United States District Court, N.D. Illinois, Eastern Division
MEMORANDUM OPINION AND ORDER
HONORABLE EDMOND E. CHANG, UNITED STATES DISTRICT JUDGE.
Capital Management is an investment firm that is trying to
recoup losses that it attributes, at least in part, to a
fraud scheme in which the Defendants allegedly participated.
The scheme was carried out by Thomas Petters, who agreed to
purchase various goods that ultimately would be supplied to
Costco. R. 10, Am. Compl. at 1-2 ¶¶ 3-5; 12
¶¶ 26, 29; 15 ¶ 37. Petters funded the scheme
with loans from Lancelot hedge funds, in which Ritchie had
invested. Id. at 3-4 ¶¶ 7-8; 17 ¶ 51.
In reality, Petters purchased very few goods, and Petters
used new investor money to pay off older loans. See
Am. Compl. at 4 ¶ 11. After the Ponzi scheme was revealed in
2008, Lancelot filed for bankruptcy. In re Lancelot
Investors Fund, L.P., 408 B.R. 167, 169-70 (Bankr.
N.D.Ill. 2009). Ritchie allegedly lost over $100 million
in its investments, and now sues Costco (and one of its
subsidiaries, National Distributors) for fraud, aiding and
abetting that fraud, and civil conspiracy. Am. Compl. at
23-25 ¶¶ 78, 82, 86, 90. Costco and National
Distributors move to dismiss the Amended Complaint in its
entirety. R. 38, Def. Mot. to Dismiss at 1. For the following
reasons, the motion is granted because the Court lacks
personal jurisdiction over the Defendants.
purposes of evaluating the dismissal motion, the Court
accepts as true the allegations in the Amended Complaint.
Costco Wholesale Corporation is a general retailer that
operates warehouse stores throughout the United States,
selling wholesale goods at below-market prices. Am. Compl. at
7 ¶ 3. Costco and its wholly-owned subsidiary, National
Clothing Company (which does business under the name National
Distributors), are both incorporated and have principal
places of business in Washington. Am. Compl. at 5 ¶
1b-c. Because of its discount retailer status,
Costco was unable to purchase (in order to resell) certain
brand-name consumer electronics-for example, plasma
televisions-due to manufacturer restrictions on selling to
warehouse clubs. Id. at 7 ¶¶ 4-5. To get
around those constraints, Costco used a series of other
businesses and people, called diverters, to purchase the
products it wanted to sell and funneled the products through
its own subsidiary, National Distributors. Id. at 1
¶ 2; see Id. at 8 ¶ 11.
around 1992 (long before Ritchie entered the picture), Costco
began a business relationship with Thomas Petters, a diverter
with ties to authorized electronic distributors. Am. Compl.
at 7 ¶ 5. To keep up with the volume of bulk purchases
that Costco required, Petters needed additional financing.
See Id. at 1 ¶¶ 2-3. In around 2000,
General Electric Capital Corporation (for convenience's
sake, GE) issued a $50 million line of credit to Petters to
finance the product purchases for Costco, based on purchase
orders that supposedly had been issued by Costco and National
Distributors; the purchase orders provided a guarantee of
payment. Id. at 8 ¶¶ 11-12.
to Ritchie, GE's issuance of the line of credit is when
Costco became aware of Petters's fraud. Am. Compl. at 9
¶ 14. In October 2000, GE requested that Costco verify
fourteen purchase orders, which totaled over $50 million.
Id. at 8-9 ¶ 13. Costco discovered that the
purchase order numbers touted by Petters as proof of his
creditworthiness were actually issued to other vendors.
Id. at 9 ¶ 14. Petters allegedly confirmed to
Costco that he had used the purchase order numbers to
intentionally misrepresent to GE that Costco owed him around
$50 million. Id. At this point, instead of informing
GE of Petters's fraud, Costco agreed to help Petters
refinance the GE debt to avoid disclosing the product
diversion scheme. Id. at 9 ¶ 17. Costco
allegedly provided Petters with what appeared to be checks
totaling $48 million, so that Petters could verify to GE that
Costco in fact had owed Petters money. Id. at 10-11
¶¶ 18-23. In truth, however, the checks had already
been issued to other payees in much smaller amounts, and had
been altered to name Petters as the payee in the inflated
amounts. Id. at 11 ¶ 21.
after the GE debacle, Costco asked Petters to finance other
diverters, and to do so without revealing Costco as the
ultimate purchaser. Am. Compl. at 12-13 ¶¶ 29-30.
Costco allegedly provided Petters with fake purchase orders
in order to induce lenders to finance loans to him, and
Petters in turn would provide the fake purchase orders to
diverters, so in the end it looked like Petters was the
actual purchaser rather than an intermediate financer.
Id. at 12-13 ¶ 33. To get financing for the
ongoing scheme, Petters created a number of special purpose
entities based out of Minnesota to appear as the purchaser of
diverted goods. Id. at 15 ¶ 38. Petters urged
an associate, Greg Bell, to found Lancelot Investment
Management, another company created to provide financing for
the Costco diversions. Id. ¶ 39-40.
where Ritchie Capital Management enters the picture. Ritchie
is an investment administrative manager and has its principal
place of business in the Cayman Islands. Am. Compl.
at 5 ¶ 1a; id. at 6 ¶ 1. Ritchie relied on
a memorandum, prepared by Bell on behalf of Lancelot,
detailing a low-risk investment in Lancelot, because the
goods to be purchased with investor money already had a bound
buyer-supposedly Petters. Id. at 16-17 ¶¶
49-52. Ritchie Capital invested in Lancelot based on these
representations, as well as on Bell's claims that
Lancelot had credit insurance (which was obtained using the
fraudulent purchase orders). Id. at 17-18
¶¶ 53-56. Each year, Ritchie received audited
financial statements for Lancelot and relied on them to
invest more money in Lancelot. Id. at 18
¶¶ 57-58. Eventually, in around 2007, Ritchie
explored the sale of its shares in a $1.1 billion
restructuring, and the valuation opinion took the Lancelot
Fund values into account. Am. Compl. at 20 ¶¶
64-66. The valuation opinion set the interests in Lancelot at
$50 million. Id. at 21 ¶ 69.
fraud scheme began to unravel when the FBI discovered that
Petters was not actually selling merchandise to Costco, and
had not been since around 2003. Am. Compl. at 19 ¶ 60.
Once it became clear that the Lancelot funds were worthless,
Ritchie incurred a $50 million liability for the
overvaluation. Id. at 21 ¶ 72. Ritchie also
lost its chance to collect around $44 million in deferred
payments. Id. at 21-22 ¶ 73.
surprisingly, Petters was charged in a federal criminal case.
In 2009, during Petters's criminal trial, a
senior-management Costco executive testified that Costco did
“very little” business with Petters in 2000;
Costco had stopped working with Petters by 2008; and Costco
had never issued fake purchase orders or guarantees. Am.
Compl. at 22 ¶ 74. More recently, in 2014, Ritchie
learned that Costco allegedly did conduct
“substantial” business with Petters, even after
discovering the false purchase orders, and issued additional
guarantee letters to Petters after 2006. Id. at 22
direct losses from its Lancelot investments exceed $94
million. Am. Compl. at 19 ¶ 60. Now, Ritchie claims
Costco contributed to the wrongful acts of Petters, Bell, and
Lancelot. The Amended Complaint asserts claims for aiding and
abetting, fraud, and conspiracy. See Id. at 23
¶ 78; 24 ¶ 86; 25 ¶¶ 90-94. Ritchie
alleges that Costco's involvement with Petters gave an
“air of legitimacy” to Lancelot's actions.
Id. at 19 ¶ 59. Finally, Ritchie argues that
Costco fraudulently concealed its relationship with Petters
during the criminal trial. Id. at 22 ¶ 76.
Costco and National Distributors move to dismiss, arguing
that this Court lacks personal jurisdiction over them; that
Ritchie lacks standing to bring the suit; and that the
Amended Complaint fails to state a claim. See Def.
Mot. to Dismiss. As explained below, the defense is right
that there is no personal jurisdiction over them in this
District, so the case is dismissed on that ground.
Standard of Review
complaint need not include facts alleging personal
jurisdiction.” Steel Warehouse of Wis., Inc. v.
Leach, 154 F.3d 712, 715 (7th Cir. 1998). However, the
plaintiff bears the burden of establishing that personal
jurisdiction is proper once challenged by the defendant.
Purdue Research Found v. Sanofi-Synthelabo, S.A.,
338 F.3d 773, 782 (7th Cir. 2003). When evaluating personal
jurisdiction on a motion to dismiss, the plaintiff
“need only make out a prima facie case of
personal jurisdiction.” Id. at 782 (quoting
Hyatt Int'l Corp. v. Coco, 302 F.3d 707, 713
(7th Cir. 2002)). In considering the prima facie
case, the plaintiff is “entitled to the resolution in
its favor of all disputes concerning relevant facts presented
in the record.” Id. at 782 (quoting Nelson
by Carson v. Park Indus., Inc., 717 F.2d 1120, 1123 (7th
Cir. 1983)). This is in contrast to what is “[n]ormally
[done] on review of a motion to dismiss, ” where the
Court “accepts all well-pleaded allegations in the
complaint as true.” Hyatt, 302 F.3d at 713. A
defendant can submit affidavits or other materials
challenging personal jurisdiction, which a plaintiff must
affirmatively refute with supporting evidence. But a
defendant's uncontested assertions will be accepted as
true. See Purdue Research Found., 338 F.3d at