Mercator Momentum Fund v. IDI Global

Filed 8/2/07 Mercator Momentum Fund v. IDI Global CA2/2

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION TWO

APPEAL from orders of the Superior Court of Los Angeles County. Richard L. Fruin, Judge. Affirmed.

Sheppard, Mullin, Richter & Hampton, Paul Malingagio and Moe Keshavarzi for Plaintiffs and Appellants.

Call, Jensen & Ferrell, Mark L. Eisenhut and Ward Lott for Defendant and Respondent Kevin Griffith.

Pfeifer & Reynolds, Michael R. Pfeifer and James P. Finerty for Defendant and Respondent John Clayton.

Plaintiffs and appellants Mercator Advisory Group, Mercator Momentum Fund, L.P. and Mercator Momentum Fund III, L.P. (collectively, plaintiffs) appeal from the trial courts orders granting separate motions to quash service of summons for lack of personal jurisdiction filed by defendants and respondents Kevin Griffith (Griffith) and John Clayton (Clayton).

BACKGROUND

A. The Parties

Plaintiffs are California entities with their principal places of business in California. Defendant IDI Global, Inc. (IDI) is a Nevada corporation with its principal place of business in Utah. Griffith is a Utah resident and IDIs chief executive officer. Clayton is a Utah resident and an IDI shareholder. Clayton is also a shareholder of First Equity Holdings, an entity that is not a party to this action. Ascendiant Securities, LLC (Ascendiant) is an investment banking firm that was involved in a financing transaction between plaintiffs and IDI that is the subject of this action.

B. The Lawsuit

Plaintiffs and IDI entered into a securities purchase agreement dated March 1, 2004 (the SPA) that provided for the transfer of $3.5 million from plaintiffs in exchange for certain warrants and promissory notes convertible into IDI common stock. Pursuant to the terms of the SPA, plaintiffs transferred $3.5 million to IDI on March 3, 2004. IDI thereafter sought to unwind the transaction, and on March 5, 2004, returned the $3.5 million to plaintiffs. Plaintiffs commenced this action against IDI on March 12, 2004 for breach of the SPA.

On March 15, 2005, plaintiffs filed a first amended complaint naming Griffith and Clayton as additional defendants, and alleging causes of action for breach of contract against IDI, common law fraud and securities fraud against IDI and Griffith, and intentional and negligent interference with contractual relations and securities fraud against Clayton. Plaintiffs allege in their first amended complaint that in February 2004, when the price of IDIs stock was declining, Clayton and First Equity purchased approximately $100,000 of IDI stock in the open market to inflate the price of the stock, and that Griffith and IDI concealed this information from plaintiffs in order to induce them into entering into the SPA. Plaintiffs further allege that after the SPA was signed, Clayton induced IDI to breach the agreement and threatened to sue IDI and its officers and directors if it did not do so.

C. The Motions to Quash

1. Griffiths Motion

Griffith filed his motion to quash on May 5, 2005. Griffiths motion was supported by his own declaration, in which he states that he has never resided in, or conducted any personal business in California, and that he has traveled to California on only three occasions as an officer of IDI, and solely in connection with efforts to obtain funding for IDI. On the first occasion, he met with Ascendiant to discuss raising funds for IDI. On the second and third occasions, he met with plaintiffs to discuss their proposed investment in IDI. Griffith denies having any knowledge that Clayton or any other person engaged in activity intended to alter the price of IDI stock. He also denies having any knowledge of Claytons past or future plans to buy or sell IDI stock.

In opposition to Griffiths motion, plaintiffs presented evidence that in addition to traveling to California three times between November 2003 and February 2004, Griffith participated in numerous telephone conversations and e-mail exchanges with plaintiffs concerning the SPA. Plaintiffs also provided the deposition testimony of an Ascendiant employee named Bradley John Wilhite, who testified as follows concerning Griffiths alleged concealment of Claytons trading activity: At one point in the middle of February when the stock price of IDI was declining, it reached about $1.25 to $1.30, I recall Kevin Griffith telling me on the phone that they, meaning IDI, John Clayton or some other parties, [had] to go in and buy stock in the open market to try to support the price so that it didnt decline further and that, quote, they had spent $100,000 doing so, that John Clayton and other parties would buy shares from selling shareholders and that those shares would then be remarketed through this investor relations group to new shareholders and this was their mechanism for supporting the stock price.

2. Claytons Motion

Claytons motion to quash was supported by his own declaration stating that he is a resident of and domiciled in the State of Utah; he holds no ownership interest in any real property in the State of California; he has not conducted any business or investment activities of any kind in California; and he has not visited California since 2001 when he attended a conference in the state. Claytons declaration further states that he is not a party to the SPA, and he did not participate in any communications or negotiations concerning the SPA. According to Clayton, he was shown a copy of the SPA in the State of Utah after it had already been executed. At that time, he expressed his opinion as a shareholder of IDI that the transaction was not a good deal for IDI or its shareholders.

Plaintiffs opposed Claytons motion, arguing that Clayton was the most powerful and influential shareholder of IDI who played a major role in the management and operation of the company. Plaintiffs contended that jurisdiction over Clayton was proper because he manipulated the price of IDI stock while the SPA was under negotiation in order to induce plaintiffs to enter into the SPA, and because he subsequently induced IDI to breach the agreement. Plaintiffs provided deposition testimony from Griffith stating that Clayton had objected to the SPA on the ground that it was not in the best interest of IDIs shareholders, and had threatened to sue IDI and its officers and directors for entering into the SPA. Plaintiffs also submitted deposition testimony by Clayton stating that after learning that IDI had entered into the SPA, he told Griffith that the transaction was a bad deal for IDI and its shareholders and that he and other shareholders would sue IDI in order to protect their investment in the company. Clayton also testified in deposition that he never told Griffith to renege on the transaction with plaintiffs.

In response to plaintiffs opposition, Clayton filed a second declaration, in which he denies being a controlling shareholder of IDI, participating in the management or operation of IDI, manipulating the price of IDI stock, or inducing IDI to breach the SPA. Clayton states that his holdings in IDI, together with the holdings of First Equity, have never exceeded more than 4 percent of the outstanding shares of IDI stock at any time. Clayton further states that neither he nor First Equity had ever traded IDI stock with the intent or belief that such trading would artificially affect the price of the stock or affect IDIs performance under the SPA. Attached to Claytons declaration is a compilation of his and First Equitys trading in IDI stock during the years 2003, 2004, and 2005, and monthly reports of all trades of IDI stock as reported by NASDAQ. These compilations and reports show that First Equity purchased 17,900 shares of IDI stock on February 23, 2004, and an additional 11,000 shares on February 27, 2004, for a total cost of $51,700. A total of 1,452,100 shares of IDI stock were traded on the open market during that month. Claytons declaration states that before March 2004, he had no knowledge that IDI or its management was negotiating, or had entered into, the SPA.

At the request of the trial court, the parties submitted supplemental briefing on the issue of Claytons alleged manipulation of IDIs stock price. Plaintiffs provided the declaration of Alexander Aganin, an expert in the field of financial economics. In his declaration, Mr. Aganin states that the number of IDI shares traded by Clayton and First Equity during the months of January and February 2004 accounted for at least 6.25 percent of all shares of IDI stock traded during those months, and that Claytons and First Equitys transactions in IDI stock in late February 2004 do not appear to be inconsistent with Bradley John Wilhites deposition testimony that that IDI, John Clayton or some other parties had made open market purchases of IDI stock in late February 2004 in order to support the price of the stock. Mr. Aganin notes that Clayton or First Equity purchased IDI stock on seven different occasions during the period from June 2, 2003 to March 5, 2004, and that on five of those occasions, IDIs stock price increased the day after the purchase transaction. According to Mr. Aganin, certain of Claytons IDI stock transactions followed peculiar patterns, in which he engaged in round-trip purchase and sale transactions in January and February 2004 involving the same quantity of IDI s stock that resulted in his buying IDI stock at a weighted average price higher than that at which he sold the stock. Mr. Aganin opines that this trading was not inconsistent with someone trading the stock to create the appearance of an active market for the companys shares.

3. The Trial Courts Rulings

After hearing argument from the parties on August 15, 2005, the trial court concluded that plaintiffs failed to establish sufficient facts subjecting Griffith to personal jurisdiction, and granted Griffiths motion to quash.

The trial court took under submission Claytons motion to quash. On November 14, 2005, the trial court issued a written ruling granting the motion. In doing so, the trial court found that Clayton had no knowledge of the March 1, 2004 transaction between IDI and plaintiffs until after the SPA was signed, and that plaintiffs failed to present evidence that Claytons IDI stock transactions were purposefully directed at plaintiffs or other persons interested in investing in IDI.

The trial court found that Clayton owned no more than up to 4 percent of IDIs outstanding shares and that he had never been a director, officer or employee of the company. The trial court also found that Clayton did not communicate with anyone in California and that he had no role in IDIs performance under the SPA, such that his failure to cooperate would prevent IDI from performing the contract. Finally, the trial court found that Clayton did no more than express vigorously to IDIs management his opinion that the SPA was a bad business decision and that he and other shareholders might initiate legal action against IDI as a result of the agreement. Based on these findings, the court concluded that Clayton neither interfered with the SPA nor induced IDI to breach the SPA.

This appeal followed.

DISCUSSION

I. Standard of Review

When a nonresident defendant challenges personal jurisdiction, the burden shifts to the plaintiff to demonstrate, by a preponderance of the evidence, that all necessary jurisdictional criteria have been met. The plaintiff can meet this burden only by the presentation of competent evidence in affidavits or declarations and authenticated documentary evidence. [Citation.] Affidavits or declarations consisting primarily of vague assertions of ultimate fact rather than specific evidentiary facts are not sufficient. [Citation.] Once the plaintiff has met the burden of demonstrating facts justifying the exercise of jurisdiction, the burden shifts to the defendant to demonstrate that the exercise of jurisdiction would be unreasonable. [Citations.] [] Thus, the process is essentially an evidentiary one and the applicable standard of appellate review is the familiar substantial evidence rule. Therefore, if there is conflicting evidence presented by the parties, we are called upon to determine whether the trial courts decision is supported by substantial evidence [citations], and, in doing so, we resolve all conflicts in the relevant evidence against the appellant and in support of the order. [Citation.] If there is no conflict in the relevant evidence, the question is one of law as to which we exercise our independent judgment. [Citation.] (Paneno v. Centres For Academic Programmes Abroad Ltd. (2004) 118 Cal.App.4th 1447, 1454 (Paneno).)

II. Applicable Law

Pursuant to Californias long-arm statute, California courts may exercise jurisdiction on any basis not inconsistent with the California or United States Constitution. (Code Civ. Proc, 410.10.) A state courts assertion of personal jurisdiction over a nonresident defendant who has not been served with process within the state comports with the requirements of the due process clause of the federal Constitution if the defendant has such minimum contacts with the state that the assertion of jurisdiction does not violate traditional notions of fair play and substantial justice. [Citations.] In other words, the exercise of jurisdiction must be reasonable. [Citations.] (Paneno, supra, 118 Cal.App.4th at pp. 1454-1455.)

The substantial connection [citations] between the defendant and the forum State necessary for a finding of minimum contacts must come about by an action of the defendant purposefully directed toward the forum State. [Citations.] [Citation.] A defendants physical presence in the state is not required, as long as his or her efforts were purposefully directed toward residents of that state. [Citations.] Thus, personal jurisdiction may be exercised over a defendant who has caused an effect in the forum state by an act or omission occurring elsewhere. [Citations.] (Taylor-Rush v. Multitech Corp. (1990) 217 Cal.App.3d 103, 112 (Taylor-Rush).)

Corporate officers and directors cannot ordinarily be held personally liable for the acts or obligations of their corporation. However, they may become liable if they directly authorize or actively participate in wrongful or tortious conduct. [Citations.] (Taylor-Rush, supra, 217 Cal.App.3d at p. 113.) Thus, [a]n act taken by a corporate officer may subject the officer to in personam jurisdiction. The act must be one for which the officer would be personally liable and the act must in fact create contact between the officer and the forum state. (For example, no personal contact would result from doing nothing more than ratifying an act taken by the corporation or by another corporate officer.) If both requirements are met, the act may be considered in determining if the contacts between the individual and the state are substantial enough as to permit the state to exercise personal jurisdiction over the individual, or whether the exercise of personal jurisdiction over the defendant offends traditional notions of fair play and substantial justice. That is, the act may be considered in determining whether (1) the defendant has engaged in activity of the requisite quality and nature in the forum state and that the cause of action is sufficiently connected with this activity and (2) whether a balancing of the inconvenience to the defendant in having to defend itself in the forum state against both the interest of the plaintiff in suing locally and the interrelated interest of the state in assuming jurisdiction justifies subjecting the foreign resident to the process of the forums courts. [Citation.] (Seagate Technology v. A.J. Kogyo Co. (1990) 219 Cal.App.3d 696, 703-704 (Seagate).)

III. Griffith

The trial court concluded there was insufficient evidence of minimum contacts between Griffith and the State of California, or of Griffiths fraudulent concealment of material information from plaintiffs, as grounds for exercising personal jurisdiction over him. Substantial evidence supports this conclusion.

A. Insufficient Contacts

Griffiths contacts with California (his travel to the state, and his telephone and e-mail contacts with plaintiffs) were all in his capacity as an officer of IDI, and none of those acts were wrongful or tortious. Because those contacts would not subject Griffith to personal liability, they cannot be considered for purposes of asserting personal jurisdiction over him. (Seagate, supra, 219 Cal.App.3d at pp. 703-704.)

B. Insufficient Evidence of Fraud

Plaintiffs fraud claims are based on a single act by Griffith that could subject him to personal liability -- his alleged concealment of Claytons IDI stock purchases in late February 2004. The evidence of alleged fraud is scant -- Wilhites recollection that as IDIs stock price was declining in mid-February 2004, Griffith told him that IDI, John Clayton or some other parties, [had] to go in and buy stock in the open market to try to support the price so that it didnt decline further and that, quote, they had spent $100,000 doing so. Griffith provided evidence that contradicts Wilhites testimony. Griffiths own declaration states that he had no knowledge of Claytons plans for buying or selling IDI stock, and that he was unaware of any trading activity designed to alter IDIs stock price. Clayton also submitted a declaration, in which he states that prior to March 2004, he had no knowledge that IDI was negotiating the SPA with plaintiffs, and that neither he nor First Equity ever traded in IDI stock with the intent or belief that such trading would affect IDIs stock price or its performance under the SPA. We resolve this conflict in the evidence in favor of the trial courts order. (Paneno, supra, 118 Cal.App.4th at p. 1454.) Plaintiffs did not meet their burden of establishing fraudulent concealment by Griffith as the basis for exercising personal jurisdiction over him.

C. Forum Selection Clause

Plaintiffs argue that a forum selection clause in the SPA subjects Griffith to jurisdiction in California, even though Griffith is not a party to that agreement.[1] They cite Lu v. Dryclean-U.S.A. of California, Inc. (1992) 11 Cal.App.4th 1490 as authority for their argument that a forum selection clause can be binding on persons who are not parties to the agreement if those persons are alleged to have participated in fraudulent representations that induced plaintiffs to enter into the agreement. Lu does not support this argument. The issue presented in Lu was whether the defendants, who were not signatories to the agreement at issue in that case, could enforce the agreements forum selection clause against the plaintiffs, who were signatories to the agreement but who were seeking to avoid application of that clause. The forum selection clause in the SPA does not apply to a nonsignatory such as Griffith.

IV. Clayton

Plaintiffs failed to meet their burden of establishing a substantial connection between Clayton and the State of California as the basis for asserting personal jurisdiction over him.

A. Forum Selection Clause

Plaintiffs argue that Clayton is bound by the forum selection clause of the SPA, despite the fact that he is not a signatory to that agreement. For reasons discussed, the forum selection clause does not apply to Clayton.

B. Alleged Securities Fraud

Substantial evidence supports the trial courts determination that plaintiffs failed to establish fraudulent securities transactions by Clayton as a basis for subjecting him to California jurisdiction. Clayton had no knowledge of plaintiffs negotiations with IDI until after the SPA was signed in March 2004. His February 2004 stock transactions therefore could not have been purposefully directed at plaintiffs for the purpose of inducing them to enter into the SPA. Moreover, plaintiffs failed to show how First Equitys purchases of IDI stock in February 2004 totaling $51,700, and comprising only two percent of the total volume of IDI shares traded on the open market during that month, could reasonably have been expected to affect IDIs stock price at the time.

Plaintiffs also failed to establish that Claytons IDI stock transactions constituted securities fraud and that those transactions were purposefully directed at other potential California investors. The purported evidence of securities fraud Claytons or First Equitys purchases of IDI stock when IDIs stock price was rising; IDI stock transactions in early 2004 when Clayton was selling high and buying low, and the fact that Claytons transactions in IDI stock involved purchases and sales of the same number of shares does not establish an intent to manipulate IDIs stock price. (Taylor-Rush, supra, 217 Cal.App.3d at p. 114 [bland allegation of personal liability, without a prima facie showing of its existence is insufficient to establish personal jurisdiction].) Clayton denied engaging in transactions intended to manipulate the price of IDIs stock or IDIs performance under the SPA. The record of Claytons and First Equitys transactions in IDI stock submitted in support of Claytons motion to quash discloses no fraudulent activity. Substantial evidence supports the trial courts determination that Claytons out-of-state stock transactions were not a basis for establishing personal jurisdiction over him.

C. Alleged Interference with the SPA

Substantial evidence also supports the trial courts determination that Clayton did not interfere with plaintiffs contractual rights under the SPA. Clayton was not an officer, director, or employee of IDI, but a shareholder who owned no more than 4 percent of IDIs outstanding shares. He never directed or suggested that IDI breach the SPA. After he learned that IDI had entered into the SPA, Clayton did no more than express his opinion that IDIs transaction with plaintiffs was a bad business decision, and that he and other shareholders might file a lawsuit against IDI in order to protect their investment in the company. Such conduct does not constitute tortious interference with plaintiffs contractual rights and should not subject Clayton to the jurisdiction of California courts.

Abbott Power Corp. v. Overhead Electric Co. (1976) 60 Cal.App.3d 272, on which plaintiffs rely in support of their contractual interference claim, is distinguishable. In that case, the plaintiff, a California-based manufacturer, entered into a contract to supply electrical switching equipment to another California-based company that was the prime contractor on a government project in New Mexico. The defendant was a New Mexico consulting firm that had no contractual relationship with either the plaintiff or the prime contractor, but had been retained by the United States government to review and approve engineering documents for the project. When the prime contractor forwarded the plaintiffs engineering drawings to the defendant for approval, the defendant wrote a letter to the prime contractor refusing to process those drawings until it received assurances from the plaintiff that plaintiff would comply with the job specifications. The prime contractor forwarded the letter to the plaintiff, who responded by providing the necessary assurances. Thereafter, the defendant wrote two additional letters to the prime contractor stating that before work could progress, certain test results on the plaintiffs equipment had to be provided. In the ensuing action against defendant for intentionally interfering with plaintiffs contractual relationship with the prime contractor, the court concluded that the defendants three letters sent to the prime contractor in California were significant acts that supported the exercise of California jurisdiction. (Id. at p. 279.) In response to the defendants argument that its actions with regard to plaintiffs drawings took place solely within the State of New Mexico, the trial court noted that the defendants action or inaction resulted in an intentional interference in California with the plaintiffs contractual relationship with the prime contractor. (Ibid.) Here, in contrast, Clayton had no communications with anyone in California. Moreover, Clayton, unlike the defendant in Abbott Power, had no role in IDIs performance of the SPA, and no right to approve IDIs performance. Claytons objections to the SPA would not have prevented IDI from performing the contract. Abbott Power is thus inapposite.

We share the concerns expressed by the trial court below that subjecting an out-of-state shareholder such as Griffith to California jurisdiction for merely voicing his objection to managements decision to enter into a business transaction and stating his intention to sue management because of that transaction would stretch the reach of California courts to the ends of the earth. The trial court did not err by granting Claytons motion to quash.

DISPOSITION

The orders granting the motions to quash are affirmed. Griffith and Clayton shall recover their costs on appeal.

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS.

____________________, J.

CHAVEZ

We concur:

_______________________, P. J.

BOREN

_______________________, J.

ASHMANN-GERST

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[1] The forum selection clause states in part: Each of the parties irrevocably consents to the jurisdiction of the United States federal courts and the state courts located in the State of California in any suit or proceeding based on or arising under this Agreement and irrevocably agrees that all claims in respect of such suit or proceeding may be determined in such courts.