Stickel v. Finkelstein, Kenneth et al

UNITED STATES BANKRUPTCY COURT
FOR THE SOUTHERN DISTRICT OF OHIO
WESTERN DIVISION AT DAYTON
In re: 	H UFFY C ORPORATION , ET AL .,
Debtors.
Case No. 	04-39148 through 04-39167
Jointly Administered
Adv. No. 	06-3127
M ARK S. STICKEL , TRUSTEE ,
Plaintiff
v.
KENNETH FINKELSTEIN, ET AL .,
Defendants
Judge L. S. Walter
Chapter 11
DECISION GRANTING TRUSTEE MARK STICKEL’S MOTION FOR
RECONSIDERATION OF THE COURT’S PRIOR DECISION
AND CONCLUDING THAT THE COURT HAS PERSONAL JURISDICTION
OVER DEFENDANT THE FORZANI GROUP LTD.
This document has been electronically entered in the records of the United
States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
Dated: March 30, 2007
____________________________________________________________
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The matter is before the court on the Motion for Reconsideration, New Trial, and
to Alter or Amend Decision as to Personal Jurisdiction, and Memorandum of Law in
Support [Adv. Doc. 83] filed by Plaintiff Mark S. Stickel, Trustee of the Huffy Recovery
Trust (“Trustee”) and the Response filed by Defendant Forzani Group Ltd. (“Forzani”)
[Adv. Doc. 87]. Also relevant to the analysis is the Affidavit of David Bryant, and the
exhibits attached thereto, filed in support of the Trustee’s motion [Adv. Doc. 84]. In his
motion, the Trustee asks the court to reconsider its dismissal of this action against
Forzani for a lack of personal jurisdiction. The Trustee alleges that new factual evidence
that has been discovered subsequent to his responsive filing to the motions to dismiss
provides the court with a basis for exercising specific personal jurisdiction over Forzani
as a defendant in this case. For the reasons discussed in this decision, the court agrees
and will vacate its prior dismissal of the action against Defendant Forzani.
Background
On December 21, 2006, this court issued its decision on a motion to dismiss filed
by Defendants Finkelstein, Salter, White and Osgoode Financial, Inc. as well as a
separate motion filed by Defendant Forzani Group, Ltd (“Forzani”) [Adv. Doc. 79]. The
motions to dismiss were based on allegations that the court lacked personal jurisdiction
over the defendants.
Relevant to the current matter is the court’s disposition of Forzani’s motion to
dismiss. In its motion, Forzani had argued that it was a Canadian sporting goods retailer
that lacked sufficient significant contacts with the United States for this court to exercise
personal jurisdiction over it. In response, the Plaintiff-Trustee had alleged that personal
jurisdiction existed because Forzani had significant contacts through its direct
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participation in an allegedly fraudulent transaction, labeled the “2004 OPP Transaction,”
involving the sale of Huffy Corporation assets called the “OPP assets.” Through the
transaction, Huffy Corporation (“Huffy”) sold the OPP assets to a company known as
“New Gen-X.” New Gen-X was owned by certain individual defendants in this
adversary proceeding, Defendants Finkelstein, Salter and White (the “individual
defendants”), who were also officers and fiduciaries of a Huffy subsidiary at the time of
the sale. The circumstances surrounding the 2004 OPP Transaction and subsequent
transfer of the same OPP assets by the individual defendants and New Gen-X to Forzani
by means of a stock sale are at the heart of this adversary proceeding.
Essentially, the Trustee argued that upon purchasing the OPP assets in the 2004
OPP Transaction, the individual defendants immediately “flipped” the OPP assets to
Forzani. Thus, the 2004 OPP Transaction was merely a subterfuge controlled by Forzani
which enabled Forzani to acquire the OPP assets through intermediaries rather than
purchasing the assets directly from Huffy for a higher price. Furthermore, the Trustee
alleged that Forzani aided the individual defendants to breach their fiduciary duties to
Huffy by depriving Huffy of the full value of the sale of its OPP assets in the 2004 OPP
Transaction.
In its prior decision, the court concluded that the Trustee lacked sufficient
evidentiary proof to support the allegations that Forzani directly participated in the 2004
OPP Transaction or aided the individual defendants in breaching their fiduciary duties to
Huffy. 	Without evidentiary proof, the court concluded that Forzani’s participation was
indirect and limited to acquiring the OPP assets by means of purchasing the stock of New
Gen-X, a Canadian corporation, from the individual defendants, all of whom were
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Canadian citizens. In other words, without evidentiary proof that Forzani directed or
controlled the individual defendants and New Gen-X in the OPP Transaction or that there
was an agency relationship between these defendants and Forzani, the Trustee’s mere
allegations did not provide a basis for personal jurisdiction over Forzani. Furthermore,
the court concluded that Forzani’s other contacts with the United States and Huffy
outside of the 2004 OPP Transaction were insufficient to provide the court with either
general or specific personal jurisdiction over Forzani as a defendant in this case.
Consequently, the court granted the motion to dismiss the Trustee’s action against
Forzani.
On January 2, 2007, the Trustee filed his motion for reconsideration, new trial and
to alter or amend the decision as to personal jurisdiction based on newly discovered
evidence. The Trustee alleges that this evidence demonstrates Forzani’s direct
participation in and control over the 2004 OPP Transaction and merits reconsideration of
the court’s earlier dismissal of Forzani from the case.
Newly Discovered Evidence
According to the affidavit filed in support of the Trustee’s motion for
reconsideration, counsel for the Trustee received new documents from Defendants
Finkelstein, Salter, White and Osgoode Financial, Inc. on November 14, 2006 pursuant to
an informal discovery request. The documents are described as “the Closing Book for
the Purchase of All the Issued and Outstanding Shares of 1294506 Ontario Limited” and
relate to transactions between Forzani and these other defendants.1 [Adv. Doc. 84, ¶ 3.]
1The documents attached as exhibits to the affidavit are somewhat voluminous, but the Trustee specifically
references only a few to support his argument on reconsideration. In this decision, the court considers and
discusses only those documents on which the Trustee specifically relies.
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The new evidence includes a March 8, 2004 letter from Forzani’s counsel to the
Toronto Stock Exchange seeking listing of three hundred thousand (300,000) new
Forzani shares on the Exchange. [Adv. Doc. 84, Ex. B.] The letter clarifies that
Forzani’s purpose in listing the shares was to provide them to New Gen-X and the
individual defendants as the purchase price for the assets that they were negotiating to
purchase from Huffy. [Id.] The Toronto Stock Exchange granted the request on March
10, 2004. [Id., Ex. C.]
In addition, the evidence includes an “Inter-Company Assignable Note” signed by
Defendant Finkelstein on behalf of 1294506 Ontario Ltd. / New Gen-X and by a
representative of Forzani. [Id., Ex. A.] With this note, Forzani advanced $7,015,264 to
the individual defendants and directed them to use the funds to enter an asset purchase
agreement with Gen-X Sports Canada, Inc. and Huffy Corporation for the OPP assets.
[Id.] The Note provided that the advance to the individual defendants was only to be
used to purchase the OPP assets. [Id., Ex. A, ¶ 3.] Furthermore, the advance was
conditioned on Forzani, “in its sole discretion,” being satisfied with the terms and
conditions of the Asset Purchase Agreement with Huffy. [Id., Ex. A, ¶ 2(a).]
The Trustee asserts that the documents confirm Forzani’s central role in the 2004
OPP Transaction between Huffy and the individual defendants and, consequently,
provide the evidentiary support needed for this court to exercise jurisdiction over Forzani
on reconsideration.
Reconsideration Standard
A motion for reconsideration, also referred to as a motion to amend or alter a
judgment, is governed by Fed. R. Civ. P. 59(e) adopted in bankruptcy pursuant to Fed. R.
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Bankr. P. 9023. See In re Nosker, 267 B.R. 555, 564-65 & n.2 (Bankr. S.D. Ohio 2001).
Such motions are appropriate only to correct manifest errors of law or fact or to present
newly discovered evidence. Id. at 564-65; In re Oak Brook Apartments of Henrico
County, Ltd., 126 B.R. 535, 536 (Bankr. S.D. Ohio 1991); Ohio Savings Bank v. Larson
(In re Larson), 103 B.R. 896, 897 (Bankr. S.D. Ohio 1989). Such motions are not
intended to give a party an opportunity to relitigate issues and facts already decided or
present the case under new theories. Nosker, 267 B.R. at 564-66 (rejecting a motion for
reconsideration that was merely a rehash of previously asserted arguments); Oak Brook
Apartments, 126 B.R. at 536. Motions for reconsideration are within the sound discretion
of the court to grant or deny. Oak Brook Apartments, 126 B.R. at 536.
The burden is on the movant to demonstrate the existence of one of the grounds
for granting reconsideration. Nosker, 267 B.R. at 565; Larson, 103 B.R. at 897. When a
motion for reconsideration is based on the existence of newly discovered evidence, the
movant must demonstrate that the evidence was previously unavailable. Edwards v. Ford
Motor Co., 218 F.Supp.2d 846, 849 (W.D. Ky. 2002); In re Quality Stores, Inc., 272
B.R. 643, 650 (Bankr. W.D. Mich. 2002). Furthermore, the movant must show: 1) facts
from which the court may infer reasonable diligence on the part of the movant; 2) that the
facts are not merely cumulative or impeaching, and 3) that the evidence is material and, if
the motion is granted, would probably produce a different result. Quality Stores, 272
B.R. at 650. See also In re Frank, 35 B.R. 305, 307 (Bankr. S.D. Ohio 1983) (movant
must not only show that the evidence was newly discovered since the original disposition,
but must also show that the movant was excusably ignorant of the facts).
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In this case, Forzani does not dispute that the Trustee received the newly
discovered evidence on November 14, 2006, subsequent to the Trustee’s deadline for
filing a response to the motions to dismiss. Although Forzani argues that the documents
are not “new” to the Trustee because Forzani mentioned them in its initial motion to
dismiss, Forzani does not suggest that it produced the documents to the Trustee nor does
Forzani’s discussion of the documents in its motion to dismiss highlight the portions
relevant to whether Forzani had direct participation in the 2004 OPP Transaction.
Furthermore, there is no suggestion that the Trustee lacked diligence in obtaining
the documents. Indeed, the defendants filed their motions to dismiss the Trustee’s action
for lack of personal jurisdiction prior to filing their answers. As such, no significant
formal discovery had yet been initiated. Consequently, it is understandable that the
Trustee would not have obtained every relevant document in the defendants’ possession
prior to the court’s disposition of the motions to dismiss.
Finally, the court concludes that the newly discovered evidence is not cumulative
of other documents and is highly relevant to the court’s determination of personal
jurisdiction because the documents demonstrate Forzani’s participation in the 2004 OPP
Transaction beyond just the purchase of stock in a Canadian corporation from Canadian
citizens. For these reasons, the court will reconsider whether it is appropriate to exercise
personal jurisdiction over Forzani.
Legal Analysis of Personal Jurisdiction with Newly Discovered Evidence
Generally, the court shall not repeat here the analysis contained in its prior
decision, but will incorporate it by reference. Suffice it to say that the court’s
determination that it did not have specific personal jurisdiction over Forzani was an
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exceedingly close question. As already noted, the Trustee presented a credible theory for
specific jurisdiction over Forzani. Simply put, that theory was that Forzani was the de
facto purchaser in the 2004 OPP Transaction, controlling the entire transaction by
providing all of the financing for the asset purchase and simultaneously orchestrating the
substance and timing of the asset and stock purchases. If Forzani was in reality the
purchaser from Huffy, merely using surrogates (including Finkelstein and Salter who
were officers of a Huffy affiliate) to implement the 2004 OPP Transaction, then Forzani
would be subject to the specific jurisdiction of this court.
Without belaboring the point, the cumulative effect of the new evidence
summarized above is to persuade the court that Forzani controlled and orchestrated the
2004 OPP Transaction for its own advantage. The evidence shows that Forzani
earmarked its stock and funds specifically for the 2004 OPP Transaction, directed and
controlled the actions taken by the individual defendants to the same end, and retained
“sole discretion” over the terms and conditions of the Asset Purchase Agreement with
Huffy, an agreement that was subject to Ohio law. While not conclusive, this evidence
together with the nearly simultaneous flip of the New Gen-X stock to Forzani is sufficient
to make a prima facie case that Forzani was a prime participant in the 2004 OPP
Transaction and may have aided the individual defendants in breaching their fiduciary
duties to Huffy. As a consequence, the actions of the individual defendants pertaining to
the negotiation and closing of the 2004 OPP Transaction are now attributable to Forzani.
As explained in the court’s prior decision, the customary framework used in the
Sixth Circuit for analyzing specific personal jurisdiction is the three-factor test
enunciated in Southern Machine Company, Inc. v. Mohasco Industries, Inc., 401 F.2d
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374, 381 (6th Cir. 1968). The preeminent factor is that “the defendant must purposefully
avail himself of the privilege of acting in the forum state or causing a consequence in the
forum state.” Id. In the court’s view, this factor is satisfied here because Forzani
purposefully involved itself with and directed the activities of corporate officers of a
Huffy affiliate, interjecting itself between the officers and the U.S. corporation to whom
they owed a fiduciary duty under U.S. corporate laws. It did so to effectuate the
acquisition by Forzani of significant Huffy assets, including some U.S. intellectual
property, pursuant to the terms of an Asset Purchase Agreement governed by Ohio law.
Such activities necessarily cause a substantial consequence in the United States,
impacting its laws, the welfare of one of its corporate citizens, and the disposition of
significant assets.
Although each of the Southern Machine factors is an independent requirement, in
this case the second factor strongly buttresses the first factor. The second factor is that
“the cause of action must arise from the defendant’s activities” in the forum state. Id.
The causes of action against Forzani (generally fraudulent transfer and aiding and
abetting breaches of fiduciary duty and constructive fraud) arise directly and entirely
from Forzani’s involvement in the 2004 OPP Transaction, including its interaction with
the individual defendants. It is unreasonable to suppose that Forzani would be surprised
to be haled into court in Ohio given the degree to which it controlled the transaction.
This tight fit between the causes of action and the transaction forming the essential basis
for specific jurisdiction makes such jurisdiction all the more appropriate. Absent a strong
countervailing factor, justice is best served if all parties to the transaction can receive
adjudication in the same forum.
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Any such countervailing factors can best be considered in the context of the third
Southern Machine factor, that “the acts of the defendant or consequences caused by the
defendant . . . have a substantial enough connection with the forum state to make the
exercise of jurisdiction over the defendant reasonable.” Id. Generally, “reasonableness”
depends upon whether Ohio or the United States have a strong interest in resolving the
conflict. Id. at 384; Aristech Chemical International Limited v. Acrylic Fabricators
Limited, 138 F.3d 624, 628 (6th Cir. 1998). In its prior decision, in the context of
discussing specific jurisdiction over Finkelstein and Salter, the court discussed at some
length this issue as well as the reasonableness of imposing jurisdiction over citizens of
Canada. That discussion, which the court will not repeat here, applies equally to Forzani
and leads to the same conclusion that specific jurisdiction is reasonable. The court is
unaware of any other factors that would compel a different result.
It may, however, be instructive to repeat here a small portion of the court’s prior
decision pertaining to Forzani:
Consequently, so the argument goes, the triangular transaction should be
collapsed and viewed as a two party transaction between Huffy and
Forzani, a transaction that would seemingly qualify as purposeful
availment of American laws or at least the purposeful causation of a
consequence in the United States.
* 	* 	*
Although the Trustee does not specifically use agency
terminology, his argument in effect casts Finkelstein, Salter, and White as
agents of Forzani rather than Huffy. Under this theory, the three of them
acted on behalf of Forzani in the negotiation and closing of the 2004 OPP
Transaction resulting in the “flip” to Forzani a day later. If they were
agents of Forzani, their activities might well be attributed to their
principal. It is also true that the use of an intermediary does not necessarily
shield a foreign party from jurisdiction. See, e.g., Fortis Corporate
Insurance v. Viken Ship Management, 450 F.3d 214, 220 (6th Cir. 2006).
However, speculation aside, there is no evidence that Forzani directed the
activities of the three men and there are no other facts to support such an
agency relationship.
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[Adv. Doc. 79]. The quoted language illustrates how close the court was to finding
specific jurisdiction over Forzani in the first instance. But speculation has now been
supplanted by evidence which, in the court’s estimation, is sufficient to make a prima
facie case for jurisdiction. The court’s findings and determinations in this decision do
not, however, constitute findings of fact or legal conclusions for any other purpose.
Conclusion
For the foregoing reasons, it is hereby ORDERED that the Motion for
Reconsideration, New Trial, and to Alter or Amend Decision as to Personal Jurisdiction
[Adv. Doc. 83] filed by Plaintiff Mark S. Stickel, Trustee of the Huffy Recovery Trust is
hereby GRANTED to the following effect:
A. 	The court’s prior Decision [Adv. Doc. 79] and Order [Adv. Doc. 80]
entered herein on December 21, 2006 are hereby amended in accordance
with the foregoing decision; and
B. 	The court has personal jurisdiction over the Forzani Group Ltd. and this
adversary proceeding shall remain pending as to this defendant.
SO ORDERED.
Copies to:
David Bryant, 1201 Elm Street, Suite 4242, Dallas, Texas 75270
Thomas Rice, 1201 Elm Street, Suite 4242, Dallas, Texas 75270
Ronald S. Pretekin, 33 West First Street, Suite 600, Dayton, OH 45402
Sherri B. Lazear, Capitol Square, Suite 2100, 65 East State Street, Columbus, OH 43215-
4260
James M. Lawniczak, McDonald Investment Center, Suite 1400, 800 Superior Avenue,
Cleveland, Ohio 44114
Nathan A. Wheatley, McDonald Investment Center, Suite 1400, 800 Superior Avenue,
Cleveland, Ohio 44114
Office of the U.S. Trustee, 170 N. High St., Suite 200, Columbus, OH 43215
# # #
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