Newsome v. Gallacher

Decision Date17 July 2013
Docket NumberNo. 12–5068.,12–5068.
Citation722 F.3d 1257
PartiesP. David NEWSOME, Jr., Liquidating Trustee of Mahalo Energy (USA), Inc., Plaintiff–Appellant, v. William GALLACHER, Duncan Chisholm, Gary H. Dundas, Jeff G. Lawson, James Burns, Kevin Wolfe, David E. Butler, and Burnet, Duckworth and Palmer, LLP, Defendants–Appellees.
CourtU.S. Court of Appeals — Tenth Circuit

OPINION TEXT STARTS HERE

Ali M.M. Mojdehi, Cooley LLP, San Diego, CA (Janet D. Gertz, Cooley LLP, San Diego, CA, and William B. Federman and Joshua D. Wells, Federman & Sherwood, Oklahoma City, OK, with him on the briefs) for Appellant.

Craig Fitzgerald, GableGotwals, and Paula J. Quillin, Franden, Woodard, Farris, Quillin + Goodnight (John Henry Rule, GableGotwals, and Joseph R. Farris, Franden, Woodard, Farris, Quillin + Goodnight, with them on the brief) Tulsa, OK, for Appellees.

Before TYMKOVICH, SEYMOUR, and GORSUCH, Circuit Judges.

TYMKOVICH, Circuit Judge.

This case requires us to answer a classic personal jurisdiction question—who was injured, and where? The answer to that question will determine whether the representative of a Canadian-owned Delaware corporation operating exclusively in Oklahoma may sue the corporation's Canadian officers and directors in Oklahoma.

To bring a suit, the plaintiff must show the defendants are subject to personal jurisdictionin Oklahoma. The Constitution allows for personal jurisdiction only when the requirements of due process are met. Here we conclude the Constitution allows this lawsuit to proceed in Oklahoma.

Plaintiff David Newsome is a litigation trustee appointed by the Bankruptcy Court for the Eastern District of Oklahoma to administer the legal claims of Mahalo Energy (USA), Inc. Newsome brought suit in the Northern District of Oklahoma alleging various breaches of fiduciary duty against the corporation's former directors and officers, other closely affiliated persons, and a law firm that provided legal services to the corporation. All defendants are Canadian citizens or entities domiciled in Alberta. The defendants moved to dismiss for lack of personal jurisdiction and the district court granted that motion.

We conclude the district court erred in part. Specifically, we hold the individual defendants (every defendant but the law firm) cultivated sufficient contacts with Oklahoma to justify suit there. We also hold that the fiduciary shield doctrine—under which personal jurisdiction may not attach to a corporate agent by virtue of actions the agent takes solely on the corporation's behalf—does not apply here. We therefore reverse as to the individual defendants and remand for further proceedings.

As for the law firm, however, we affirm. Given the law firm's out-of-state character and that it performed all of its relevant services out-of-state on an out-of-state transaction, it did not cultivate sufficient contacts with Oklahoma to justify personal jurisdiction there. The district court therefore correctly dismissed the law firm.

I. Background
A. Mahalo USA and Mahalo Canada

Mahalo Energy (USA), Inc. is a Delaware corporation which, before its bankruptcy, operated exclusively in Oklahoma. Mahalo USA was in the business of exploring for and producing natural gas. Mahalo USA had a field office, employees, equipment, and real estate interests in Oklahoma.

Mahalo USA is wholly owned by Mahalo Energy Ltd., a Canadian corporation we will refer to as Mahalo Canada.” The basic thrust of this lawsuit is that Mahalo Canada's directors (some of whom were also directors or officers of Mahalo USA) conspired to maximize their own profits by shifting unsustainable debt to Mahalo USA. This course of action began in 2006, when Mahalo Canada acquired another company and assumed its debt. Mahalo Canada then transferred all of that debt to Mahalo USA while keeping the equity. Mahalo Canada also encumbered Mahalo USA's assets as partial security for Mahalo Canada's $50 million revolving line of credit. Finally, Mahalo Canada sold some of its Canadian assets to an investment vehicle in which most Mahalo Canada directors were invested, leaving Mahalo USA's encumbered assets as the primary security for Mahalo Canada's credit line.

B. The Ableco Transaction

Newsome claims things got worse for Mahalo USA in July 2008, when Mahalo Canada caused Mahalo USA to pay off Mahalo Canada's line of credit and enter into a new $105 million line of credit with a company called Ableco. Ableco supposedly has a “loan to own” reputation ( i.e., loaning to failing companies with hopes of seizing assets upon default). Newsome says that Mahalo USA's directors and officers knew the company could never service the new $105 million debt, but entered into the Ableco transaction anyway because it maximized their equity in Mahalo Canada. Mahalo USA defaulted on the Ableco loan about three weeks after closing.

Apparently Mahalo USA soon received an offer from a third party to purchase Mahalo USA's assets for an amount that would pay off its debts. But Mahalo Canada's directors scuttled the deal because the offered purchase price was barely more than Mahalo USA's outstanding debt, meaning the equity holders ( i.e., defendants) would see little or no profit.

After rejecting the purchase offer, Mahalo Canada caused Mahalo USA to sign an amendment with Ableco that increased the credit line and the fees charged. Mahalo USA still could not pay off its debts and filed for bankruptcy protection in the Eastern District of Oklahoma in May 2009.

C. The Nature of Newsome's Lawsuit

After receiving his charge to administer Mahalo USA's legal claims for the benefit of its creditors, Newsome brought suit against seven Canadian citizens and a Canadian law firm, all domiciled in Alberta. The individual defendantsJames Burns, David Butler, Duncan Chisholm, Gary Dundas, William Gallacher, Jeff Lawson, and Kevin Wolfe—generally had overlapping roles as directors or officers (or both) at Mahalo Canada or Mahalo USA (or both). All have equity stakes in Mahalo Canada. Jeff Lawson was also a partner at the law firm (Burnet, Duckworth & Palmer LLP), to which both Mahalo entities frequently turned for legal services. The law firm itself had no equity stake in Mahalo Canada.

Newsome claims all defendants breached their fiduciary duties to Mahalo USA with respect to the debt transactions that sank the company. To the extent a defendant did not have a fiduciary duty toward Mahalo USA, Newsome claims the defendant aided and abetted a breach of fiduciary duty. As to the law firm, he claims it represented both Mahalo Canada and Mahalo USA but had an irreconcilable conflict of interest because Mahalo Canada directed the firm to take actions that favored Mahalo Canada at Mahalo USA's expense. Newsome also asserts that the law firm aided and abetted the individual defendants' breaches of fiduciary duty.

D. Defendants' Contacts with Oklahoma

Every alleged breach originated in Alberta without any contact with Oklahoma. As officers of Mahalo USA, Chisholm and Burns both traveled to Oklahoma frequently to check up on Mahalo USA's physical operations, but only two of those trips—taken by Burns in January 2009—have any conceivable connection to the debt transactions that gave rise to this lawsuit. Those two trips involved presentations to potential purchasers of Mahalo USA's assets.

The other individual defendants had significantly fewer travels to Oklahoma. Dundas made one trip in 2005 (before the period relevant to this lawsuit) in his dual capacity as a director of Mahalo Canada and Mahalo USA. Gallacher traveled with Dundas on the same trip as a director of Mahalo Canada, but otherwise never traveled to Oklahoma on Mahalo business. Butler and Lawson have never traveled to Oklahoma on Mahalo business. Wolfe has never set foot in Oklahoma for any reason. None of the individual defendants have ever owned or leased real property in Oklahoma, held bank accounts in Oklahoma, appointed agents in Oklahoma, filed suit in Oklahoma, or registered to do business in Oklahoma.

Similarly, the law firm has very few Oklahoma connections. It is not licensed to practice law or otherwise do business in Oklahoma, does not advertise in Oklahoma, has no offices or other real property in Oklahoma, has no bank accounts in Oklahoma, and does not pay taxes in Oklahoma. In terms of its actions toward Mahalo USA, the law firm performed all legal services relevant to this lawsuit in Canada.

II. Analysis
A. Personal Jurisdiction Generally

We begin with an overview of personal jurisdiction, in particular the requirements of state and federal law in assessing the power of courts to assert jurisdiction over these Canadian defendants.

Federal courts may exercise personal jurisdiction over a defendant “who is subject to the jurisdiction of a [state] court ... in the state where the [federal] court is located.” Fed.R.Civ.P. 4(k)(1)(A). This requires us to focus first on state law, and particularly, the relevant state's long-arm statute. That statute establishes the extent to which the state intends its courts to exercise jurisdiction over nonresidents. Thus, any personal jurisdiction analysis must begin there.

The Oklahoma legislature has authorized Oklahoma courts to “exercise jurisdiction on any basis consistent with the Constitution of this state and the Constitution of the United States.” Okla. Stat. Ann., tit. 12, § 2004(F). No party has argued any state constitutional objection, so we turn to the only relevant inquiry for this case—whether the United States Constitution places any limits on Oklahoma's ability to exercise jurisdiction.

“The Supreme Court has held that, to exercise jurisdiction in harmony with due process, defendants must have ‘minimum contacts' with the forum state, such that having to defend a lawsuit there would not ‘offend traditional notions of fair play and substantial justice.’ Dudnikov v. Chalk & Vermilion Fine Arts, Inc., 514 F.3d 1063, 1070 (10th Cir.2008) (quoting Int'l Shoe Co. v. Washington, 326 U.S. 310, 316...

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