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LEDUC v. KENTUCKY CENT. LIFE INS. CO.

August 31, 1992

THOMAS LeDUC AND TOM LeDUC AGENCY, Plaintiffs,
v.
KENTUCKY CENTRAL LIFE INSURANCE COMPANY, et al., Defendants. STEVEN TARNOFSKY AND STEVEN TARNOFSKY INSURANCE SERVICES, INC. Plaintiffs, vs. KENTUCKY CENTRAL LIFE INSURANCE COMPANY, et al., Defendants.



The opinion of the court was delivered by: ROBERT F. PECKHAM

 INTRODUCTION

 These actions have been related before this court because they involve the same parties and substantially the same set of facts. The following motions to dismiss and strike by Kentucky Central Life Insurance Company ("Kentucky Central") and certain directors and officers of Kentucky Central ("Individual Defendants") are before the court: (1) Kentucky Central's motion to strike portions of the first amended complaint in the LeDuc action; (2) Kentucky Central's motion to strike portions of the complaint in the Tarnofsky action; (3) Individual Defendants motion to dismiss LeDuc first amended complaint for lack of personal jurisdiction; (4) Individual defendants motion to dismiss Tarnofsky complaint for lack of personal jurisdiction; (5) Kentucky Central's motion to dismiss certain claims in LeDuc first amended complaint under Rule 12(b)(6) and (6) Kentucky Central's motion to dismiss certain claims in Tarnofsky complaint under Rule 12(b)(6).

 BACKGROUND

 Plaintiffs Thomas LeDuc, the Tom LeDuc Agency, Steven Tarnofsky and Steven Tarnofsky Insurance Services, Inc. were agents of Kentucky Central who solicited and sold life insurance policies for Kentucky Central. Plaintiffs Tarnofsky and LeDuc claim that during the latter part of the 1980's, Kentucky Central and certain of its officers and directors engaged in fraudulent investment practices which they concealed from their agents, LeDuc and Tarnofsky. They claim that Kentucky Central failed to disclose the financial instability of the company and the improper lending practices in order to sell more life insurance and annuity investments at higher premiums.

 In addition, Plaintiffs claim that Kentucky Central and its officers and directors perpetuated their scheme to defraud by attempting to silence Kentucky Central agents, competitors and others from disclosing the facts relating to the fraudulent lending practices and policies and deteriorating financial condition. This attempted silencing and fraudulent misrepresentation of the financial condition of the company was allegedly accomplished through various letters mailed to the agents and customers in which Kentucky Central downplayed its recent financial difficulties and suggested that certain of its agents were improperly casting doubts regarding the financial security of the insurance company.

 LeDuc and Tarnofsky claim that they were forced to resign as representatives of Kentucky Central as a result of these improper activities by Kentucky Central and its directors and officers. LeDuc and Tarnofsky further claim that Kentucky Central owes them for outstanding commissions.

 Plaintiffs' actions assert claims for RICO violations, libel, breach of contract, bad faith interference with prospective economic advantage, fraud, negligent misrepresentation, California Business and Professions Code violations, declaratory relief, and intentional infliction of emotional distress. In general the complaints asserts that: (1) Kentucky Central misrepresented its financial condition to induce the public to purchase its products and, in the process, damaged Plaintiffs; (2) Kentucky Central made libelous statements regarding Plaintiffs; and (3) Kentucky Central breached employment or business contracts with Plaintiffs. The LeDuc and Tarnofsky complaints are based upon the same general factual allegations and assert nearly identical claims. The LeDuc action asserts two claims which are not asserted in Tarnofsky but neither of those claims is at issue in these motions.

 Kentucky Central claims that these two RICO actions are a defensive reaction to state court litigation which Kentucky Central initiated against former Kentucky Central agents, including Tarnofsky and LeDuc, for their alleged participation in a campaign of misrepresentation regarding the financial condition of Kentucky Central to induce Kentucky Central policyholders to replace their policies with policies from other insurance companies. Kentucky Central dismissed the state court action without prejudice and brought an action in this court asserting essentially the same claims as those pled in the previous state action in order to have all three actions before a single judge. This third action has been related to these suits.

 Kentucky Central maintains that Plaintiffs LeDuc and Tarnofsky have used the fact of Kentucky Central's rating reduction and setbacks in Kentucky Central's mortgage and real estate portfolio to make misleading and false allegations in their complaints about Kentucky Central's financial condition. Kentucky Central asserts that it has filed required financial statements with the SEC and many state insurance departments during the period in question. Kentucky Central claims that its real estate related loses have been fully disclosed to shareholders and agents and have been scrutinized by numerous regulatory authorities.

 Kentucky Central acknowledges that it experienced some downgrades in its ratings by A.M. Best and Standard and Poors in 1991. Kentucky Central maintains, however, that it still has adequate funds to meet all of the obligations of its policyholders. Kentucky Central claims that plaintiffs LeDuc and Tarnofsky have seized upon the downgradings and have attempted to create panic among policyholders by causing them to believe that Kentucky Central would be "the next Executive Life". According to Kentucky Central, the activities of LeDuc and Tarnofsky have caused the replacement of hundreds of policies by insureds who obtained their Kentucky Central policies through plaintiffs and other agents.

 DISCUSSION

 A. Motions of Individual Defendants to Dismiss LeDuc and Tarnofsky Actions for Lack of Jurisdiction:

 Personal jurisdiction is determined by the applicable state personal jurisdiction statute and constitutional principles of due process. Data Disc Inc. v. Systems Tech. Assoc., 557 F.2d 1280, 1286 (9th Cir. 1977). California's personal jurisdiction statute confers jurisdiction to the extent permitted by the due process clause. See Cal. Code of Civil Procedure 410.10. The due process clause restricts the exercise of jurisdiction to those situations where a defendant has "certain minimum contacts with the forum state such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice". International Shoe Co. v. Washington, 326 U.S. 310, 316, 66 S. Ct. 154, 90 L. Ed. 2d 95 (1945).

 Personal jurisdiction over a non-resident of the forum state can be either general or specific. Sher v. Johnson, 911 F.2d 1357, 1361 (9th Cir. 1990). General jurisdiction is applicable where a defendant's activities in the forum state are "substantial" or continuous and systematic", even if the cause of action is unrelated to those activities. Data Disc., 557 F.2d at 1287. None of the Individual Defendants lives in California, works in California or owns real property in California, although a few of the Individual Defendants have made occasional business related trips to California. Several of the Individual Defendants have not even been in California in the last five years. Thus, none of the Individual Defendants is sufficiently connected to California to warrant the exercise of general jurisdiction in this case.

 California courts may assert specific jurisdiction over non-resident defendants if their activities in the forum give rise to or are related to the litigation. Helicopteros Nacionales do Colombia, S.A. v. Hall, 466 U.S. 408, 413-14, 104 S. Ct. 1868, 80 L. Ed. 2d 404 (1984). Such specific jurisdiction is established by the following three-part test: (1) the out of state defendant must have purposefully directed its activities toward residents of the forum state; (2) the cause of action must arise out of or result from the defendant's forum-related action; and (3) the forum's exercise of personal jurisdiction must be reasonable. Sher, 911 F.2d at 1361.

 The mere fact that a corporation is subject to general jurisdiction does not mean that its non-resident officers and directors are subject to jurisdiction as well. Davis v. Metro Productions, 885 F.2d 515, 520 (9th Cir. 1989) Each defendant's contacts with the forum state must be examined individually to determine whether that defendant has sufficient minimum contacts to support a finding of jurisdiction. Id. at 522.

 In Davis, the Ninth Circuit determined that jurisdiction was appropriately exercised over officers and directors of a corporation where it was demonstrated that the individuals purposefully directed allegedly fraudulent activities toward the forum state. Id. Thus, the court asserted jurisdiction over two corporate directors who were the sole shareholders of a corporation in a RICO action alleging fraud and securities violations where it was shown that these individual directors purposefully availed themselves of the forum state by soliciting business from that state and meeting with a citizen of that state to discuss the opportunity for his clients, also citizens of the forum, to invest in the fraudulent venture. Id. at 522-23.

 In reaching the decision to uphold the exercise of jurisdiction over these individual directors, the Davis court relied upon the United States Supreme Court's decision in Calder v. Jones, 465 U.S. 783, 104 S. Ct. 1482, 79 L. Ed. 2d 804 (1984) in which the Court affirmed the assertion of jurisdiction in California over a nonresident reporter and editor who had libeled the plaintiff in an article they had written and edited in Florida. The Court rejected the defendants' claim that they were not subject to jurisdiction in the forum because their only contact with California occurred in their capacity as employees of a corporation. The Court distinguished general untargeted negligence which might not provide a basis for jurisdiction over a nonresident employee from intentional, allegedly tortious actions by the defendants expressly aimed at the forum state which would provide a basis for the exercise of personal jurisdiction in spite of the individual's corporate affiliation. 465 U.S. 789-90, 104 S. Ct. at 1487.

 In the instant case, Plaintiffs claim that each of the Individual Defendants has purposefully availed himself of the California forum by directing the activities of Kentucky Central to California. With the exception of Defendant Burnett, however, Plaintiffs have failed to demonstrate that the activities either conducted in this state or directed at this state are sufficiently linked to this litigation to justify the exercise of jurisdiction over them in this case.

 Plaintiffs' only claims regarding Defendants Hembree and Schaeffer are that they have each admitted to being present in California in the last five years for the purpose of testifying in a case to which Kentucky Central was not a party. The only evidence linking Defendant Preston to California is the fact that he made two visits to the state for trade association meetings. Defendant Gunn has been in California only three times in the last five years and none of his visits are linked to the allegations of fraudulent conduct by Kentucky Central. Although Defendant Rampulla admits to making occasional trips to California to conduct business, there is no evidence that his few trips to California were connected with the issues in this dispute. There is no basis for asserting specific jurisdiction over any of these defendants in their individual capacities.

 Plaintiffs' claim for the exercise of personal jurisdiction over Defendant Surmick is based solely on his status as Regional Director for Kentucky Central's Western Region which includes California. Plaintiffs contend that this position would require that Defendant Surmick meet with agents who solicit business in California and therefore, should be sufficient to subject him to jurisdiction in this state in this action. This is an insufficient basis for the exercise of jurisdiction, however. There is no evidence of any purposeful action taken by this defendant either in or directed at California which is in any way connected with the fraud alleged in this action. Plaintiffs seek to establish personal jurisdiction over this individual on nothing more than his corporate title. This asserted basis for jurisdiction stands in stark contrast to the intentionally tortious actions of the defendants which were directed at the forum state and its citizens in Davis and Calder.

 Similarly, Plaintiffs seek to establish jurisdiction in California over Defendant Sammartin because he signed various agency contracts with Plaintiff LeDuc which authorized LeDuc to solicit business from California residents. In addition, Defendant Sammartin travelled to California twice a year to meet with agents in this state. Such connections are insufficient to establish personal jurisdiction over this defendant in this action. This dispute centers upon the failure of Kentucky Central to disclose allegedly fraudulent practices to its agents. Defendant Sammartin could not reasonably have known that by signing such contracts he would be subject to jurisdiction in this state in this case. Although his signing of the documents may have indirectly assisted Kentucky Central in developing further business in California, the act of signing the agency's contract is neither sufficiently directed at this state, nor is it adequately connected with the issues of this litigation to warrant the exercise of jurisdiction in this action.

 Finally, Plaintiffs claim that jurisdiction is appropriately exercised over Defendant Burnett, the President and Chairman of the Board of Kentucky Central because he authored a letter to policyholders, including those in California, which assured them that "there is absolutely no reason for you to be concerned about your policy's safety or about Kentucky Central's stability". Because this suit alleges the fraudulent concealment of the financial downfall of Kentucky Central, the writing of such a letter of assurance to Kentucky Central policyholders is an act directed to the forum which is closely linked the allegations of this litigation. Through the writing of this letter, Plaintiffs contend, Defendant Burnett furthered the fraudulent scheme charged in the complaint. This court considers this action to be analogous to the intentional and allegedly tortious conduct of the defendants in Davis and Calder and thus, under the teachings of those cases, jurisdiction must be exercised over this defendant in his individual capacity.

 In sum, Plaintiffs have failed to establish that any of the Individuals Defendants, with the exception of Defendant Barnett, has sufficient contacts with California to warrant the exercise of jurisdiction over them in this case and consequently their motions for dismissal for lack of jurisdiction will be granted. Defendant Barnett will not, however, be dismissed since the letter which he wrote to policyholders in California is a sufficient basis for jurisdiction.

 Plaintiffs have submitted interrogatory responses filed by the Individual Defendants pertaining to the contacts of each defendant with the forum state. The court has reviewed those responses and finds nothing in ...


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