Martin v. Ju-Li Corp.

• Decision Date: 20 April 1983
• Docket Number: No. 66387,JU-LI,66387
• Citation: 332 N.W.2d 871
• Parties: William D. MARTIN, Trustee in Bankruptcy for the Ju-Li Corp., Suing Derivatively on Behalf of the Ju-Li Corp. and Suing in His Name as Trustee on Behalf of the Ju-Li Corp. and Its Former Employees and Unsecured Creditors, Appellant, v.CORP. f/d/b/a Judy's Hamburgers and Home Fixins' Nominal Defendant Real Party-Plaintiff in Interest; C. Patel Corp., Inc.; and C.P. Patel, C.G. Patel, C.C. Patel, Warren P. Landsman, and Donald Ghareeb, Appellees.
• Court: Iowa Supreme Court

Page 871

332 N.W.2d 871

William D. MARTIN, Trustee in Bankruptcy for the Ju-Li Corp., Suing Derivatively on Behalf of the Ju-Li Corp. and Suing in His Name as Trustee on Behalf of the Ju-Li Corp. and Its Former Employees and Unsecured Creditors, Appellant, v. JU-LI CORP. f/d/b/a Judy's Hamburgers and Home Fixins' Nominal Defendant Real Party-Plaintiff in Interest; C. Patel Corp., Inc.; and C.P. Patel, C.G. Patel, C.C. Patel, Warren P. Landsman, and Donald Ghareeb, Appellees.

No. 66387.

Supreme Court of Iowa.

April 20, 1983.

Richard P. Moore and Gregory Alan Lewis of Moyer & Bergman, Cedar Rapids, for appellants.

Robert C. Tilden, Gregory M. Lederer, and Charles M. Peters of Simmons, Perrine, Albright & Ellwood, Cedar Rapids, for appellees other than Donald Ghareeb.

Considered en banc.

UHLENHOPP, Justice.

This appeal involves the question of whether Iowa courts have personal jurisdiction of certain Illinois residents.

C. Patel Corp., Inc. is an Illinois corporation not licensed to do business in Iowa. Its sole shareholders are C.P. and C.G. Patel (spouses), who are residents of Illinois. Ju-Li Corp. (Ju-Li) is a Delaware corporation authorized to do business in Iowa and actively operating here at the times in question. On August 7, 1978, C. Patel Corp. acquired all of the stock of Ju-Li from another company.

On the date of acquisition, C.P. Patel and C.C. Patel (father and son), Warren Landsman, and Donald Ghareeb became the new officers and directors of Ju-Li. All of these individuals are Illinois residents except Ghareeb, who lived in Iowa at the time.

Ju-Li failed within a few months after the acquisition, and was adjudged bankrupt. A federal court appointed plaintiff William D. Martin as bankruptcy trustee. The trustee, for the estate of the bankrupt Ju-Li and derivatively on behalf of Ju-Li, brought the present action against defendants C. Patel Corp., the three Patels, Landsman, and Ghareeb.

The trustee stepped into the shoes of Ju-Li and could sue for alleged wrongs done to it by its officers, directors, stockholders, and others. Bayliss v. Rood, 424 F.2d 142, 144 (4th Cir.1970); Roach v. Reldon Trading Corp., 321 F.2d 42, 44 (2nd Cir.1963); Schmitt v. Jacobson, 294 F.Supp. 346, 347 (D.Mass.1968); Smith v. State Farm Mutual Automobile Insurance Co., 278 F.Supp. 405, 409 (E.D.Tenn.1967); Parrish v. Brantley, 256 N.C. 541, 544, 124 S.E.2d 533, 536 (1962); Nesse v. Brown, 218 Tenn. 686, 693, 405 S.W.2d 577, 579 (1964); see 9 Am.Jur.2d Bankruptcy § 271, at 473 (scheduling as asset the "rights of corporation against stockholders, officers, or directors").

The trustee's petition is in two counts. The first count bases a claim on defendants' failure to contribute adequate capital to Ju-Li and breach of fiduciary and managerial duties to it, alleges that Ju-Li was the alter ego of C. Patel Corp., and charges that defendants' acts were fraudulent, oppressive, and unjust to the damage of Ju-Li and its employees and creditors. The second count bases a claim on defendants' inadequate management of Ju-Li, mismanagement of it, negligent management of it, and waste of its assets, again to the damage of Ju-Li and its employees and creditors. Although the allegations in both counts are against the "defendants," which would include C. Patel Corp. and the five individuals, the prayer in each count is against the five individuals.

Ghareeb appeared generally in the action. The other defendants appeared specially, however, challenging the jurisdiction of the court over them. We refer to them as the defendants. The district court held a hearing and thereafter sustained the special appearance. The trustee appealed. At that time we had not yet decided State ex rel. Miller v. Internal Energy Management Corp., 324 N.W.2d 707 (Iowa 1982).

I. Initially we emphasize two distinctions. One is that a difference exists between the question of whether the trustee has stated a claim on which relief can be granted and the question of whether Iowa courts have jurisdiction to permit him to try to prove his claim in our courts. Miller, 324 N.W.2d at 714. We do not have the former question before us at this time. Moreover, we do not now know whether at trial the trustee will be able to establish his claim on the merits, either factually or legally. We are at a preliminary stage, deciding whether he should be allowed to endeavor to establish his claim here.

The other distinction is the difference, in special appearance proceedings, between allegations of a petition which go to the merits of a claim and other allegations of the petition. The latter may be contradicted in special appearance proceedings by affidavits, testimony, and other evidence; the former, however, are taken as true for special appearance purposes, and are not subject to contradiction at that stage. E & M Machine Tool Corp. v. Continental Machine Products, Inc., 316 N.W.2d 900, 904 (Iowa 1982) ("For purposes of the special appearance, we assume that the plaintiff's allegations on the merits are true."); Svendsen v. Questor Corp., 304 N.W.2d 428, 429 (Iowa 1981) ("We accept the allegations of the petition as true."); Hovey v. Elson, 303 N.W.2d 132, 135 (Iowa 1981); Fox v. Martin, 287 Mich. 147, 152, 283 N.W. 9, 10 (1938) (" 'Its jurisdiction, necessarily, has to be determined from the allegations, assuming them to be true.' "); Iowa Electric Co. v. State Board of Control, 221 Iowa 1050, 1059, 266 N.W. 543, 547 (1936) ("Such a procedure [presentation of evidence of allegations of petition, at hearing on special appearance] would involve a determination of the merits of the case, and this is not the purpose of a special appearance.").

The federal courts apply the same rule. The court stated in Schramm v. Oakes, 352 F.2d 143, 149 (10th Cir.1965) (citations omitted):

Certainly the trial court may gather evidence on the question of jurisdiction by affidavits or otherwise in an effort to determine the facts as they exist, and based upon the evidence so obtained, decide the jurisdictional dispute before trial. One deviation from this procedure is in the case where the issue of jurisdiction is dependent upon a decision on the merits. In that circumstance, the trial court should determine jurisdiction by proceeding to a decision on the merits. The purpose of postponing a determination upon a jurisdictional question when it is tied to the actual merits of the case is to prevent a summary decision on the merits without the ordinary incidents of a trial including the right to jury.

To similar effect, see McBeath v. Inter-American Citizens for Decency Committee, 374 F.2d 359, 363 (5th Cir.), cert. denied, 389 U.S. 896, 88 S.Ct. 216, 19 L.Ed.2d 214 (1967) ("Undoubtedly, under Rule 12(d) of the Federal Rules of Civil Procedure a court may determine the prerequisite to jurisdiction in advance of trial on the merits. However, where the factual and jurisdictional issues are completely intermeshed the jurisdictional issue should be referred to the merits, for it is impossible to decide the one without the other."); Fireman's Fund Insurance Co. v. Railway Express Agency, 253 F.2d 780, 784 (6th Cir.1958); Observa-Dome Laboratories, Inc. v. McGraw-Hill, Inc., 343 F.Supp. 1030, 1033 (E.D.Pa.1972) ("When jurisdictional facts are thus intertwined with the merits, they must be left to trial on the merits."). See also Johns-Manville Sales Corp. v. Mitchell Enterprises, Inc., 417 F.2d 129, 131 (5th Cir.1969); 5 Wright & Miller, Federal Practice and Procedure § 1350, at 558 (1969) ("If, however, a decision of the jurisdictional issue requires a ruling on the merits of the case, the decision should await a determination of the merits either by the court or a summary judgment motion or by the fact finder at trial."); 21 C.J.S. Courts § 112, at 171 (1940); 35A C.J.S. Federal Civil Procedure § 470, at 696 (1960).

We begin consideration of the special appearance, therefore, on the assumption that Ju-Li was a corporation licensed and operating in Iowa; that defendants fraudulently, oppressively, and unjustly failed to contribute adequate capital to Ju-Li and breached fiduciary and managerial duties to it; and that defendants inadequately and negligently managed Ju-Li, mismanaged it, and wasted its assets--all to the damage of Ju-Li and its employees and creditors. The question is whether these allegations, accepted as true at this point, give Iowa courts jurisdiction to proceed to trial.

II. In resolving jurisdictional questions regarding nonresidents, we employ a two-prong test: first, does a statute authorize assumption of jurisdiction of the defendants, and second, would assumption of jurisdiction offend constitutional due process of law? Larsen v. Scholl, 296 N.W.2d 785, 787 (Iowa 1980). We have no difficulty here with the first prong; the allegations of the petition bring the case within the provisions of our long-arm statute, section 617.3 of the Iowa Code (1979). The controversy involves the minimum-contacts requirement of constitutional due process, to which we now turn.

III. In analyzing this case we consider several aspects of it. We initially take up the situation of all of the individual defendants except C.G. Patel, wife of C.P. Patel; we will deal with her situation later.

A. We first ascertain the roles of these individuals. This is not a case like Miller in which individuals in state A, acting through their corporation, perpetrate wrongs on individuals in state B. In this case the corporation, Ju-Li, is itself the alleged victim; individuals in state A, officers and directors of a corporation, are alleged to have committed wrongs against their own corporation licensed and operating in state B, whereby it was brought to bankruptcy. These are allegations of direct wrongdoing against a corporation in Iowa by its officers and directors, not wrongdoing through a corporation. As to the individual defendants other than C.G. Patel, therefore, we hold that at least minimum...