Phillips Exeter v. Howard Phillips CV-98-277-B 01/11/99

UNITED STATE DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE

Phillips Exeter Academy

v. Civil No. 98-277-B

Howard Phillips Fund, Inc.

MEMORANDUM AND ORDER

Phillips Exeter Academy filed this action in New Hampshire

Federal District Court claiming, among other things, that

defendants. The Howard Phillips Fund, Inc. and Dr. Phillips,

Inc., breached contractual and fiduciary duties they owed to

Exeter. Defendants have moved to dismiss the action for lack of

personal jurisdiction. For the reasons noted below, I grant

defendants' motion to dismiss.

I. BACKGROUND

Howard Phillips, an Exeter alumnus, died in Florida in 1979.

Phillips was domiciled within the state when his will was drafted and probated there. Exeter's claims arise from the defendants'

obligations under the will.

When Phillips died, he held a power of appointment over 100

of the capital stock of Dr. Phillips, Inc. ("the Company"), a

Florida corporation engaged in the business of developing and

leasing commercial and industrial properties. Phillips

begueathed his stock in the Company to one of three private

charitable foundations. Phillips' will specified that whichever

foundation accepted the stock must pay Exeter: (1) five percent

of the Company's annual income over a 20-year period; (2) five

percent of the proceeds from any sales of the Company's stock

during this period; and (3) five percent of the foundation's own

income during the twenty-year period.

One of the foundations, then known as the Della Philips

Foundation, accepted Phillips' stock in the Company and agreed t

abide by the conditions governing his beguest. The Internal

Revenue Code, however, imposes substantial tax penalties on

private foundations that hold more than 20 percent of the stock

in a business corporation for more than five years. To avoid

these penalties while retaining control over the stock, the Dell Phillips Foundation converted itself into a "support

organization," which is exempt from these tax penalties. The

Fund also changed its name to the Howard Phillips Fund, Inc.

("the Fund"). The Fund is organized as a Florida not-for-profit

corporation.

Pursuant to a condition in Phillips' will, Exeter has been

represented on the board of directors of the Fund since 1983 by

John Emery, an Exeter alumnus. Emery is an attorney who lives

and works in New York. Shortly after Emery's appointment, H.E.

Johnson, president of both the Fund and the Company, corresponded

with Emery by mail in an attempt to settle the Fund's future

fiduciary obligation to Exeter with a one-time lump-sum payment.

This correspondence was directed to Emery's office in New York.

Other settlement correspondence was directed to Exeter's

principal, Steven Kurtz, at his New Hampshire office. Emery and

Kurtz rejected these offers as being inconsistent with the

provisions of the will.

From 1985 to 1992, the Fund paid Exeter five percent of the

Company's annual dividends. Thereafter, in November 1992, James

Hinson, who succeeded Johnson as president of both the Fund and

the Company, visited Exeter in November 1992 as an agent of the

Fund to again propose a settlement of Exeter's remaining interests under the will. The Fund mailed a further settlement

proposal to Exeter in August 1993, at which time Exeter rejected

the proposal. The Fund continued to make payments to Exeter

through 1997 from annual distributions of the Company's dividend

payments to the Fund.

The Company reorganized in 1997. A new not-for-profit

corporation was formed under the laws of Delaware and the Company

then merged into the new Delaware corporation, with the new

corporation maintaining the Company's name of Dr. Phillips, Inc.

As part of this reorganization, the Fund exchanged its stock in

the Company for a membership interest in the newly reorganized

company. Exeter was notified of the reorganization by mail in

May 1997. After the reorganization, the Company continued to

maintain its principal place of business in Florida.

During the relevant time period, defendants have neither

maintained an office in New Hampshire nor transacted business

here. Neither defendant has owned or leased any real property or

personal property in New Hampshire, nor do they hold any bank

accounts, securities, or other assets in the state. Defendants

do not advertise or solicit business in New Hampshire. Further,

except for the contacts discussed above, no officer, agent,

representative, or employee of either the Fund or the Company transacted any business in the state.

II. DISCUSSION

Exeter alleges that the Fund has breached the contractual

and fiduciary duties it owes Exeter by: (1) paying to Exeter

five percent of the annual dividends declared by the Company,

rather than five percent of the Company's total annual income;

(2) refusing to sell the Company's stock within five years of

Howard Phillips' death; and (3) not paying Exeter five percent of

the value of the Company's stock when the Company converted to a

not-for-profit Delaware corporation in 1997. Exeter also alleges

that the Company was aware of and participated in these breaches

of fiduciary duty. Defendants respond by arguing that this Court

does not have personal jurisdiction over either the Company or

the Fund.

A. Standard of Review

When personal jurisdiction over a defendant is contested,

the plaintiff bears the burden of showing that such jurisdiction

exists. See Sawtelle v. Farrell,

(1st Cir.

1995). To carry its burden of proof when there has been no

evidentiary hearing, a plaintiff must make a prima facie showing

by submitting evidence that, if credited, is enough to support findings of all facts essential to personal jurisdiction. See

Bolt v. Gar-Tec Prods., Inc.,

(1st Cir. 1992).

A plaintiff resisting a motion to dismiss for lack of personal

jurisdiction "ordinarily cannot rest upon the pleadings, but is

obliged to adduce evidence of specific facts," and the court

"must accept the plaintiff's (properly documented) evidentiary

proffers as true" in making its ruling as a matter of law.

Foster-Miller, Inc. v. Babcock &Wilcox Canada,

, 145-

47 (1st Cir. 1995); United Elec. Workers v. 163 Pleasant St.

Corp.,

(1st Cir. 1993). Disputed allegations of

jurisdictional fact are construed in the light most favorable to

the plaintiff.1 See Ticketmaster-New York, Inc. v. Alioto, 26

F .3d 201, 203 (1st Cir. 1994).

B. Application

A court may assert personal jurisdiction over a non-resident

defendant in a diversity of citizenship case only if the

plaintiff establishes both that: (1) the forum state's long-arm

statute confers jurisdiction over the defendant; and (2) the

1 An evidentiary hearing is necessary only if the court determines that it would be unfair to the defendant to resolve the issue without reguiring more of the plaintiff than a prima facie showing of jurisdiction. See Foster-Miller,

. Here, fairness does not reguire an evidentiary hearing. Therefore, I apply the prima facie standard.

-6- defendant has sufficient "minimum contacts" with the forum state

to ensure that the court's exercise of jurisdiction comports with

the requirements of constitutional due process. See Sawtelle,

; Kowalski v. Doherty, Wallace, Pillsburv & Murphy,

Attorneys at Law,

(1st Cir. 1986). Because I

conclude that defendants have not had sufficient contacts with

the state of New Hampshire to satisfy due process requirements, I

need not consider whether New Hampshire's lonq-arm statute

confers jurisdiction over the defendants.

The Fourteenth Amendment's Due Process Clause limits a

state's power to assert personal jurisdiction over non-resident

defendants. See Helicopteros Nacionales de Columbia, S.A. v.

Hall,

(1984) (citinq Pennover v. Neff,

(1877)). For the court to properly assert personal

jurisdiction over such a defendant, the defendant must have had

"certain minimum contacts with [the forum] such that the

maintenance of the suit does not offend 'traditional notions of

fair play and substantial justice.'" Id. at 414 (quotinq

International Shoe Co. v. Washington,

(1945)).

To satisfy this minimum contacts requirement, the defendant's

conduct must bear such a "substantial connection with the forum

[state]" that the defendant "should reasonably anticipate beinq haled into court there." Burger King Corp. v. Rudzewicz,

(1985) (internal quotations omitted).

"The extent of the required jurisdictional showinq by a

plaintiff depends upon whether the litigant is asserting

jurisdiction over a defendant under a theory of ’ 'general' or

'specific' jurisdiction." Sawtelle,

n.3.

General jurisdiction enables the court to hear cases both related

and unrelated to the defendant's contacts with the forum state,

but requires the plaintiff to show that the defendant has

maintained "substantial" or "continuous and systematic activity,

unrelated to the suit, in the forum state." United Elec. Workers

v. 163 Pleasant St., 960 F.2d at 1080, 1088 (1st Cir. 1992).

Specific jurisdiction enables the court to hear only cases

arising out of the defendant's contacts with the forum state.

See Massachusetts School of Law at Andover, Inc. v. American Bar

Ass'n ,

(1st Cir. 1998) ("Specific jurisdiction

exists when there is a demonstrable nexus between a plaintiff's

claims and a defendant's forum-based activities[.]"); see also

Helicopteros,

; United Elec. Workers, 960 F.2d

at 10 8 9.

Exeter does not state whether it is asserting general or

specific jurisdiction. Because I find that Exeter has failed to identify sufficient jurisdictional facts establishing contacts

with the forum state of a "substantial" or "continuous and

systematic" nature to bring defendants before this court under a

theory of general jurisdiction, I look to see if plaintiff's

stated facts are sufficient to support a showing of specific

jurisdiction. See United Elec. Workers, 960 F.2d at 1088.

The First Circuit applies a tripartite test to determine

whether a court's exercise of specific personal jurisdiction over

a defendant survives constitutional scrutiny:

First, the claim underlying the litigation must directly arise out of, or relate to, the defendant's in-state activities. Second, the defendant's in-state contacts must represent a purposeful availment of the privilege of conducting activities in the forum state, thereby invoking the benefits and protections of that state's laws and making the defendant's involuntary presence before the state's courts foreseeable. Third, the exercise of jurisdiction must, in light of the Gestalt factors, be reasonable.

Id. at 1089. I focus my analysis on the relatednesscomponent of

this test.

The relatedness component of the specific jurisdiction test

ensures that a defendant with only limited contacts with a forum

state will not be subject to suit in the state's courts without

"fair warning that a particular activity may subject [the

defendant] to the jurisdiction of a foreign sovereign . . . ."

-9- Burger King,

(quoting Shaffer v. Heitner,

(1977) (Stevens, J., concurring in the judgment).

The relatedness requirement serves this purpose by requiring the

existence of a nexus between a defendant's contacts with the

forum and the plaintiff's cause of action. See Ticketmaster, 26

F.3d at 206-07.

The First Circuit has used slightly different language to

describe the relatedness requirement depending upon whether the

plaintiff's claims sound in contract or tort. With respect to

contract claims, the court must determine whether the defendant's

forum state activities were "instrumental in the formation of the

contract."2 Massachusetts School of Law,

(quoting

Hahn v. Vermont Law Sch.,

(1st Cir. 1983) . With

respect to tort claims, the defendant's forum state contacts

ordinarily must be both a "cause in fact" (injury would not have

occurred but for the defendant's forum state activities) and a

legal cause (the defendant's forum state activities were a

proximate cause of the plaintiff's injury). See Massachusetts

School of Law,

. One circumstance where the court

2 Although the First Circuit has not expressly so held, I assume for purposes of analysis that the relatedness requirement in contract cases also can be satisfied if the defendant's forum state contacts were instrumental in the breach of a contract formed in another jurisdiction.

-10- will not require proof of legal causation is if a defendant has

"directly target[ed] residents [of the forum state] in an on­

going effort to further a business relationship." Nowak v. Tak

How Investments, Ltd.,

(1st Cir. 1996), cert.

denied, 117 S. C t . 1333 (1997). In such circumstances, evidence

that the defendant's activities were a cause in fact of the

plaintiff's injuries may be sufficient. See

I apply these

standards in determining whether defendants' forum state

activities satisfy the relatedness component of the specific

jurisdiction test.

Exeter alleges in essence that it is the third party

beneficiary to a contract between Phillips and the Fund that was

formed when the Fund accepted Phillips' bequest of the Company's

stock. The Fund allegedly violated this contract first by

failing to fulfill its obligation to pay Exeter five percent of

the Company's income and later by failing to pay it five percent

of the value of the Company's stock when the Company was

converted from a business corporation into a not-for-profit

corporation. Accepting Exeter's properly supported allegations

as true, the contract on which its claim is based was formed in

Florida when the Fund agreed to accept the conditions Phillips

imposed on his bequest of the Company's stock. Further, the

-11- conduct giving rise to Exeter's breach of contract claim - the

Fund's alleged failure to pay Exeter five percent of the

Company's income and five percent of the value of the Company's

stock - also occurred in Florida where both the Fund and the

Company are based. The only New Hampshire contacts Exeter has

cited to support its claims are that funds were mailed to Exeter

in the state, and that some settlement discussions occurred here.

These contacts are not sufficiently tied to Exeter's cause of

action to support its personal jurisdiction claim. See

Massachusetts School of Law,

(in forum effects of

extra-forum activities will not satisfy relatedness reguest).

Exeter's tort claims fare no better. Its primary claim is

that the Fund breached the fiduciary duty that it owed Exeter

when it failed to pay it five percent of the Company's income and

five percent of the Company's stock. Exeter similarly alleges

that the Company also is liable because it knowingly retained

money that the Fund owed to Exeter. Exeter cannot credibly

claim, however, either that the delivery of inadeguate checks to

Exeter in New Hampshire or that the initiation of settlement

efforts with Exeter in New Hampshire were a proximate cause of

Exeter's injuries. Nor is this a case where defendants can be

said to have targeted Exeter in an on-going effort to further a

-12- relationship with the school. To the contrary, most of

defendants' forum state contacts with Exeter were intended to

terminate rather than promote their relationships with Exeter.

Accordingly, Exeter has not demonstrated that a sufficient nexus

exists between the defendants' forum state activities and its

causes of action to satisfy the relatedness requirement of the

specific personal jurisdiction test.

III. CONCLUSION

For the reasons discussed above, I hold that this Court

cannot exercise personal jurisdiction over defendants as Exeter

has not shown that defendants' forum-based activities satisfy due

process requirements. Therefore, I grant defendants' motion to

dismiss for lack of personal jurisdiction (document no. 11).

Defendants' motion to dismiss or transfer for improper venue

(document no. 12) is dismissed as moot.

SO ORDERED.

Paul Barbadoro Chief Judge January , 1999 cc: Harvey Wolkoff, Esq. Jack B. Middleton, Esq. Richard Couser, Esq. Gregory Presnell, Esq.

-13-