Babcock Power, Inc. et al v. The Sterling Group, LP

Filing 34

MEMORANDUM OPINION signed by Senior Judge Charles R. Simpson, III on 7/25/2017, re Defendant's 23 MOTION TO DISMISS.cc: Counsel (RLK)

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF KENTUCKY
AT LOUISVILLE
PLAINTIFFS

BABCOCK POWER, INC., et al.
v.

CIVIL ACTION NO. 3:16-CV-789-CRS

THE STERLING GROUP, LP

DEFENDANT

MEMORANDUM OPINION

This matter is before the court on motion of the defendant, The Sterling Group, LP
(“Sterling”), to dismiss the complaint for lack of personal jurisdiction, pursuant to Fed.R.Civ.P.
12(b)(2). Additionally, Sterling urges that certain of the plaintiffs’ causes of action fail to state a
claim upon which relief can be granted. As we conclude that personal jurisdiction over Sterling
is lacking, we will not delve into the sufficiency of the other particular claims.
Babcock Power, Inc. and Vogt Power International, Inc. (collectively, “Babcock”) filed
suit against Stephen T. Kapsalis (the “Kapsalis suit”) in July of 2013. Babcock amended its
complaint to add Express Group Holdings, LLC as a defendant in November, 2014. Express
Group Holdings, LLC (“Express”) filed a petition in bankruptcy under Chapter 7 in the Northern
District of Oklahoma on November 9, 2016. Babcock filed the above-captioned lawsuit (the
“Sterling suit”) against Sterling on December 9, 2016.
The Sterling suit seeks to impose liability on Sterling by alleging various affiliations
between Sterling and Kapsalis/Express. Particularly, the complaint states:
Personal jurisdiction over Sterling is proper based on this Court’s inherent power
to enforce orders it has issued even over non-parties…This Court also has
personal jurisdiction over Sterling because various acts or omissions of Sterling

giving rise to this Complaint occurred within Kentucky and/or were directed at
persons and/or property within Kentucky that resulted in harm.

DN 1, Complaint, ¶ 7.
Sterling has filed a properly-supported motion to dismiss pursuant to Fed.R.Civ.P.
12(b)(2). It has attached the sworn affidavits of Charles Kevin Garland, a Partner in Sterling,
and Bradley Alan Staller, a Director with Sterling, who both aver that they reside in Houston
Texas, as do all of the Sterling Partners. Sterling has no offices, employees or partners in
Kentucky, owns no real property in Kentucky, conducts no business in Kentucky, and pays no
taxes in Kentucky. Additionally, they aver that Sterling does not regularly do business or derive
substantial revenue from goods used or consumed or services rendered in Kentucky.
Particularly, with regard to each affiant’s affiliation with Express and Kapsalis, the
affidavits establish the following:
(1) In 2010, Sterling’s affiliate, Sterling Group Partners II, LP, and an Oklahoma
limited liability company, CCCG, LLC, formed Sterling-Express Holdco
Corp. (“Holdco”), a Delaware corporation which acquired a controlling 55.1%
equity interest in Express.
(2) After Holdco acquired its interest in Express, both Garland and Staller
became members of the board of directors of Express. They were both tasked
with working with the Express management team to enhance Express’
performance. Both had frequent contact from their respective offices in
Houston and at Express’ home office in Oklahoma. Garland has never acted
or had any business dealings on behalf of Express while in Kentucky. Staller
has been to Kentucky on behalf of Express only one time, attending a
settlement conference in the Kapsalis case as Express’ representative.
(3) The hiring of Kapsalis came about through the work of a Pennsylvania search
firm, JM Search & Company, Inc., who was retained to provide candidates for
the CEO position at Express. JM Search identified Kapsalis as a candidate.
Kapsalis was interviewed by Garland and Staller on January 21, 2013 and
February 24, 2013 in Houston. All meetings were conducted outside of
business hours. Between January 21, 2013 and April 19, 2013 when the
employment agreement was executed, emails between Kapsalis and Garland
and Staller were sent to and received from Kapsalis personal email address.

The employment agreement hiring Kapsalis as CEO of Express was signed by
Garland in Houston on behalf of CCCG, LLC, the hiring entity.
(4) After April 19, 2013, email communications were sent to his address at
Express.

(DNs 17-2; 23-3).
Under Kentucky law, “in the face of a properly supported motion for dismissal, the
plaintiff may not stand on his pleadings but must, by affidavit or otherwise, set forth specific
facts showing that the court has jurisdiction. [citation omitted].” Theunissen v. Matthews, 935
F.2d 1454, 1458 (6th Cir. 1991); V-Soft Consulting Group, Inc. v. Logic Corporation, No. 3:16cv-425-DJH. The plaintiff bears the burden of establishing that jurisdiction exists. Theunissen,
935 F.2d at 1458, citing McNutt v. General Motors Acceptance Corp., 298 U.S. 178, 189, 56
S.Ct. 780, 785, 80 L.Ed. 1135, 1141 (1936).
In response, Babcock stands on its pleadings. No affidavits or other supportive evidence
has been submitted. Thus, Sterling’s properly supported allegations stand unrefuted, and the
court will find personal jurisdiction lacking unless there are sufficient allegations in the
complaint to establish personal jurisdiction which stand unrefuted by the sworn evidence
provided by Sterling. For the reasons stated below, we find that the burden to establish personal
jurisdiction has not been met by Babcock.

Babcock has alleged all sorts of reprehensible

conduct by Kapsalis in exhibiting disloyalty, stealing and disseminating trade secrets and
attempting to divert business away from Babcock.

Babcock alleges that Sterling was the

recipient of confidential and trade secret information, and that Kapsalis was Sterling’s agent and
conducted Express business while in Kentucky. Upon careful review however, it is apparent that

the requirements for the exercise of personal jurisdiction over Sterling in Kentucky have not
been shown, despite these allegations.
The only grounds argued for this court to exercise long-arm jurisdiction over Sterling fall
under KRS 454.210(2)(a)(3) or (4) which permit
the exercise of personal jurisdiction over a person who acts directly or by an
agent, as to a claim arising from the person’s…
3. Causing tortious injury by an act or omission in this Commonwealth; [or]
4. Causing tortious injury in this Commonwealth by an act or omission outside
this Commonwealth if he regularly does or solicits business, or engages in any
other persistent course of conduct, or derives substantial revenue from goods used
or consumed or services rendered in this Commonwealth, provided that the
tortious injury occurring in this Commonwealth arises out of the doing or
soliciting of business or a persistent course of conduct or derivation of substantial
revenue within the Commonwealth…
Sterling has established via affidavits that it does not regularly do or solicit business or
derive substantial revenue from goods used or consumed or services rendered in Kentucky.
Sterling’s partners have not come to the Commonwealth and done business on behalf of Express,
nor had any communications reaching into the Commonwealth beyond emails relating to
Kapsalis’ negotiation of employment with Express which were sent to Kapsalis’ personal email
address.
Babcock makes a number of arguments in an attempt to establish personal jurisdiction in
the face of Sterling’s evidence:

(1) Kapsalis acted as an agent of Sterling when he took

Babcock’s confidential and trade secret information and transferred the information to Sterling,
both directly and through Express; (2) Kapsalis remained a Kentucky resident while acting as an
agent for Sterling and numerous phone calls and electronic communications were made by
members of Sterling into Kentucky to reach Kapsalis; (3) Sterling aided and abetted Kapsalis’

civil contempt when he used and disseminated confidential and proprietary information he took
from Babcock.
With respect to Babcock’s agency argument, it has offered nothing to it enable to reach
past Express, Kapsalis’ employer as of April 13, 2013, to impose tort liability on Sterling, an
investor in the company. Babcock’s mere recitation of the term “agent” does not make it so. In
opposing a properly supported challenge to personal jurisdiction, Babcock must offer facts to
back its argument.
In arguing that “Kapsalis conducted business on behalf of Express and Sterling…”
Babcock cites to paragraph 26 of the complaint which states
Sterling directed Kapsalis and Express’ management team to strategies and
specific initiatives identified for Express by Sterling. Typically Sterling would
meet with the Express management team (which was comprised of Kapsalis,
Express’ CFO, the vice president of operations, the vice president of sales and the
vice president of corporate development) once a month.
Both Garland and Staller acknowledged their involvement with the Express management team,
from their locations in Houston and Oklahoma, with various initiatives to improve Express’
performance. Nothing, however, has been offered by Babcock which even remotely suggests
that this involvement created an agency relationship such that Kapsalis was acting as the agent of
Sterling, rather than his employer, Express.
Similarly, nothing has been offered that supports the argument that Express was
Sterling’s agent. Babcock contends that the management fee paid to Sterling by Express “made
Sterling an agent of Express and Kapsalis as well, given that Sterling was paid to oversee
Express’ operations.” DN 32, p. 3. This argument is both vague and wholly unsupported by any
authority.

There is simply no evidence that Kapsalis was an agent of Sterling. Therefore business
of Express conducted by Kapsalis in Kentucky, if any,1 cannot be attributed to Sterling.
Babcock’s contention that Kapsalis was acting as Sterling’s agent when he purportedly
took Babcock’s confidential and trade secret information and transferred it to Sterling is
similarly unavailing. First, Kapsalis was not employed by Express until April 13, 2013, two
days after both his departure from Babcock as well as two days after his alleged taking of
confidential and trade secret documents.2

The complaint claims that thereafter, Kapsalis

provided to Garland, Staller, and others at Express various confidential documents belonging to
Babcock. The allegations are, again, nonspecific, and suggest only that they were electronically
transmitted. The complaint discusses the purported attempt to compete with Babcock on the so
called “Wolf Data Center bid,” utilizing the confidential information acquired by Kapsalis while
working for Babcock. However, these allegations fail to establish personal jurisdiction in
Kentucky over Sterling, as there is no evidence of any connection to the Commonwealth. There
is no suggestion that such conduct gives rise to sufficient contacts with Kentucky under either (3)
or (4) of the long-arm statute to warrant the exercise of personal jurisdiction over Sterling.
Finally, Babcock contends that Sterling “aided and abetted civil contempt” by knowingly
encouraging Kapsalis to violate the preliminary injunction entered by Judge Heyburn in the
Kapsalis suit. First, Babcock offers no authority to establish that aiding and abetting contempt of
an injunction by a non-party in one suit can be asserted as a freestanding claim for relief in a

1

There is a complete lack of specificity as to any “business” of Express conducted by Kapsalis in Kentucky. At
best, there is a suggestion that he continued to maintain residence in Kentucky while employed by Express, and
commuted between Express’ Oklahoma headquarters and his home in Kentucky. It is suggested that there were
email communications between Garland and Staller and Kapsalis after April 13, 2013 concerning Express business.
However, Garland and Staller have averred that they sent email communications to Kapsalis’ Express email address.
The fact that Kapsalis may have accessed his company emails from his laptop while he and it were physically in
Kentucky does not suggest that Sterling did business in Kentucky or reached into Kentucky and committed a tort.
The argument makes little sense and is wholly unsupported both factually and legally by Babcock’s filings.
2
These allegations are, of course, the subject matter of the Kapsalis suit.

separate civil action against the non-party. In any event, the facts giving rise to this purported
claim, if such claim were to exist, revolve around the “Wolf Data Center bid” where Express
allegedly attempted to compete with Babcock for this piece of business. As such, there is no
evidence concerning this matter which would warrant the exercise of personal jurisdiction over
Sterling in Kentucky. Not only is there a lack of proof that Kapsalis and/or Express were the
agents of Sterling, but further, there is no evidence offered of sufficient contacts with Kentucky
to render the exercise of personal jurisdiction over Sterling reasonable.
Finally, Babcock seeks to leapfrog over the Kentucky contacts requirements of the longarm statute by urging that the court’s inherent authority to redress violations of its injunctions
would allow the court to properly exercise personal jurisdiction over Sterling. Not in this case,
as there is no injunction in force in this suit.
For these reasons, Babcock has failed to establish personal jurisdiction over Sterling.
The action must therefore be dismissed without prejudice. A separate order will be entered this
date in accordance with this opinion.

July 25, 2017

IT IS SO ORDERED.

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