Proficio Bank v. Wire Source, The et al

Filing 45

ORDER AND MEMORANDUM DECISION granting 33 Motion for Leave to File 2nd Amended Complaint; granting in part and denying in part 25 Motion to Dismiss for Failure to State a Claim; granting in part and denying in part 25 Motion to Dismiss for L ack of Jurisdiction - the court dismisses claims for fraudulent transfer, conversion, and disregard of corporate form without prejudice for lack of personal jurisdiction, but Plaintiff may proceed on its claim for breach of the Validity Indemnification. Signed by Judge Tena Campbell on 4/26/12 (alt)

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF UTAH
CENTRAL DIVISION
PROFICIO BANK,
Plaintiff,
ORDER AND
vs.

MEMORANDUM DECISION

THE WIRE SOURCE, LLC; BRADLEY J.
RUSSELL; SOUTHINGTON INDUSTRIAL
PARK, LLC; METALS DIRECT, LLC; and
JOHN DOES 1-10,

Case No. 2:11-cv-808

Defendants.
Proficio Bank (Proficio) filed suit for injuries that it alleges were caused by the
Defendants’ breach of a Loan and Security Agreement and other actions. One of the defendants,
Southington Industrial Park, LLC (SIP), filed a motion to dismiss the claims against it (Dkt. No.
25). SIP argues that the court lacks personal jurisdiction over it and further claims that, at any
rate, Proficio has failed to state a claim against the company for conversion, fraudulent transfer,
or disregard of corporate form.1
Proficio has filed a motion to amend its complaint (Dkt. No. 33), seeking leave to add a
breach of contract claim against SIP on the grounds that SIP signed a Validity Indemnification in
which SIP agreed to indemnify Proficio for certain losses. SIP opposes Proficio’s motion, both
on the grounds that the court lacks personal jurisdiction and that the Validity Indemnification
does not cover the injuries that Proficio alleges.
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Proficio also alleged causes of action for fraud and negligent misrepresentation against
Southington in its First Amended Complaint. Because Proficio agreed to voluntarily dismiss
these claims, the court does not address them. (See Pl.’s Opp’n Mem. 24, Dkt. No. 32.)

For the reasons discussed below, the court agrees with SIP that Proficio has failed to
plead sufficient facts that would allow the court to exercise personal jurisdiction over SIP for the
claims of conversion, fraudulent transfer, and disregard of corporate form. But the court finds
that, due to the Validity Indemnification, it does have jurisdiction over SIP for the breach of
contract claim that Proficio seeks leave to add to its complaint. Accordingly, the court GRANTS
Plaintiff’s Motion to Amend (Dkt. No. 33). Defendant’s Motion to Dismiss (Dkt. No. 25) is
GRANTED IN PART, to the extent that the claims against SIP in Proficio’s First Amended
Complaint are DISMISSED. The motion is DENIED IN PART, to the extent that SIP remains a
party in this lawsuit on the breach of contract claim in Proficio’s Second Amended Complaint.
Furthermore, the claims against SIP in the First Amended Complaint are dismissed WITHOUT
PREJUDICE. If, during discovery, Proficio uncovers facts that would allow the court to exercise
personal jurisdiction over SIP for these causes of action, Proficio may move to amend its
complaint in order to bring these claims back.
BACKGROUND2
In July 2008, Proficio entered into a Loan and Security Agreement (the Agreement) with
Defendant The Wire Source, LLC (Wire Source), in which Proficio agreed to make revolving
loans to Wire Source up to an aggregate amount of $3.7 million. The Agreement was signed by
Bradley J. Russell and SIP as managing members of Wire Source, and the Agreement stated that
its terms would be governed by Utah law. At the same time that they signed the Agreement, Mr.
Russell and SIP also signed a Revolving Demand Note and SIP signed a Validity

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The court takes these facts from Plaintiff’s Opposition Memorandum (Dkt. No. 32), and
assumes they are true for the purposes of this motion.
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Indemnification, in which SIP agreed to indemnify Proficio for certain losses. Later, Mr. Russell
and SIP signed a Renewal Promissory Note, as well as an amendment to the Agreement.
On August 18, 2011, Proficio demanded repayment of the notes it had issued to Wire
Source. At the time of the demand, the unpaid principal amounted to $2,446,703.33. Proficio
also noticed discrepancies in the accounts receivable reports that Wire Source had given it.
Because Proficio had taken a security interest in Wire Source’s inventory, equipment, and
accounts receivable as collateral, Proficio was concerned to discover that Wire Source had sold
some of its inventory. Proficio has not yet received any payment on the loan from Wire Source.
As a result, Proficio filed suit against Wire Source, Mr. Russell, SIP, and Metals Direct, LLC, a
company that Proficio believes was set up to receive Wire Source’s assets.
Proficio has brought claims against SIP for fraudulent transfer, conversion, and disregard
of corporate form, and seeks leave to add a claim for breach of the Validity Indemnification. SIP
does not dispute the loss of Proficio’s security, but contends that it did not participate in the
removal or conversion of that security. More importantly, SIP claims that this court does not
have jurisdiction over SIP because the only contacts that SIP has with Utah are the signatures on
the various agreements, which SIP claims it signed as a member of Wire Source and not in its
personal capacity.
ANALYSIS
Standard of Review
When reviewing a Rule 12(b)(6) motion to dismiss for failure to state a claim upon which
relief may be granted, the court must presume the truth of all well-pleaded facts in the complaint,
but need not consider conclusory allegations. Tal v. Hogan, 453 F.3d 1244, 1252 (2006), cert.
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denied, 127 S. Ct. 1334 (2007); Mitchell v. King, 537 F.2d 385, 386 (10th Cir. 1976). Although
all reasonable inferences must be drawn in the non-moving party’s favor, Tal, 453 F.3d at 1252,
a complaint will only survive a motion to dismiss if it contains “enough facts to state a claim to
relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007),
quoted in Ridge at Red Hawk, LLC v. Schneider, 493 F.3d 1174, 1177 (10th Cir. 2007). Stating
a claim under Rule 8 of the Federal Rules of Civil Procedure “demands more than an unadorned,
the-defendant-unlawfully-harmed-me accusation. A pleading that offers ‘labels and conclusions’
or ‘a formulaic recitation of the elements of a cause of action will not do.’” Ashcroft v. Iqbal, 129
S. Ct. 1937, 1949 (2009) (quoting Twombly, 550 U.S. at 555).
The court uses this same standard in order to determine whether Proficio may file its
Second Amended Complaint. Although leave to amend should generally be freely given, the
court will deny a motion to amend “as futile when the proposed amended complaint would be
subject to dismissal for any reason.” E.SPIRE Commc’ns, Inc. v. New Mexico Pub. Regulation
Comm’n, 392 F.3d 1204, 1211 (10th Cir. 2004).
Personal Jurisdiction
To establish personal jurisdiction over SIP, Proficio must show, first, that jurisdiction is
authorized under Utah law and, second, that the exercise of jurisdiction does not offend the due
process clause of the Fourteenth Amendment. Far West Capital, Inc. v. Towne, 46 F.3d 1071,
1074 (10th Cir. 1995). But the Utah Supreme Court has explicitly said that “any set of
circumstances that satisfies due process will also satisfy the long-arm statute.” SII
MegaDiamond, Inc. v. Am. Superabrasives Corp., 969 P.2d 430, 433 (Utah 1998). This holding
collapses the Utah standard into the more general “due process” standard for jurisdiction. See
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Rusakiewicz v. Lowe, 556 F.3d 1095, 1100 (10th Cir. 2009).
The first step in this analysis is to determine whether SIP had “minimum contacts” with
the forum state. Int’l Shoe Co. v. Washington, 326 U.S. 310, 316 (1945). In Employers Mutual
Casualty Co. v. Bartile Roofs, Inc., the Tenth Circuit held that the minimum contacts test is
satisfied “by showing that (1) the defendant has purposefully availed [herself] of the privilege of
conducting activities or consummating a transaction in the forum state and (2) the litigation
results from alleged injuries that arise out of or relate to those activities.” 618 F.3d 1153, 1160
(10th Cir. 2010).
SIP argues that it does not have the “minimum contacts” necessary for a Utah court to
exercise jurisdiction over it because its activities were undertaken as a corporate officer or
managing member of Wire Source, and therefore do not subject Southington to jurisdiction
individually. But the Supreme Court has rejected the suggestion “that employees who act in their
official capacity are somehow shielded from suit in their individual capacity.” Keeton v. Hustler
Magazine, Inc., 465 U.S. 770, 781 n. 13 (1984). Rather, “employees of a corporation that is
subject to the personal jurisdiction of the courts of the forum may themselves be subject to
jurisdiction if those employees were primary participants in the activities forming the basis of
jurisdiction over the corporation.” Calder v. Jones, 465 U.S. 783, 790 (1984).
The Tenth Circuit has interpreted this language in Ten Mile Industrial Park v. Western
Plains Service Corp., 810 F.2d 1518 (10th Cir. 1987) and Rusakiewicz v. Lowe, 556 F.3d 1095
(10th Cir. 2009). In Ten Mile, the Tenth Circuit found that a corporation’s minimum contacts
could not be attributed to the individual defendants who were part of the corporation’s executive
committee: “Where the acts of individual principals of a corporation in the jurisdiction were
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carried out solely in the individuals’ corporate or representative capacity, the corporate structure
will ordinarily insulate the individuals from the court’s jurisdiction.” Ten Mile, 556 F.3d at 1527
(citations omitted). But in Rusakiewicz, the court cautioned that its holding in Ten Mile should
not be read too broadly. The court held that an employee was not shielded from jurisdiction
simply because her actions were undertaken as a corporate officer. Rather, the court may
continue to exercise jurisdiction over such an employee provided that jurisdiction is based on that
employee’s individual contacts with the forum state. Rusakiewicz, 556 F.3d at 1102.
The Loan Agreement
The Agreement that SIP signed as a managing member of Wire Source is not an
individual contact that subjects SIP to jurisdiction in Utah. SIP signed the agreement in its
corporate, not its individual capacity. Unlike the plaintiffs in Rusakiewicz, Proficio has not
alleged that SIP performed any actions in Utah or had other individual contacts with Utah besides
the documents that SIP signed for Wire Source. As a result, the court does not have jurisdiction
over SIP for the claims arising out of the Agreement.
Proficio has alleged that SIP disregarded the corporate form, and several courts have held
that “where an individual has organized, used, and controlled a corporation for the sole purpose
of carrying out her own business interests, the activities of the corporation within the forum are
deemed the activities of the individual controlling the corporation.” Segil v. Gloria Marshall
Mgmt. Co., Inc., 568 F. Supp. 915, 919 (D. Utah 1983); see also Salter v. Lawn, 294 F. Supp.
882 (D. Mass. 1968); Holfield v. Power Chemical Co., 382 F. Supp. 388 (D. Md. 1974). But
Proficio’s allegations do not rise to this level. Proficio claims that “Southington failed to
participate or otherwise monitor the management of Wire Source, thereby allowing Russell to
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utilize Wire Source as an extension of Russell’s own interests.” (Am. Compl. ¶ 109, Dkt. No. 6.)
Based on these pleadings, and in the absence of any factual allegations stating otherwise, the
court cannot find that it is plausible that SIP “organized, used, and controlled” Wire Source for
the sole purpose of carrying out SIP’s business interests. As a result, the court cannot exercise
personal jurisdiction over SIP on the basis of Wire Source’s actions.
The claims for conversion, fraudulent transfer, and disregard of corporate form all arise
out of the Agreement—namely, the provision of funds to Wire Source and the obligation to repay
those funds. Because the court cannot exercise jurisdiction over SIP in relation to the
Agreement, the court must dismiss these claims.
The Validity Indemnification
The Validity Indemnification subjects to SIP to a different analysis. SIP acted in its
individual capacity when it guaranteed to Proficio that certain representations concerning Wire
Source were true. Moreover, SIP signed the agreement in order to “induce [Proficio] to extend
financial accommodations to [Wire Source]” and agreed to indemnify Proficio if any of the listed
representations in the agreement were inaccurate. In doing so, SIP purposely availed itself of the
opportunity to conduct business with a Utah financial institution. This contact satisfies the
minimum contacts test that the Tenth Circuit set forth in Employers Mutual.
Having determined that SIP’s actions created sufficient “minimum contacts,” the court
must still consider “whether the exercise of personal jurisdiction over the defendant offends
traditional notions of fair play and substantial justice.” OMI Holdings, Inc. v. Royal Ins. Co. of
Canada, 149 F.3d 1086, 1091 (10th Cir. 1998). In making this inquiry, the court looks at five
factors: the burden on the defendant, the forum state’s interest in resolving the dispute, the
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plaintiff’s interest in obtaining convenient and effective relief, 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 social policies. Asahi Metal Indus. Co. v. Superior Court
of California, 480 U.S. 102, 113 (1987).
SIP is a Connecticut limited liability company with is principal place of business in
Decatur, Georgia. (Jacobson Decl. ¶ 3, Dkt. No. 26-1.) While SIP will face a burden by having
to defend itself in Utah, the court does not find that this burden is unreasonable in light of the
other factors that the court must consider. SIP does not dispute that Proficio may litigate its
claims against Mr. Russell and Wire Source in Utah, and Proficio has an interest in obtaining
relief in one proceeding, rather than litigating its claims piecemeal in various fora. The interstate
judicial system shares this interest, as Proficio’s claims against Wire Source and SIP arise out of
the same set of events and should be litigated in the same court if possible. As a result, the court
finds it does not run afoul of traditional notions of justice and fair play to find jurisdiction over
SIP in Utah. As a result, Proficio may proceed against SIP in this court for its claim that SIP
breached the Validity Indemnification.
Failure to State a Claim
Because the court finds that it does not have personal jurisdiction over SIP for the claims
of fraudulent transfer, conversion, or disregard of corporate form, the court will not address SIP’s
argument that Proficio has failed to state a claim for these causes of action. But SIP also
contends that Proficio has failed to state a claim for breach of the Validity Indemnification. The
court disagrees.
SIP argues that the Validity Indemnification had a limited purpose, which was to warrant
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that certain specified representations made by Wire Source to Proficio prior to the date of
execution (July 31, 2008) were accurate. (Def.’s Mot. to Amend 11, Dkt. No. 40.) SIP claims
that it only agreed to warrant against fraudulent statements made after the date of execution if
those statements were made “with the undersigned [i.e. SIP’s] knowledge.” (Id.) But the
Validity Indemnification states that all of the representations and warranties contained in the
agreement “are continuing and irrevocable for so long as [Wire Source] is indebted to
[Proficio].” SIP’s argument cannot stand in the face of the plain language of the indemnification
agreement.
The court finds that Proficio has stated a plausible claim for breach of the Validity
Indemnification.
ORDER
For the reasons stated above, the court GRANTS Plaintiff’s Motion to Amend (Dkt. No.
33). Defendant’s Motion to Dismiss (Dkt. No. 25) is GRANTED IN PART and DENIED IN
PART. The court dismisses the claims for fraudulent transfer, conversion, and disregard of
corporate form WITHOUT PREJUDICE for lack of personal jurisdiction, but Plaintiff may
proceed on its claim for breach of the Validity Indemnification.
SO ORDERED this 26th day of April, 2012.
BY THE COURT:

______________________________
TENA CAMPBELL
United States District Judge

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