2014. (Id.)

         The Overall Receiver asserts three counts in his complaint: (1) a violation of the Florida Uniform Fraudulent Transfer Act (“FUFTA”), Fla. Stat. § 726.105(1)(a), based on “actual fraudulent transfer”; (2) a violation of FUFTA, Fla. Stat. § 726.105(1)(b), based on “constructive fraudulent transfer”; and (3) unjust enrichment. (Id. at ¶¶ 25-45.) The Overall Receiver seeks judgment against Shamir for $850, 000; an equitable accounting setting forth how Shamir used the funds from the fraudulent transfer and the funds' current location; a constructive trust over all of Shamir's assets and an order enjoining Shamir from “dissipating, assigning or transferring any of his assets without authorization from th[e] Court or from the Overall Receiver”; and attorneys' fees and costs.[4] (Id. at ¶¶ 32, 40, 45.)


         I. Personal Jurisdiction

         A. Legal Standard

         A motion to dismiss pursuant to Rule 12(b)(2) tests whether a federal court has personal jurisdiction over a defendant. See Fed. R. Civ. P. 12(b)(2). In analyzing a Rule 12(b)(2) motion, courts may consider matters outside of the pleadings. See Purdue Research Found. v. Sanofi-Synthelabo, S.A., 338 F.3d 773, 782 (7th Cir. 2003). Without the benefit of an evidentiary hearing, the plaintiff “bears only the burden of making a prima facie case for personal jurisdiction.” uBID, Inc. v. GoDaddy Grp., Inc., 623 F.3d 421, 423-24 (7th Cir. 2010). Under such circumstances, courts take “the plaintiff's asserted facts as true and resolve any factual disputes in its favor.” Id. Where the plaintiff fails to refute facts contained in the defendant's affidavit, however, courts accept those facts in the affidavit as true. GCIU-Emp'r Ret. Fund v. Goldfarb Corp., 565 F.3d 1018, 1020 n.1 (7th Cir. 2009).

         B. The Interplay of the Federal Receivership Statutes and Rule 4(k) Provides Nationwide Personal Jurisdiction

         The Overall Receiver argues that the Court has personal jurisdiction over Shamir in this action based on the “Federal Receivership Statutes, ” 28 U.S.C. §§ 754 and 1692, which he says combine with Federal Rule of Civil Procedure 4(k) to provide the district court where the receivership is pending “with personal jurisdiction over any individual defendant who holds receivership assets, regardless of where that individual defendant resides.” (R. 1308, Overall Receiver's Response, at 4-5.) As the Overall Receiver points out, the Court has previously expressed its agreement with his analysis in a March 8, 2016 order. (R. 958.) Although the defendants in the action at issue, Ward Harris Properties and Ward Harris Properties II, did not dispute personal jurisdiction (instead, they sought to transfer venue to the Southern District of Florida), the Court explained that the Federal Receivership Statutes “provide nationwide jurisdiction and service of process, respectively to receivers.” (Id. at 3). This ruling contradicts Shamir's argument that the Federal Receivership Statutes do not confer the Court with personal jurisdiction and that Shamir's contacts with Illinois are relevant to the personal-jurisdiction analysis. (See R. 1289 at 5-6.)

         The Court stands on its March 8, 2016 ruling as to personal jurisdiction in the receivership context. Federal Rule of Civil Procedure 4(k)(1)(C) provides that “[s]erving a summons or filing a waiver of service establishes personal jurisdiction over a defendant . . . when authorized by a federal statute.” Section 1692 is such a federal statute.[5] See, e.g., S.E.C. v. Bilzerian, 378 F.3d 1100, 1103 (D.C. Cir. 2004) (Garland, J.); Haile v. Henderson Nat'l Bank, 657 F.2d 816, 824 (6th Cir. 1981); Quilling v. Cristell, No. 03-5237, 2006 WL 316981, at *1-4 (W.D. N.C. Feb. 9, 2006); U.S. Small Bus. Admin. v. Chimicles, No. 03-5987, 2004 WL 2223304, at *3-4 (E.D. Pa. Sept. 22, 2004). To invoke § 1692, a receiver must comply with § 754-compliance that is undisputed in this case. See e.g., Bilzerian, 378 F.3d at 1103; Haile, 657 F.2d at 823-24; Chimicles, 2004 WL 2223304, at *4; see also (R. 174). Thus, as a number of courts have held, Rule 4 and the Federal Receivership Statutes vest a district court with in personam jurisdiction over “one who holds receivership assets in a remote district, ” and “the minimum contacts analysis of International Shoe as a limitation on extraterritorial power, does not apply, since service of process under § 1692 [is nationwide].” Bilzerian, 378 F.3d at 1103-04 (quoting 7 (Pt. 2) James Wm. Moore, Moore's Federal Practice ¶ 66008[1] (2d ed. 1996), and citing Haile, 657 F.2d at 826, and Am. Freedom Train Found. v. Spurney, 747 F.2d 1069, 1073 (1st Cir. 1984)); see also, e.g., Carney v. Horion Invs., Ltd., 107 F.Supp.3d 216, 227 (D. Conn. 2015); Chimicles, 2004 WL 2223304, at *2; Quilling, 2006 WL 316981, at *1-4; Chimicles, 2004 WL 2223304, at *3-4.[6]

         Shamir barely acknowledges the authority cited in the preceding paragraph, providing only a “but see” citation to Chimicles. (R. 1289 at 5.) Instead, he relies on Stenger v. World Harvest Church, Inc., No. 02 C 8036, 2003 WL 22048047, at *4 (N.D. Ill. Aug. 29, 2003), for the proposition that the Federal Receivership Statutes “d[o] not, by [themselves], confer extraterritorial in personam jurisdiction.” (Id.) In World Harvest Church, the district court concluded that “§ 1692 merely authorizes extraterritorial service of process in aid of in rem actions and does not do so in cases like this one in which the receiver seeks an in personam judgment.” 2003 WL 22048047, at *2. The court based its reasoning on the language of § 1692, specifically that it “does not mention service of process; rather it speaks only of issuance and execution of process.” Id. The court explained that “[t]he issuance of process is the Clerk's ministerial act of issuing a summons to a plaintiff so that he or she can serve it on the defendant, ” and “[t]he execution of process involves the act, in an in rem action, of attaching property.” Id. The court also looked to various statutes that authorize nationwide service of process, distinguishing § 1692 from them because it does not reference the “service” of process. Id.[7]

         The Court respectfully disagrees with the Stenger court's reasoning and instead agrees with the reasoning of the D.C. Circuit, the Sixth Circuit, the First Circuit, and a number of other courts, including those cited above. The D.C. Circuit in Bilzerian addressed Stenger directly, explaining why it reached a different conclusion. 378 F.3d at 1105-06. The D.C. Circuit disagreed with Stenger's narrow definition of the terms “may issue” and “be executed” in § 1692. See Id. at 1105 (“[N]either Congress nor the courts have restricted [the relevant] terms to the meaning insisted upon by Stenger.”). As to the term “be executed, ” the Bilzerian court explained that “federal rules, statutes, and court opinions have used ‘execution' as more than merely a synonym for ‘attaching property.'” Id. The court pointed to Federal Rule of Civil Procedure 79-which at the time provided that “the civil docket contain entries showing ‘the substance of each order or judgment of the court and of the returns showing execution of process.'” Id. The court explained that the Rule used “execution of process” as a rough equivalent for “service of process.”[8] Id. The court also explained that the term “‘[e]xecution is also often used to mean the method by which a judgment, including a judgment in personam, is enforced.” Id. This usage, the D.C. Circuit reasoned, “is distinct from an ‘attachment, ' which is often used to denote the method by which in-rem (or quasi-in-rem) jurisdiction is obtained.” Id. at 1105-06. “In this sense, ” the court said, “‘may issue and be executed' describes the entire process from initial issuance, through service, through judgment, to final enforcement of judgment.” Id. at 1106.

         In addition, the D.C. Circuit explained that “Congress has used ‘issue' as a shorthand to comprehend the phase of the process that extends from issuance of an order through and including its service, ” and that “courts frequently use ‘issuance' and ‘service' interchangeably.” Id. at 1106 & nn.6-7 (citing a number of cases and statutes).

         In short, the Court agrees with the reasoning of the D.C. Circuit and the other courts that have determined that the Federal Receivership Statutes provide for nationwide service of process. See, e.g., Quilling, 2006 WL 316981 at *3 (declining to follow Stenger in part because there is “overwhelming authority” to the contrary). The Court further notes that its conclusion promotes the efficiencies of receiverships. See Id. at *2 (explaining that the Federal Receivership Statutes' “provisions for extraterritorial service are ‘made to facilitate judicial efficiency by permitting courts to manage claims regarding receivership property in a single forum'” (quoting Terry v. June, No. Civ. A 303CV00052, 2003 WL 22125300, at *5 (W.D. Va. Sept. 2003))).

         Shamir argues that even if the Overall Receiver satisfies his burden under the minimum contacts test, the “Court's exercise of personal jurisdiction does not comport with traditional notions of fair play and substantial justice.” (R. 1289 at 7.) In the Seventh Circuit, when a statute provides for nationwide service of process, “due process requires only that [the defendant] have sufficient minimum contacts with the United States as a whole to support personal jurisdiction.” KM Enters., 725 F.3d 730-31; see also Bd. of Trs., Sheet Metal Workers Nat'l Pension Fund v. Elite Erectors, Inc., 212 F.3d 1031, 1036-37 (7th Cir. 2000) (explaining that, in part because defendants can seek to transfer venue, a statute that provided nationwide service of process comported with the Constitution and provided a district court with personal jurisdiction over two defendants even if neither had any “contacts” with the jurisdiction); Fitzsimmons v. Barton, 589 F.2d 330, 333 (7th Cir. 1979); Siswanto, 153 F.Supp.3d at 1028 (“When the defendants are domiciled in the United States, such as in KM Enterprises, 725 F.3d at 721-22, 730-31, Fitzsimmons v. Barton, 589 F.2d 330, 333-34 (7th Cir.1979), and many other cases Plaintiffs cite, the due process analysis under a nationwide service of process statute is straightforward. Domestic companies and individuals, almost by definition, have minimum contacts with the United States, so there may be general personal jurisdiction in any federal court throughout the country. See Fitzsimmons, 589 F.2d at 333-34 & n. 4.”). The Court also notes that the D.C. Circuit in Bilzerian did not conduct the “fairness” inquiry that Shamir requests. See generally S.E.C. v. Bilzerian, 378 F.3d 1100 (D.C. Cir. 2004).

         Some courts, however, have considered whether an assertion of personal jurisdiction over a defendant pursuant to a statute providing nationwide service of process violates the defendant's due process rights despite his sufficient contacts with the United States. See, e.g., Republic of Panama v. BCCI Holdings (Luxembourg) S.A., 119 F.3d 935, 942, 947-48 (11th Cir. 1997) (explaining that in rare cases, a defendant with sufficient contact to the United States may be able to prove that he faces an undue burden litigating in “a faraway and inconvenient forum, ” in which case jurisdiction is proper “only if the federal interest in litigating the dispute in the chosen forum outweighs the burden imposed on the defendant”); Peay v. BellSouth Med. Assistance Plan, 205 F.3d 1206, 1212-13 (10th Cir. 2000); Terry, 2003 WL 22125300, at *4 (explaining that even though § 1692 authorized nationwide service of process, defendants still have some due process protection against “the unfair burden of litigating in an inconvenient forum, ” but that when a defendant is located within the United States, “any inconvenience will ...

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