In re National Audit Defense Network

• Decision Date: 23 June 2005
• Docket Number: Adversary No. 04-1261.,Bankruptcy No. BK-S-03-17306-BAM.
• Parties: In re NATIONAL AUDIT DEFENSE NETWORK, Debtor. William A. Leonard, Jr., Chapter 7 Trustee, Plaintiff, v. Optimal Payments Ltd. (f/k/a SF Online Processing Ltd.); Optimal Payments Corporation; and Optimal Payments Inc., Defendants.
• Court: United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — District of Nevada

Page 896

332 B.R. 896

In re NATIONAL AUDIT DEFENSE NETWORK, Debtor.

William A. Leonard, Jr., Chapter 7 Trustee, Plaintiff, v. Optimal Payments Ltd. (f/k/a SF Online Processing Ltd.); Optimal Payments Corporation; and Optimal Payments Inc., Defendants.

Bankruptcy No. BK-S-03-17306-BAM.

Adversary No. 04-1261.

United States Bankruptcy Court, D. Nevada.

June 23, 2005.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

William A. Leonard, Las Vegas, NV, Chapter 7 Trustee.

Barton L. Jacka, Esq., Las Vegas, NV, for trustee.

Behnam Dayanim, Esq., Patrick J. Tongi, Esq., Paul, Hastings, Janofsky & Walker LLP, Washington, DC, Nile Leatham, Esq., James B. MacRobbie, Esq., Las Vegas, NV, for Defendants.

MEMORANDUM ON DEFENDANTS' MOTION TO DISMISS OR FOR SUMMARY JUDGMENT

BRUCE A. MARKELL, Bankruptcy Judge.

This case involves the ability of a party to a merchant credit card processing agreement to obtain payment, as well as an accounting, of funds collected by the other party. On one side is William A. Leonard, Jr., the trustee (Trustee) of the debtor National Audit Defense Network, Inc. (NADN). On the other side is Optimal Payments, Ltd., a corporation incorporated under the laws of England and Wales (OPL) and a Canadian corporation known as Optimal Payments, Inc. (OPI). OPL and OPI will be referred to collectively as "Optimal,"¹ and their relative identities and roles will be made known in due course.

By his action, the Trustee seeks damages for breach of the credit card processing agreement, as well as an accounting for, and a turnover of, more than $1 million of credit card payments processed under that agreement. Optimal counters that none of the funds identified in the complaint belongs to the Trustee or his estate, and in any event, OPC is not subject to jurisdiction in this forum. The court has once before sustained Optimal's motion, and the Trustee returned with an amended complaint. This time, the court overrules the jurisdictional objections, dismisses the Trustee's claims for turnover and an accounting, and orders Optimal to answer the breach of contract claims and the various bankruptcy avoidance actions alleged by the Trustee within thirty days of the entry of this memorandum.

Background Facts

NADN engaged in selling dodgy tax advice to those predisposed to hear its message. It collected (some might say bilked) millions of dollars from thousands of individuals during its relatively short life. Some of these individuals paid cash, but most paid by that ubiquitous emblem of consumer finance, the credit card.² That is where Optimal, in all its various forms, joined the picture.

In August 2002, NADN entered into a credit card processing agreement (Agreement)³ with SF Online Processing, Ltd. (SF). Through processes unknown, SF became OPL at some time before the Trustee filed his complaint. OPL is alleged to be a wholly owned subsidiary of OPI.

The complaint alleges that, in various ways that are at best generally described, OPL and OPI participated in processing NADN's prepetition and postpetition credit card receivables. It also alleges that OPL holds, or held, $957,984 of credit card payments made prepetition to NADN, and $92,037 in similar postpetition credit card receivables. Against these amounts, the Trustee alleges that OPL improperly assessed fines of $97,325 prepetition, and $344,650 post-petition. Finally, the complaint also alleges that OPL imposed an unspecified amount of "improper and unjustified" chargebacks against amounts held by OPL but collected for NADN.

The Trustee wants the funds, and wants the fines and chargebacks reversed. It predicates its request upon breach of contract, plus an array of equitable and bankruptcy-based claims for relief. OPI claims that this court does not have jurisdiction over it, and OPL contends that any funds it retains it owns outright, and that it has already given the Trustee an adequate accounting.

Legal Background and Analysis

A. Jurisdiction

Optimal seeks to dismiss the complaint as to OPI, the Canadian parent, alleging that this court does not have personal jurisdiction over it. This claim is made under Rule 12(b)(2) of the Federal Rules of Civil Procedure, made applicable by Rule 7012 of the Federal Rules of Bankruptcy Procedure. Under Rule 12(b)(2), it is the Trustee's burden to establish personal jurisdiction. Harris Rutsky & Co. Ins. Services, Inc. v. Bell & Clements Ltd., 328 F.3d 1122, 1128-29 (9th Cir.2003); Doe, I v. Unocal Corp., 248 F.3d 915, 922 (9th Cir.2001) (per curiam). Here, without an evidentiary hearing, the Trustee need only make a prima facie showing of jurisdiction to avoid the defendant's motion to dismiss. Harris Rutsky, 328 F.3d at 1129. Put another way, the Trustee "need only demonstrate facts that if true would support jurisdiction over the defendant." Unocal, 248 F.3d at 922, quoting Ballard v. Savage, 65 F.3d 1495, 1498 (9th Cir.1995). As stated in Harris Rutsky, "[u]nless directly contravened, [the Trustee's] version of the facts is taken as true, and `conflicts between the facts contained in the parties' affidavits must be resolved in [the Trustee's] favor for purposes of deciding whether a prima facie case for personal jurisdiction exists.'" Harris Rutsky, 328 F.3d at 1129, quoting Unocal, 248 F.3d at 922, in turn quoting AT & T v. Compagnie Bruxelles Lambert, 94 F.3d 586, 588 (9th Cir.1996).⁴

Where, as here, there is no applicable federal statute governing personal jurisdiction, the law of the state in which the trial court sits applies. Core-Vent Corp. v. Nobel Industries AB, 11 F.3d 1482, 1484 (9th Cir.1993). As a consequence, the Trustee must show (1) that Nevada's long-arm statute confers personal jurisdiction over Optimal and (2) that the exercise of jurisdiction comports with the constitutional principles of due process. See Rio Properties, Inc. v. Rio Int'l Interlink, 284 F.3d 1007, 1019 (9th Cir.2002). Nevada's long-arm statute permits the exercise of jurisdiction to the same extent as the United States Constitution. Nev. Rev. Stat. § 14.065 (2001). Hence, the court "need only determine whether personal jurisdiction in this case would meet the requirements of due process." Brainerd v. Governors of the Univ. of Alberta, 873 F.2d 1257, 1258 (9th Cir.1989).

Due process requires "that in order to subject a defendant to a judgment in personam, if he be not present within the territory of the forum, he have certain minimum contacts with it such that the maintenance of the suit does not offend `traditional notions of fair play and substantial justice.'" International Shoe Co. v. Washington, 326 U.S. 310, 316, 66 S.Ct. 154, 90 L.Ed. 95 (1945), quoting Milliken v. Meyer, 311 U.S. 457, 463, 61 S.Ct. 339, 85 L.Ed. 278 (1940). To determine whether a court may exercise jurisdiction over the defendants, there must be either general jurisdiction or specific jurisdiction.

1. General Jurisdiction

For general jurisdiction to exist over a nonresident defendant, the defendant must engage in "continuous and systematic general business contacts" with the state in which the forum is located. Helicopteros Nacionales de Colombia, S.A. v. Hall, 466 U.S. 408, 416, 104 S.Ct. 1868, 80 L.Ed.2d 404 (1984), citing Perkins v. Benguet Consol. Mining Co., 342 U.S. 437, 72 S.Ct. 413, 96 L.Ed. 485 (1952). These contacts must "approximate physical presence" in the forum state. Schwarzenegger v. Fred Martin Motor Co., 374 F.3d 797, 801 (9th Cir.2004), citing Bancroft & Masters, Inc. v. Augusta Nat'l, Inc., 223 F.3d 1082, 1086 (9th Cir.2000). As pointed out in Schwarzenegger, "[t]his is an exacting standard, as it should be, because a finding of general jurisdiction permits a defendant to be haled into court in the forum state to answer for any of its activities anywhere in the world." Schwarzenegger, 374 F.3d at 801.

In support of general jurisdiction over OPI, the Trustee points to a common website maintained by the Optimal group of companies that is accessible in Nevada.⁵ With the rise of Internet activity and commerce over the last decade or so, American courts have struggled with applying traditional notions of jurisdiction to those who maintain websites that can be viewed from any computer anywhere in the world. Does posting a website on the Internet establish the "minimum contacts" necessary for jurisdiction everywhere?

After initially toying with the idea that jurisdiction could be found anywhere that a website could be viewed, courts subsequently rejected that view. They adopted stricter tests, requiring, in general, some interactivity between a viewer in the forum state and the website or, alternatively, evidence that the website specifically targets users in that state. See generally 4A CHARLES ALAN WRIGHT & ARTHUR R. MILLER, FEDERAL PRACTICE AND PROCEDURE: CIVIL 3D § 1073.1 (2002 & Supp.2005). Despite these efforts, no bright-line rule has yet emerged that a court can easily apply to determine whether it has jurisdiction over a company that invites and conducts business over the Internet. See Allan R. Stein, Personal Jurisdiction and the Internet: Seeing Due Process Through the Lens of Regulatory Precision, 98 Nw.U.L.Rev.411 (2004).

In the present case, while OPI maintains a website for its various credit card payment enterprises, its website almost certainly does not meet the test for general jurisdiction, which, as stated before, requires that the company engage in "continuous and systematic general business contacts," Helicopteros Nacionales, 466 U.S. at 416, 104 S.Ct. 1868, that "approximate [s] physical presence" in the forum state. Bancroft & Masters, Inc. v. Augusta Nat'l, Inc., 223 F.3d 1082, 1086 (9th Cir.2000).

The Ninth Circuit held last year that an Ohio business with several attenuated connections to California and "an Internet website accessible by anyone capable of using the Internet, including people living in California" fell "well short of the ...