America/International 1994 Venture v. Mau

• Decision Date: 23 November 2016
• Parties: AMERICA/INTERNATIONAL 1994 VENTURE, et al., appellants, v. Bruce MAU, respondent.
• Court: New York Supreme Court — Appellate Division

146 A.D.3d 40

42 N.Y.S.3d 188

2016 N.Y. Slip Op. 07915

AMERICA/INTERNATIONAL 1994 VENTURE, et al., appellants,

v.Bruce MAU, respondent.

Supreme Court, Appellate Division, Second Department, New York.

Nov. 23, 2016.

Becker & Poliakoff, LLP, New York, NY (James J. Mahon and Oliver Edwards of counsel), for appellants.

Satterlee Stephens Burke & Burke LLP, New York, NY (Richard Saldinger, pro hac vice, and Mario Aieta of counsel), for respondent.

JOHN M. LEVENTHAL, J.P., L. PRISCILLA HALL, LEONARD B. AUSTIN, and BETSY BARROS, JJ.

AUSTIN, J.

The question presented on this appeal is whether New York has jurisdiction over an Illinois resident who entered into an agreement to invest in a New York joint venture. As relevant to this appeal, the agreement appointed a corporation that has its principal office in New York to act as an agent on behalf of all of the investors with respect to the business of the joint venture. For the reasons set forth herein, we find that the agreement, which gave investors no right to control the activities of the corporation appointed as agent, cannot serve as a basis for the exercise of long-arm jurisdiction. Accordingly, the Supreme Court properly granted the nondomiciliary defendant's motion to dismiss the complaint on the ground of lack of personal jurisdiction.

A. Factual Background

The plaintiff American/International 1994 Venture (hereinafter AIV) is a joint venture organized under the laws of the State of New York to engage in oil and gas drilling. The defendant, Bruce Mau, a resident of Glenview, Illinois, alleges that in late 1994, his accountants approached him about an opportunity to invest in the joint venture. After a series of meetings and discussions with his accountants, all of which took place in Illinois, the defendant decided to make the investment. On December 17, 1994, the defendant executed closing documents memorializing his purchase of four units in AIV. To secure his purchase of the units, on that date the defendant also executed a promissory note made payable to AIV, in the amount of $315,000. The note was scheduled to become payable in 15 years, on December 31, 2009. It is undisputed that the closing documents and note were all executed in Illinois and delivered to the defendant's accountants at their Illinois office.

The closing documents executed by the defendant in Illinois on December 17, 1994, included a power of attorney, pursuant to which the defendant agreed to appoint Kraft Oil Management, Inc. (hereinafter Kraft), as his “attorney-in-fact” for various business purposes related to the joint venture. Kraft is a Delaware corporation that maintains its principal office in Great Neck, New York.

The terms relating to investment in the joint venture, and Kraft's role in it, were set forth in the “Subscription Agreement of [AIV]” (hereinafter the Subscription Agreement) entered into by the investors and Kraft. In Article One of the Subscription Agreement, which pertained to “Defined Terms,” the term “Agent” was defined as “Kraft Oil Management, Inc., or such other person or entity appointed by the Investors pursuant hereto as attorney-in-fact for the Investors to carry out the purpose of this Agreement.” “Manager,” a term used to identify Kraft, meant “Agent” as defined in the Subscription Agreement. The term “Working Interest” was defined, in part, as

“the exclusive right to exploit the oil and gas located below the surface of a tract of land covered by an oil or gas lease.... Each Investor as a result of his ownership of a working interest will only be personally liable for his pro-rata share of any liability incurred by [AIV].”

Article Three, subsection 1, of the Subscription Agreement provided, in pertinent part, that each investor “shall receive an operating interest in an undivided fractional Working Interest or other rights that the Manager may contract for in such wells to be selected by the Manager.”

Article Four of the Subscription Agreement, which pertained to “Management and Appointment of Attorney–in–Fact,” defined the relationship between the defendant and Kraft as follows:

“4.1 General Each Investor shall have equal rights in the management of [AIV's] business subject to the appointment of [Kraft] as Agent and Attorney–in–Fact.

“4.2 Appointment of Agent and Attorney–in–Fact

A. The parties hereto by the execution of this Agreement hereby appoint and authorize Kraft ... and its partners, to act as agent and attorney-in-fact for each of the parties hereto ... with full power and authority in his name ... as may be necessary or appropriate to carry out the provisions or purposes of this Agreement, including but not limited to the following:

“To manage actively and conduct the business of [AIV] through completion or abandonment of the wells, as the case may be, devoting such time and talents to such management as shall from time to time be deemed necessary by the Manager. The Manager shall have, without the further consent of the Investors, except as set forth below, the power to do any and all things necessary or incident to the management and conduct of the business of [AIV] ...”

Section 4.2(A) then enumerated the various business activities that Kraft was authorized to conduct on behalf of the investors, which included acquiring, exploring, developing, managing and operating oil, gas or other mineral properties; selecting drill sites and arranging for the drilling of wells; entering into operating, drilling, and construction agreements; and retaining geologists, engineers, and other consultants and employees.

The power of individual investors to revoke Kraft's appointment as agent and attorney-in-fact was restricted by Section 4.2(B), which provided:

“B. The appointment by all Investors of the Agent as attorney-in-fact shall be deemed to be a power coupled with an interest, in recognition of the fact that each of the Investors under this Agreement will be relying upon the power of the Agent to act as contemplated by this Agreement and the Memorandum in any filing and other action by it on behalf of the Investors, and shall survive the incapacity of any Investor or any part of the interest of such Investor.... This power of attorney shall be binding on the parties hereto, their heirs and assigns, until written notice of revocation is received by a majority of the Investors.”

Article Six pertained to the “Fiduciary Responsibility of the Manager.” This article provided that

“[i]n order to expedite the handling of [AIV] Business, it is understood and agreed that any document executed by the Manager, while acting in the name and on behalf of [AIV], shall be deemed to be the action of the Investors as to any third parties (including the Investors as third parties for such purpose).”

The Subscription Agreement also contained a “Governing Law” provision, which stated: “This Agreement shall be construed in accordance with and governed in all respects by the laws of the State of New York applicable to an agreement executed in and performed entirely within said state.” However, the Subscription Agreement contained no choice of forum provision.

Shortly after the defendant executed the note and closing documents, AIV assigned the note to the plaintiff Springfield Petroleum Corporation (hereinafter Springfield and together with AIV, the plaintiffs) by agreement dated December 31, 1994. In exchange for the assignment, Springfield provided credit to AIV. Springfield is a Delaware corporation authorized to do business in New York and maintains its principal place of business in Great Neck.

The plaintiffs allege that the defendant failed to pay the note when it came due on December 31, 2009.

B. Allegations of the Complaint

More than four years later, by summons and complaint dated June 24, 2014, the plaintiffs commenced this action against the defendant to recover on the promissory note. The summons and complaint were filed in the Supreme Court, Nassau County. According to the summons, venue was based on CPLR 503.¹

The plaintiffs alleged in their complaint that in 1994, AIV “organized a tax-advantaged oil and gas drilling joint venture,” which was “a leveraged investment to engage in oil and gas exploration efforts.” The opportunity to invest in the joint venture was offered “only to investors who had wealth, experience, high income and need for tax deductions.” These tax deductions were made possible “by the investor's promissory note payable to AIV that provided the investor with a large initial tax deduction, while payments of interest and principal were deferred by the terms of the promissory note for a number of years.” The plaintiffs then alleged that the defendant, an Illinois resident, was an investor in the joint venture and personally executed and delivered to AIV a promissory note in the sum of $315,600. As a basis for exercising personal jurisdiction over the defendant, the plaintiffs asserted that, as an investor, he “became a working interest owner in the Joint Venture, and as such began doing business in the State of New York.”

The plaintiffs additionally alleged in their complaint that the joint venture hired Springfield as the driller, and that Springfield in turn retained Berkshire Coal Corporation, located in New York, to provide geophysical services. The plaintiffs also noted that “[p]ursuant to the terms of the Joint Venture, the program manager of the Joint Venture acted as the agent of the investors including the Defendant.”

Finally, the plaintiffs alleged that the defendant had defaulted under the terms of the note by failing and refusing to make payment when the note became due on December 31, 2009.

C. The Defendant's Motion to Dismiss Pursuant to CPLR 3211(a)(8)

The defendant moved pursuant to CPLR 3211(a)(8) to dismiss the complaint for lack of personal jurisdiction.

In support of his motion, the defendant argued that the court could not exercise long-arm jurisdiction over him because he had not transacted any business within the state that would satisfy the...