Rollin v. William V. Frankel & Co., Inc.

• Decision Date: 23 March 2000
• Docket Number: No. 2 CA-CV 99-0164.,2 CA-CV 99-0164.
• Citation: 196 Ariz. 350,996 P.2d 1254
• Parties: Lawrence S. ROLLIN, individually; and J. William Mandelbaum and Barbara Mandelbaum, husband and wife; and on behalf of all others similarly situated, Plaintiffs/Appellants, v. WILLIAM V. FRANKEL & CO., INC., a New Jersey corporation; Hill, Thompson, Magid & Co., Inc., a New York corporation, Defendants/Appellees.
• Court: Arizona Court of Appeals

996 P.2d 1254

196 Ariz. 350

Lawrence S. ROLLIN, individually; and J. William Mandelbaum and Barbara Mandelbaum, husband and wife; and on behalf of all others similarly situated, Plaintiffs/Appellants, v. WILLIAM V. FRANKEL & CO., INC., a New Jersey corporation; Hill, Thompson, Magid & Co., Inc., a New York corporation, Defendants/Appellees.

No. -0164.

Court of Appeals of Arizona, Division 2, Department A.

March 23, 2000.

Rusing & Lopez, P.L.L.C. By G. Todd Jackson and Laura A. Hubbard, Tucson, and McNamara & Goldsmith, P.C. By Eugene N. Goldsmith, Tucson, Attorneys for Plaintiffs/Appellants.

Snell & Wilmer L.L.P. By Joel P. Hoxie and David E. Rauch, Phoenix and Law Offices of Richard L. Herzfeld By Richard L. Herzfeld, New York, New York, Attorneys for Defendant/Appellee William V. Frankel & Co., Inc.

Osborn Maledon, P.A. By David Rosenbaum and Maureen Beyers, Phoenix and Bingham Dana L.L.P. By Steven W. Hansen and Timothy P. Burke, Boston, Massachusetts, Attorneys for Defendant/Appellee Hill, Thompson, Magid & Co., Inc.

OPINION

PELANDER, Presiding Judge.

¶ 1 In this putative class action, plaintiffs/appellants Lawrence S. Rollin and J. William and Barbara Mandelbaum appeal from the trial court's order dismissing their complaint against defendants/appellees William V. Frankel & Co. (Frankel) and Hill, Thompson, Magid & Co. (HTM) for lack of personal jurisdiction. We affirm.

BACKGROUND

¶ 2 This action arises out of the purchase and sale of worthless public stock in a company called Discovery Zone. On July 29, 1997, a bankruptcy court extinguished all of Discovery Zone's publicly owned stock pursuant to a confirmed plan of reorganization under Chapter 11 of the Bankruptcy Code. The Securities and Exchange Commission (SEC) did not suspend trading on that stock, however, until August 1, 1997. In the interim, on July 31, plaintiffs purchased Discovery Zone stock through their brokers in Tucson, Fidelity Investments and Merrill Lynch. Fidelity, through its Boston office, purchased 2,000 shares on Rollin's behalf from Frankel. Through transactions occurring in New York and New Jersey, Merrill Lynch purchased the same number of shares on the Mandelbaums' behalf from HTM.

¶ 3 Plaintiffs, Arizona residents, filed this action against Frankel and HTM, the market makers on the National Association of Securities Dealers Automated Quotation (NASDAQ)¹ system who had sold the Discovery Zone stock to plaintiffs' agents. Plaintiffs brought the action on behalf of themselves and a class of approximately 5,000 similarly situated persons who had purchased Discovery Zone stock from Frankel or HTM on or after July 29, 1997. In their amended complaint, plaintiffs alleged causes of action for rescission, restitution, unjust enrichment, and negligence.

¶ 4 Frankel, a New Jersey corporation with its principal place of business there, and HTM, a New York corporation with its principal place of business in New Jersey, moved to dismiss the action for lack of personal jurisdiction pursuant to Rule 12(b)(2), Ariz. R. Civ. P., 16 A.R.S. The trial court granted the motions, and this appeal followed. We have jurisdiction under A.R.S. § 12-2101(D).

DISCUSSION

¶ 5 We review de novo a trial court's dismissal for lack of personal jurisdiction, viewing the facts in the light most favorable to the plaintiffs. A. Uberti and C. v. Leonardo, 181 Ariz. 565, 567, 569, 892 P.2d 1354, 1356, 1358 (1995). Frankel and HTM are securities broker-dealers registered with the SEC and the National Association of Securities Dealers (NASD). Both companies function as market makers on the NASDAQ stock market. Market makers are independent dealers that openly compete with each other for investors' orders in NASDAQ-listed stock by using their own capital to buy and sell NASDAQ securities. Because NASDAQ does not have a traditional trading floor, it relies on the market makers to generate competition and immediate, continuous trading and to ensure liquidity for stocks listed on NASDAQ.

¶ 6 Although market makers operate from individual offices, they conduct much of their activity through a vast computer network, linked by NASDAQ. Market makers provide quotations electronically to the NASDAQ stock exchange. Depending upon the level of NASDAQ work station terminal maintained at their particular office, NASDAQ broker-dealers may then access those quotes and place orders with market makers on behalf of customers located throughout the United States and abroad.² Market makers generally do not deal directly with the public, but rather, transact business only with other broker-dealers that are NASDAQ members. Market makers are obligated by the NASD to sell to or buy from any such firm that agrees to the posted price quotes. Thus, the quotes essentially constitute irrevocable offers to sell or buy at the stated prices.

¶ 7 It is undisputed that neither Frankel nor HTM is incorporated; is registered to do business; owns or leases any property; maintains any offices, bank accounts, or telephone listings; or has any employees, agents, or other physical presence in Arizona. As noted in ¶ 2 above, Rollin's purchase of Discovery Zone stock actually occurred between Frankel's New Jersey office and Fidelity's Boston office, and the Mandelbaums' purchase occurred in New Jersey and New York. In addition, plaintiffs' broker/agents acted on behalf of undisclosed principals. That is to say, when a broker-dealer such as Fidelity or Merrill Lynch contacted Frankel or HTM to accept a stock quote, the market maker was not informed whether the purchase order was for the broker-dealer's own account or on behalf of a customer. Thus, Frankel and HTM had no information about the identity or location of broker-dealers' ultimate customers who placed purchase orders with them.

¶ 8 Plaintiffs contend, however, that the "modern realities of electronic commerce" permit Arizona to assert both general and specific jurisdiction over Frankel and HTM because of their unique roles as market makers. Plaintiffs have the burden of "`mak[ing] a prima facie showing of jurisdiction.'" Uberti, 181 Ariz. at 569, 892 P.2d at 1358, quoting Barone v. Rich Bros. Interstate Display Fireworks Co., 25 F.3d 610, 611 (8th Cir.1994)

. See also Macpherson v. Taglione, 158 Ariz. 309, 312, 762 P.2d 596, 599 (App. 1988). Viewing the facts in the light most favorable to plaintiffs, we cannot say they met their burden of establishing either general or specific jurisdiction here.

A. General Jurisdiction

¶ 9 "General jurisdiction subjects the defendant to suit on virtually any claim, `[e]ven when the cause of action does not arise out of or relate to the [defendant's] activities in the forum State.'" Batton v. Tennessee Farmers Mut. Ins. Co., 153 Ariz. 268, 270, 736 P.2d 2, 4 (1987), quoting Helicopteros Nacionales de Colombia, S.A. v. Hall, 466 U.S. 408, 416, 104 S.Ct. 1868, 1872, 80 L.Ed.2d 404, 411 (1984)

(brackets in Batton). General jurisdiction applies only if "the defendant has `substantial' or `continuous and systematic' contacts with the forum state." Batton, 153 Ariz. at 270,

736 P.2d at 4,

quoting in part Helicopteros, 466 U.S. at 416,

104 S.Ct. at 1873,

80 L.Ed.2d at 412. See also Burger King Corp. v. Rudzewicz, 471 U.S. 462, 475, 487, 105 S.Ct. 2174, 2184, 2190, 85 L.Ed.2d 528, 542, 550 (1985). "[M]ere purchases, even if occurring at regular intervals, are not enough to warrant a State's assertion" of general jurisdiction. Helicopteros, 466 U.S. at 418,

104 S.Ct. at 1874,

80 L.Ed.2d at 413.

¶ 10 Plaintiffs contend Frankel and HTM have "conducted continuous and systematic business with [Arizona] through participation in the electronic NASDAQ stock market." To support that claim of general jurisdiction, plaintiffs point to the fact that, "[i]n 1997, HTM conducted over $14 million worth of trades with twelve broker dealers located in Arizona ... [and] Frankel, in one month alone, [July 1997,] conducted almost $13,000 worth of trades with broker-dealers located in Arizona."

¶ 11 Plaintiffs essentially concede that none of the traditional indicia of general jurisdiction is present here. See Helicopteros, 466 U.S. at 416-18,

104 S.Ct. at 1873-74,

80 L.Ed.2d at 412-14. Other than the gross value of Frankel's and HTM's transactions during certain time frames with broker-dealers that had trading desks in Arizona, the record reflects no other activities that could be characterized as conducting business in Arizona, directly or indirectly. In addition, most of HTM's sales transactions to which plaintiffs refer actually were conducted outside Arizona with broker-dealers that maintained trading desks in Arizona and elsewhere. And, HTM's total 1997-98 sales to broker-dealers with trading desks in Arizona, both in terms of volume and monetary receipts, constituted less than one percent of HTM's total business for those years. Similarly, of the 19,659 trades that Frankel entered into in July 1997, only seven sales and no purchases were made with brokers domiciled in Arizona. During the relevant time frame, July 29 through August 1, 1997, HTM did not sell any Discovery Zone stock to a broker-dealer that maintained a trading desk in Arizona. And, Frankel made no trades for Discovery Zone stock in Arizona at any time.

¶ 12 In support of their general jurisdiction argument, plaintiffs cite cases that considered a defendant's high value of transactions or Internet solicitation in the forum state. Those cases, however, primarily addressed a state's power to exercise specific jurisdiction and involved intentional solicitation in the forum state not present here. See, e.g., Inset Sys., Inc., v. Instruction Set, Inc., 937 F.Supp. 161 (D.Conn.1996)

; Raymond E. Danto, Assoc., Inc. v. Arthur D. Little, Inc., 316 F.Supp. 1350 (E.D.Mich.1970); Maritz, Inc. v. Cybergold, Inc., 947 F.Supp. 1328 (E.D.Mo.1996). On this record, we cannot say Frankel or HTM had substantial or systematic and continuous contacts with Arizona so as to...