Wallace v. Frank

• Decision Date: 17 June 1987
• Docket Number: Civ. No. 86-CV-73351-DT.
• Citation: 662 F. Supp. 876
• Parties: Gaston and Pallie WALLACE, Plaintiffs, v. Stewart D. FRANK, Robert Davidson, Gertrude Quinlan Davidson, Frank & Company, P.C., a Michigan Professional Corporation, Warren Rosenkranz, the Rosenkranz Group, a Pennsylvania Limited Partnership, Technological Advancement Corporation, a Michigan Corporation, and Raddiss & Rosenfelt, a Pennsylvania Professional Corporation, Defendants.
• Court: U.S. District Court — Western District of Michigan

662 F. Supp. 876

Gaston and Pallie WALLACE, Plaintiffs, v. Stewart D. FRANK, Robert Davidson, Gertrude Quinlan Davidson, Frank & Company, P.C., a Michigan Professional Corporation, Warren Rosenkranz, the Rosenkranz Group, a Pennsylvania Limited Partnership, Technological Advancement Corporation, a Michigan Corporation, and Raddiss & Rosenfelt, a Pennsylvania Professional Corporation, Defendants.

Civ. No. 86-CV-73351-DT.

United States District Court, E.D. Michigan, S.D.

June 17, 1987.

Richard Yanko & Mark C. Lahti, Birmingham, Mich., for plaintiffs.

Patrick Barrett & Christine Oldani, Detroit, Mich., for defendant Raddiss & Rosenfelt.

Robert N. Dunn & Jaimie A. Kleinstiver, Detroit, Mich., for defendants Warren Rosenkranz & The Rosenkranz Group.

COHN, District Judge.

MEMORANDUM AND ORDER

This is a securities fraud case with pendent state claims. Before the Court are the motions of defendant Raddiss & Rosenfelt (now Rosenfelt, Siegel & Goldberg) and defendants Warren Rosenkranz and The Rosenkranz Group to dismiss for lack of personal jurisdiction. Fed.R.Civ.P. 12(b)(2). Plaintiffs have responded. For the reasons which follow, the motions will be denied.

I.

A.

Raddiss and Rosenfelt are charged with conspiracy to defraud in Count I of the complaint and with negligence in Count VIII. It appears undisputed that Raddiss & Rosenfelt, a Pennsylvania partnership, performed accounting services and prepared financial and tax information for The Rosenkranz Group, a Pennsylvania limited partnership, charged with being the principle instrument of the fraud alleged by plaintiffs. Plaintiffs were limited partners in The Rosenkranz Group. It also appears undisputed that pertinent financial papers were sent by Raddiss & Rosenfelt to plaintiffs in Michigan.

If the Court has jurisdiction over Raddiss & Rosenfelt, it must be found in the limited personal jurisdiction provisions of Michigan's long-arm statute, Mich.Comp.Laws § 600.725. Under this statute, a partnership may be subject to the jurisdiction of this court for doing, or causing any act to be done, or consequences to occur in Michigan resulting in an action for tort. Id.

The Court is satisfied that an accounting firm that prepares and sends into Michigan for use by a Michigan resident allegedly fraudulent financial and tax information, which causes injury to the Michigan resident, is subject to the long-arm jurisdiction of a federal court in Michigan. This conclusion is consistent with the Court's decision in Pasternak v. Sagittarius Recording Co., No. 82-70500, Order of Jan. 13, 1983 (copy attached). A more detailed explanation follows in Part III.

B.

Warren Rosenkranz and The Rosenkranz Group are charged with three violations of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1962, in Count III and with federal and state securities fraud claims in Counts IV and V. While plaintiffs originally invested in Dearborn Associates, a limited partnership organized under Florida law, all the interests in that limited partnership were transferred to The Rosenkranz Group, with the latter's consent, when the subscription level proved inadequate to establish Dearborn Associates. Subsequent to the transfer, The Rosenkranz Group caused a private placement memorandum and an "offer of rescission" to be sent to plaintiffs in Michigan. While Rosenkranz and The Rosenkranz Group heavily rely on the fact that a California law firm, not the limited partnership, actually sent the investment and rescission papers to plaintiffs in Michigan, placing substance over form, the mailing was done on behalf of The Rosenkranz Group and clearly for its benefit. In any event, the record also shows that Rosenkranz sent financial papers concerning The Rosenkranz Group to plaintiffs in Michigan.

In the same fashion as with Raddis & Rosenfelt, if the Court has jurisdiction over Rosenkranz and The Rosenkranz Group, it must be found in the limited personal jurisdiction provisions of Mich.Comp.Laws § 600.725.

The Court is satisfied that a limited partnership and its general partner, which cause to be sent into Michigan an allegedly fraudulent and misleading private placement memorandum, an offer of rescission and fraudulently prepared financial papers are also subject to the long-arm jurisdiction of a federal court in Michigan. A more detailed explanation follows in Part IV.

II.

A.

The question of jurisdiction is to be decided by Michigan law under Fed.R.Civ.P. 4(e). Any decision on whether to exercise personal jurisdiction over a particular defendant depends on the facts of the situation. Woods v. Edgewater Amusement Park, 381 Mich. 559, 569, 165 N.W.2d 12 (1969). The burden of establishing jurisdiction is on plaintiffs. When the issue is determined solely on the basis of written materials, they need only demonstrate a prima facie case, and the pleadings and affidavits must be considered in the light most favorable to the party asserting the existence of jurisdiction. Welsh v. Gibbs, 631 F.2d 436 (6th Cir.1980); K-Mart Corp. v. Knitjoy Mf'g., Inc., 542 F.Supp. 1189, 1191 (E.D.Mich.1982).

B.

The Court must resolve two issues: first, whether a defendant's acts created a relationship in Michigan within the meaning of its long-arm statute, and second, whether the exercise of limited personal jurisdiction over the defendant is compatible with due process. Khalaf v. Bankers & Shippers Ins. Co., 404 Mich. 134, 142, 273 N.W.2d 811 (1978). Michigan has interpreted its long-arm statute as being the broadest grant of jurisdiction consistent with the constitutional requirements of due process. Sifers v. Horen, 385 Mich. 195, 188 N.W.2d 623 (1971); Microelectronic Systems Corp. of America v. Bamberger's, 434 F.Supp. 168, 170 (E.D.Mich.1977). Determining the outer limits of personal jurisdiction permitted by the due process clause is a federal question. Bamberger's, 434 F.Supp. at 171.

C.

As to due process, the Court must consider whether a defendant purposefully established such "minimum contacts" with Michigan that maintenance of the action "does not offend traditional notions of fair play and substantial justice." Burger King Corp. v. Rudzewicz, 471 U.S. 462, 474, 105 S.Ct. 2174, 2184, 85 L.Ed.2d 528 (1985); International Shoe Co. v. Washington, 326 U.S. 310, 316, 66 S.Ct. 154, 158, 90 L.Ed. 95 (1945). The substantial connection necessary for a finding of minimum contacts must come about by the action of the defendant purposefully directed toward the forum state. Burger King Corp, 471 U.S. at 476, 105 S.Ct. at 2186. By such action, the defendant has clear notice that it is subject to suit in the forum state and can therefore take appropriate action to alleviate the risk. World-Wide Volkswagen v. Woodson, 444 U.S. 286, 297, 100 S.Ct. 559, 567, 62 L.Ed.2d 490 (1980). Also, the cause of action must arise from the defendant's activities in the forum. Southern Machine Co. v. Mohasco Indus., Inc., 401 F.2d 374, 381 (6th Cir.1968). A single act, if it has a "substantial connection" with the forum state, may be sufficient. McGee v. International Life Ins. Co., 355 U.S. 220, 223, 78 S.Ct. 199, 201, 2 L.Ed.2d 223 (1957). Finally, the determination of reasonableness of the exercise of jurisdiction in a particular case depends on the evaluation of several factors:

A court must consider the burden on the defendant, the interests of the forum state, and the plaintiff's interest in obtaining relief. It must also weigh in its determination "the interstate judicial system's interest in obtaining the most efficient resolution of controversies; and the shared interest of the several States in furthering fundamental substantive social policies."

Asahi Metal Indus. Co. v. Super. Ct. of California, ___ U.S. ___, ___, 107 S.Ct. 1026, 1034, 94 L.Ed.2d 92, 105 (1987) (citing World-Wide Volkswagen, 444 U.S. at 292, 100 S.Ct. at 564-565).

III.

A.

While plaintiffs currently reside in Washington D.C., they resided in Michigan during the events in question. Several of the defendants charged with fraudulent conduct live in Michigan, e.g., Stewart Frank, Robert Davidson, Gertrude Davidson and Frank & Company; several live in Pennsylvania. Plaintiffs claim that defendants set up a scam limited partnership, The Rosenkranz Group, in which plaintiffs invested in reliance on the representation that they would realize legitimate tax benefits from their investment. Further, plaintiffs say that Raddiss and Rosenfelt fraudulently performed the accounting and tax work for the scam, causing damage to plaintiffs when they relied on their papers to take tax deductions which the Internal Revenue Service later disallowed and assessed interest and penalties.

B.

While Raddiss & Rosenfelt summarily denies any relationship with Michigan, it nonetheless concedes that "as part of its performance of professional services for the Rosenkranz Group some of whose Limited Partners resided in Michigan, it mailed prepared K-1 forms and Financial Statements to them in Michigan." (Motion to Dismiss, par. 17). This is enough. Raddiss & Rosenfelt were on clear notice that they were sending financial information to plaintiffs in Michigan on which plaintiffs would rely. If in fact the information was false and Raddiss & Rosenfelt fraudulently prepared the papers, it is responsible to plaintiffs, who were injured by its actions.

Plaintiffs' cause of action against Raddiss & Rosenfelt arises directly from the latter's contacts with Michigan. Requiring Raddiss & Rosenfelt to account for their actions in Michigan does not offend "traditional notions of justice and fair play." While the contacts may be quantitatively minor, they are qualitatively substantial. It is always a burden to be a defendant. However, Raddiss & Rosenfelt's burden here is occasioned by what it did in Michigan, not simply because it must defend in Michigan.

C.

The cases cited by Raddiss & Rosenfelt in support of its motion are distinguishable.

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