Kreutter v. McFadden Oil Corp.

OPINION OF THE COURT

Plaintiff, a resident of Hamburg, New York, sought to invest

The Texas defendants moved to dismiss the complaint for want of jurisdiction and Supreme Court denied their motions after a hearing. The Appellate Division modified, sustaining jurisdiction over McFadden Oil but dismissing the actions against defendants Downman and Harmony. It held Downman was not subject to jurisdiction because he was acting on behalf of McFadden Oil in the transaction and, therefore, was protected by the fiduciary shield doctrine. It dismissed the action against defendant Harmony because it found plaintiff failed to establish Harmony had sufficient contacts with New York. We granted plaintiff leave to appeal so that we could review the jurisdictional questions presented and we now reverse. Plaintiff established that Downman and Harmony transacted business in this State through an agent, McFadden Company, and that his cause of action arose from that transaction. We hold further that the fiduciary shield doctrine cannot be invoked to insulate defendant Downman from personal jurisdiction. Accordingly, the motion to dismiss should be denied as to both defendants.

I

n 1972, Downman, Brian McFadden and their counsel,

Although both McFadden Company and McFadden Oil were incorporated in Texas, McFadden Company established its principal office in New York and is licensed to do business here. McFadden Oil listed McFadden Company’s New York office as its own New York address, and McFadden Company listed McFadden Oil’s Texas office as its Texas address. At the time of incorporation, McFadden Company and McFadden Oil shared the same officers and directors, but the corporations have always had different shareholders. At the time of these transactions, Downman had no office or ownership in McFadden Company but he exercised management control of McFadden Oil and he had a direct ownership interest in it through personally held shares and also an indirect ownership interest in it through another company he owned in part which held

Over the years, plaintiff invested $145,000 in participation shares marketed by McFadden Company. He had twice met Downman in Texas, once to discuss this transaction, but he made all his investments through McFadden Company. In 1977, plaintiff decided to invest additional moneys. Unlike prior transactions, however, this investment did not involve the acquisition of participation shares. Instead, defendants proposed a financing device they apparently had not used before. Plaintiff was to purchase an oil rig from McFadden Oil and then lease the equipment back to it, or so he believed. Plaintiff tendered $70,000 for the purchase to McFadden Company’s Buffalo area representative, defendant Mumbach. Mumbach deducted a $6,000 commission and then sent the balance of $64,000 to defendant McFadden Company. Although the sale of participation shares — the type of transaction covered by the joint venture agreement between McFadden Oil and McFadden Company — was not involved, McFadden Company kept 22% of the $64,000 and sent a check for the remaining $49,990 to McFadden Oil to purchase the oil rig. McFadden Oil did not own the rig, however; it was owned by Harmony. Accordingly, someone in the office of McFadden Oil, falsely stating that Harmony was a subsidiary of McFadden Oil, directed McFadden Company to issue a new instrument payable to Harmony. McFadden Oil either destroyed or returned the original check naming it payee and McFadden Company issued a new check payable to Harmony.

Although the evidence did not directly establish who instructed McFadden Company to issue a new check, the trial court drew the inference that it was Downman because he knew of plaintiff’s investment in the oil rig and he was in constant communication with McFadden Company at the time it was being processed. Indeed, Downman acknowledged his involvement with the leasing of the rig and the many problems he was experiencing with the arrangement in memoranda sent to Brian McFadden after the check was sent to Harmony, memoranda which indicated that Downman was acting on behalf of Harmony, explained Harmony’s inability to pay the amounts due under the leaseback, and confirmed to Brian McFadden that McFadden Company’s marketing of the rig had been on Harmony’s behalf.

Constitutional due process requires that a court have a jurisdictional basis to exercise its powers over a party. Customarily this basis is supplied by the party’s presence within the court’s geographical jurisdiction. With the growth of national markets for commercial trade and technological advances in communication and travel systems, however, an enormous volume of business may be transacted within a State without a party ever entering it. Recognizing this, the Supreme Court has expanded the permissible powers of States to obtain personal jurisdiction over nondomiciliaries. So long as a party avails itself of the benefits of the forum, hits sufficient minimum contacts with it, and should reasonably expect to defend its actions there, due process is not offended if that party is subjected to jurisdiction even if not "present” in that State (see, McGee v International Life Ins. Co., 355 US 220 , 222-223; see also, Burger King Corp. v Rudzewicz, 471 US 462 ; World-Wide Volkswagen Corp. v Woodson, 444 US 286 , 292; International Shoe Co. v Washington, 326 US 310 ). Specifically, in the International Shoe case the court held that "the privilege of conducting activities within a state * * * may give rise to obligations, and, so far as those obligations arise out of or are connected with the activities within the state, a procedure which requires [a party] to respond to a suit brought to

New York’s long-arm statute, CPLR 302, was enacted in response to those decisions. CPLR 302 (a) (1), the provision in issue on this appeal, authorizes the court to exercise jurisdiction over nondomiciliaries for tort and contract claims arising from a defendant’s transaction of business in this State. It is a "single act statute” and proof of one transaction in New York is sufficient to invoke jurisdiction, even though the defendant never enters New York, so long as the defendant’s activities here were purposeful and there is a substantial relationship between the transaction and the claim asserted (see, Reiner & Co. v Schwartz, 41 NY2d 648 , 651-652; Parke-Bernet Galleries v Franklyn, 26 NY2d 13 , 16-17; cf., Talbot v Johnson Newspaper Corp., 71 NY2d 827 ; and McGowan v Smith, 52 NY2d 268 , 272).

In this case, plaintiff did not deal directly with McFadden Oil, Harmony or Downman. He dealt with McFadden Company in New York, and the question is whether McFadden Company was acting as the agent of the Texas defendants so that its actions are attributable to them and support New York’s assertion of jurisdiction over them. Plaintiff need not establish a formal agency relationship between defendants and McFadden Company (see, Parke-Bernet Galleries v Franklyn, supra, at 19 ; Elman v Belson, 32 AD2d 422 , 426). He need only convince the court that McFadden Company engaged in purposeful activities in this State in relation to his transaction for the benefit of and with the knowledge and consent of the Texas defendants and that they exercised some control over McFadden Company in the matter (see, Lupton Assocs. v Northeast Plastics, 105 AD2d 3 , 7; Cato Show Print. Co. v Lee, 84 AD2d 947 , 949, appeal dismissed 56 NY2d 953 ; East N. Y. Sav. Bank v Republic Realty Mtge. Corp., 61 AD2d 1001 , 1002; CutCo Indus. v Naughton, 806 F2d 361 , 366).

A

Because Downman relies primarily on the "fiduciary shield doctrine” and the Appellate Division held it was available to defeat jurisdiction over him, we address it first. That doctrine provides that an individual should not be subject to jurisdiction if his dealings in the forum State were solely in a corporate capacity. It is based upon the notion that it is unfair to subject a corporate employee personally to suit in a foreign

The phrase "fiduciary shield doctrine” was first used by the United States Court of Appeals in United States v Montreal Trust Co. ( 358 F2d 239 , cert denied 384 US 919 ), a diversity case in which the Second Circuit applied New York’s jurisdictional rules. In doing so the court construed our long-arm statute to require the application of the fiduciary shield doctrine based upon its reading of Boas & Assocs. v Vernier ( 22 AD2d 561 ). In Boas, however, plaintiff was suing on a contract and the Appellate Division merely found that, as a matter of substantive law, no claim could be asserted against an individual nonresident defendant whose only contact with New York was his execution of a contract here on behalf of his corporate employer. That was so, the Boas court noted, because one who executes a contract on behalf of a corporation without also signing it in his individual capacity is not personally obligated under the agreement (id., at 563, citing Savoy Record Co. v Cardinal Export Corp., 15 NY2d 1 ; Salzman Sign Co. v Beck, 10 NY2d 63 ). The Boas court did not address whether the defendant was amenable to jurisdiction in the New York courts and thus it provides no basis for development of the jurisdictional doctrine the Second Circuit attributed to it. Some courts have also found a suggestion in Yardis Corp. v Cirami ( 76 Misc 2d 793 ) that the fiduciary shield doctrine had been adopted in this State. Yardis did not involve interpretation of New York’s long-arm statute, however; it rested on constitutional principles.

The Boas and Yardis decisions appear to supply the only basis for Federal court determinations that the fiduciary shield doctrine has been accepted in New York but, remarkably, application of the doctrine has proliferated and it has been accepted by several Federal courts and by some Depart

In applying the fiduciary shield doctrine in this case, the Appellate Division cited to some of these decisions and also to our decision in Laufer v Ostrow ( 55 NY2d 305 ). The principal issue in Laufer, however, was whether the corporate defendant had "done business” in New York sufficient to support jurisdiction over it under CPLR 301. Neither long-arm jurisdiction nor the fiduciary shield doctrine was involved because an entity doing business in New York under CPLR 301 is deemed present in the State and long-arm jurisdiction need not be invoked. The Laufer court did note that the individual defendant was not subject to long-arm jurisdiction under CPLR 302. This was not because he was protected by the fiduciary shield, however, but because the claim was for a conversion which took place outside the State and no New York injury resulting from the defendant’s tortious conduct was alleged (see, Laufer v Ostrow, supra, at 313-314 , citing Fantis Foods v Standard Importing Co., 49 NY2d 317 , 326-327; see also, 1 Weinstein-Korn-Miller, op. cit, fl 302.06a, at 3-109 -3-110).

Thus, none of our prior decisions have adopted the fiduciary shield doctrine and we now address whether we should do so in this case. The analysis differs somewhat from that in CPC Intl. v McKesson Corp. ( 70 NY2d 268 , supra) which construed CPLR 302 (a) (2) and involved corporate officers charged with fraudulent misrepresentations made during a meeting in New York State. In this case, Downman, the corporate agent over whom jurisdiction is sought, has not physically entered New York and jurisdiction has been asserted over him because he acted on behalf of nondomiciliary corporations transacting business in New York. Downman claims that under these circumstances equity requires the application of the fiduciary shield because it is unfair to bring him into New York’s courts when, under familiar principles of contract and corporate law, he may not be substantively liable unless the corporate veil is pierced or there is clear evidence that he intended to be

Defendant’s argument addresses substantive liability and the fact that a corporation is liable for acts of its corporate employee is not relevant to the matter now before us. Liability may be considered only after it is decided, on the basis of CPLR 302, that the defendant is subject to the in personam jurisdiction of our courts (Longines-Wittnauer Watch Co. v Barnes & Reinecke, 15 NY2d 443 , 460, cert denied sub nom. Estwing Mfg. Co. v Singer, 382 US 905 ; and see generally, Siegel, NY Prac § 92; 1 Weinstein-Korn-Miller, op. cit., |J 302.06a, at 3-110). Moreover, plaintiffs objective is more limited than Downman would have us believe. He seeks to acquire jurisdiction over an individual who was a primary actor in the transaction with him in New York, not some corporate employee in Texas who played no part in it (cf., Calder v Jones, 465 US 783 , 789-790 [where distinction was drawn between corporate employee who knowingly contributed to the wrong and an employee who played a collateral role or acted without guilty knowledge]). Downman represented two corporations during their participation in purposeful corporate acts in this State and if he acted improperly in representing them, the fact that he acted for one or both of the corporations should not necessarily relieve him from responding to plaintiffs claims against him.

Turning then to the interpretation of CPLR 302, we determine that it is neither necessary nor desirable to adopt the fiduciary shield doctrine in New York. Nothing in the statute’s language or the legislative history relating to it suggests that the Legislature intended to accord any special treatment to fiduciaries acting on behalf of a corporation or to insulate them from long-arm jurisdiction for acts performed in a corporate capacity.

Nor is the rule necessary as a matter of fairness. The equitable concerns which motivated development of the doctrine are amply protected by constitutional due process requisites which guarantee that jurisdiction over a nonresident will be sustained only when the demand for his presence is reasonable and consistent with notions of " 'fair play and substantial justice’ ” (International Shoe Co. v Washington, 326 US 310 , 316, supra). Indeed, the Supreme Court has addressed the

This case is a good example of why the doctrine is not necessary to avoid inequitable results. Plaintiff has obtained jurisdiction over McFadden Oil and Downman will undoubtedly be its principal witness and will have to come to New York for that purpose. That being so, the inconvenience he faces if made a party to the suit individually is minimal and, as a result, notions of fairness do not require us to shield him from the reach of the long-arm statute. Inasmuch as the constitutional and statutory safeguards sufficiently alleviate the equitable concerns posed by long-arm jurisdiction, there is "no convincing reason why the mere fact of corporate employment should alter the jurisdictional calculus” (Koenig, Personal Jurisdiction and the Corporate Employee: Minimum Contacts Meet the Fiduciary Shield, 38 Stan L Rev 813 , 830; accord, Sponsler, Jurisdiction over the Corporate Agent: The Fiduciary Shield, 35 Wash & Lee L Rev 349 , 364; McLaughlin, Supplementary Practice Commentaries, McKinney’s Cons Laws of NY, Book 7B, C302:3, 1988 Cum Ann Pocket Part, at 43-47, 49-50).

Nor is the rule desirable as a matter of public policy. Quite the contrary, it has been soundly condemned by writers for unfairly prejudicing plaintiffs who seek relief against defendants conducting affairs in this State (see, e.g., Sponsler, op. cit.; 1 Weinstein-Korn-Miller, op. cit., [[ 302.06a; Koenig, op. cit.; McLaughlin, Supplementary Practice Commentaries, McKinney’s Cons Laws of NY, op. cit.) and the courts which recognize the doctrine have created several exceptions to avoid perceived injustices resulting from its application. For example, courts have refused to apply it where the corporate agent stood to gain personally from activities he conducted on behalf of the corporation or was not faithfully acting in the

Harmony and Downman maintain that the conduct of McFadden Company cannot be attributed to them because there was no agency arrangement between them and McFadden; it did not even know it was representing Harmony. If McFadden Company had marketed the rig with full knowledge that it was acting for Harmony, however, an agency relationship between the two would unquestionably have existed and there is no reason to hold that one did not exist here because Harmony and Downman used Downman’s relationship with McFadden Oil to conceal the truth from the New York entity acting for them.

It is irrelevant, therefore, whether Downman acted on behalf of Harmony or McFadden Oil with respect to plaintiffs transaction. Because we have rejected the fiduciary shield doctrine jurisdiction can be exercised over him for his actions on behalf of either corporation.

Accordingly, the order of the Appellate Division should be reversed, with costs, and the motion to dismiss complaint as against defendants Downman and Harmony Drilling Co., Inc., denied.

Chief Judge Wachtler and Judges Kaye, Alexander and Bellacosa concur; Judges Titone and Hancock, Jr., taking no part.

Order reversed, etc.