Opinion
02 Civ. 2089 (RWS)
July 24, 2002
Attorney for Plaintiff: LOUIS J. MALONE, ESQ., SALON MARROW DYCKMAN NEWMAN, New York, N.Y.
Attorney for Defendant, STEVEN M. FREDERICK, ESQ., WOFSEY ROSEN KEWSKIN KURIANSKY, Stamford, CT
OPINION
Plaintiff Data-Stream AS/RS Technologies, LLC ("Data-Stream") has moved to stay part of an arbitration proceeding in which defendant ACEquip Ltd ("ACEquip") has asserted a counterclaim that Data-Stream asserts is nonarbitrable. In addition to opposing this motion, ACEquip has moved for an order pursuant to Rule 12(b)(2) and (5) of the Federal Rules of Civil Procedure to dismiss the complaint on the grounds of lack of personal jurisdiction over the defendant and insufficient service of process. In the event that dismissal is not granted, ACEquip has moved to transfer the action to the District of Connecticut pursuant to 28 U.S.C. § 1404.
For the following reasons, ACEquip's motion to dismiss on the basis of lack of personal jurisdiction is granted. As a result, the other motions are denied.
Parties
Data-Stream is a limited liability corporation incorporated in Delaware, with its present place of business located at 11 Kirby Lane North, Rye, New York. It is in the business of designing and marketing automated marine container storage systems and automated parking systems for vehicles.
ACEquip is a corporation organized and existing pursuant to the laws of the United Kingdom. It is in the business of installing and/or fabricating air cargo handling systems.
ACEquip Transact ("Transact") operates its offices at 22 Thorndal Circle, 2nd Floor, Darien, Connecticut. Prior to July 30, 2001, Transact was a wholly owned subsidiary of ACEquip. After that time, Transact ceased to be a subsidiary of ACEquip and became an affiliated corporation. ACEquip does not currently own any shares of Transact's stock. Data-Stream claims that Transact is the "alter-ego" of ACEquip.
Facts
The following facts are as alleged in the parties' submissions and do not constitute findings of fact by the Court.
ACEquip
ACEquip has no offices in New York or in the United States. It has no employees, bank accounts, or telephone listings in the United States. ACEquip has never transacted business in New York, nor performed any projects in New York.
ACEquip has received just two contracts from the United States market, both of which were negotiated and executed outside of the State of New York. ACEquip entered into a novation agreement with Transact and the United States Air Force through which ACEquip was assigned Transact's rights and obligations under a contract involving the construction of an air cargo handling system at the United States Air Force based in Kadena, Japan. ACEquip also entered into a contract with the United States military for work to be performed at the McChord Air Force base in Washington and the Norfolk Naval Base in Virginia. Transact was hired to manage the Kadena and McChord/Norfolk projects.
Transact
Transact was formed in November 2000 to compete in the United States and Far East air cargo handling markets. Transact was a wholly owned subsidiary of ACEquip until July 30, 2001. However, Transact has always operated independently of ACEquip.
Data-Stream suggests that ACEquip has not provided any evidence that Transact is no longer its wholly owned subsidiary. However, the burden on this motion is on Data-Stream, and it has provided no evidence that Transact remains a wholly owned subsidiary.
Transact has no offices, employees, bank accounts, and telephone listings in New York. Its offices, employees, bank accounts, and telephone listings are all in Connecticut. Transact claims that it has performed only one project in New York. Transact was asked to provide manuals for an existing Transact system previously owned by Korean Airlines at JFK airport.
The Relationship Between Transact and ACEquip
Transact does not solicit business for ACEquip, but rather submits bids, in its own name, for projects within the United States and the Far East. Transact has submitted bids for projects in Japan and a project for the Asia Air Freight Terminal in Hong Kong. Transact was awarded a contract by Yusen Air Sea Services in Narita, Japan.
At trade shows, Transact's representatives market Transact's product and services, not those of ACEquip. E r w i n Zimmerman, a former employee of ACEquip, stated in an affidavit that on March 28, 2002, he witnessed Transact representatives marketing and selling an ACEquip product, the Slave Master, which is a flexible tool for moving heavy loads in a warehouse. Further, Data-Stream states that the Slave Master brochures being distributed to the public continue to bear the names of ACEquip Ltd. and Transact. ACEquip Ltd. claims that Transact made enough modifications to the ACEquip Ltd. product that it now considers the current version of the product to be its own.
Data-Stream also claims that a videotape used as late as the summer of 2001 markets ACEquip Ltd. equipment under the Transact label.
Contracts that are awarded to Transact are performed by Transact and its subcontractors. Transact does not have any manufacturing facilities and thus must subcontract the manufacturing portions of contracts to third parties. ACEquip is often a bidder for the manufacturing portion of Transact's contracts, but is not always successful in obtaining the subcontract. For instance, ACEquip did not manufacture any equipment for the Norfolk project and only a fraction of the equipment for the McChord and Narita, Japan projects.
All engineering designs are made at Transact's offices in Darien, Connecticut. ACEquip has a separate and independent engineering department that is not involved in this process.
Until at least June 30, 2001, ACEquip Ltd. transferred $25,000 to $30,000 every month from its bank, Haburgishe LandesBank to Transact's bank account at First Union Bank in Darien, Connecticut, to fund and carry on the business of both ACEquip Ltd. and Transact. Data-Stream has received checks from Transact drawn on this account.
Data-Stream asserts that all letters from ACEquip have a letterhead including Transact. However, it does not proffer a current letter bearing such a letterhead.
Activities of Former Employee
It is disputed whether Erwin Zimmerman ("Zimmerman") was employed by ACEquip or by Transact. Data-Stream claims that ACEquip interviewed and hired him in New York City in May 2000. Misak Kesterlian, vice president and chief operating officer of Transact, states that Zimmerman was employed by Transact and that he was asked to resign on June 11, 2001, because of misconduct.
From May 2000 to June 2001, Zimmerman marketed and sold air cargo equipment and services to airlines located in airports in the New York metropolitan area, including John F. Kennedy International Airport in Queens, New York. Zimmerman operated his office out of 14 Locust Lane, Eaton's Neck, New York, and utilized his telephone, cellphone, and facsimile machine.
During that period, Data-Stream claims that Zimmerman and M. Kesterlian made sales visits to various airlines in the New York metropolitan area in an attempt to sell ACEquip's equipment and services. Data-Stream is unaware of any sales that were actually consummated.
ACEcruip's Contract with Data-Stream
On January 31, 2000, ACEquip entered into an asset purchase agreement with Data-Stream. This agreement was negotiated between Data-Stream, at its offices in Darien, Connecticut, and ACEquip representatives in the United Kingdom. The agreement was executed in Darien, Connecticut. The agreement provides that any disputes or controversies arising under or by reason of the agreement or any claimed breach of the agreement must be settled by arbitration in Stamford, Connecticut. Agreement, ¶ 10.1. Further, it provides that the parties consent to the jurisdiction of the Connecticut Superior Court for proceedings pertaining to the arbitration and that the governing law for any disputes is the law of Connecticut. Id.
On April 20, 2000, the parties entered into a Letter of Understanding, which was later superseded by an agreement on August 4, 2000.
On May 15, 2000, Arto Kesterlian, managing director of ACEquip ("Kesterlian"), met with Joseph Chira, the chief executive manager of Data-Stream ("Chira"), at the Sheraton Russell Hotel in New York, New York. At the time, Kesterlian was on holiday with his wife celebrating their 30th wedding anniversary. At the meeting, Kesterlian executed a Letter of Understanding on behalf of ACEquip. That Letter of Understanding was superseded by the August 4, 2000 agreement.
The parties dispute as to whether the meeting was prearranged. They also dispute whether Kesterlian and Chira discussed ACEquip's hiring of Erwin Zimmerman at the meeting.
On August 4, 2000, the parties entered into another Letter of Understanding. The counterclaim asserted by ACEquip, and which Data-Stream challenges as non-arbitrable, is based on this contract. The contract finalized consideration due Data-Stream and was executed by ACEquip at its offices in the United Kingdom.
Chira also claims that M. Kesterlian met with him in Rye, New York in July 2001 with respect to pending arbitration issues.
On June 11, 2001, Data-Stream commenced an arbitration proceeding in Connecticut against ACEquip, seeking specific performance pursuant to the January 31, 2000, agreement. All arbitration hearings have been held in Connecticut. ACEquip sought to assert a counterclaim based on the August 4, 2000 Letter of Understanding, and Data-Stream claims the counterclaim is nonarbitrable. The arbitrators ruled, over Data-Stream's objection, that the counterclaims by ACEquip should be included and litigated as part of the arbitration.
Data-Stream brought this action to stay arbitration on March 15, 2002. The action was initially dismissed pursuant to Fed.R.Civ.P. 12(b)(5) on the grounds of lack of proof of service of process on the defendant.
On March 21, 2002, Data-Stream effectuated service of the summons and complaint upon Misak Kesterlian, the vice-president and chief operating officer of Transact ("M. Kesterlian"). According to Chira, M. Kesterlian was employed by ACEquip Ltd. as of August 22, 2001, as he signed "for and behalf of ACEquip Ltd." on a letter dated August 22, 2001, to the Department of the United States Air Force on letterhead. Further, Data-Stream claims that M. Kesterhan held himself out as an officer of ACEquip in a letter dated January 25, 2001. ACEquip agrees that M. Kesterlian was an officer of ACEquip as of January 25, 2001, but that his employment with ACEquip ceased as of July 31, 2001, the day after Transact ceased to be a wholly owned subsidiary of ACEquip. ACEquip further states that it has not authorized M. Kesterlian, Transact or any of its employees to accept service on its behalf.
Data-Stream refiled its petition to stay arbitration on April 4, 2002. On May 6, 2002, ACEquip again moved pursuant to Rule 12(b)(2) and (5) to dismiss for lack of personal jurisdiction and insufficient service of process. ACEquip also moved in Opposition to Data-Stream's petition. Oral argument was heard on May 8, 2002, and the papers were considered fully submitted at that time.
Discussion
Personal jurisdiction over a non-resident defendant in a diversity case is determined by the law of the jurisdiction in which the federal court sits. Bensusan Restaurant Corp. v. King, 126 F.3d 25, 27 (2d Cir. 1997). If the exercise of jurisdiction is appropriate under that statute, the court must then decide whether such exercise comports with the requirements of due process. Id.; see also International Shoe v. Washington, 326 U.S. 310 (1945) ("[I]n order to subject a defendant to a judgment in personam, if he be not present within the forum, he [must] have certain minimum contacts with it such that the maintenance of the suit does not offend 'traditional notions of fair play and substantial justice.'")
New York's personal jurisdiction statutes are located in Sections 301 and 302 of the Civil Practice Law and Rules. If the defendant challenges the court's territorial jurisdiction, the plaintiff has the burden of proving the existence of a basis of jurisdiction under these statutes. CPLR § 301:1 Practice Commentaries.
I. CPLR 301: General Jurisdiction
When a state exercises personal jurisdiction over a defendant in a suit arising out of or related to the defendant's contacts with the forum, the state is exercising "specific jurisdiction" over the defendant. Helicopteros Nacionales de Colombia, S.A. v. Hall, 466 U.S. 408, 414 n. 8 (1984). When a state exercises personal jurisdiction over a defendant in a suit not arising out of or related to the defendant's contacts with the forum, the state is exercising "general jurisdiction" over the defendant. Id. at 414 n. 9.
Pursuant to N.Y. C.P.L.R. § 301, "[a] court may exercise . . . . jurisdiction over persons, property, or status as might have been exercised heretofore." N.Y. C.P.L.R. § 301. New York courts recognize five potential bases for potential jurisdiction: (1) presence, (2) consent, (3) domicile, (4) doing business, and (5) "long-arm jurisdiction." N.Y. C.P.L.R. § 301, Practice Commentary, C301:l. The first four of these existed prior to the adoption of the CPLR, and CPLR 301 was intended to make clear that the advent of "long-arm jurisdiction" in CPLR § 302 did not supersede or limit any of these then-existing bases of jurisdiction recognized by statute or case law. N.Y. Adv. Comm. on Prac. Proc., Second Prelim. Report, Legis. Doc. No. 13, p. 38 (1958)
A. Data-Stream Has Not Met Its Burden to Show That ACEquip Was "Doing Business" in New York
ACEquip is not located in New York, has not consented to jurisdiction in New York, and is not domiciled in New York. Therefore, pursuant to CPLR § 301, the only potential means of "general jurisdiction" is if ACEquip is "doing business" in New York.
As discussed infra, Section 302 also contains a provision regarding transaction of business. However, it requires a considerably weaker showing than Section 301, which demands business amounting to a "presence" in the state.
The New York Court of Appeals explains the concept as follows:
A foreign corporation is amenable to suit in New York courts under CPLR 301 if it has engaged in such a continuous and systematic course of "doing business" here that a finding of its "presence" in this jurisdiction is warranted. . . . The test for "doing business" is a "simple [and] pragmatic one," which varies in its application depending on the particular facts of each case. . . . The court must be able to say from the facts that the corporation is "present" in the State "not occasionally or casually, but with a fair measure of permanence and continuity.Landoil Resources Corp. v. Alexander Alexander Servs. Inc., 77 N.Y.2d 28, 33-34 (1990). "Thus, jurisdiction is dependent upon a showing that the corporation is doing business in New York systematically, continuously, and with a fair measure of permanence." CPLR § 301:8(b) Practice Commentaries.
For instance, the combination of a New York office, instate employees, local activity promoting the defendant's business, local bank account and local telephone listing has been found sufficient for a finding of doing business in New York pursuant to § 301. Bryant v. Finnish Nat'l Airline, 15 N.Y.2d 426, 432 (1965) (finding jurisdiction where foreign corporation maintained office in New York staffed by half dozen employees whose function was to engage in publicity work and transmit reservation information between New York and Europe for travel on defendant's European flights); Tauza v. Susquehanna Coal Co., 220 N.Y. 259, 260 (1917) (finding jurisdiction where foreign corporation maintained office in New York staffed by half dozen employees whose function was to solicit orders for coal resulting in shipments from Pennsylvania to New York).
ACEquip has no offices in New York or in the United States, for that matter. It has no employees, bank accounts, or telephone listings in the United States. ACEquip nonetheless could be subject to personal jurisdiction if it engaged in "systematic, regular, and continuous" activities in the State of New York. E.g., Laufer v. Ostrow, 55 N.Y.2d 305, 312 (1982) (finding defendant was "doing business" despite lack of office, telephone listing and bank account in New York because of systematic, regular and continuous activity of three employees, one of whom resided in New York, who were assigned to New York accounts, ran clinics for customers and handled buyers' complaints; and based on shipments of goods into New York).
Data-Stream has failed to show such systematic, regular, and continuous activities on the part of ACEquip, but argues that ACEquip did business through its purported agent Erwin Zimmerman and is doing business through Transact as its purported alter-ego or agent.
B. Zimmerman's Activities Are Irrelevant
A corporation must be doing business in New York at the time the suit commences in order to create "doing business" jurisdiction. Lancaster v. Colonial Motor Freight Line, Inc., 581 N.Y.S.2d 283, 286, 177 A.D.2d 152, 156 (1st Dep't 1992) (citing Gaboury v. Central Vermont Ry. Co., 250 N.Y. 233, 236-37 (1929)); see also Pieczenik v. Dyax Corp., 2000 WL 959753, at *3 (S.D.N.Y. July 11, 2000) ("Because these agreements terminated prior to the time this action was commenced, they are irrelevant for jurisdictional purposes."); Russell v. Quinn, 1997 WL 124121, at *1 (S.D.N.Y. March 19, 1998) (quoting Lancaster for the proposition that "a fundamental sine qua non of all such holdings is the requirement that defendant be shown to have been 'doing business' at the time when the action was commenced"). "This is crucial to the concept of 'presence' upon which the jurisdiction is based, since the defendant corporation must be 'here' and therefore subject to the state's power, at the very time of the exercise of the jurisdiction itself." Lancaster, 581 N.Y.S.2d at 286, 177 A.D.2d at 156.
There is no need to resolve the dispute as to whether Zimmerman was an agent of ACEquip. Zimmerman ceased his activities on June 11, 2001, almost a year before this suit was commenced. Therefore, his activities are irrelevant for purposes of the "doing business" inquiry.
C. Data-Stream Has Failed to Show that Transact's Activities Should be Imputed to ACEquip
In order to impute Transact's activities to ACEquip, Data-Stream must allege one of two different theories: (1) the "mere department" doctrine, which applies when the defendant and the corporation doing business in New York, despite separate incorporation, are in reality "mere departments" of one another; or (2) agency.
The "mere department" theory may be invoked only when the defendant and the corporation that is doing business in New York are in a Parent-subsidiary relationship. Delagi v. Volkswagenwerk AG of Wolfsburg, Germany, 29 N.Y.2d 426, 432 (1972) (extent of foreign manufacturer's control over operations of franchise dealers in New York was irrelevant in absence of Parent-subsidiary relationship). Further, the parent must also exercise such complete control over the activities of the subsidiary that it is "in fact, merely a department of the parent." Id. see also Meat Systems Corp. v. Ben Langel-Mol Inc., 410 F. Supp. 231, 234 (S.D.N.Y. 1976) (following Delagi and requiring "common ownership and the performance of essential services"). Because Transact is no longer a subsidiary of ACEquip, this Court may not obtain jurisdiction by this means.
The leading New York Court of Appeals case regarding the agency theory is Frummer v. Hilton Hotels Int'l Inc., 19 N.Y.2d 533, cert. denied, 389 U.S. 923 (1967). There, the London Hilton, a British corporation, was found to be doing business in New York because of the activity of the Hilton Reservation Service, a company with which the defendant shared common owners. The reservation service maintained a New York office and bank account, advertised and generated business for the entire Hilton chain of hotels and, most significantly, accepted and confirmed room reservations at the London Hilton. Id. at 537 ("[T]he Service [did] all the business which [London Hilton] could do were it here by its own officials.")
Similarly, the Second Circuit in Gelfand v. Tanner Motor Tours, Ltd., 385 F.2d 116 (2d Cir. 1967) in following Frummer, upheld jurisdiction over an out-of-state tour operator where an independent New York travel representative, who had no direct contractual obligation to the defendant, was responsible for arranging and confirming roughly half of defendant's Grand Canyon tour business. The Court found the "decisive test" in Frummer to be where a foreign corporation's "representative provides services beyond 'mere solicitation' and these services are sufficiently important to the foreign corporation that if it did not have a representative to perform them, the corporation's own officials would undertake to perform substantially similar services." Id. at 121. This formulation has not been endorsed by the New York Court of Appeals.
ACEquip and Transact operate in different global territories and perform separate and distinct operations. Transact solicits its own projects, designs its own equipment, hires its own subcontractors, and retains manufacturers (including, but not limited to ACEquip) to produce its equipment. Transact has its own offices, its own employees, its own bank accounts, and its own telephone listings.
Transact does not solicit business for ACEquip, nor does it provide additional services that ACEquip itself would undertake to perform if Transact did not. Transact was formed in November 2000 to compete in the United States and Far East air cargo handling system markets. However, it is unlike the defendant in Frummer in that its operations in the United States and Far East market are not for the benefit of ACEquip. Transact submits bids in its own name and then performs them on its own. It is true that ACEquip is often a subcontractor of Transact, but it is not the only subcontractor. Further, Transact has no authority to bind ACEquip.
Data-Stream conclusorily asserts that Transact is the alter-ego of ACEquip but does not present sufficient evidence to support these statements. It does point to a shared bank account in Transact's name in Connecticut, to which ACEquip sent monthly installments of up to $30,000. However, Data-Stream only alleges that the transfers occurred up through the summer of 2001, after which time Transact ceased being a wholly owned subsidiary of ACEquip. Data-Stream does not present evidence that ACEquip continues to send money to Transact, a situation that would suggest some deeper relationship than that which ACEquip alleges.
Data-Stream also suggests that Transact continues to market ACEquip products. If this were the case, Data-Stream may have an argument that it would fit into the Frummer line of cases. As evidence of this, however, Data-Stream only points to a video used prior to the time when Transact ceased being a wholly owned subsidiary and to a line of equipment, the "Slave Master." ACEquip and Transact claim that, while ACEquip designed the original Slave Master, the product that Transact was selling was a much modified version. Data-Stream has not met its burden of proof.
Data-Stream contests this claim, noting that if "SlaveMaster" were trademarked, Transact would not be able to use that mark on a different product. However, Data-Stream has not presented evidence that ACEquip has trademarked the "Slave Master" name.
In any case, Transact's activities as alleged do not rise to the level required for general jurisdiction. Assuming that Data-Stream's allegations are true, it has only pointed to one project supplying manuals for an already existing system and heretofore unsuccessful marketing efforts. These allegations alone do not establish a systematic, regular or continuous presence.
II. CPLR 302: Transaction of Business
New York's long-arm statute, CPLR § 302, was designed to take advantage of the "minimum contacts" theory of personal jurisdiction formulated in International Shoe, 326 U.S. 310 (1945) CPLR § 302:1 Practice Commentaries. The applicable portion of the long-arm statute is whether ACEquip "transacts any business within the state or contracts anywhere to supply goods or services within the state." § 302(a)(1).
The term "transaction of business" is different from the standard of "doing business" discussed above. The former "is applicable when the defendant has engaged in an isolated but purposeful business transaction in New York and the plaintiff's claim arises out of the particular transaction." CPLR 302:6 Practice Commentaries. One such act may be sufficient. Kreutter v. McFadden Oil Corp., 71 N.Y.2d 460, 467 (1988) ("It is a 'single act statute' and proof of one transaction in New York is sufficient to invoke jurisdiction, even though the defendant never enters New York, so long as the defendant's activities here were purposeful and there is a substantial relationship between the transaction and the claim asserted."); In re Sumitomo Copper Litig., 120 F. Supp.2d 328, 337 (S.D.N.Y. 2000) ( citing Kreutter).
Data-Stream has not alleged that either Transact or Zimmerman engaged in specific business transactions from which this cause of action arises. Instead, Data-Stream bases jurisdiction on, at most, ACEquip's (1) entering into a superseded contract in New York; and (2) a disputed visit to Rye, New York. Data-Stream does not present any case law that supports its contention that jurisdiction should be established in these circumstances.
Long-arm jurisdiction typically attaches if a party negotiates and signs a contract in New York that is the basis for the cause of action against it. Reiner Co. v. Schwartz, 41 N.Y.2d 648, 653 (1977) (noting that out-of-state defendant came to New York purposefully seeking employment, interviewed with employer, negotiated contract and signed it); Firegreen Ltd. v. Claxton, 160 A.D.2d 409, 411, 553 N.Y.S.2d 765 (1990) (denying motion to dismiss on the basis of lack of jurisdiction where it was alleged that during two-hour meeting, parties determined price and quantity of almonds to be delivered, future relationship between the parties, payment terms, down payment, and the means by which almonds would be supplied).
However, a defendant's execution of a contract in New York does not confer jurisdiction where the contract was negotiated outside of New York and involves performance elsewhere. For instance, in Presidential Realty Corp. v. Michael Square West, Ltd., 44 N.Y.2d 672 (1978), the court determined defendant was not "transacting business" where the parties negotiated in Atlanta, New Orleans and Mobile for the sale of real estate in Alabama. Prior to closing the deal, the plaintiff requested further talks at its New York office. There was no proof that any negotiations of substance occurred at this meeting, and thus defendant's signing of the agreement at the meeting in New York was held insufficient to create a transaction in New York. Id. at 673-74.
The situation here is similar to that in Presidential Realty. First, the contract that Kesterlian signed in New York is no longer controlling. The counterclaim that Data-Stream claims is nonarbitrable is based on the superseding August 4 Letter of Understanding, which was signed in the United Kingdom. There is also a question of whether ACEquip purposefully chose to sign the contract in New York. Kesterlian stated that the meeting in which he signed the contract was not planned, but was prompted at Chira's instigation. Further, that contract was first sent to ACEquip's office in the United Kingdom, where changes were made. The contract also was not to be performed in New York. On the basis of these facts, the signing of the contract cannot confer jurisdiction over ACEquip.
Data-Stream also does not assert how M. Kesterlian' s purported visit to its office in Rye, New York was "related to" the cause of action, nor does it cite case law for the proposition that such a contact could confer jurisdiction.
Therefore, Data-Stream has not established long-arm jurisdiction over ACEquip, and this action must be dismissed. This ruling does not sound the death knell for Data-Stream's claims. As noted above, ACEquip has consented to jurisdiction in the Connecticut Superior Court.
Conclusion
ACEquip's motion to dismiss on the basis of lack of personal jurisdiction is granted.
It is so ordered.