Klein v. Eaton et al
Filing
11
MEMORANDUM DECISION denying 8 Motion to Dismiss for Lack of Jurisdiction. Signed by Judge Dee Benson on 5/5/14. (jlw)
IN THE UNITED STATES COURT FOR THE DISTRICT OF UTAH
CENTRAL DIVISION
R. WAYNE KLEIN
Plaintiff,
MEMORANDUM DECISION AND
ORDER
vs.
GLENDALE M. EATON, individually and as
trustee of the GM & CR Eaton Living Trust,
the GM & CR EATON LIVING TRUST, and
Defendant(s).
Case No. 2:13-cv-00440
Judge Dee Benson
Defendants GM & CR Eaton Living Trust and Mr. Glendale Eaton in his capacity as
trustee of the Trust, and Mr. Eaton individually, move to dismiss Plaintiff R. Wayne Klein’s (the
“Receiver”) complaint in this case. The parties did not request oral argument. Having reviewed
the parties’ briefing and the relevant law, the court enters the following Memorandum Decision
and Order.
BACKGROUND
This case is ancillary to a recent case brought by the Securities and Exchange
Commission (the “SEC”) against National Note of Utah, LC (“National Note”) and Wayne
LaMar Palmer, for various alleged fraudulent activities. See Securities and Exchange
Commission v. National Note of Utah, LC et al., Case No. 2:12-cv-00591 (D. Utah) (Jenkins, J.)
(hereinafter “SEC Civil Enforcement Case”). The court-appointed Receiver of National Note
filed a complaint against Defendants seeking to recover, for the benefit of the receivership estate,
transfers made by National Note to the Defendants. The Receiver alleges that during 2006,
Defendants invested an initial $50,000.00 in National Note and then received interest payments
of $12,091.78 over the course of two years as well as the return of the principal amount.
(Compl. ¶¶ 14-17.) The Receiver filed the instant action against Defendants claiming the
transactions qualify as fraudulent transfers under the Utah Code, and Defendants filed a motion
to dismiss.
DISCUSSION
I.
Personal Jurisdiction
Defendants’ assert that this court does not have personal jurisdiction over them in this
case. Before a federal court can assert personal jurisdiction over a defendant in a federal
question case, the court must determine (1) “whether the applicable statute potentially confers
jurisdiction” by authorizing service of process on the defendant, and (2) “whether the exercise of
jurisdiction comports with due process.” Peay v. BellSouth Medical Assistance Plan, 205 F.3d
1206, 1209 (10th Cir. 2000) (citation omitted). Although both requirements must be satisfied
before a suit can proceed, they are distinct concepts that require separate inquiries. Id.
a. Nationwide Service of Process
Regarding the first requirement, the Receiver was authorized to serve process on
Defendants in this case. Under 28 U.S.C. § 754, federal receivers are granted authority to protect
receivership “property, real, personal or mixed, situated in different districts.” 28 U.S.C. § 754.
To preserve this authority, a receiver must “within ten days after the entry of his order of
appointment, file copies of the complaint and such order of appointment in the district court for
each district in which property is located.”1 Id. Additionally, 28 U.S.C. 1692 states that when
such property lies in multiple districts, “process may issue and be executed” in any such district
“as if the property lay wholly within one district.” And this court has found that when 28 U.S.C.
§§ 754 and 1692 are read together, these federal receiver statutes confer nationwide service of
process for in personam as well as in rem jurisdiction. Wing v. Apex Holding Co., LLC, 2009
WL 2843343, at *3 (D. Utah Aug. 27, 2009).
b. Due Process
Next, defendants assert that this court’s exercise of jurisdiction over them would violate
due process under both the Fifth and Fourteenth Amendments. However, where, as here,
nationwide service of process is established by federal statute, “the constitutional limits of due
process derive from the Fifth, rather than the Fourteenth, Amendment.” Peay, 205 F.3d at 1210
(citation omitted). In Peay, the Tenth Circuit set the standard for determining whether due
process is met in a nationwide service of process case:
[I]n evaluating whether the defendant has met his burden of establishing
constitutionally significant inconvenience, courts should consider the following
factors: (1) the extent of the defendant's contacts with the place where the action
was filed; (2) the inconvenience to the defendant of having to defend in a
jurisdiction other than that of his residence or place of business, including (a) the
nature and extent and interstate character of the defendant's business, (b) the
defendant's access to counsel, and (c) the distance from the defendant to the place
where the action was brought; (3) judicial economy; (4) the probable situs of the
discovery proceedings and the extent to which the discovery proceedings will take
place outside the state of the defendant's residence or place of business; and (5)
the nature of the regulated activity in question and the extent of impact that the
defendant's activities have beyond the borders of his state of residence or
business.
Id. at 1211-12.
1
The Receiver timely filed Notices of Receivership in each of the four United States District
Courts located in Texas within ten days of the court’s entry of an order reappointing the Receiver
entered on May 20, 2013 in the SEC Civil Enforcement Case.
Although this standard shares similarities with the requirements for personal
jurisdiction under the Fourteenth Amendment, the Court emphasized that “it is only in
highly unusual cases that inconvenience will rise to the level of constitutional concern.”
Id. Additionally, the burden is on defendants to show that the court’s exercise of
jurisdiction will “make litigation so gravely difficult and inconvenient” that they are at a
“severe disadvantage in comparison to [their] opponent.” Peay, 205 F.3d at 1212 (10th
Cir. 2000) (citations omitted). Furthermore, even if a defendant can show that litigation
in the chosen forum is unduly inconvenient, the court’s jurisdiction will still comport
with due process if the “federal interest in litigating the dispute in the chosen forum
outweighs the burden imposed on the defendant.” Id. Regarding the federal interest in
receivership litigation, this court has previously recognized that “[t]here is a strong
federal interest in having [the court], which created the receivership, maintain litigation
related to the receivership.” Wing v. Storms, 2004 WL 724448, at *3 (D. Utah Feb. 5,
2004).
Regarding the first factor, Defendants argue that they have no contacts with the
state of Utah. However, the Receiver has submitted evidence that shows Defendants
invested fifty-thousand dollars in National Note, which is a Utah company, and that they
received twenty-three regular payments from National Note over the course of two years.
See Compl. Ex. A (Dkt. No. 2-1.)
As to the second factor, although litigating in Utah would not be convenient for
Defendant Mr. Eaton, he cannot show that this burden “rises to the level of constitutional
concern.” See Peay, 205 F.3d at 1213. Any burden of litigating this matter in Utah is
significantly lessened by technology that allows Mr. Eaton to communicate remotely with
counsel and to travel between Texas and Utah. See id. (“modern methods of
communication and transportation greatly reduce the significance of this physical
burden.”).
The third factor considers judicial economy. Because this case is ancillary to the
SEC Civil Enforcement Case currently before Judge Jenkins, a fellow judge in this
district, litigating in this court conserves judicial resources by encouraging collaboration
and efficiency in this case as well as in other cases initiated by the receiver which are
pending in this district.
The fourth factor regarding the situs of discovery is roughly split. Any deposition
of Mr. Eaton will take place in Texas, where he resides. However, business records and
other discovery are likely to be located in Utah, where National Note was operated.
Additionally, Defendants’ financial records are likely located in Texas and could easily
be transmitted electronically.
The fifth and final factor is evenly split. This factor evaluates the nature of the
regulated activity in question and its impact beyond the borders of the defendant’s state
of residence. Although Defendants’ activities here consisted of passively investing from
their home state of Texas, their investments affected Utah by benefitting a Utah company
that the SEC has since alleged was operating as a Ponzi scheme.
In light of the above factors, the court concludes that the Fifth Amendment due
process clause is not violated in this case because defendants have failed to establish that
this is a highly unusual case, or that they will suffer from a severe disadvantage by
litigating this matter in this court. Furthermore, even if Defendants had met this burden,
the federal interest in having a court in this district maintain all litigation related to the
National Note receivership outweighs the burden to Defendants. Otherwise, the value of
creating a receivership at all would be questionable if the receiver were required to
litigate every lawsuit in the respective home districts of each defendant. Accordingly,
Defendants’ motion to dismiss for lack of personal jurisdiction is denied.
II.
Failure To State a Claim
Defendants next assert that the Receiver has failed to sufficiently state a claim against
Mr. Eaton personally. On a motion to dismiss for failure to state a claim, “the Court accepts
well-pled allegations of the Complaint as true and construes them in the light most favorable to
the plaintiff.” Mink v. Knox, 613 F.3d 995, 1000 (10th Cir. 2010).
Here, the Receiver’s complaint alleges that (a) “Eaton and the Trust commenced
investing with NNU”; (Compl. ¶ 14.) (b) “Eaton and the Trust paid NNU cash in the total
amount of $50,000 on or about 2006”; (id. at ¶ 15.) and (c) “NNU transferred a total of
$62,091.78 in cash to Eaton and the Trust.” (Id. at ¶ 16.) Additionally, the Receiver has attached
an exhibit to the Complaint entitled “Investment Pay History,” which purports to list the
payments between National Note and Defendants. See Compl. Ex. A. Mr. Eaton’s name, as
well as the name of the Trust, is included at the top of the Exhibit. From these facts, it is
impossible at this stage in the litigation to conclude that Eaton did not receive payments directly
from NNU or did not receive monies from the Trust. Accordingly, the Receiver’s assertions
combined with the attached exhibit are sufficient to state a claim against Mr. Eaton personally
that is plausible on its face. See Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 556 (2007).
Defendants also argue that the Receiver has failed to establish the requisite elements of a
fraudulent transfer as it relates to the payments from National Note. However, as already
discussed, the court must accept all well-pled allegations as true and construe them in the light
most favorable to the non-moving party. In his complaint, the Receiver asserted the following
facts: (a) NNU operated as a Ponzi scheme from 1994 until the commencement of the SEC Civil
Enforcement Case; (b) NNU was insolvent at all times relevant to the Complaint; (c)
Defendants were investors in NNU; and (d) Defendants received specific amounts of
money from NNU in excess of the amount of their principal investment. This information
contains sufficient factual information to put the Defendants on notice of the claims asserted
against them and the basis for the assertion of those claims.
CONCLUSION
For the foregoing reasons, Defendants’ motion to dismiss is DENIED.
DATED this 5th day of May, 2014.
___________________________________
Dee Benson
United States District Judge
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