Jurisdictional Piercing

Jurisdictional Piercing

      In a case from last year, a federal district court in California applied the law of “jurisdictional piercing” in order to find that it had personal jurisdiction over an individual. Platypus Wear, Inc. v. Bad Boy Europe Ltd., Case No. 16-CV-02751-BAS-DHB, 2018 WL 3706876 (S.D. Ca. Aug. 2, 2018).

      Platypus Wear and Deep Blue Sports entered into a license agreement. That agreement included provisions calling for the application of California law and agreeing that the parties consented to jurisdiction of the courts in San Diego County in California. In 2013, that agreement was assigned to Bad Boy Europe. In 2013 an audit was performed, which purported to show that Platypus Wear was owed in excess of $300,000 by Bad Boy Europe and Deep Blue Sports exceeding $300,000. In 2015, the agreement was renegotiated by Paul Gardner, until then a director and officer of Bad Boy. After Gardner’s resignation, Platypus Wear became aware that Bad Boy was in dire financial condition. When suit was ultimately brought in San Diego, Gardner asserted that the court lacked personal jurisdiction over him.

      Applying a long-arm analysis, the court found that it had personal jurisdiction over Gardner based upon his contacts with California.

      The court then turned its attention to the “fiduciary shield doctrine,” which generally provides that “a person’s mere association with the corporation that causes injury in the form state is not sufficient in itself to permit that form to assert jurisdiction over the person.” 2018 WL 3706876, * 7, quoting Davis v. Metro Prods, Inc., 885F. 2d 515, 520 (9^th Cir. 1989). Because of that limitation, the court undertook an analysis of whether Gardner was the alter ego of either of the subject business corporations, thereby justifying piercing the veil and thereby holding him subject to personal jurisdiction in California. Holding that the plaintiff need only make a prima facia showing of alter ego in order to justify jurisdictional piercing, the court wrote:

Plaintiff makes a prima facie showing that there is a unity of interest between Gardner, Deep Blue Sports, and BBE sufficient for alter ego liability. Plaintiff alleges that Gardner was the sole owner, stockholder, and managing director of both Deep Blue Sports and BBE. In addition, the two companies share the same office and employees, operate the same type of business, and Gardner freely transferred assets between them. Plaintiff also alleges that BBE sold products on a website registered to Deep Blue Sports and Gardner. Finally, Plaintiff alleged that Deep Blue Sports and BBE failed to observe corporate formalities, that BBE was so undercapitalized that it was illusory, and that BBE was a mere shell company without capital, assets, or stock, and was used a device to avoid liability. The Court finds that these allegations demonstrate a unity of interest between Gardner, Deep Blue Sports, and BBE. See Flynn, 734 F.2d at 1393. Thus, Plaintiff establishes a prima facie showing that separate personalities of the companies and Gardner do not exist, and rather they are alter egos. Plaintiff also makes a prima facie showing that failure to find alter ego liability would result in injustice. Because Plaintiff alleges that Gardner engaged in asset stripping and using BBE as a device to avoid liability, failure to find alter ego would allow Gardner to succeed in his alleged fraudulent scheme to avoid liability. Gardner allegedly placed BBE’s assets in Deep Blue Sports’s name, and simultaneously negotiated with Plaintiff to release Deep Blue Sports from liability for its past debts without disclosing the asset transfer to Plaintiff. Plaintiff remained under the impression that BBE was adequately capitalized to operate as a business and maintain a prosperous relationship. Based on these allegations, Gardner may be liable for Deep Blue Sports and BBE’s contract breach and subsequent debts, especially if he caused BBE’s insolvency to the detriment of its creditors, like Plaintiff. If the allegations against Gardner, Deep Blue Sports, and BBE prove to be true, then adhering to the fiction of their separate existence would permit an abuse of corporate privilege. As suggested by Plaintiff, it would be inequitable for Gardner to escape liability to Plaintiff by virtue of his fraudulent scheme. And though Gardner contests Plaintiff’s claims of fraud and asset stripping, for jurisdiction, “the plaintiff need only demonstrate facts that if true would support jurisdiction over the defendant.” Unocal, 248 F.3d at 922.

      Speaking for myself, and this is a topic on which I need to do some more research and an expanded discussion, decisions such as this are analytically flawed in that this is a misapplication of piercing law. Piercing is not a cause of action, but is rather a remedy by which individual owners of the business venture may be held personally liable on the venture’s debts. Because piercing sets aside the statutory rule of limited liability, high thresholds are required for its application. When courts use piercing in order to exercise personal jurisdiction over the constituents of the business, they are applying a post-judgment remedy as substantive law. In addition, they are doing so without a developed factual record, but based only upon the assertions of the plaintiff. If it is ultimately determined that a defendant is both liable and is unable to satisfy the judgment, there then may be a post-trial determination as to whether or not piercing is appropriate. It should not happen, however, at the beginning of a proceeding.