By: Francis G.X. Pileggi, Esquire and Leslie B. Spoltore, Esquire.
Delaware legislation makes it clear that officers, as well as directors, of Delaware corporations can be subject to the personal jurisdiction of Delaware courts for claims made against those individuals in their capacity as officers and directors of Delaware entities. Similar consent statutes apply to managers of Delaware limited liability companies. See 10 Del. C. Section 3114 and 6 Del. C. Section 18-109. See also Assist Stock Management LLC v. Rosheim, 753 A.2d 974 (Del. Ch. 2000).
However, when jurisdiction over relevant individuals is not clearly within the consent statutes, in appropriate circumstances the “civil conspiracy theory of jurisdiction” may apply to secure jurisdiction over a non-resident party.
In Delaware, the exercise of personal jurisdiction over an individual need not be solely premised on the acts in Delaware of that individual party. Rather, jurisdiction over that individual may be appropriate based on the actions of other defendants involved in a civil conspiracy and when there is clear jurisdiction over those other parties. The conspiracy theory was first clarified as a basis for personal jurisdiction in Delaware by the case of Instituto Bancario Italiano SpA v. Hunter Engineering Company, Inc., 449 A.2d 210 (Del. 1982). It is not an independent basis for jurisdiction, however it “provides a framework with which to analyze a foreign defendant’s contacts with Delaware.” Hercules, Inc. v. Leu Trust & Banking Ltd., 611 A.2d 476, 482 n.6 (Del. 1992). To establish jurisdiction under this theory, a plaintiff in Delaware must satisfy a five (5) part test by establishing that:
(1) a conspiracy to defraud [or other unlawful act] existed; (2) the defendant was a member of that conspiracy; (3) a substantial act or substantial effect in furtherance of the conspiracy occurred in the forum state; (4) the defendant knew or had reason to know of the act in the forum state or that acts outside the forums state would have an effect in the forum state; and (5) the act in, or effect on, the forum state was a direct and foreseeable result of the conduct in furtherance of the conspiracy.
However, as of the date of this article there is no Delaware decision on point that addresses whether a corporation may conspire with its officers. There is no controlling authority on the issue of whether a policy exception should apply when a closely-held entity, controlled by one person or a small group of individuals, uses the entity for improper purposes in what would otherwise be a conspiracy but for the disinclination to allow a conspiracy to be based on actions between a corporation and the officers of a corporation (on the theory that a corporation can only act through its officers).
The general rule regarding the capacity of a corporation to conspire with its officers holds that an entity cannot conspire with itself.1 The general rule might be deemed inapplicable where, for example, it is established that officers or agents acted pursuant to personal motives or in other than their capacities as agents for the corporation.” Donald J. Wolfe, Jr. & Michael Pittinger, Corporate and Commercial Practice in the Delaware Court of Chancery, section 3-5[b], 3-85 (2004). The United States District Court for the District of Delaware has addressed the issue as it relates to federal antitrust actions, holding that a corporation may not conspire with an affiliated entity like a subsidiary; but “too much should not be read into the district court’s decision, however. There exists significant authority indicating that the rule precluding a finding of conspiracy among affiliated business entities is limited to the antitrust context.” Id. at 3-86 (citation omitted). Importantly, however, the Delaware Chancery Court has in the past premised the exercise of personal jurisdiction “in part, on a conspiracy theory of jurisdiction, notwithstanding that the alleged conspiracy involved affiliated entities,” although the issue was not squarely addressed. Id. (citing Macklowe v. Planet Hollywood Inc., 1994 WL 586838 (Del. Ch.)).
This question of intracorporate conspiracy has been addressed in various federal cases including antitrust, federal discrimination, and general tort claims. The Fifth Circuit addressed the issue of intracorporate conspiracy in an antitrust matter in the case of Nelson Radio and Supply Company v. Motorola, Inc., 200 F.2d 911(5th Cir. 1952). In this case, the plaintiff alleged that a conspiracy existed between the corporation, its president, its sales manager and its agents. Interestingly, the plaintiff did not name the president, sales manager or other agents as defendants. The court held that “in the absence of any allegation whatever to indicate that the agents of the corporation were acting in other than their normal capacities, plaintiff has failed to state a cause of action based on conspiracy under Section 1 of the [Sherman Antitrust] Act.” Id. at 914.
The Third Circuit addressed this issue in the case of Johnston v. Baker. In that case the Third Circuit specifically examined whether corporate employees can be held liable for conspiracy with the corporate entity. 445 F.2d 424, 427 (3rd 1971). In Johnston, the plaintiff brought an action against a hotel, the corporate owner of the hotel and the president and general manager of the hotel, alleging that they conspired to injure, embarrass, harass and hinder him in the management of his restaurant business that was located in the hotel. The defendants argued that the corporation and its agents may not be liable in the conspiracy for acts done solely for the corporation. The plaintiff in this case did not challenge the general rule that was set forth in Nelson Radio, supra, but rather contended that an exception to the general rule should apply. In Johnston, there was sufficient evidence to support a finding that the conspirators were acting for personal reasons and one of the conspirators was not an agent of the corporation. The Third Circuit agreed with the plaintiff and upheld the finding of liability notwithstanding the fact that the conspiracy included some of the officers of the corporation.
Precisely what will lead a court to agree that corporate officers or agents can conspire with the corporation because they were acting for personal reasons must, of necessity, be factually determinative.2 Relevant to this analysis is the size of the corporation, the number of shareholders, the independence of members of the board of directors and the relationship between the decision-making individuals and the conspirators. One may argue that a small, closely-held corporation, is be more susceptible to engaging in acts for the primary personal benefit of its officers or directors. Simply put, a small closely-held corporation is more subject to manipulation compared with a large diversely-held corporation with an independent board and the absence of controlling shareholders. In a small closely-held corporation, the decision-making authority by definition is held by a small number of people. The sole officer and director may also be the majority shareholder of the corporation thereby eliminating any sort of checks and balances. If this is the case, the officer(s) and director(s) would be able to manipulate the corporation to improperly advance their own personal profit without interference from others, thereby allowing them to use the entity for illicit purposes contrary to the general reasons that would favor conspiracy liability.
Many courts recognize that a conspiracy may lie where the “officers, agents or employees were acting for personal reasons, or where they have an independent personal stake in achieving the object of the conspiracy, or where an independent third-party conspired with the corporation.” 10 Fletcher Cyclopedia of Corporations Section 484 (2001)(citing Hackett v. Metropolitan General Hospital, 422 So. 2d. 986 (Fla. App. 1982); Johnston v. Baker, 445 F.2d 424 (3rd Cir. 1971); Mehl v. Navastar International Corp., 670 F. Supp. 239 (M.D. Ill. 1987); Elbe v. Wausau Hospital Center, 606 F. Supp. 1491 (W.D. Wis 1985); Denenberg v. American Family Corp. of Columbus, Georgia, 566 F. Supp. 1242 (E.D. Pa. 1983) (applying Pennsylvania law)). These cases recognize those factual situations where the conspiracy theory should apply between officers and their corporations to prevent abuse of the entity.
The application of this exception to the general rule is compatible with other cases in which the courts of various states including Delaware have refused to extend protective doctrines to officers engaged in acts of misconduct. See T.V. Spano Building Corporation v. Wilson, 584 A.2d 523, 530 (Del. Super. 1990). In that case the Delaware Superior Court rejected a corporate officer’s attempt to escape jurisdiction based on the assertion that he was acting in his capacity as an officer. The court ruled that while an officer may not be liable for a business transaction made on behalf of the corporation, they are liable for their own tortious conduct. 584 A.2d 523, 530 (Del. Super. 1990).
Common sense and logic support the reasoning that third-party defendants should be responsible for the actions taken in their own behalf. See generally, Nicolet, Inc. v. Nutt, 525 A.2d 146, 150 (Del. 1987)(one conspirator is liable for acts of co-conspirator done in furtherance of the conspiracy). A contrary result would countenance the use of an entity for illicit purposes, to enable wrongdoers to take advantage of the corporate “machinery of the state” for purposes contrary to public policy. Compare Sonne v. Sacks, 314 A.2d 194, 197 (Del. 1973) (corporate entity may be disregarded to avoid fraud). See generally, J. Prisbe, The Intracorporate Conspiracy Doctrine, 16 U. Balt. L. Rev. 538, 542 (1987) (public policy reasons for allowing concept of intracorporate conspiracy).
In the event that the consent statutes for officers and directors of Delaware corporations or managers of Delaware Limited Liability Companies are not availing, and there is a good faith basis to add a claim against other non-resident defendants, the civil conspiracy basis of personal jurisdiction over those individuals should be considered in appropriate circumstances.
- Directors and officers who wish to avoid jurisdiction based on the argument that they cannot conspire with a corporation may be subject to personal jurisdiction on other theories such as the agency and controlling person theories. A defendant will not be permitted to assert both that he does not control the corporate defendant for the purposes of avoiding personal jurisdiction under the agency theory, and then claim that he does control all of the corporate defendants for the purposes of avoiding jurisdiction under the conspiracy theory. See Little Switzerland, Inc. v. Destination Retail Holdings Corporation, 1999 WL 223496, n.11 (D. Del.).
- A challenge to the authority of the court to subject the defendant to the jurisdiction of the court should not be confused with a challenge on the merits of a claim . The ability to challenge the jurisdiction of the court may be done through a Rule 12(b)(2) motion while a challenge based on the merits is more properly brought under Rule 12(b)(6). See Carlton Investments v. TLC Beatrice International Holdings, 1995 WL 694397, *13 (Del. Ch.).