Bankruptcy lawyers are sometimes asked how a business or individual can be required to defend a lawsuit in Delaware. Typically, this issue arises when a debtor commences an adversary action, such as filing a preference complaint, and sues a defendant who has no ties to Delaware. “How can they do this?” is a common question. Judge Walrath recently issued a decision in the Uni-Marts bankruptcy that addresses this question – the scope of personal jurisdiction under the Bankruptcy Code. This post looks at the opinion in Uni-Marts and the basis by which bankruptcy courts extend jurisdiction.
Uni-Marts operates company-owned, franchise operated stores throughout the northeast. Charan Trading Company and Varni LLC (“Plaintiffs”) purchased a store from Uni-Marts in 2005, however, by 2008 Plaintiffs filed an adversary action in Uni-Marts’ bankruptcy proceeding seeking to rescind the contract and recover damages. Plaintiffs’ sued Uni-Marts, as well as its president, Henry Sahakian, alleging Sahakian induced Plaintiffs to purchase the Uni-Marts store in Wilkes-Barre, Pennsylvania through fraud or negligent misrepresentation.
Sahakian sought to dismiss the adversary proceeding under Fed.R.Civ.P. 12(b)(2) & (6), made applicable under Bankruptcy Court Rule 7012(b). Sahakian argued that the Bankruptcy Court lacked personal jurisdiction over him.
Bankruptcy Rule 7004(f) addresses the personal jurisdiction of bankruptcy courts. The Rule provides in pertinent part that “serving a summons … is effective to establish personal jurisdiction over the person of any defendant with respect to a case under the Code or a civil proceeding arising under the Code, or arising in or related to a case under the Code.” Federal Rule of Civil Procedure 4(k)(1)(A) limits personal jurisdiction over non-resident defendants to a court of general jurisdiction in the forum state. Even so, Fed.R.Civ.P. 4(k)(1)(C) broadens personal jurisdiction of the courts where service of process is “authorized by federal statute.” The Court therefore began its analysis in Uni-Marts by stating that Bankruptcy Rule 7004(d), in allowing nationwide service of process, is the type of “federal statute” that creates an exception to Rule 4(k)(1)(C).
The Court cited the Third Circuit’s decision in Max Daetwyler Corp. v. Meyer, for its holding that to impose personal jurisdiction of the federal courts requires that minimum contacts exist between the non-resident defendant and the forum which the court exercising jurisdiction sits. 762 F.2d 290, 293 (3d Cir. 1985)(citing International Shoe Co. v. Washington, 326 U.S. 310, 316 (1945). However, the Court further reasoned that the minimum contacts in bankruptcy proceedings are expanded to a “national contacts” standard, not “Delaware contacts,” when determining whether the bankruptcy court has jurisdiction. Thus, in bankruptcy proceedings, the applicable forum is the United States, not the state in which the debtor filed.
Even though a “national contacts” standard is applied, courts must still determine whether the defendant directed his activities to residents of the forum. Further, such activities must be sufficient to support jurisdiction in any litigation for injuries arising from those activities. Burger King Corp. v. Rudzewicz, 471 U.S. 462, 472 (1985). The Court in Uni-Marts also relied on Burger King for its holding that a defendant’s lack of physical contacts with a jurisdiction does not defeat personal jurisdiction.
Given that the jurisdictional issues in Uni-Marts were raised in a motion to dismiss, the Court construed facts alleged in the Plaintiff’s complaint as true. Because Plaintiffs did not make any allegations regarding Sahakian’s residence or domicile, the Court treated him as a non-resident of the forum. Even so, the Court noted that Plaintiffs alleged Sahakian purposely directed his activities at the Plaintiffs and that the current suit brought by the Plaintiffs arose out of or related to Sahakian’s activities (his activities being that he provided documents containing false or misleading sales documents). Based on these allegations, the Court found that “even if Sahakian was directing this activity from outside the United States, the Plaintiff’s allege that he directed tortuous activities at the Plaintiff inside the United States.” Taking the Plaintiff’s allegations as true, the Court found that minimum contacts existed.
The Court concludes its analysis by looking at whether extending jurisdiction comports with “traditional notions of fair play and substantial justice.” Once a plaintiff makes its case regarding minimum contacts, the burden shifts to the defendant to show that jurisdiction would be unreasonable. Sahakian argued that he would be unreasonably burdened by having to defend the adversary proceeding in Delaware. However, the Court found that the issue is not whether it is burdensome to litigate in Delaware, but instead whether it is burdensome to litigate within the United States. In the end, the Court found that Defendant failed to carry his burden of showing that jurisdiction over him offended “fair play and substantial justice.” See Imo Indus., Inc., v. Kiekert AG, 155 F.3d 254, 259 (3rd Cir. 1998).