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Martin County Economic Development Authority, Inc. v. Cone Drive Operations, Inc.

United States District Court, E.D. Kentucky, Southern Division

March 21, 2018

MARTIN COUNTY ECONOMIC DEVELOPMENT AUTHORITY, INC, PLAINTIFF,
v.
CONE DRIVE OPERATIONS, INC., UNIGEAR DAVID BROWN SYSTEMS [CANADA, INC., DAVID BROWN GEAR SYSTEMS, LTD and CLYDE BLOWERS CAPITOL PLC., DEFENDANTS

          OPINION AND ORDER

          KAREN K. CALDWELL, CHIEF JUDGE UNITED STATES DISTRICT COURT EASTERN DISTRICT OF KENTUCKY

         This matter is before the Court on the defendants' motion to dismiss (DE 14). With their motion, the defendants argue that this matter must be dismissed because the Court does not have personal jurisdiction over them and because the plaintiff, Martin County Economic Development Authority, Inc. (“Martin County”), has failed to state a claim.

         At least for purposes of this motion, the defendants do not dispute the facts asserted in Martin County's complaint. They agree that, in early 2011, one of the defendants - Cone Drive Operations, Inc. - approached Martin County about constructing a customized facility on property owned by Martin County for the purpose of manufacturing gear boxes for underground mining and conveyer systems. Cone Drive was a well-known company in the mining industry and, for that reason, Martin County agreed to construct the facility.

         Martin County's board members met with representatives of Cone Drive and of another defendant, David Brown Gear Systems, Ltd. (“David Brown UK”), which is an English corporation. According to the complaint, David Brown UK and Cone Drive are both owned by the fourth defendant, Clyde Blowers Capitol, PLC (“Clyde Blowers”).

         Representatives of Cone Drive and David Brown UK made numerous trips to Martin County and conducted extensive negotiations with Martin County about the facility. Eventually, representatives of Cone Drive came to Martin County to participate in the construction and to scout housing within driving distance of the facility. Cone Drive representatives also applied to and met with the Kentucky Cabinet for Economic Development on behalf of Martin County to obtain incentives and support for the project.

         On February 14, 2011, David Brown UK sent a signed letter of intent to Martin County. Cone Drive and Martin County then circulated draft leases. At some point Martin County customized the facility to accommodate the defendants' requirements, spending approximately $3 million. On February 17, 2012, a Cone Drive employee e-mailed Martin County to say that the name of the tenant on the final lease should be changed from Cone Drive to David Brown Systems Service and Repair Center, Inc. (“David Brown Kentucky”). On March 21, 2012, David Brown Kentucky and Martin County signed a 15-year lease, requiring David Brown Kentucky to pay $18, 996.44 per month. David Brown Kentucky took possession of the facility on that same day.

         David Brown Kentucky never experienced the business it anticipated at the Martin County facility. Accordingly, in July 2014, it ceased operations and left the premises. It never paid rent after that.

         In October 2014, Martin County filed suit against David Brown Kentucky in Kentucky state court asserting that it owes over $3 million under the lease. In June 2015, however, David Brown Kentucky filed a voluntary Chapter 7 petition in Delaware. Martin County has asserted a claim in that action, which remains pending.

         Martin County then brought this action against Cone Drive, David Brown UK, and Clyde Blowers and a fourth company, Unigear David Brown Systems [Canada], Inc. Martin County asserts these four companies are all related and that David Brown Kentucky was simply their “alter ego.” (DE 1, Complaint, ¶ 24.) The defendants then removed the action to this Court asserting that this Court has subject-matter jurisdiction over the action pursuant to federal diversity jurisdiction. 28 U.S.C. § 1332(a)(3). The defendants now move to dismiss the action against them, arguing that this Court does not have personal jurisdiction over them and that the plaintiffs have failed to state a claim.

         As it must, the Court will first address the issue of personal jurisdiction. None of the defendants is a resident of Kentucky. In determining whether personal jurisdiction exists over these defendants in this diversity case, this Court “must apply the law of the state in which it sits, subject to constitutional limitations.” Reynolds v. Int'l Amateur Athletic Fed'n, 23 F.3d 1110, 1115 (6th Cir.1994). This means that “[t]he defendant must be amenable to suit under the forum state's long-arm statute and the due process requirements of the Constitution must be met.” CompuServe, Inc. v. Patterson, 89 F.3d 1257, 1262 (6th Cir. 1996) (citation omitted).

         Whether analyzing personal jurisdiction under the due-process clause or Kentucky's long-arm statute, however, the Court must first determine what claims the plaintiff is asserting. This is because, under both provisions, when the plaintiff asserts that the Court has specific jurisdiction over a defendant as the plaintiff does here, the Court must ascertain whether the claims asserted in the complaint “arise from” the actions that the defendant allegedly directed at the state. See KRS§ 454.210(2)(a); Southern Mach. Co. v. Mohasco Industries, Inc., 401 F.2d 374, 381 (6th Cir. 1968).

         In its prayer for relief, Martin County asks for judgment against the defendants for “breach of the terms of the Lease Agreement.” In its complaint, Martin County also alleges that David Brown Kentucky was the “alter ego” of all four named defendants. An alter ego claim, however, is not by itself a cause of action.” In re RCS Engineered Prod. Co., Inc., 102 F.3d 223, 226 (6th Cir. 1996). “Rather, it is a doctrine which ‘fastens liability on the individual who uses a corporation merely as an instrumentality to conduct his or her own personal business, and such liability arises from fraud or injustice perpetuated not on the corporation but on third persons dealing with the corporation.'” Id. (quoting 1 Fletcher Cyclopedia on the Law of Private Corporations § 41.10 at 615 (1990)).

A claim based on the alter ego theory is not in itself a claim for substantive relief, but rather is procedural. A finding of fact of alter ego, standing alone, creates no cause of action. It merely furnishes a means for a complainant to reach a second corporation or individual upon a cause of action that otherwise would have existed only against the first corporation. An attempt to pierce the corporate veil is a means of imposing liability on an underlying cause of action such as ...

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