When you transact business with an out-of-state company, a dispute may arise that requires filing a lawsuit against the out-of-state company and the individuals involved in the business. If the company transacted business in California, the lawsuit could be filed in California. Or, the lawsuit could be filed where the out-of-state company resides. Solely for convenience, it is advantageous to bring the lawsuit in California.
While the out-of-state company would be subject to the jurisdiction of the courts of California, the issue of whether the individuals involved in the out-of-state company would be subject to personal jurisdiction in California is not as clear.
Non-Resident LLC Members May be Subject to Personal Jurisdiction in California
The United States District Court, Northern District of California, recently answered the question of whether non-resident members in an out-of-state limited liability company, which entered into a partnership with a California company, may be subject to jurisdiction in California, even though they did not live in California.
In Poga Mgmt Ptnrs LLC v. Medfiler LLC, the court answered, yes. In this case, Poga MGMT Partners, LLC, a California company, entered into a partnership with Medfiler, LLC, a New York company, and its two members. The members of Medfiler lived in New York and never lived in California. The partnership formed a new company called “401k Retirement Solutions, LLC,” which they created to open an “architecture platform service that offered bundled services to clients to service their 401k accounts.” Medfiler and its members were required to make quarterly distributions of income to Poga. During the course of the partnership, the parties communicated and conducted most of their business by telephone and e-mail.
At some point, the relationship soured, and Poga claimed Medfiler and its members were siphoning off clients and not paying all the distributions. Poga filed a lawsuit in California against Medfiler and its members alleging breach of fiduciary duty and conspiracy to commit breach of fiduciary duty. Medfiler and its members filed a motion to dismiss for lack of personal jurisdiction. The court denied the motion with respect to Medfiler, but held the complaint failed to allege facts demonstrating personal jurisdiction for the LLC’s members. Poga filed an amended complaint, and the members again moved to dismiss for lack of personal jurisdiction.
Fiduciary Shield Doctrine Does Not Insulate Members from Personal Jurisdiction
Personal jurisdiction over a nonresident defendant is analyzed under a two-part test: One, jurisdiction must satisfy the requirements of the applicable state long-arm statute. And two, due process requires that a defendant have sufficient “minimum contacts” with the forum state.
On analysis of whether there were sufficient contacts, the court discussed that personal jurisdiction over a company does not necessarily mean its agents, officers, directors, or employees are also subject to personal jurisdiction. The court stated that, “the fiduciary shield doctrine provides that ‘a person’s mere association with a corporation that causes injury in the forum state is not sufficient in itself to permit that forum to assert jurisdiction over that person. Rather, there must be a reason for the court to disregard the corporate form.'”
Analyzing the individual members’ contacts with California, the court stated that the plaintiff “alleged sufficient facts to establish personal jurisdiction over the individual defendants.” The court looked at the members’ roles in the partnership:
[T]hey were the primary participants and central figures in creating the competing business platform; they directed and authorized the use of 401k Retirement Solutions’ funds for creating the competing platform; they directed 401k Retirement Solutions employees to administer the competing platform; they directed RPG to create an identical software platform to administer 401k Retirement Solutions’ clients through RPG; and they negotiated contracts with the software creator.
Allen Barron Corporate Law Attorneys
The Poga Mgmt Ptnrs LLC case is helpful because it explains under what circumstances non-resident individuals may be subject to personal jurisdiction in California. While it may be simple to establish jurisdiction over the company, the same does not hold true for the individuals involved. While your company may not consider this when deciding to transact business with an out-of-state company, the issue can be paramount if a dispute arises that requires litigation.
Our experienced corporate law attorneys can help advise your business on the ramifications and potential issues if you decide to transact business with out-of-state or international companies.
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