USA v. Bacara Partners, LLC et al

Filing 23

MEMORANDUM OPINION & ORDER: Dfts' 15 MOTION to Dismiss for Lack of Jurisdiction is GRANTED as to all individual dfts & DENIED as to Bacara Partners, Inc. Signed by Judge Jennifer B Coffman on 05/31/2012.(RJD)cc: COR

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF KENTUCKY
CENTRAL DIVISION
LEXINGTON
CIVIL ACTION NO. 11-342-JBC
UNITED STATES OF AMERICA,
V.

PLAINTIFFS,

MEMORANDUM OPINION AND ORDER

BACARA PARTNERS, LLC, et al.,

DEFENDANT.

**********

Pending before the court is the defendants’ motion to dismiss for lack of
personal jurisdiction (R.15). For reasons explained below, the motion will be
granted as to the individual defendants and denied as to Bacara Partners, LLC.
According to the United States’ complaint, in 2003 Elk Horn Coal Company
(a Delaware LLC whose principal place of business is Prestonsburg, Kentucky)
became the successor-in-interest to Pen Holdings, a Tennessee Corporation
engaged in coal mining in Kentucky and West Virginia. Two years later, Elk Horn
sold rights to Pen Holdings’s tax refund claims to Bacara in exchange for half of
any net recoveries.
Bacara filed amended tax returns in the name of Pen Holdings, declaring net
operating losses for the tax years 2001-2003 and carrying those losses back to
1991-1993. The IRS issued refund checks to Pen Holdings in 2006, 2007, and
2008. Each was endorsed by defendant Alfred Hahnfeldt (who has an ownership
interest in Bacara through his ownership interest in Spinneret Financial Solutions,
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LLC), as designee of Pen Holdings Inc. Fifty percent of the net proceeds of the
refunds were then transmitted to Elk Horn.
In order to meet its burden of establishing that the court has personal
jurisdiction over each defendant, the United States must demonstrate that the
exercise of jurisdiction over each defendant complies with Kentucky’s long-arm
statute (KRS 454.210) and federal due process requirements. See Compuserve,
Inc. v. Patterson, 89 F.3d 1257, 1262 (6th Cir. 1996). In order for a suit to be
brought against a non-resident defendant in compliance with Kentucky’s long-arm
statute, the defendant’s conduct or activity must fit into one of the statute’s
enumerated categories that include “Transacting any business in this
Commonwealth” and “Contracting to supply services or goods in this
Commonwealth.” KRS 454.210(2)(a)(1-2).
As for the federal due process requirements, the critical inquiry is whether a
non-resident defendant has sufficient contacts with the forum state such that the
exercise of personal jurisdiction would comport with “traditional notions of fair play
and substantial justice.” International Shoe v. Washington 326 U.S. 310 (1945).
That determination involves a three-part test, requiring: purposeful availment of the
benefits and privileges of acting in the forum; a cause of action arising from the
defendant’s activities there; and a substantial enough connection between the
forum and the acts of, or consequences caused by, the defendant such that the
exercise of jurisdiction is reasonable. CompuServe, Inc. v. Patterson, 89 F.3d at
1263 (6th Cir. 1996).
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Taken as a whole, the actions of, and consequences caused by, Bacara in
Kentucky are sufficient to meet the standards of Kentucky’s long-arm statute and
constitutional due process. Bacara is alleged to have transacted business in
Kentucky and purposefully availed itself of the privilege of acting or causing a
consequence in Kentucky by: soliciting the purchase of federal tax refund claims
held by Elk Horn, (a Delaware LLC with its principal place of business in
Prestonsburg, Kentucky); negotiating the agreement through correspondence into
Kentucky via fax and email and, presumably, telephone; consenting to be governed
by Kentucky law under the agreement; operating under the agreement for at least
three years; generating over $3 million in revenue from 2006 through 2008 (over
67% of the company’s total revenue during that period) as a result of its Kentucky
contacts; and sending fifty percent of the net proceeds from the tax refund claims
back into Kentucky on at least three separate occasions. Bacara’s contacts with
Kentucky were intentional, significant, and sustained. And this action arises out of
Bacara’s contacts with Kentucky: The refunds collected by Bacara that the United
States seeks to recover were made possible by Bacara’s agreement with Elk Horn.
Satisfaction of the first two due process criteria creates an inference that the
reasonableness criterion is also met. Intera Corp. v. Henderson, 428 F.3d 605,
618. In determining reasonableness, the court considers: the burden on the
defendant; the interest of the forum state; the plaintiff’s interest in obtaining relief;
and other states’ interest in securing the most efficient resolution of the
controversy. Given the impact that the proceeds in question in this case had on
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Kentucky commerce, the state of Kentucky has a serious interest in having this
case tried in this forum. See National Can Corp. v. K Beverage Co., 674 F.2d
1134, 1138 (6th Cir. 1982).
The United States claims that it would face statute-of-limitations problems if
it were to pursue these claims in other forums. The several states have a shared
interest in the recovery of any erroneous tax refunds wherever they can be
recovered. Bacara has failed to establish that defending against this litigation in
Kentucky would impose significant undue hardship to it. Thus, the interests of
Kentucky and the United States in trying this case in Kentucky outweigh any
burden that the defendant might face in defending the litigation in Kentucky.
Although this court has personal jurisdiction over Bacara in this matter, the
United States has not demonstrated that the individual defendants have minimum
contacts with Kentucky sufficient to make the exercise of personal jurisdiction over
them reasonable. Defendants Larry Manth, Spinneret Financial Solutions, LLC, and
Victoria Tan have ownership interests in Bacara, but the United States has not
alleged any direct contacts between any of these defendants and Kentucky.
Defendants Michael Rosenblum and Alfred Hahnfeldt are alleged to have had
actual contact with Kentucky. But the actions of these two defendants that gave
rise to the alleged contacts with Kentucky were made on behalf of Bacara:
Hahnfeldt signed a purchase agreement with Elk Horn on behalf of Bacara, and was
included in email correspondence between Michael Rosenblum and Elkhorn that
was conducted on behalf of Bacara. Therefore, Rosenblum and Hahnfeldt lack the
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necessary minimum contacts with Kentucky for this court to exercise personal
jurisdiction in compliance with the requirements of federal due process.
The United States’ argument that this court could assert personal jurisdiction
over each of the defendants under the theories of agency and conspiracy are not
compelling. The United States did not allege a conspiracy in the complaint, and
“[m]ere speculation that a conspiracy exists or that the non-resident defendants are
co-conspirators is insufficient to meet the plaintiff's burden.” Ky. Speedway, LLC
v. NASCAR, 410 F. Supp. 2d 592, 599 E.D.K.Y 2006). Although Hahnfeldt and
Rosenblum were agents of Bacara, they were not agents of every person or entity
with an ownership interest in Bacara. See KRS 275.150(1). Accordingly,
IT IS ORDERED that the defendants’ motion to dismiss (R. 15) is GRANTED
as to all individual defendants and DENIED as to Bacara Partners, LLC.

Signed on May 31, 2012

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