Harris v. Lloyds TSP Bank, PLC, 061808 FED6, 07-5661

Docket Nº:07-5661
Opinion Judge:SUHRHEINRICH, Circuit Judge.
Party Name:FRANK HARRIS, Plaintiff-Appellant Cross-Appellee, v. LLOYDS TSP BANK, PLC, Defendant-Appellee, Cross-Appellant.
Judge Panel:BEFORE: SUHRHEINRICH, CLAY, and COOK, Circuit Judges.
Case Date:June 18, 2008
Court:United States Courts of Appeals, Court of Appeals for the Sixth Circuit

FRANK HARRIS, Plaintiff-Appellant Cross-Appellee,


LLOYDS TSP BANK, PLC, Defendant-Appellee, Cross-Appellant.

No. 07-5661

United States Court of Appeals, Sixth Circuit

June 18, 2008




SUHRHEINRICH, Circuit Judge.

Frank Harris sued Lloyds TSB Bank PLC ("Lloyds") after allegedly becoming a victim of a fraudulent Ponzi scheme whose perpetrators were customers of Lloyds. The district court granted summary judgment to Lloyds. Harris appeals that decision and Lloyds cross-appeals the district court's denial of its motion to dismiss for lack of personal jurisdiction. We conclude that the district court lacked personal jurisdiction. We therefore reverse the judgment of the district court and remand with instruction to dismiss without prejudice.

I. Background

A. Facts 1

Harris, a Tennessee resident, aspired to develop a theme park in Tennessee, at an estimated cost of $50 billion, but needed start-up funds for the project. Around 1997, Harris met Ron Hogsed, also a Tennessee resident, and president of Merit Quest, who told Harris of a method for raising large sums of money by repeatedly buying and selling United States Treasury Bills ("T-bills") through its "Asset Enhancement Program." According to the program materials, a participant would transfer funds to the "Program Attorney Client Trust Account;" which the "Program Attorney" would exchange for T-bills, which would then be "held in a Master Custodial Numbered Account for the benefit of the Corporate Participant." Harris understood that an individual named Monica Bond was the "Program Attorney." Harris also understood the document's reference to the "Program Attorney Client Trust Account" to mean an account with a company called Merit Quest, account number 18004546. Harris claimed that Hogsed told him that the bank account was at Lloyds and was a "trust account, " "insured" by Lloyds, but Harris never attempted to confirm this information.

On March 9, 1999, Monica Bond, a United Kingdom citizen, instructed Lloyds Bank, which is incorporated in England and Wales with its headquarters in London, England, to open a U.S. dollar account in the name of "The Bond Partnership Client Account Re: Hercules Holdings" for her client, Hercules Holdings. Lloyds Bank opened the account and assigned it account number 11287303. This account was not a trust account for Merit Quest and did not have the account number 1800 4546, and none was ever created.

Harris became an agent of Merit Quest and entered into an agreement with Hogsed by which Harris would earn a ten percent commission on all funds wired to Merit Quest accounts, as well as 50% of the monthly earnings after these funds were invested. The Agreement provided in part that "[a]ll monies that have and will be wired to Merit Quest's accounts in Erwin, Tennessee and London, England, (from the clients introduced by Frank Harris/Impact) will be held in trust and secured by Ron Hogsed/Merit Quest on behalf of all parties, which include investors, brokers, and Frank Harris/Impact." Harris recruited several others and together they convinced 118 individuals to invest in Merit Quest. Between April and October 1999, Hogsed transferred over $990, 000 in "commissions" and "earnings" to Harris's bank account from the Merit Quest scheme. Hogsed later confirmed that these payments to Harris did not derive from any earnings of the program, but from the money deposited by later investors, in the nature of a Ponzi scheme.

Harris also invested personal funds. On June 23, 1999, Harris invested $10, 000 in the Merit Quest Program by wiring the fund to Hogsed's First Tennessee Bank account in Erwin, Tennessee for Merit Quest. On September 17, 1999, Harris instructed his bank, The Bank of Goodlettsville, by telephone, to wire another $200, 000 to Lloyds Bank in London. Harris obtained the wire instructions from Hogsed. On a form entitled "Instructions for Bank Wire, " Harris indicated that the "Beneficiary" was "The Bond Partnership Client Account, Ref Hercules Holdings" with an account number of "11 28 73 03." Harris listed the "Receiving Bank" as being "Lloyds Bank plc" in London, England. This form also has a section entitled "Further Ref." In this section, Harris listed "Merit Quest Management International Ltd, Acct # 1800 4546." The Bank used this document to complete the "Wire Transfer Request Form." The Wire Transfer Request Form lists the "Originator" of the wire as "Frank A. Harris." The "Receiving Bank" was listed as "Lloyds Bank PLC, Berkeley Square House." The "Beneficiary" of the wire was "The Bond Partnership Client Account." The "Beneficiary's Address" was provided, as well as the "Beneficiary Account Number, " which the bank stated as "11 28 73 03." Under "Special Instructions" The Bank of Goodlettsville listed "Ref Hercules Holdings/ F/C Merit Quest Management Int'l Ltd Acct #1800 4546." This was the only time Harris wired money to an account at Lloyds. Harris understood that the money was placed into the Bond Partnership Account, and that this account was controlled by Bond and another individual named Bill Cook.

Harris's money was electronically wired from his ban k in Goodlettsville, Tennessee, to Harris Bank International in New York via the Fedwire funds transfer system, and then to Lloyds via an international electronic funds transfer system known as "SWIFT" (Society for Worldwide Interbank Financial Telecommunications).2 On September 20, 1999, these funds were credited to a U.S. Dollar account (Account No. 11287303). Upon transfer of these funds, Lloyds issued a credit advice to its customer, The Bond Partnership, notifying of the credit to account 11287303. In this credit advice Lloyds also notified the Bond Partnership of the additional instructions for the Bond Partnership, i.e. "REF HERCULES HOLDINGS FURTHER CREDIT MERIT QUEST MANAGEMENT INT LTD ACC 1800 4546." Id.

On October 25, 1999, the Tennessee Securities Division of the Department of Commerce and Insurance issued a cease and desist order directing Harris to refrain from violating the state securities laws by acting as an unregistered broker-dealer and selling unregistered securities. Harris received the order on November 1, 1999, and claims that he shut down the Merit Quest Enhancement Program that day.

In March 2000, Lloyds froze the Hercules Holdings accounts, which at the time contained just under $1, 385, 000.00. On July 13, 2000, Harris, through The Bank in Goodlettsville, attempted to recall the $205, 000 wire transfer to the Bond Partnership Client Account at Lloyds' Bank. On July 14, 2000, Lloyds issued a response through the SWIFT system stating: "WE REGRET THAT OUR BRANCH ARE [sic] UNABLE TO OBTAIN BEN[EFICIARY]'S AUTHORITY TO RETURN PAYMENT. WE SUGGEST REMITTER CONTACT[] BENEFICIARY DIRECT."

On February 2, 2001, following a hearing, a Tennessee administrative law judge held that Harris had violated the Tennessee Securities Act of 1980 by selling unregistered securities without a license. Hardcastle, 170 S.W .3d at 80. Following a civil trial in Chancery Court, Harris was found liable to four of the investors he introduced to the Merit Quest Program for selling them unregistered investment contracts without a license. Id.

B. Procedural History

Harris sued Lloyds in federal court in Tennessee on the basis of diversity jurisdiction. The essence of Harris's claim is that the "further reference" portion of the Wire Transfer Request Form, which listed Merit Quest and a 1800 4546 account number, should have alerted Lloyds when processing the wire transfer that the funds should have been placed in a trust account. Harris asserted the following state law causes of action: (1) failure to verify and follow wire instructions, (2) failure to follow bank procedure and protocol, (3) failure to know its customers, (4) failure to follow bank wire recalls, (5) misappropriation of funds, (6) breach of implied contract, (7) breach of fiduciary duty owed to Plaintiff, and (8) accounting and constructive trust.

Lloyds filed a motion to dismiss for lack of personal jurisdiction and a motion for summary judgment. The district court denied the motion to dismiss and granted the motion for summary judgment. Harris appeals the grant of summary judgment to Lloyds, and Lloyds cross-appeals the denial of its motion to dismiss. As noted below, because we find the issue of personal jurisdiction dispositive, we begin and end our discussion there.

II. Analysis

This Court reviews the district court's denial of its motion to dismiss for lack of personal jurisdiction de novo. Calphalon Corp. v. Rowlette, 228 F.3d 718, 721 (6th Cir. 2000). Because the district court did not conduct an evidentiary hearing, we...

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