Free MEMORANDUM in Support - District Court of Delaware - Delaware

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EXHIBIT 6
Not Reported in A.2d Page 1
Not Reported in A.2d, 2004 WL 249581
(Cite as: Not Reported in A.2d)
C
Not Reported in A.2d, 2004 WL 249581 added Fraidin as a defendant, alleging he,
Only the Westlaw citation is currently available. individually and through HBD, fraudulently induced
UNPUBLISHED OPINION. CHECK COURT MPM to enter into the contract and fraudulently
RULES BEFORE CITING. breached the contract. Currently before the court is
Superior Court of Delaware. Fraidin’s Motion to Dismiss on Jurisdictional
MARKETING PRODUCTS MANAGEMENT, Grounds.
LLC and Chris Lundin, Plaintiffs,
v. III. STANDARD OF REVIEW
HEALTHANDBEAUTYDIRECT.COM, INC., f/k/
a Health and Beauty Direct, Inc., and Brian Fraidin, Once a defendant challenges personal jurisdiction,
Defendants. the plaintiff bears the burden of establishing a prima
No. 02C—04—256 CLS. facie case that the court has personal jurisdiction
over the defendant. FNl All factual inferences must
Submitted Sept. 3, 2003. be viewed in a light most favorable to plaintiffs
Decided Jan. 28, 2004. FN2 and all allegations of jurisdictional fact are
presumed to be true. FN3 Delaware’s Long Arm
On Defendants’ Motion to Dismiss Brian Fraidin on Statute is to be construed to the maximum extent
Jurisdictional Grounds. Granted. possible, consistent with due process. FN4 "Failure
to make an adequate evidentiary showing of facts
Dermis B. Phifer , Demris Bruce Phifer, P.A. , sufficient to satisfy the requirements of either
Wilmington, Delaware; Francis G.X. Pileggi , and component of the personal jurisdiction test [is] fatal
Sheldon K. Rennie , Fox Rothschild LLP, to plaintiffs’ defense of [a] motion [to dismiss for
Wilmington, Delaware, for Plaintiffs. lack of personal jurisdiction]. FN5
Philip Trainer, Jr. , and Carolyn S. Hake , Ashby &
Geddes , Wilmington, Delaware; William C. Davis, FN1. Wright v. American Home Products Corp.,
III , Shulman Rogers Gandal Porty & Ecker, P.A., 768 A.2d 518, 526 (Del.Super.2000).
Rockville, Maryland, for Defendants.
FN2. Id.
MEMORANDUM OPINION
FN3. Jeffreys v. Exten, 784 F.Supp. 146, 151
SCOTT, J. (D.Del. 1992) (internal citation omitted).
I. INTRODUCTION FN4. Id.
*1 Defendant Brian Fraidin ("Fraidin") has filed a FN5. Newspan, Inc. v. Hearthstone Funding Corp.,
Motion to Dismiss on Iurisdictional Grounds. Upon 1994 WL 198721 at *4 (Del.Ch.)
consideration of the briefs submitted by the parties,
this court concludes Fraidin’s motion should be IV. DISCUSSION
GRANTED.
Fraidin states he is merely a stockholder and officer
II. BACKGROUND and/or director of HBD. He has no other contacts
with the state of Delaware and the allegations in the
This action arises from the alleged breach of a complaint do not relate to his status as officer or
contract between plaintiff Marketing Products director. He argues, therefore, this court has no
Management, Inc. ("MPM") and defendant personal jurisdiction over him.
HealthandBeautyDirect.com, Inc. ("HBD"). MPM
disputes the calculation of the profit participation MPM counters that jurisdiction in Delaware is
under the contract upon which payments to MPM proper over Fraidin under several theories. First, as
are made. MPM also alleges fraudulent inducement a director of HBD, Fraidin is subject to jurisdiction
of the contract. The Second Amended Complaint under 10 Del. C. § 3114. Second, the act of
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incorporating HBD in Delaware constitutes a FN9. Id.
transaction sufficient to satisfy 10 Del. C. § 3l04(c)
. Third, that HBD and other entities FN6 were FN10. Id.
incorporated in Delaware, thereafter operated as part
of a conspiracy to defraud MPM, and this 1. Whether service is authorized.
conspiracy is a sufficient ground for asserting
personal jurisdiction over Fraidin. Fourth, MPM It is clear that mere ownership of stock in a
alleges HBD is the mere alter ego of Fraidin and Delaware corporation is insufficient to establish
jurisdiction is proper by "piercing the corporate jurisdiction over a majority or sole shareholder.
veil." Fifth, MPM attacks the fiduciary shield FN1l The act of incorporation may constitute a
doctrine which otherwise would insulate Fraidin transaction sufficient for the purposes of satisfying §
from being sued in Delaware where his sole contacts 3l04(c)(l). FN12 The act of incorporation is
with Delaware have been on behalf of HBD. sufficient to confer personal jurisdiction, however,
only if the claims at issue are related to the act of
FN6. Plaintiffs are seeking to add these other incorporation FN 13 or are based upon Delaware
entities as defendants in a Third Amended corporate law. FNl4
Complaint. That Motion to File a Third Amended
Complaint remains pending before this court. FN11. Shajj‘er v. Heitner, 433 U.S. 186, 212, 97
S.Ct. 2569, 53 L.Ed.2d 683 (1977).
A. Jurisdiction under 10 Del. C. § 3114.
FN12. Papendick v. Bosch, 410 A.2d 148, 152
Section 3114 requires that, in order to obtain (Del.l979).
jurisdiction over corporate directors, the suit must
concern acts performed in their directorial FN 13. Id.
capacities. FN7
FN14. Outokumpu Engineering Enterprises, Inc. v.
FN7. Armstrong v. Pomerance, 423 A.2d 174, 175 Kvaerner Enviropower, Inc., 685 A.2d 724, 728
(Del. 1980). (Del.Super. 1996).
The court finds in the case at bar, the allegedly The court finds that HBD was incorporated in 1999.
fraudulent actions involved Fraidin acting as an The contract under which MPM is suing was formed
individual and not in his directorial capacity. The in 2001. The court finds no basis to support the
allegedly fraudulent actions, therefore, are not contention HBD was incorporated with the intent to
related to his status as a director of HBD. Therefore, defraud MPM since it was formed nearly two years
personal jurisdiction is improper under 10 Del. C. § prior to the formation of the contract at issue. The
3114. court concludes there is no basis to authorize service
upon Fraidin under § 3104.
B. Jurisdiction under 10 Del. C. § 3104.
2. Whether due process is violated.
*2 Section 3104 provides personal jurisdiction in
Delaware courts over nonresidents based on acts Assuming arguendo that service was proper under §
performed within the state. The analysis of whether 3104 (based on the act of incorporation constituting
jurisdiction is proper under § 3104 requires a two- a sufficient act to authorize service), MPM would
part analysis. First, does § 3104 authorize service? still have to establish that the exercise of personal
Second, if service is authorized, are constitutional jurisdiction over Fraidin by this court would not
due process requirements satisfied? FN8 These two offend "traditional notions of fair play and I
tests are independent. FN9 There must first be an substantial justice." FNl5 MPM must show that
analysis of whether service is authorized under § Fraidin had such minimum contacts with Delaware
3104 and then a due process analysis. FN10 that he can be shown to have "purposely availed"
himself of the privilege of conducting activities in
FN8. Wright, 768 A.2d at 527. Delaware and reasonably should have anticipated
being haled into a Delaware court. FN16 l
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FN15. Sternberg v. O’Neil, 550 A.2d 1105, 1109 729 A.2d 300, 307 (Del.Ch.1999) ; Computer
(Del.1987) (internal citation omitted). People, Inc. v. Best Int’l Group, Inc., 1999 WL
28819 at *5 (Del. Ch.).
FN16. See World-Vldde Volkswagen Corp. v.
Woodson, 444 U.S. 286, 297 (1980). FN20. Computer People, 1999 WL 28819 at *7.
The court finds there are insufficient contacts with *3 While MPM alleges the incorporation of HBD
Delaware by Fraidin to satisfy this requirement. The was a sufficient "substantial act" in furtherance of a
contract at issue was formed in Massachusetts, conspiracy, the court holds otherwise. For the same
Fraidin lives in Maryland, HBD has its primary reasons the act of incorporation is not sufficient to
place of business in Maryland, and none of the establish jurisdiction under 10 Del. C. § 3104,
allegedly fraudulent activity took place within FN21 the act of incorporation of HBD is insufficient
Delaware. The court concludes Fraidin’s due to be a "substantial act" in furtherance of a
process rights would be violated by an assertion of conspiracy. Having found no substantial act in
personal jurisdiction over him by this court. The furtherance of a conspiracy occurred in Delaware,
court thus finds MPM has met neither test under § the court finds no basis for establishing personal
3104 , and concludes there is no basis for asserting jurisdiction over Fraidin under a conspiracy theory.
personal jurisdiction over Fraidin under 10 Del. C.
§ 3104. FN21. See discussion at B, supra.
C. Jurisdiction under a conspiracy theory. D. HBD as Fraidin’s alter ego.
Civil conspiracy can be a ground for asserting The alter ego theory of jurisdiction is based on the
personal jurisdiction over a defendant who otherwise premise that the contacts of a Delaware entity may
is not amenable to suit under § 3104. FN17 In order be attributed to another person or entity if the
to establish jurisdiction, the plaintiff must show Delaware entity is the mere alter ego of such other
that: (1) a conspiracy existed, (2) the defendant was person or entity. FN22 This theory permits courts to
a member of that conspiracy, (3) a substantial act or ignore corporate boundaries where fraud or inequity
substantial effect in furtherance of the conspiracy in the use of the corporate form is found. FN23 This
occurred in the forum state, (4) the defendant knew is generally termed "piercing the corporate veil."
or had reason to know of the act in the forum state
or that acts outside the forum state would have an FN22. Fitzgerald v. Cantor, 1998 WL 842316 at *2
effect in the forum state, and (5) the act in, or effect (Del.Ch.) ; Sears, Roebuck & Co. v. Sears plc, 744
on, the forum state was a direct and foreseeable F.Supp. 1297, 1304 (D.Del.1990) ; Mobil Oil
result of the conduct in furtherance of the Corp. v. Linear Films, Inc., 718 F.Supp. 260, 266
conspiracy. FN18 Delaware courts have consistently (D.Del. 1989).
held that this five-part test is a strict one with a
narrow scope. FNl9 Plaintiffs must assert specific FN23. Id.
factual evidence to show that the nonresident
defendant was a conspirator and that a substantial This court finds it camrot establish jurisdiction over
wrongful act in furtherance of the conspiracy took Fraidin under an alter ego theory because this court
place in Delaware in order to establish jurisdiction. lacks jurisdiction to "pierce the corporate veil."
FN20 FN24 As an equitable remedy, Delaware Court of
Chancery has sole jurisdiction over actions to
FN17. Instituto Bancario Italiano SpA v. Hunter "pierce the corporate veil." FN25
Eng ’g Co., Inc., 449 A.2d 210, 225 (Del.1982).
FN24. John Julian Constr. Co. v. Monarch
FN 18. Id. Builders, Inc., 324 A.2d 208, 210 n. 1 (De1.1974) ;
Sonne v. Sacks, 314 A.2d 194, 197 (Del.1973).
FN19. Id., see also Hercules, Inc. v. Leu Trust &
Banking (Bahamas) Ltd., 611 A.2d 476, 482 n. 6 FN25. Id.
(Del.1992) ; HMG/Courtland Props. Inc. v. Gray,
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Even if this court had jurisdiction to "pierce the court, therefore, does not have jurisdiction over
corporate veil," the court finds the record shows Fraidin under an exception to the fiduciary shield
HBD is a legitimate business and not merely the doctrine.
alter ego of Fraidin. The court, therefore, cannot
assert personal jurisdiction over Fraidin under an V. CONCLUSION
alter ego theory.
*4 For the above reasons, this court finds it cannot
E. Fiduciary shield doctrine. exercise personal jurisdiction over defendant Brian
Fraidin. Therefore, Fraidin’s Motion to Dismiss is
The fiduciary shield doctrine prohibits acts GRANTED.
performed by an individual, in his capacity as a
corporate officer or employee, from serving as the Del.Super.,2004.
basis for personal jurisdiction over that individual. Marketing Products Management, LLC v.
FN26 The "underpinning of this fiduciary shield HealthandBeautyDirect.com, Inc.
doctrine is the notion that it is unfair to force an Not Reported in A.2d, 2004 WL 249581
individual to defend a suit brought against him
personally in a forum with which his or1ly relevant END OF DOCUMENT
contacts are acts performed not for his own benefit
but for the benefit of his employer." FN27 There is
an exception to the doctrine when the corporation is
a mere shell for its owner. FN28 The court in
Plummer noted the standard for finding the
corporation was a "mere shell" was more liberal
than "normally applied in other contexts for piercing
the corporate veil ." FN29 However, the court in
Plummer also noted the fiduciary shield doctrine
was an equitable doctrine. FN3O
FN26. Tristrata Technology, Inc. v. Neoteric
Cosmetics, Inc., 961 F.Supp. 686, 690
(D.Del. 1997).
FN27. Plummer & C0. Realtors v. Crisaji, 533
A.2d 1242, 1246 (Del.Super.1987) (internal citation
omitted).
FN28. Id.
FN29. Id. at 1247.
FN30. Id. at 1246 (emphasis supplied).
This court finds, under the facts in the case at bar,
that finding an exception to the fiduciary shield
doctrine is indistinguishable from "piercing the
corporate veil." Therefore, as discussed above in
part D, this court does not have jurisdiction to find
an exception to the fiduciary shield doctrine, as
Delaware Court of Chancery has sole jurisdiction
over equitable doctrines. The court finds, as well,
that HBD is a legitimate business and, as noted in
part D, not the mere alter ego of Fraidin. This
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