Schmitz et al v. Diao et al

Filing 111

ORDER ON DEFENDANT'S MOTIONS TO DISMISS by the Honorable Scott W Skavdahl GRANTING 77 Motion to Dismiss Pursuant to Rule 12(b)(2); DENYING 79 Motion to Dismiss Pursuant to Rule 12(b)(1) and 12(b)(6); DENYING as moot 81 Motion to Dismi ss. Plaintiffs' voluntarily dismissed Sik Siu Kwan from this lawsuit [See ECF No. 93]. IT IS FURTHER ORDERED that Defendants' Xiqing Diao, Wenhua Guo, Christopher Patrick Holbert, William D. Suh, Lianjun Cai, and Punan Xie are hereby DISMISSED from this lawsuit.(Court Staff, stbd)

U.S. D!STf;:OT COURT
DiS;''slCT OF WYOMING

Zfl]3 ^OU
IN THE UNITED STATES DISTRICT

7 RH 8 37
OilcRK
A5PER

FOR THE DISTRICT OF WYOMING

NORMAN M. SCHMITZ and STEVEN R.

DIEHL, Individually, On Behalf of All
Others Similarly Situated, and Derivatively
On Behalf of Nominal Defendant

DUOYUAN PRINTING, INC.,
Plaintiffs,
Case No. 11-CV-157-S

vs.

XIQING DIAO, WENHUA GUO,
BAIYUN SUN, CHRISTOPHER
PATRICK HOLBERT, WILLIAM D.
SUH, JAMES ZHANG, LIANJUN CAI,
PUNAN XIE, SIK SIU KWAN, and CHUI
MAN LUNG EVERETT,

Defendants,
and

DUOYUAN PRINTING, INC.,
Nominal Defendant.

ORDER ON DEFENDANTS' MOTIONS TO DISMISS

This matter came before the Court on three motions to dismiss: (1) Defendants

Xiqing Diao, Wenhua Guo, Christopher Patrick Holbert, William D. Suh, Lianjim Cai,
Piman Xie, and Sik Siu Kwan's "Motion to Dismiss the Complaint Pursuant to Rule

12(b)(2)" [ECF No. 77]; (2) Defendants Xiqing Diao, Wenhua Guo, Christopher Patrick

Holbert, William D. Suh, Lianjun Cai, and Punan Xie's "Motion to Dismiss the
Complaint Pursuant to Rule 12(b)(1) and 12(b)(6)" [ECF No. 79]; and (3) Defendant Sik
Siu Kwan's "Motion to Dismiss the Complaint" [ECF No. 81]. Having considered the

motions, the memoranda submitted in support and opposition, the record herein, and

being otherwise fully advised, the Court FINDS and CONCLUDES that it has subject
matter jurisdiction but lacks personal jurisdiction over the Individual Defendants.
BACKGROUND

1.

Nominal Defendant Duoyuan Printing, Inc. (hereafter "Duoyuan" or "the

corporation") is incorporated in Wyoming with its principal place of business located in
Beijing, China. It supplies offset printing equipment solely in the People's Republic of
China.

2.

Plaintiffs Schmitz and Diehl were shareholders in Duoyuan at the time of

the actions complained of, and they have continuously held shares in Duoyuan since.

Page 2 of32

Plaintiff Schmitz is a resident of the State of Missouri while Plaintiff Diehl is a resident
of the State of Colorado.

3.

The Individual Defendants^ are all current or former officers and/or

directors of Duoyuan. All Individual Defendants resided and continue to reside in China,

Hong Kong (which is an autonomous territory falling within the sovereignty of the
People's Republic of China), or Africa.

4.

Plaintiffs filed a two-count complaint on April 27, 2011. Count I is a

shareholder derivative action that seeks recovery of damages, alleging the Individual
Defendants breached their fiduciary duties to the corporation and their breaches injured

the corporation by reducing its stock value. Count II alleges a class action on behalf of
all persons who held stock in the corporation and requests the Court to order the directors
to hold an annual shareholder meeting, which they have not done since October 2009 in
violation of Wyoming Statute § 17-16-701(a).
FACTS

5.

Taken in the light most favorable to Plaintiffs, as required at this stage in

the litigation, Dudnikov v. Chalk & Vermilion Fine Arts, Inc., 514 F.3d 1063, 1068 (10th

' "Individual Defendants" refers to Xiqing Diao, Wenhua Guo, Christopher Patrick Holbert, William D. Suh,
LianjunCai, and Punan Xie. Defendants James Zhangand Sik Siu Kwan havebeen voluntarily dismissed from this
lawsuit by Plaintiffs. [ECF Nos. 57,93.] Defendants BaiyunSunand ChuiMan Lung Everett havenot responded
to this lawsuit, and these motions to dismiss do not include them.
Page 3 of32

Cir. 2008), the facts establish that Duoyuan was a privately-held corporation first
incorporated in Wyoming in 2005 under the name "Asian Financial, Inc." In late 2009,

after several allegedly profitable years, Asian Financial, Inc. changed its name and held
an Initial Public Offering (IPO), where its corporate stock became available for public
purchase on the New York Stock Exchange imder the ticker symbol "DYP." Following

the IPO, Duoyuan reported continued positive financial results in February 2010 and May
2010.

6.

In March 2010, in more apparently good news, Duoyuan announced it was

changing its independent auditor from the relatively small and unknown Frazer Frost,

LLP, to the much larger Deloitte Touche Tohmatsu CPA Limited, an affiliate of a "Big
Four" auditing firm.
7.

In late sunmier of 2010, Deloitte encountered several serious discrepancies

in Duoyuan's financial records.

Deloitte informed the corporation and its audit

committee of the inconsistencies and requested more information in an attempt to resolve

the issues.

Duoyuan's corporate officers and directors either refiised to tender the

information requested or stated that they did not have access to the information sought by
Deloitte. Deloitte then questioned whether it could rely on future representations from
the corporation's officers and directors.

Page 4 of32

8.

In early September 2010, a meeting of the corporation's board members

and audit committee members resulted in Duoyuan terminating the auditing services of

Deloitte. Duoyuan announced on September 6, 2010, that itjiad fired Deloitte. Duoyuan

has yet to retain a new independent auditor. The board and committee members who had
voted against dismissing Deloitte resigned from their positions in the corporation within
the next few days.

9.

In October 2010, the U.S. Securities and Exchange Commission initiated a

formal investigation into whether the corporation had committed securities fraud.
Additionally, following the dismissal of Deloitte, the corporation was unable to fulfill its

obligations imder the SEC to file its required annual and quarterly reports, resulting in it
being delisted from the New York Stock Exchange. Since Duoyuan's public troubles

began, its stock value has plummeted, from a high of $11.00 per share to a current value
of approximately $0.04 per share.

10.

Plaintiffs spent much of 2011 and 2012 trying to obtain service on the

Individual Defendants. The parties also spent much of 2012 in mediation negotiations,

which have proved unsuccessful. Plaintiffs ultimately served Individual Defendants in
May 2013 by alternative service, as permitted by the Court [ECF Nos. 55, 56, 58.] In
answering the complaint, the Individual Defendants filed the instant motions to dismiss.
Page 5 of32

DISCUSSION

11.

The Court will address each motion to dismiss separately. When faced

with a challenge to both subject matter and personal jurisdiction, "there is no imyielding

jurisdictional hierarchy," but, "[c]ustomarily, a federal court first resolves doubts about
its jurisdiction over the subject matter ...." Ruhrgas AG v. Marathon Oil Co., 526 U.S.
574, 578 (1999).
1.

Motion to Dismiss for Lack of Subject Matter Jurisdiction and
Failure to State a Claim

12.

Individual Defendants filed a motion to dismiss imder F.R.C.P. 12(b)(1) for

lack of subject matter jurisdiction and 12(b)(6) for failure to state a claim upon which

relief could be granted.^ The Court will only address Individual Defendants' claim of
lack of subject matter jurisdiction at this time, not answering the question of whether
Plaintiffs stated a claim upon which relief could be granted because it lacks personal
jurisdiction over Individual Defendants.
A.

Applicable Law

13.

Individual Defendants contend this Court lacks subject matter jurisdiction

over this action because Plaintiffs lack standing to sue. Absent a plaintiff with proper

standing, the Court lacks subject matter jurisdiction over the plaintiffs' claims. See
^Defendant SikSiuKwan also was a party to this motion before he was voluntarily dismissed byPlaintiffs.
Page 6 of32

Warth V. Seldin, 422 U.S. 490, 501-02 (1975) (federal court's jurisdiction may be
invoked only by a party with proper standing). Once challenged, the plaintiff has the
burden to demonstrate that it has standing. Lujan v. Defenders of Wildlife, 504 U.S. 555,
561 (1992).

14.

Individual Defendants assert that Plaintiffs lack standing to bring this

shareholder derivative because they "fail to allege the date that they acquired stock and

give no indication they purchased in the IPO." (Defs.' Brief Supporting Mot. Dismiss
Pursuant to 12(b)(1) and 12(b)(6) at 5-6, ECF No. 80.) This constitutes a facial attack on

the complaint's allegations as to the existence of subject matter jurisdiction, which
requires the Court to accept the allegations in the complaint as true. Holt v. United
States, 46 F.3d 1000,1002 (10th Cir. 1995).

15.

Wyoming statutory law provides:

A shareholder may not commence or maintain a derivative proceeding
unless the shareholder:

(i)

Was a shareholder of the corporation at the time of the act or
omission complained of, or became a shareholder through
transfer by operation of law from one who was a shareholder
at the time; and

(ii)

Fairly and adequately represents the interests of the
corporation in enforcing the right of the corporation.

Page 7 of32

Wyo. Stat. Ann. § 17-16-741(a) (2013). Similarly, the federal rules require a plaintiff to
be a "shareholder or member at the time of the transaction complained of, or that the
plaintiffs share or membership later devolved on it by operation of law." Fed. R. Civ. P.
23.1(b)(1).

B.

Analysis

16.

The Court need not spend much discussion on this issue.

In their

Complaint, each named Plaintiff specifically alleges he "is a shareholder of nominal
defendant Duoyuan, was a shareholder of Duoyuan at the time of the wrongdoing alleged
herein, and has been a shareholder of Duoyuan continuously since that time." (Compl.

9-10, ECF No. 1 at p. 4.) Accepting Plaintiffs' assertions as true, as is required here, the
Court finds that Plaintiffs have satisfied the requirements for standing under both

Wyoming Statute § 17-16-741(a) and Federal Rule ofCivil Procedure 23.1(b)(l).^
C.

Conclusion

17.

Plaintiffs have carried their burden of establishing their standing to bring

this action. Consequently, Individual Defendants' request to dismiss the complaint for
lack of subject matter jurisdiction must be denied. Additionally, Individual Defendants'

request to dismiss for failure to state a claim upon which relief can be granted is moot.
^During oral argument onthis motion, Plaintiffs' counsel offered to submit verification as to Plaintiffs' stock
ownership and the date upon which it was acquired. At this stage of the proceeding, the Court believes the
allegations set forth in the complaint are sufficient, for now.
Page 8 of32

11.

Motion to Dismiss for Lack of Personal Jurisdiction

18.

Individual Defendants seek to dismiss the complaint under Federal Rule of

Civil Procedure 12(b)(2), arguing the Court lacks personal jurisdiction over them.
A.

Applicable Law

19.

"To obtain personal jurisdiction over a nonresident defendant in a diversity

action, a plaintiff must show that jurisdiction is legitimate under the laws of the forum
state and the exercise of jurisdiction does not offend the due process clause of the
Fourteenth Amendment." Kuenzle v. HTM Sport-Und Freizeitgerdte AG, 102 F.3d 453,

455 (10th Cir. 1996) (quoting

West Capital, Inc. v. Towne, 46 F.3d 1071, 1074 (10th

Cir. 1995)). Wyoming's long-arm statute allows its courts to "exercise jurisdiction on
any basis not inconsistent with the Wyoming or United States constitution." Wyo. Stat.
Ann. § 5-1-107(a) (2013). "Because this statute extends Wyoming jurisdiction to the
limit of the federal constitution, 'our only concern is whether ... maintenance of the suit

... would ... offend the due process clause of the Fourteenth Amendment.'" Kuenzle,
102 F.3d at 455 (quoting Shanks v. Westland Equip. & Parts Co., 668 F.2d 1165, 1167
(10th Cir. 1982)).

20.

In International Shoe Co. v. Washington, 326 U.S. 310 (1945), the United

States Supreme Court held that due process would not be offended by the exercise of
Page 9 of32

jurisdiction over a nonresident defendant if that defendant had "certain minimum contacts
with [the forum] such that the maintenance of the suit does not offend 'traditional notions

of fair play and substantial justice.'" Id. at 316 (quoting Milliken v. Meyer, 311 U.S. 457
(1940); Kuenzle, 102 F.3d at 455.
21.

If a nonresident party has "continuous and systematic general business

contacts with the forum state," general jurisdiction may exist. Trujillo v. Williams, 465

F.3d 1210, 1218 n.7 (10th Cir. 2006) (internal quotation marks omitted).

General

personal jurisdiction permits the forum to resolve any dispute involving that party, not
just the dispute at issue. Helicopteros Nacionales de Colombia, S.A. v. Hall, 466 U.S.
408, 414-16 (1984). In the instant case, however. Plaintiffs have not argued that any

defendant has continuous and systematic contacts with Wyoming to warrant general
personal jurisdiction. Thus, the Court focuses on specific personal jurisdiction, "i.e.,
jurisdiction specific to this dispute—and its attendant 'minimum contacts' test."
Newsome v. Gallacher, 111 F.3d 1257,1264 (10th Cir. 2013).

22.

The Tenth Circuit recently explained the minimum contacts required for

specific personal jurisdiction as follows:
"Because a state's sovereignty is territorial in nature, a defendant's contacts
with the forum state must be sufficient such that, notwithstanding its lack of
physical presence in the state, the state's exercise of sovereignty over it can
Page 10 of 32

be described as fair and just." Dudnikov [v. Chalk & Vermilion Fine Arts,
Inc.], 514 F.3d [1063,] 1070 [10th Cir. 2008]. To implement this principle,
courts typically make three inquiries: (1) whether the defendant
purposefully directed its activities at residents of the forum state; (2)
whether the plaintiffs injury arose from those purposefully directed
activities; and (3) whether exercising jurisdiction would offend traditional
notions of fair play and substantial justice. Id.
Newsome, 111 F.3d at 1264.

23.

The plaintiff bears the burden of demonstrating sufficient minimum

contacts for personal jurisdiction. Kuenzle, 102 F.3d at 456. If the plaintiff satisfies its
minimum contacts burden, the burden then shifts to the defendant to demonstrate that

exercising personal jurisdiction would nonetheless "offend traditional notions of fair play

and substantial justice." Newsome v. Gallacher, 111 F.3d 1257, 1271 (10th Cir. 2013)
(quoting Dudnikov, 514 F.3d at 1080).
B.

Analysis

24.

For ease of discussion, the Court will address the three inquiries of the

personaljurisdiction analysis separately. However, before beginning that analysis, the
Court must answer the preliminary question of whether Individual Defendants should be
treated as a single entity or whether the Court must address each Individual Defendant
separately.

Page 11 of 32

25.

Plaintiffs treat each Individual Defendant as identical in all material

respects. Plaintiffs allege that all Individual Defendants reside outside the United States.
Plaintiffs allege that Individual Defendants' actions can only be given effect in the state
where the corporation is located—Wyoming. Plaintiffs allege that all Individual
Defendants took intentional actions that breached fiduciary duties owed to Duoyuan.

Plaintiffs also allege that Individual Defendants' physical locations are irrelevant to the
issue and the lawsuit. (Pis.' Memo, of Law in Opposition to Mot. to Dismiss Compl.

Pursuant to Rule 12(b)(2), at 2.) Accepting these allegations as true for purposes of this
motion, there is no theoretical problem with analyzing personal jurisdiction over

Individual Defendants as a group. See Newsome, 122 F.3d at 1266. Accordingly, the
Court will treat Individual Defendants as materially identical for personal jurisdiction
purposes.

Whether Individual Defendants Purposefullv Directed Their Activities at
Residents of the Forum State

26.

Purposeful direction in a tort-based lawsuit, such as this one,"^ has three

elements: (a) an intentional action (b) expressly aimed at the forum state, (c) with

^SeeNewsome, 111 F.3dat 1264 (describing a suitagainst corporate directors andofficers for breach of fiduciary
duties as "tort-based").

Page 12 of 32

knowledge that the brunt of the injury would be felt in the forum state. Newsome, 122
F.3d at 1264-65,1268.

(a)

Intentional Action

27.

The intentional action element warrants little discussion.

Plaintiffs claim

that Individual Defendants intentionally acted in a wrongful manner by falsely reporting
inflated financial information to induce the public to invest in Duoyuan. Additionally,
there is no suggestion that Individual Defendants acted unintentionally when certifying
allegedly false financial reports and voting to terminate Deloitte rather than comply with

Deloitte's investigation. Therefore, the Court finds that Plaintiffs satisfy the intentional
action element of the purposeful direction inquiry.
(b)

Expressly Aimed at Forum State

28.

The express aiming element focuses on a defendant's intentions and

requires Wyoming to have been the "focal point" of the tort. Id. at 1268 (quoting
Dudnikov, 514 F.3d at 1074). The Tenth Circuit has taken a "somewhat more restrictive

approach" to this element, holding that the forum state itself—and not merely a known
resident of the forum state—^must be the focal point of a defendant's actions. Dudnikov,
514 F.3d at 1075 n.9. It is at this point that the personal jurisdiction analysis begins to

Page 13 of 32

disfavor Plaintiffs. Comparison of the instant facts to other cases helps to define the
express aiming element. Newsome, 722 F.3d at 1268.

29.

Perhaps most relevant to the instant case is Newsome itself.

There, a

bankruptcy trustee for a wholly-owned subsidiary corporation brought suit against the
parent corporation's directors (some of whom were also directors or officers of the

subsidiary corporation) for alleged breaches of fiduciary duties. Id. at 1262. All
defendants were Canadian citizens or entities domiciled in Canada. Id. The bankruptcy

trustee sued in Oklahoma even though the business was a Canadian-owned Delaware

corporation. Id. The bankruptcy trustee alleged that the individual defendants conspired
to maximize their (and the parent corporation's) profits by shifting imsustainable debt

fi-om the parent to the subsidiary. Id. The individual defendants challenged jurisdiction,
and the Tenth Circuit concluded the defendants had sufficient contacts with Oklahoma to

allow the Oklahoma federal district court to exercise personal jurisdiction. Id. In the

"express aiming" portion of its analysis, the Tenth Circuit found that the individual
defendants knew that the subsidiary operated exclusively in Oklahoma, "making

Oklahoma the focal point of any tort against" the subsidiary. Id. at 1269. Therefore, held
the Tenth Circuit, the individual defendants expressly aimed their wrongdoing at

Page 14 of 32

Oklahoma when they drowned the subsidiary, which operated exclusively in Oklahoma,
with overwhelming debt. Id.

30.

The instant case is very nearly the opposite of Newsome. Here, Duoyuan, a

Wyoming corporation, operates exclusively in China. Thus, under Newsome's reasoning,
China is the "focal point" of any of wrongful acts perpetuated against the corporation.
Individual Defendants expressly aimed their wrongdoing at a Chinese forum (likely
Beijing, where the corporation operates), not Wyoming.
31.

Next, in Bancroft & Masters, Inc. v. Augusta National, Inc., 223 F.3d 1082

(9th Cir. 2000), overruled in part on other grounds in Yahoo! Inc. v. La Ligue Contre Le
Racisine Et L 'Antiseinitisine, 433 F.3d 1199 (9th Cir. 2006) (en banc), the owner of The

Masters golf tournament (a Georgia corporation holding the "Masters" trademark) sent a
letter to a Virginia internet domain name registrar disputing a California computer
businesses use of the web address "masters.com." Bancroft, 223 F.3d at 1085. The

California business sued the Georgia corporation in a California court, seeking

declaratory judgment for the right to use the web address. Id. The Georgia corporation
contested personal jurisdiction. Id. Although the Georgia corporation sent its letter to
Virginia rather than California, the Ninth Circuit found it satisfied the express aiming

element because the Georgia corporation "individually targeted" the California computer

Page 15 of32

business, "a California corporation doing business almost exclusively in California." Id.
at 1088.

32.

Here, Plaintiffs assert that Individual Defendants targeted Duoyuan, a

Wyoming corporation, purportedly making Wyoming the focal point of the case. "[B]y
harming a Wyoming corporation, which is precisely what the Defendants are alleged to
have done, the directors and officers of the corporation established contacts with
Wyoming and affirmatively directed conduct toward Wyoming."

(Pis.' Memo, in

Opposition at 2.) In comparison to Bancroft, though, the argument for individualized
targeting is weak in the instant case.

Specifically, Duoyuan has not conducted any

business in Wyoming; all of its operations were in China. The Court finds it significant
that the true effect of Individual Defendants' alleged conduct has not been felt in
Wyoming.

33.

Finally, in Schwarzenegger v. Fred Martin Motor Co., 374 F.3d 797 (9th

Cir. 2004), an Ohio car dealership used a photograph of the actor-tumed-govemor-

tumed-actor

Arnold

Schwarzenegger

in

its

local

advertisements

without

Schwarzenegger's permission. Id. at 799. "The advertisement featured a photograph of
Arnold Schwarzenegger in The Terminator (1984), one of his most popular film roles in
which he appears as a murderous cyborg, '(a cybernetic organism; i.e., a robot whose

Page 16 of32

mechanical parts are encased in living tissue
Schwarzenegger, 374 F.3d at 799).

Dudnikov, 514 F.3d at 1076 (quoting

When Mr. Schwarzenegger sued in a California

court, the Ninth Circuit found California did not have personal jurisdiction over the car

dealership because the advertisements were not "expressly aimed" at the forum state of
California. Schwarzenegger, 374 F.3d at 807. Instead, they were expressly aimed at

Ohio, "to entice Ohioans to buy or lease cars from" the car dealership in Ohio "and, in
particular, to 'terminate' their current car leases." Id. The advertisements were never
circulated in California, and the Ohio car dealership had no reason to believe that any
Califomians would see the ads. Id.

It may be true that [the car dealership's] intentional act eventually caused
harm to Schwarzenegger in California, and [the car dealership] may have
known that Schwarzenegger lived in California. But this does not confer
jurisdiction, for [the car dealership's] express aim was local.
Id.

Again, the "focal point" of the controversy was where the defendant company

conducted its business, which was limited to Ohio.

34.

The instant case is similar to Schwarzenegger in the sense that Individual

Defendants' alleged conduct may have eventually caused harm to Duoyuan in Wyoming

by causing a decline in the corporation's value.

However, Individual Defendants'

express aim was local to China, where Duoyuan conducted its business. Additionally,
Page 17 of 32

there is no allegation that a single shareholder of Duoyuan resides in Wyoming.
Therefore, it cannot be said that Individual Defendants intended to entice Wyomingites to
purchase Duoyuan stock at a nefariously-inflated price.
35.

Therefore, the Court finds that Plaintiffs cannot satisfy the "express

aiming" element of the purposeful direction inquiry because Wyoming was not the "focal
point" of Individual Defendants' alleged wrongdoing. See Newsome, 722 F.3d at 1268

(quoting Dudnikov, 514 F.3d at 1074). Individual Defendants did not expressly aim their
alleged misconduct at Wyoming.

(c)

Knowledge that the Brunt ofthe Injury Would be Felt in Forum State

36.

The third element of the purposeful direction inquiry "concentrates on the

consequences of the defendant's action—^where was the alleged harm actually felt by the
plaintiff"

Dudnikov, 514 F.3d at 1075.

Again, the Court finds a comparison to

Dudnikov and Newsome to be helpful in analyzing this element.
37.

In Dudnikov, the Tenth Circuit found the "brunt of the injury" element was

met where the plaintiffs' business was located in Colorado and the defendant knew its
actions would affect the business. Dudnikov, 514 F.3d at 1077. Similarly, in Newsome,

the Tenth Circuit found that the forum state of Oklahoma felt the brunt of the injury

Page 18 of32

where the director defendants knew the corporation (that they saddled with unsustainable

debt) operated exclusively in Oklahoma. Newsome, 722 F.3d at 1269.
38.

Contrasting Dudnikov and Newsome with the instant case is telling. Here,

Duoyuan has never operated in Wyoming (or even the United States). It conducted
business exclusively in China and its corporate headquarters are located in Beijing.
Additionally, there is no allegation that any shareholder of Duoyuan resides in Wyoming.
See Newsome, 122 F.3d at 1268 ("a court evaluating personal jurisdiction need not ignore

the creditors' or shareholders' places of residence simply because the cause of action [for
breach of fiduciary duty] belongs to the corporation"). Therefore, the brunt of the injury

from Individual Defendants' wrongful conduct cannot be said to have occurred in
Wyoming.

Specifically, while recognizing that Duoyuan is a Wyoming corporation,

Duoyuan and its shareholders were injured primarily in China or, at a minimum, outside

of Wyoming. See id. (concluding that the Delaware corporation and its creditors, to
whom the defendants owed a fiduciary duty, were injured primarily in Oklahoma because

that is where the corporation conducted its business).

39.

Considering the three elements of the purposeful direction inquiry, the

Court concludes that Individual Defendants did not direct their allegedly wrongful

activities at Wyoming. Plaintiffs have not satisfied the purposeful direction test as to

Page 19 of32

Individual Defendants.

The Court is even more convinced of this conclusion when

examining the case law relied upon by the parties.
40.

Individual Defendants primarily rely on the United States Supreme Court

case of Shaffer v, Heitner, 433 U.S. 186 (1977). There, a nonresident shareholder of

Greyhound Corp., a Delaware corporation with its principal place of business in Phoenix,
Arizona, brought a shareholder's derivative action against current and former officers and

directors of the corporation for breach of fiduciary duties.

Id. at 189.

The

plaintiffi^appellee filed suit in Delaware. Id. The plaintiff^appellee never alleged that any
of the individual defendants/appellants ever set foot in Delaware. Id. at 213.

The

plaintiff first alleged that Delaware had in rem jurisdiction over the defendants because

each defendant owned stock in the company and a statute pronounced all stock of a

Delaware corporation was to be considered physically present in Delaware. See id. at
191-94.

The Supreme Court rejected this argument because the defendants' stock

ownership was unrelated to the lawsuit; their ownership of the stock was unrelated to
their fiduciary duties. M at 213.

As an alternative, the plaintiff argued that the

defendants' positions as directors and officers of a Delaware corporation provided
sufficient minimum contacts with Delaware for it to assume jurisdiction over them. Id. at

213,215. The Supreme Court expressly rejected this contention. Id. at 214-16.
Page 20 of 32

[T]his line of reasoning establishes only that it is appropriate for Delaware
law to govern the obligations of appellants to Greyhound and its
stockholders. It does not demonstrate that appellants have "purposefully
avail(ed themselves) of the privilege of conducting activities within the
forum State," Hanson v. Denckla, [357 U.S. 235,] 253, 78 S. Ct. [1228,]
1240 [1958], in a way that would justify bringing them before a Delaware
tribunal. Appellants have simply had nothing to do with the State of
Delaware. Moreover, appellants had no reason to expect to be haled before
a Delaware court.

Mat 216.

41.

The Court concludes Shaffer is on point and controlling.

There, the

plaintiffs/appellees explicitly argued that the individual defendants/appellants were
subject to Delaware jurisdiction because they accepted positions as officers or directors
of a Delaware corporation and their alleged wrongdoing arose from their actions as
officers or directors. Id. at 215-16. The U.S. Supreme Court determined that simply was

not enough to justify forcing them before a Delaware court. Id. at 216. Likewise,
Plaintiffs here contend that "Defendants' actions as directors and officers of Duoyuan

satisfy the 'purposeful availment' requirement of due process."

(Pis.' Memo, in

Opposition at 9.) They assert that "accepting and exercising" positions as officers and/or

directors of a Wyoming corporation is sufficient for personal jurisdiction. {Id. at 8-9.)
However, as was the case in Shaffer, Individual Defendants' positions as directors and/or

Page 21 of32

officers of a Wyoming corporation and their actions as such simply are not enough to
justify forcing them before a Wyoming court.
42.

In response, Plaintiffs discuss two different cases.

However, the Court

finds these cases distinguishable from Shaffer and unpersuasive.

43.

First, Plaintiffs rely on the case of Pittsburgh Terminal Corp. v. Mid

Allegheny Corp., 831 F.2d 522 (4th Cir. 1987). There, the plaintiff was a minority
stockholder in a West Virginia corporation and filed a shareholder derivative action in a

West Virginia court. Id. at 524. The plaintiff claimed the director-defendants breached
their fiduciary duties by accepting a merger that significantly undervalued the

corporation. Id. The corporation conducted business only in West Virginia. Id. at 524,
528. The director-defendants, however, were not residents of West Virginia, and the
plaintiff never alleged that the director-defendants were ever physically present in West

Virginia for any purpose relating to the challenged merger. Id. at 524-25. The Fourth
Circuit held that the director-defendants' positions and actions as directors of the West

Virginia corporation constituted sufficient contacts to be haled into a West Virginia court.
Id at 529.

44.

The Court finds Pittsburgh Terminal does not control here for two reasons.

First, as was important in both Dudnikov and Newsome, the Fourth Circuit in Pittsburgh
Page 22 of 32

Terminal found it significant that the West Virginia corporation conducted business

exclusively in West Virginia. Id. at 528 ("Unlike Shaffer, MtAs is not a case where the
corporation is a phantom resident of the chartering state.... [The corporation] apparently
does business only in West Virginia, and its president lives and maintains his office in
West Virginia."). The instant case is readily distinguished on this basis because Duoyuan
is a phantom resident of Wyoming, and it does business only in China. Further, none of
its officers or directors resides in Wyoming.

45.

Second, the Pittsburgh Terminal court's reasoning is unpersuasive.

Pittsburgh Terminal refused to follow Shaffer because it found that the Supreme Court in
Shaffer "did not hold, however, that the acceptance and exercise of a directorship in a

domestic corporation was an insufficient contact to allow jurisdiction. In fact, the
implications of the Court's language suggest just the opposite." Id. at 526 (emphasis in
original). The Supreme Court in Shaffer, however, did directly address the argument that
"by accepting positions as officers or directors of a Delaware corporation, appellants

performed the acts required by Hanson v. Denckla'' which would grant Delaware
personal jurisdiction over the officers or directors. Shaffer, 433 U.S. at 215. The
Supreme Court explicitly rejected this argument, stating

"this line of reasoning establishes only that it is appropriate for Delaware
law to govern the obligations of appellants to Greyhound and its
Page 23 of32

stockholders. It does not demonstrate that appellants have 'purposefully

avail(ed themselves) of the privilege of conducting activities within the
forum State
in a way that would justify bringing them before a
Delaware tribunal."

Id. at 216 (quoting Hanson v. Denckla, 357 U.S. 235, 253 (1958)). The Supreme Court

expressly rejected the distinction upon which Pittsburgh Terminal relies. Based on the
material distinction and unpersuasive reasoning outlined here, the Court concludes that
Pittsburgh Terminal should not control the question of personal jurisdiction over
Individual Defendants in the instant case.

46.

Plaintiffs also rely heavily on the Nevada Supreme Court case of Consipio

Holding, BV V. Carlberg, 282 P.3d 751 (Nev. 2012).

There, shareholders filed a

derivative action, contending that respondents breached their fiduciary duties. Id. at 753-

54. The corporation was incorporated in Nevada, but had its principal place of business
in Spain. Id. at 754. The respondents were all citizens and residents of European nations,
and few of the respondents had ever visited Nevada. Id. The Nevada Supreme Court
held that "[o]fficers or directors who directly harm a Nevada corporation are
affirmatively directing conduct toward Nevada, and by doing so can be subject to
personal jurisdiction even without a director consent statute." Id. at 756. "Thus, a

Page 24 of32

district court can exercise personal jurisdiction over nonresident officers and directors
who directly harm a Nevada corporation." Id.

47.

The Nevada Supreme Court's reasoning, though, suffers from flaws similar

to those foimd in Pittsburgh Terminal.

Specifically, the Consipio court rather

confusingly states, "However, Shaffer does not prohibit a state court from exercising
jurisdiction over nonresident officers and directors who directly harm a corporation that

is incorporated in that state, even when the state does not have a director consent statute."
Id. at 755. The Supreme Court directly addressed that issue and held opposite of the

Consipio court. The nonresident officers and directors in Shaffer were alleged to have
directly harmed Greyhound, which was incorporated in Delaware, when Delaware did
not have a director consent statute. Id. at 189-90, 214. The Supreme Court held that the
nonresident officers and directors did not have sufficient contacts with, or purposely avail

themselves of the privilege of conducting business within, the forum state of Delaware.
Id. at 213-16. Accordingly, the Consipio court's interpretation of Shaffer and reasoning
for finding personal jimsdiction is questionable and unconvincing.
48.

In the instant case, the Court also examines the Individual Defendants'

quantity and quality of their contacts with Wyoming. Emp'rs. Mut. Cas. Co. v. Bartile
Roofs, Inc., 618 F.3d 1153, 1160 (10th Cir. 2010) (quoting OMIHoldings, Inc. v. Royal
Page 25 of32

Ins. Co. of Can., 149 F.3d 1086, 1091 (10th Cir. 1998)).

Here, the Individual

Defendants' contacts with Wyoming are minimal. During the times in question and
since, Individual Defendants resided in China, Hong Kong, or Africa. They have never
been to Wyoming. They do not own personal or real property in Wyoming. They do not
have bank accounts in Wyoming. They have had very little communication with anyone

in Wyoming, consisting entirely of phone calls and/or emails with corporate counsel
located in Cheyenne, Wyoming, but even that communication was sparse.
49.

Based on the Court's findings that Individual Defendants did not expressly

aim their allegedly wrongful conduct at Wyoming and that the brunt of the injury was not

felt in Wyoming, combined with the United States Supreme Court's on-point
determination in Shaffer v. Heitner, the Court concludes that Plaintiffs have not satisfied
their burden of proving that Individual Defendants purposefully directed their activities at

Wyoming.

Individual Defendants have not created a "substantial connection" with

Wyoming simply by accepting positions as directors and/or officers of a Wyoming
corporation and acting within those positions. See Emp'rs Mut. Cas., 618 F.3d at 1160

(quoting OMI Holdings, 149 F.3d at 1091). There simply is not enough of a connection
between Individual Defendants and Wyoming that they "should reasonably anticipate
being haled into court" in Wyoming. Id.

Page 26 of 32

Whether Plaintiffs' Injuries Arose Out of Individual Defendants' ForumRelated Activities

50.

The specific personal jurisdiction analysis also requires "the plaintiffs

injuries [to] arise out of defendant's forum-related activities." Newsome, 722 F.3d at

1269 (quoting Dudnikov, 514 F.3d at 1071). There must be a "nexus" between the
defendant's forum-related contacts and the cause of action. Emp 'rs. Mut. Cas., 618 F.3d

at 1160 (quoting THAgric. & Nutrition, LLC v. AceEuropean Grp. Ltd., 488 F.3d 1282,
1291 (10th Cir. 2007)). When a controversy is related to or "arises out of a defendant's
contacts with the forum state, the U.S. Supreme Court has said that a "relationship among

the defendant, the forum, and the litigation" is the essential foundation of in personam
jurisdiction. Shaffer, 433 U.S. at 204.
51.

The Tenth Circuit has stated that

there are potentially two tests here—^the but-for test and the proximate
cause test:

Under the [but-for] approach, any event in the causal chain leading
to the plaintiffs injury is sufficiently related to the claim to support
the exercise of specific jurisdiction. The [proximate cause]
approach, by contrast, is considerably more restrictive and calls for
courts to examine whether any of the defendant's contacts with the
forum are relevant to the merits of the plaintiffs claim.

Newsome, 722 F.3d at 1269-70 (quoting Dudnikov, 514 F.3d at 1078). The Tenth Circuit
has not, as of yet, chosen one test over the other. Id.
Page 27 of 32

52.

The Tenth Circuit's ultimate election does not affect this case, however,

because Plaintiffs cannot satisfy either test. Considering the more restrictive proximate
cause approach, the Individual Defendants' contacts with Wyoming (as negligible as they
are) simply are not relevant to the merits of Plaintiffs' claims. Individual Defendants are

accused of taking action in China which damaged the value of a corporation operating

entirely in China. Their insignificant contacts with Wyoming are not relevant to their
alleged wrongful conduct. See Newsome, 722 F.3d at 1270 (finding that the plaintiffs

allegation that the individual defendants "knowingly acted in Canada to destroy a

company operating entirely in Oklahoma" satisfied the proximate cause test for personal
jurisdiction in Oklahoma).

53.

Additionally, under the but-for test, none of Individual Defendants'

contacts with Wyoming fall within the causal chain leading to Plaintiffs' alleged injuries.
Plaintiffs have offered no evidence demonstrating how their alleged injuries are "but for"

causally connected to Individual Defendants' activities in Wyoming. In short, there is
only a miniscule, if any, relationship between the forum and Individual Defendants'
alleged wrongdoing. Individual Defendants' limited contacts with Wyoming are not a
but-for cause of this lawsuit.

See Dudnikov, 514 F.3d at 1079 (finding that the

defendants' contacts with Colorado, which consisted of shutting down Colorado-based

Page 28 of 32

plaintiffs' eBay auction and sending emails threatening to sue plaintiffs, satisfied the but-

for test for personal jurisdiction in Colorado). The alleged conduct giving rise to this
action had no meaningful association with Wyoming. The only connection to Wyoming,
that Duoyuan was incorporated in the state, remains outside the causal chain leading to
Plaintiffs' alleged injuries.

54.

It cannot be said that Plaintiffs' alleged injuries arose out of Individual

Defendants' remote connection to Wyoming. The Court concludes that Plaintiffs have

not satisfied their burden of proving that their injuries arose out of Individual Defendants
forum-related activities.

55.

Having determined that Plaintiffs have failed to show that Individual

Defendants purposefully directed their activities at Wyoming or that Plaintiffs' injuries
arose out of Individual Defendants' activities in Wyoming, the Court concludes that
Plaintiffs have not established minimum "contacts, ties, or relations," Int'l Shoe Co. v.

Washington, 326 U.S. 310, 319 (1945), with Wyoming sufficient to give its courts

jurisdiction over Individual Defendants. They have not purposefully availed themselves
of the privilege of conducting business in Wyoming "in a way that wouldjustify bringing
them before a [Wyoming] tribunal." Shaffer, 433 U.S. at 216.

Page 29 of 32

Traditional Notions of Fair Play and Substantial Justice

56.

When a plaintiff satisfies its minimum contacts burden, the burden then

shifts to the defendant to show that exercising personal jurisdiction would nonetheless
"offend traditional notions of fair play and substantial justice." Newsome, 122 F.3d at
1271 (quoting
57.

514F.3dat 1080).

Having determined that Plaintiffs have not met their burden of proving

minimum contacts for personal jurisdiction and that Shaffer v. Heitner applies to this
case, the burden does not shift to Individual Defendants.
C.

Conclusion

58.

Exercising personal jurisdiction over Individual Defendants in this case

would offend the due process clause of the Fourteenth Amendment due to the lack of
minimum contacts between Individual Defendants and Wyoming.

Accordingly,

exercising personal jurisdiction in this case is not permitted by Wyoming's long-arm
statute.^

^During oral argument onthis motion, Plaintiffs' counsel posited that ifjurisdiction does notexist in Wyoming, the
only other viable and unsatisfactory forum would be China. This Court cannot answer the broad question of where
personal jurisdiction over Individual Defendants might exist; it can only determine whether personal jurisdiction
exists in Wyoming. Further, the Court will not get into the public policy discussion other than to observe that at
least twelve other states have guaranteed their jurisdiction over corporate directors and/or officers by enacting a
director consent statute, which "treats acceptance of a directorship as consent to jurisdiction in the State." Shaffer,
433 U.S. at 216; see. e.g., Del. Code Ann. Tit. 10, § 3114 (2009); Wis. Stat. Ann. § 801.05(8) (2013). Wyoming has
not enacted such a statute. Admittedly, since the Supreme Court decided Shaffer in 1977, die reach and potential
impact of corporate activities has expanded, not only from state to state, but from nation to nation. It is now not
Page 30 of 32

CONCLUSION AND ORDER

59.

For the reasons discussed herein, the Court holds that it possesses subject

matter jurisdiction over this case because Plaintiffs have standing to bring this action.
The Court, however, lacks personal jurisdiction over Individual Defendants. Individual
Defendants' miniscule contacts with Wyoming are not such that they should reasonably

anticipate being haled into court here. Plaintiffs cannot carry their burden of proving
sufficient minimum contacts for personal jurisdiction, and Shaffer v. Heitner, 433 U.S.
186 (1977), controls here.
IT IS THEREFORE ORDERED that Individual Defendants' "Motion to

Dismiss the Complaint Pursuant to Rule 12(b)(1) and 12(b)(6)" [ECF No. 79] is hereby
DENIED.

Individual Defendants' demand to dismiss this action for lack of subject

matterjurisdiction is denied because the Court concludes that it possesses subject matter

jurisdiction. Individual Defendants' demand to dismiss the complaint for failure to state

a claim upon which relief can be granted is denied as moot due to the Court's lack of
personaljurisdiction over Individual Defendants.

uncommon to have corporate officers and/or directors who reside in foreign nations, have never set footinside the
state of incorporation, andexercise all of their corporate activities via laptop computer. Thatbeing said, thedecision
inShaffer remains binding precedent that in this Court's view cannot be meaningfully distinguished from thefacts in
this case.

Page 31 of 32

IT IS FURTHER ORDERED that Individual Defendants' "Motion to Dismiss

the Complaint Pursuant to Rule 12(b)(2)" [ECF No. 77] is hereby GRANTED.
IT IS FURTHER ORDERED that Defendants Xiqing Diao, Wenhua Guo,

Christopher Patrick Holbert, William D. Suh, Lianjun Cai, and Punan Xie are hereby
DISMISSED from this lawsuit.

IT IS FINALLY ORDERED that Defendant Sik Siu Kwan's "Motion to Dismiss

the Complaint" [ECF No. 81] is hereby DENIED as moot because Plaintiffs voluntarily
dismissed her from this lawsuit [ECF No. 93].

ORDERED this

/

day of November, 2013.

Scott W. Skavdahl

United States District Judge

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