Kreutter v. McFadden Oil Corp.

Citation71 N.Y.2d 460,527 N.Y.S.2d 195,522 N.E.2d 40
Parties, 522 N.E.2d 40 Albert E. KREUTTER, Appellant, v. McFADDEN OIL CORP., et al., Defendants, and Harmony Drilling Co., Inc., et al., Respondents.
Decision Date29 March 1988
CourtNew York Court of Appeals Court of Appeals
OPINION OF THE COURT

SIMONS, Judge.

Plaintiff, a resident of Hamburg, New York, sought to invest in a Texas oil venture and for that purpose he delivered $70,000 to defendant Brian McFadden and Company, Inc., a Texas corporation which markets oil investments through its office in New York City. After various transfers involving defendants McFadden Oil Corporation and Harmony Drilling Company, Inc., both Texas corporations, and defendant Eugene Burch Downman, Jr., a Texas resident, McFadden Company eventually paid the balance of plaintiff's funds, after commissions, to defendant Harmony, supposedly to buy an oil rig for plaintiff which was to be leased back to Harmony. Plaintiff received nothing for his money, not even confirmation of its delivery, and believing himself cheated he instituted this action to recover his $70,000 together with incidental and punitive damages. Plaintiff's complaint alleges causes of action in fraud, conversion, breach of contract and related claims. He seeks to acquire jurisdiction over the Texas defendants pursuant to CPLR 302(a)(1). That subdivision provides that "a court may exercise personal jurisdiction over any non-domiciliary * * * who in person or through an agent * * * transacts any business within the state".

The Texas defendants moved to dismiss the complaint for want of jurisdiction and Supreme Court denied their motions after a hearing. The Appellate Division, 122 A.D.2d 614, 504 N.Y.S.2d 915, modified, sustaining jurisdiction over McFadden Oil but dismissing the actions against defendants Downman and Harmony. It held Downman was not subject to jurisdiction because he was acting on behalf of McFadden Oil in the transaction and, therefore, was protected by the fiduciary shield doctrine. It dismissed the action against defendant Harmony because it found plaintiff failed to establish Harmony had sufficient contacts with New York. We granted plaintiff leave to appeal so that we could review the jurisdictional questions presented and we now reverse. Plaintiff established that Downman and Harmony transacted business in this State through an agent, McFadden Company, and that his cause of action arose from that transaction. We hold further that the fiduciary shield doctrine cannot be invoked to insulate defendant Downman from personal jurisdiction. Accordingly, the motion to dismiss should be denied as to both defendants.

I

In 1972, Downman, Brian McFadden and their counsel, Norman Jones, negotiated an arrangement whereby McFadden would procure funds for investment in Downman's Texas oil producing operations. They formed two corporations for the purpose: defendant Brian M. McFadden and Company, Inc., which would market the investment opportunities and defendant McFadden Oil Corp., which would acquire and manage the Texas oil properties. McFadden Company was given the right of first refusal to market all McFadden Oil's opportunities but if it chose not to exercise its right for a specific project, McFadden Oil was free to finance that endeavor on its own or to offer the investment opportunity to another interested party. More than 50% of the oil company's opportunities were sold to McFadden Company, however, and in such cases, title in the opportunity and entitlement to the net profits from the venture vested with McFadden Company. It derived the capital to purchase these opportunities by selling participation shares to investors, who, in turn, received interests in particular ventures proportionate to their investment. The joint venture agreement between McFadden Company and McFadden Oil provided that when McFadden Company sold shares in McFadden Oil's ventures it was to retain a 22% commission from the investor's contribution and forward the remaining 78% to McFadden Oil. As each venture progressed, McFadden Oil issued dividend checks to the investors holding participation shares, as directed by McFadden Company, and also issued a newsletter to them reviewing the status of their investment. From 1975 to 1982, McFadden Company allegedly sold over $5,000,000 in participating interests in McFadden Oil operations.

Although both McFadden Company and McFadden Oil were incorporated in Texas, McFadden Company established its principal office in New York and is licensed to do business here. McFadden Oil listed McFadden Company's New York office as its own New York address, and McFadden Company listed McFadden Oil's Texas office as its Texas address. At the time of incorporation, McFadden Company and McFadden Oil shared the same officers and directors, but the corporations have always had different shareholders. At the time of these transactions, Downman had no office or ownership in McFadden Company but he exercised management control of McFadden Oil and he had a direct ownership interest in it through personally held shares and also an indirect ownership interest in it through another company he owned in part which held McFadden Oil shares. Defendant Harmony Drilling Co., Inc., was incorporated in Texas in 1977 and it is owned exclusively by Downman, his wife and his infant daughter.

Over the years, plaintiff invested $145,000 in participation shares marketed by McFadden Company. He had twice met Downman in Texas, once to discuss this transaction, but he made all his investments through McFadden Company. In 1977, plaintiff decided to invest additional moneys. Unlike prior transactions, however, this investment did not involve the acquisition of participation shares. Instead, defendants proposed a financing device they apparently had not used before. Plaintiff was to purchase an oil rig from McFadden Oil and then lease the equipment back to it, or so he believed. Plaintiff tendered $70,000 for the purchase to McFadden Company's Buffalo area representative, defendant Mumbach. Mumbach deducted a $6,000 commission and then sent the balance of $64,000 to defendant McFadden Company. Although the sale of participation shares--the type of transaction covered by the joint venture agreement between McFadden Oil and McFadden Company--was not involved, McFadden Company kept 22% of the $64,000 and sent a check for the remaining $49,990 to McFadden Oil to purchase the oil rig. McFadden Oil did not own the rig, however; it was owned by Harmony. Accordingly, someone in the office of McFadden Oil, falsely stating that Harmony was a subsidiary of McFadden Oil, directed McFadden Company to issue a new instrument payable to Harmony. McFadden Oil either destroyed or returned the original check naming it payee and McFadden Company issued a new check payable to Harmony.

Although the evidence did not directly establish who instructed McFadden Company to issue a new check, the trial court drew the inference that it was Downman because he knew of plaintiff's investment in the oil rig and he was in constant communication with McFadden Company at the time it was being processed. Indeed, Downman acknowledged his involvement with the leasing of the rig and the many problems he was experiencing with the arrangement in memoranda sent to Brian McFadden after the check was sent to Harmony, memoranda which indicated that Downman was acting on behalf of Harmony, explained Harmony's inability to pay the amounts due under the leaseback, and confirmed to Brian McFadden that McFadden Company's marketing of the rig had been on Harmony's behalf.

II

Defendant Downman argues that jurisdiction cannot be acquired over him because he did not personally transact any business in New York State and jurisdiction cannot be predicated on his activities as the corporate agent of either McFadden Oil or Harmony. Jurisdiction over him cannot be predicated on anything he did for McFadden Oil, he maintains, because although it transacted business in New York, plaintiff's claim did not arise out of that business but out of a leaseback investment with Harmony Drilling Company. Jurisdiction cannot be acquired over him because of his activities on behalf of Harmony, he maintains, because Harmony did not transact any business in this State. Downman contends, further, that even if McFadden Company's activities can be attributed to McFadden Oil or Harmony and support a finding that they transacted business in New York through an agent, he is insulated from jurisdiction under the fiduciary shield doctrine because he was not acting in his individual capacity when participating in the leaseback transaction but on behalf of a corporation.

Constitutional due process requires that a court have a jurisdictional basis to exercise its powers over a party. Customarily this basis is supplied by the party's presence within the court's geographical jurisdiction. With the growth of national markets for commercial trade and technological advances in communication and travel systems, however, an enormous volume of business may be transacted within a State without a party ever entering it. Recognizing this, the Supreme Court has expanded the permissible powers of States to obtain personal jurisdiction over nondomiciliaries. So long as a party avails itself of the benefits of the forum, has sufficient minimum contacts with it, and should reasonably expect to defend its actions there, due process is not offended if that party is subjected to jurisdiction even if not "present" in that State ( see, McGee v. International Life Ins. Co., 355 U.S. 220, 222-223, 78 S.Ct. 199, 200-201, 2 L.Ed.2d 223; see also, Burger King Corp. v. Rudzewicz, 471 U.S. 462, 105 S.Ct. 2174, 85 L.Ed.2d 528; World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 292, 100 S.Ct. 559, 564, 62 L.Ed.2d 490; International Shoe...

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