Khan v. Gramercy Advisors, LLC

FILED
2016 IL App (4th) 150435 June 30, 2016
Carla Bender
4th District Appellate
NO. 4-15-0435
Court, IL
IN THE APPELLATE COURT
OF ILLINOIS
FOURTH DISTRICT
SHAHID R. KHAN; ANN C. KHAN; UVIADO, LLC; ) Appeal from
JONCTION, LLC; and LEMAN, LLC, ) Circuit Court of
Plaintiffs-Appellees, ) Champaign County
v. ) No. 09L139
GRAMERCY ADVISORS, LLC; GRAMERCY )
ASSET MANAGEMENT, LLC; GRAMERCY )
FINANCIAL SERVICES, LLC; TALL SHIPS )
)
CAPITAL MANAGEMENT, LLC; and JAY A.
) Honorable
JOHNSTON, ) Jeffrey B. Ford,
Defendants-Appellants. ) Judge Presiding.
JUSTICE APPLETON delivered the judgment of the court, with opinion.
Justice Turner concurred in the judgment and opinion.
Justice Steigmann specially concurred, with opinion.
OPINION
¶1 The plaintiffs are Shahid R. Khan (Khan); his spouse, Ann C. Khan; and some
limited liability companies, in which, pursuant to the "2002 and 2003 Distressed Debt
Strategies," he bought majority interests. The strategies proved to be ineffectual tax shelters, as
the Khans later came to realize. The limited liability companies generated losses, which the
Khans claimed in their individual income tax returns so as to reduce their taxable income. After
auditing their returns, however, the Internal Revenue Service (IRS) disallowed the losses as
artificial and lacking in economic substance, and consequently the Khans incurred genuine
financial loss in the form of interest, penalties, and the amounts they had paid for the creation
and implementation of the tax shelters. Now plaintiffs seek damages from defendants for
inducing them, by fraudulent misrepresentations, to buy the tax shelters and to use them for the
2002 and 2003 tax years. The defendants are Gramercy Advisors, LLC (Gramercy); Gramercy
Asset Management, LLC (Gramercy Asset Management); Gramercy Financial Services, LLC
(Gramercy Financial); Tall Ships Capital Management, LLC (Tall Ships); and Jay A. Johnston.
¶2 None of these defendants is domiciled in Illinois. Therefore, they filed a motion
for dismissal in the trial court, arguing that exercising personal jurisdiction over them in Illinois
would violate due process. Without an evidentiary hearing, the court denied their motions,
finding, on the basis of the documentary submissions, that it would be consistent with due
process to subject defendants to the specific jurisdiction of Illinois. We granted defendants leave
to appeal. See Ill. S. Ct. R. 306(a)(3) (eff. July 1, 2014).
¶3 In our de novo review, we find that two of the defendants, Gramercy and
Johnston, have made minimum contacts with Illinois and that exercising personal jurisdiction
over them would be consistent with due process. But we find no minimum contacts with Illinois
by the remaining defendants, Gramercy Asset Management, Gramercy Financial, and Tall Ships.
Therefore, we affirm the trial court's judgment in part and reverse it in part: as to Gramercy and
Johnston, we affirm the denial of the motion for dismissal, but as to Gramercy Asset
Management, Gramercy Financial, and Tall Ships, we reverse the denial of the motion for
dismissal.
¶4 I. BACKGROUND
¶5 A. The Places Where the Parties Reside or Are Domiciled
¶6 According to the complaint, the Khans are citizens of Illinois and reside in
Champaign, and the remaining three plaintiffs—UVIADO, LLC (UVIADO); JONCTION, LLC
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(JONCTION); and LEMAN, LLC (LEMAN)—are Delaware limited liability companies and
have their principal place of business in Houston, Texas.
¶7 The defendants that are limited liability companies—Gramercy, Gramercy Asset
Management, Gramercy Financial, and Tall Ships—are Delaware limited liability companies and
have their principal place of business in Greenwich, Connecticut, according to the complaint.
¶8 "On information and belief," the complaint alleges that the remaining defendant,
Johnston, is a citizen of Connecticut and has his principal place of business in Greenwich.
Johnston states, in his affidavit of April 21, 2015, that he is a comanaging member of Gramercy
but that he resides in Puerto Rico.
¶9 B. The Fee-Sharing Agreement Between BDO Seidman, LLP, and Gramercy
¶ 10 In his own affidavit, dated April 21, 2015, Paul Shanbrom states as follows. From
July 1987 to December 2008, he was a partner at BDO Seidman, LLP (BDO), and he was a
member of BDO's tax solutions group. (According to the complaint, BDO has its principal place
of business in Chicago.) As a member of the tax solutions group, Shanbrom "was specifically
charged with the task of negotiating the terms of BDO's arrangement with Gramercy with regard
to their joint efforts in offering tax-advantaged transactions to potential clients, including those at
issue in the instant proceedings." The person at Gramercy he negotiated with was Johnston.
¶ 11 On January 10, 2001, Shanbrom and Johnston reached a "[n]ew deal," under
which BDO and Gramercy would split the fees "charged to clients in connection with the tax-
advantaged transactions jointly promoted by BDO and Gramercy[,] *** which included the tax-
advantaged transaction involving distressed debt (engaged in by the Khans in the tax years 2002
and 2003)."
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¶ 12 The term "[n]ew deal" is in a note, handwritten by Shanbrom at the time of the
negotiation and attached to his affidavit. According to the note, the "[o]ld deal" between BDO
and Gramercy was 50/50 of net fees, but the "[n]ew deal" would be 66% for BDO and 34% for
Gramercy, although, when it came to "[p]erformance," the split would be 20% for BDO and 80%
for Gramercy.
¶ 13 Shanbrom describes the contemplated joint efforts of BDO and Gramercy as
follows:
"As part of this fee-splitting agreement between BDO and
Gramercy, it was understood and agreed to that BDO had primary
responsibility for, among other things, identifying potential clients
and assisting in the marketing of the Transactions and that
Gramercy had primary responsibility for, among other things,
handling all aspects of the investments and transactional
documents necessary to implement the [t]ransactions, in addition
to assisting in marketing the [t]ransactions to clients identified by
BDO. It was on this basis of BDO's and Gramercy's joint efforts
that BDO and Gramercy orally agreed to the division of fees and
profits as outlined in my January 10, 2001, notes."
¶ 14 The record contains the printout of an e-mail, dated January 22, 2001, from
Robert Jones to Judy Geiselhart, both of BDO. The subject line is "Bonus for Paul Shanbrom,"
and the text of the e-mail reads: "Please process a $100,000 bonus for Paul Shanbrom in
recognition of his achievement in re-negotiating the joint venture between Gramercy and Tax
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Solutions." (An affidavit of Todd Simmens, BDO's national managing partner of tax risk
management, authenticates this e-mail as a business record of BDO.)
¶ 15 C. BDO's and Gramercy's Joint Efforts To Sell
the 2002 Distressed Debt Strategy to Khan
¶ 16 1. The Alleged Meeting in Urbana
¶ 17 In his affidavit, dated April 1, 2014, Khan states the following. Around June
2001, Shanbrom, a partner at BDO—a firm that Khan describes as his and his wife's "longtime
accountants"—solicited the Khans to participate in a "new Foreign Currency Derivative
Strategy" (which is the subject of Khan v. Gramercy Advisors, LLC, 2016 IL App (4th)
150436-U, and which, to be clear, we will not consider as a suit-based contact in the present
case—this case is about the 2002 and 2003 Distressed Debt Strategies, not the 2001 Foreign
Currency Derivative Strategy—although, merely for the sake of a coherent narrative, we
occasionally will refer to the 2001 Foreign Currency Derivative Strategy). In order that Khan
could learn more about the 2001 Foreign Currency Derivative Strategy, Shanbrom referred him
to Gramercy. Shanbrom even arranged for a representative from Gramercy to meet with Khan at
his executive office in Urbana, Illinois, in the summer of 2001 (Khan says in his affidavit). Khan
could not remember the name of the person Shanbrom brought along to this meeting in Urbana,
but he remembered that Shanbrom introduced him as an "operating partner" of Gramercy.
¶ 18 Khan continues in his affidavit:
"This meeting lasted between 45 minutes and one hour. During
the meeting the Gramercy partner described Gramercy's
investment capabilities generally and in particular with regard to
distressed debt investments, and solicited my investment with
Gramercy. Shanbrom and the Gramercy operating partner further
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represented that BDO and Gramercy had worked together on these
types of investments before, had other investors lined up to
participate, that the product was bullet-proof, and that prominent
law firm opinions backed up the product."
¶ 19 Defendants, on the other hand, dispute that anyone from Gramercy visited Khan
in Urbana. All eight persons who were employed by Gramercy in the summer of 2001—
Johnston, Robert Young, Robert Lanava, Rodd Kauffman, Robert S. Koenigsberger, Marc Hélie,
Robert Rauch, and Renato Mazzuchelli—have signed affidavits stating they never met with
Khan in Illinois and that, as far as they know, no one else from Gramercy did, either.
¶ 20 2. Telephone Calls From Gramercy to Khan, in Illinois
¶ 21 After this meeting in Urbana (Khan further says in his affidavit), the "Gramercy
operating partner" followed up with two or three telephone calls to Khan, in Illinois, "to inform
[him] that Gramercy only had one Brazilian distressed debt investment to offer at the time, ask
whether [he] was interested in the entire investment, request that [he] invest additional cash
(several millions) to lend further legitimacy to the investment and enhance the return on the
investment, and further assure [him] that a prominent law firm opinion on the transaction would
issue." (According to the complaint, a law firm, DeCastro, West, Chodorow, Glickfield & Nass,
Inc. (DeCastro), ultimately did issue opinions to Khan validating the legality of the 2002 and
2003 Distressed Debt Strategies, but instead of being an "independent" law firm, DeCastro was
in a conspiracy with BDO.)
¶ 22 3. The Conference Call in August 2001
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¶ 23 In August 2001, Shanbrom arranged for a conference call between Khan, himself,
and Johnston "to further discuss the 2001 Foreign Currency Derivative Strategy." Khan recounts
this conference call as follows:
"12. *** Shanbrom initiated the call, Johnston joined in,
and I participated in the call from my office in Illinois. During the
call, I introduced myself to Johnston and told him about my
Illinois-based businesses and residency. *** Johnston *** touted
what he described as Gramercy's special expertise with distressed
debt investments and its long history of achieving high rates of
return. Johnston promised me that Gramercy could achieve results
for my wife and me (and the other Plaintiffs) that few, if any, other
investment firms could provide. ***
***
14. Again, before Plaintiffs ever entered into any
agreements with Gramercy, during the call referenced in paragraph
12, BDO's Shanbrom and Gramercy's Johnston advised me that the
2001 Foreign Currency Derivative Strategy could yield a
substantial profit and at the same time, regardless of whether we
made or lost money on the investments, legally reduce Plaintiffs'
capital gains and income tax burden. Both men also told me that
Plaintiffs should invest additional sums of money with Gramercy,
aside from the investments directly involved in the strategies,
because these other investments would diversify Plaintiffs'
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portfolio, provide [plaintiffs] with a chance to achieve even higher
rates of return, and provide even more economic substance for the
2001 Foreign Currency Derivative Strategy. They later repeated
these statements with respect to the Distressed Debt Strategies
(sometimes collectively referred to as the 'Strategies'). In addition
to the money related to the Strategies, Shanbrom further
recommended that Plaintiffs invest additional funds with
Gramercy. Johnston and Shanbrom told me that any further
investment would be part of the Strategies.
15. My wife and I lacked any prior knowledge in the area
of these types of sophisticated investments and tax reduction
strategies."
¶ 24 In his affidavit of November 13, 2014, Johnston denies that, in the telephone
conversation of August 2001, he "made statements to Khan regarding the legality and tax
implications of Khan and BDO's tax strategies." But he does not deny that the telephone
conversation took place; nor does he otherwise contradict Khan's account of the telephone
conversation.
¶ 25 D. The Implementation of the 2002 Distressed Debt Strategy
¶ 26 1. The Investment Management Agreement of 2001
¶ 27 In November 2001, Gramercy sent a proposed "Investment Management
Agreement" to Khan in Illinois. After reviewing the agreement and signing it in Illinois, Khan
sent it back to Gramercy in Connecticut.
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¶ 28 In the agreement, which contained a New York choice-of-law clause but not a
forum-selection clause, Khan designated Gramercy as his "attorney-in-fact," authorizing
Gramercy to do various things on his behalf, i.e., entering into investments; selecting,
maintaining, and closing accounts with brokers; opening, maintaining, and closing bank accounts
in the course of effecting trading and investment transactions; and executing all documents and
taking all other actions that Gramercy considered to be necessary or appropriate to carry out its
duties. The agreement further stated that all correspondence was to be mailed to Khan at his
Illinois address and that his initial capital allocation to Gramercy was to be $2.5 million.
¶ 29 Under the heading "Limitation of Liability, Exculpation[,] and Indemnification,"
the investment management agreement provided as follows:
"(c) The Investment Manager [(defined as Gramercy)] is
not required to inquire into or take into account the effect of any
tax laws or the tax position of the Client [(defined as Khan)] in
connection with managing the Account. To the fullest extent
permitted by law, neither the Investment Manager, its members[,]
[n]or any of their respective affiliates and their respective partners,
members, officers, directors, employees, shareholders[,] and agents
shall be liable in any manner to the Client with respect to the effect
of any U.S. federal, state, local[,] or any other taxes of any nature
whatsoever on the Account or the Client in connection with
managing the Account or in connection with this Agreement or
otherwise. The Client agrees that it has consulted its own tax
advisor regarding the possible tax consequences of establishing the
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Account or entering into any investment made under or in
connection with this Agreement."
(In their brief, defendants quote section 7(c) as further saying: " '[Plaintiff] represents and agrees
that it has consulted its own tax advisor, and that neither [Gramercy] nor any of its affiliates has
made any oral or written statement to [Plaintiff], regarding the possible tax consequences of
establishing the Account or entering into any investment made under or in connection with this
Agreement. [Plaintiff] further represents and agrees that it has not relied on [Gramercy] or any
of its affiliates in connection with any tax advice.' " (Emphasis omitted.) Actually, that language
is not in section 7(c) of the 2001 investment management agreement, although, as we later will
discuss, it was in section 7(c) of a subsequent investment management agreement, the one Khan
entered into in 2003.)
¶ 30 On November 5, 2001, the same day he signed the 2001 investment management
agreement, Khan signed a letter addressed to Gramercy, in which he repeatedly referred to
himself as "it" (suggesting, perhaps, that this was a form letter). The second paragraph of this
letter, which defendants call a "side letter," reads as follows:
"The undersigned further acknowledges that: (a) it has
consulted with its own financial, tax[,] and legal advisors with
respect to the Transactions and, in particular, the effect of the tax
laws and regulations and the impact of any notices or
announcements issued by the IRS, (b) it has not relied on the
Investment Manager for any financial, tax[,] or legal advice with
respect to the Transactions, and (c) it shall not have any claim
against the Investment Manager in the event that any tax liability,
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problem[,] or issue should arise in connection with the
Transactions other than as a direct result of any negligence of the
Investment Manager in effecting the investments pursuant to the
Agreement."
¶ 31 2. Step-by-Step Telephonic Instructions
From Gramercy and Johnston to Khan, in Illinois,
on How To Carry Out the 2002 Distressed Debt Strategy
¶ 32 Khan recounts in his affidavit that Gramercy repeatedly telephoned him, in
Illinois, to explain to him how to accomplish the various steps of the 2002 Distressed Debt
Strategy. He says:
"Gramercy's representatives also participated in many telephone
conversations with me (directly and through Plaintiffs'
representative) regarding the implementation of the 2002
Distressed Debt Strategy. During these telephone conversations,
Gramercy's representative, including Johnston, advised me as to
the status of the 2002 Distressed Debt Strategy and Plaintiffs'
investments in distressed debt and instructed Plaintiffs with respect
to carrying out each of the steps of the Distressed Debt Strategies,
including when to dispose of the debt. I was present in Illinois
during these calls."
¶ 33 3. The Steps of the 2002 Distressed Debt Strategy
¶ 34 In their complaint, plaintiffs provide the following nutshell description of a
distressed debt strategy:
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"The tax component [of the strategy] involves the contribution of
distressed debts (generally assets trading substantially below their
face value) from a foreign contributor to a U.S. partnership. That
partnership subsequently contributes the distressed debts to lower-
tier partnerships. The foreign partner then sells its interest in the
lower-tier partnership to a U.S. taxpayer[,] who contributes other
assets to the partnership. The tax benefit is realized when the
partnership sells or exchanges the contributed distressed assets for
cash or other assets."
See also I.R.S., Coordinated Issue Paper-Distressed Asset/Debt Tax Shelters,
LMSB-04-0407-031 (eff. Apr. 18, 2007), available at
www.lb7.uscourts.gov/documents/12-33671.pdf (last visited June 27, 2016).
¶ 35 When the foreign party contributes an asset to a domestic partnership, such as a
distressed debt, the foreign party receives, in return, an interest in the partnership and becomes a
partner (or, in the case of a limited liability company, a member). See Superior Trading, LLC v.
Commissioner of Internal Revenue, 728 F.3d 676, 679 (7th Cir. 2013). In the hands of the
partnership, the basis of the asset is the foreign partner's original basis, which is, roughly
speaking, what the foreign partner originally paid for the asset. See id.; Black's Law Dictionary
145 (7th ed. 1999) (defining "basis" as "[t]he value assigned to a taxpayer's investment in
property and used primarily for computing gain or loss from a transfer of the property").
¶ 36 Over time, assets can fluctuate in value. The value of the asset that the foreign
partner contributed to the partnership might have changed since the date when the foreign partner
originally acquired the asset. For example, a receivable that is "distressed"—a debt that the
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borrower, because of his worsening financial condition, appears increasingly unlikely to repay—
will have declined in fair market value since the date when the foreign partner acquired it,
because a receivable, a debt, has value only to the extent it is likely to be paid. This decline in
value is a loss to the foreign partner.
¶ 37 Recognition, for tax purposes, of loss attributed to any change in the asset's value
that occurred before the foreign partner contributed the asset to the partnership is deferred until
the partnership sells the asset. See id. (citing 26 U.S.C. § 721(a) (2012)). If the asset is worth
less than what the foreign partner paid for it, the loss in value, called "built-in loss," will be
recognized only if and when the partnership sells the asset. See id. (citing 26 U.S.C.
§ 704(c)(1)(A) (2012)). If the foreign partner sells its partnership interest to a United States
taxpayer before the partnership sells the contributed asset, the United States taxpayer steps into
the foreign partner's shoes and will recognize the built-in loss only if and when the partnership
sells the asset. See id. (citing 26 C.F.R. § 1.704-3(a)(7) (2012)).
¶ 38 The United States partner, however, will be able to claim a built-in loss only up
the amount of his own basis in the partnership. See id. (citing 26 U.S.C. §§ 704(d), 705(a)(2)(A)
(2012)). Unless the United States partner has made a contribution to the partnership, his basis in
the partnership will equal only the amount he paid the foreign partner for its partnership interest,
and his recognition of built-in loss will be limited accordingly. See id. (citing 26 C.F.R. § 1.741-
1 (2012)). For illustration, let us say that the built-in loss associated with the asset (the distressed
debt the foreign partner had contributed to the partnership) is $1 million but that the United
States taxpayer paid the foreign partner only $300,000 for its partnership interest. When the
partnership later sells that asset for next to nothing, the United States taxpayer's loss will be
limited to $300,000—unless, before the partnership sells the asset, the United States taxpayer
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contributes, say, an additional $700,000 to the partnership, thereby increasing his basis in the
partnership to a level at which he will be able to recognize the full loss of $1 million ($300,000 +
$700,000). See id.¶ 39 By his capital contribution to the partnership, the United States taxpayer increases
his basis in the partnership, enabling him, later on, to claim the full amount of the built-in loss
when the partnership sells the asset. A distressed debt strategy is all about exploiting built-in
loss. And, typically, the built-in loss will be vastly greater than any actual economic loss the
taxpayer himself incurred. That is the aim.
¶ 40 Specifically, how did the 2002 Distressed Debt Strategy exploit built-in loss? The
first step was to find foreign companies that owned receivables which had declined precipitously
in value since the foreign companies acquired them. As it happened, some Brazilian companies
owned "emerging market receivables," or notes, that were worth substantially less than their face
value.
¶ 41 The next step was to form domestic partnerships to which the Brazilian
companies could contribute these distressed receivables. Gramercy was the managing member
of three United States limited liability companies that were suitable for that purpose: PBANAN,
LLC; JAKEND, LLC; and CFURDR, LLC. We will call these three limited liability companies
"the lower-tier partnerships." (For purposes of taxation, limited liability companies are treated
the same as partnerships. 26 C.F.R. § 301.7701-2(c)(1) (2015).) On February 11, 2002, the
Brazilian companies contributed their distressed receivables to the lower-tier partnerships in
return for membership interests in those partnerships.
¶ 42 Gramercy then helped Khan establish a contractual relationship with a broker,
Refco Capital Markets, Ltd. (Refco), so that Khan could buy options. On September 13, 2002,
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Gramercy, as Khan's attorney-in-fact under the investment management agreement, signed, on
his behalf, an International Swap Dealers Association, Inc. (ISDA), master agreement with
Refco. The plan was for Khan to buy options through Refco and then contribute these options to
a second-tier partnership. He thereby would build up his basis in the second-tier partnership so
that, ultimately, he could claim the full amount of the built-in loss after the lower-tier
partnerships contributed the distressed receivables to the second-tier partnership and the second-
tier partnership sold them.
¶ 43 On September 16, 2002, Tall Ships (an affiliate of Gramercy) and the lower-tier
partnerships entered into an operating agreement, creating the second-tier partnership, UVIADO.
The lower-tier partnerships then contributed the Brazilian distressed receivables to UVIADO in
return for membership interests in UVIADO.
¶ 44 On September 26, 2002, pursuant to Gramercy's instructions and through
Gramercy as his attorney-in-fact, Khan entered into option transactions with Refco, buying and
selling options in Japanese yen. He paid Refco a premium of $500,000, representing the
difference between the $70 million in options he bought and the $69.5 million in options he sold.
We say that Khan paid the premium, but, more precisely, Gramercy, as his attorney-in-fact, paid
this amount to Refco out of his account.
¶ 45 On October 17, 2002, Khan entered into an ISDA master agreement with
Gramercy Financial. Johnston signed the agreement on Khan's behalf, by virtue of Gramercy's
position as Khan's attorney-in-fact. That same day, pursuant to this ISDA master agreement,
Gramercy Financial sold Khan "certain United Mexican States 2026 Put Options" (to quote the
complaint). Lavana signed for the seller, Gramercy Financial, and another Gramercy employee,
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Koenigsberger, signed for Khan as the buyer, acting on behalf of Gramercy as Khan's attorney-
in-fact.
¶ 46 On November 18, 2002, through three interest transfer agreements, which
Gramercy sent to Khan in Illinois and which he signed in Illinois, he bought membership
interests in UVIADO from the first-tier partnerships. He thereby stepped into the shoes of the
first-tier partnerships—and, ultimately, into the shoes of the foreign partners—for purposes of
built-in loss.
¶ 47 That same day, Tall Ships entered into a contribution agreement between Khan
and UVIADO, whereby Khan contributed the Refco options to UVIADO, together with cash and
other assets. These contributions increased his basis in UVIADO to the point at which he owned
roughly 97% of UVIADO, with Tall Ships and the first-tier partnerships owning the remaining
3%. He also entered into an assignment agreement with UVIADO, by which he assigned to
UVIADO all his interest in the options he had bought from Gramercy Financial, further
increasing his basis in UVIADO. Johnston signed the assignment agreement pursuant to
Gramercy's authority as Khan's attorney-in-fact.
¶ 48 On December 26, 2002, UVIADO exchanged the Brazilian distressed receivables
with an unrelated third party, triggering a built-in tax loss.
¶ 49 The next step was to distribute this loss among the members of UVIADO. That
was done through the preparation of income tax forms. Gramercy hired Financial Strategy
Group, a Tennessee accounting firm, to prepare the 2002 UVIADO income tax return and the
corresponding Schedules K-1 for UVIADO's members, including the Khans.
¶ 50 Although Gramercy was the entity that hired Financial Strategy Group, Tall Ships
actually was UVIADO's "tax matters partner," according to UVIADO's 2002 tax return. Under
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section 1.39 of UVIADO's "Amended and Restated Operating Agreement," dated November 18,
2002, Tall Ships was the " 'Sole Manager' " of UVIADO, and the sole manager had the exclusive
right to make tax determinations. Section 3.8 empowered and obligated Tall Ships, as the sole
manager, to make determinations as to the allocations of tax losses among members of
UVIADO, and the members were not to gainsay those determinations. Section 3.8 provided:
"All matters concerning the valuation of Securities and other assets
of the Company, the allocation of Net Profit, Net Loss[,] and items
of taxable income, gains, losses[,] and deductions among the
Members, including taxes thereon, and accounting procedures not
expressly provided for by the terms of this Agreement shall be
determined in good faith by the Sole Manager, which
determination shall be final and conclusive as to all Members."
¶ 51 Financial Strategy Group prepared the 2002 UVIADO income tax return "on
behalf of Gramercy Advisors, LLC," "using summary data sheets provided by [Gramercy] and
reviewed by BDO Seidman as the source documents for the information to be reported in the
returns." (We are quoting from exhibit No. 5 of Michael A. Shaul's deposition. Shaul was a
member of Financial Strategy Group, and exhibit No. 5 is an "engagement letter," dated March
18, 2003, and addressed from him to "J. Robert Young" of "Gramercy Advisors" in Greenwich,
Connecticut.) After completing the 2002 UVIADO income tax return and associated Schedules
K-1, Financial Strategy Group sent them to Gramercy.
¶ 52 Gramercy in turn mailed a 2002 UVIADO Schedule K-1 to the Khans in Illinois.
According to Shaul's deposition, this Schedule K-1 stated that Khan owned almost 97% of
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UVIADO, and it "show[ed] a substantial loss of 69.8 million dollars." This was the loss
purportedly generated by the 2002 Distressed Debt Strategy.
¶ 53 Khan says in his affidavit:
"In April 2003, Plaintiffs received a copy of UVIADO's 2002
[Schedule] K-1 from Gramercy at my home address in Champaign,
Illinois. *** UVIADO's 2002 tax return and corresponding K-1
comprised the mechanism which directed Plaintiffs to claim
millions of dollars in losses on our tax returns, including my and
my wife's returns. As had been explained to me by Gramercy and
BDO, without the [Schedule] K-1 which Gramercy actually mailed
to Plaintiffs in Illinois, Plaintiffs would have lacked the
independent tax return support to realize the purported benefits of
the 2002 Distressed Debt Strategy."
¶ 54 E. The IRS Audit
¶ 55 In 2005, the IRS audited the Khans' income tax returns for 2002 and 2003.
Afterward, the IRS decided that the distressed debt strategies were abusive tax shelters and that
the losses they purported to generate, being contrived and devoid of economic substance, were
invalid and did not have the effect of reducing the Khans' taxable income. Consequently, the
IRS assessed millions of dollars of back taxes, interest, and penalties against the Khans, all of
which they paid from Illinois.
¶ 56 F. BDO and Gramercy Split Khan's Fee
for the 2002 Distressed Debt Strategy
¶ 57 On October 10, 2002, Gramercy sent an invoice to Robert Jones, in BDO's
Chicago office, requesting, "per [their] agreement," $400,000 as Gramercy's share of Khan's fee
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for the 2002 Distressed Debt Strategy. On October 16, 2002, Jones approved payment to
Gramercy in that amount.
¶ 58 G. BDO and Gramercy's Joint Efforts To Sell
the 2003 Distressed Debt Strategy to Khan
¶ 59 There was more than one distressed debt strategy. There was the 2002 Distressed
Debt Strategy, which we have just finished describing, and then there was the purportedly new
and improved version, the 2003 Distressed Debt Strategy. Khan says in his affidavit:
"In the spring of 2003, Shanbrom and BDO advised me that BDO
and Gramercy had redesigned the 2002 Distressed Debt Strategy to
give its clients, like my wife and me, a much greater chance of
making even more money from the distressed debt investments.
By this time, Plaintiffs had been Gramercy clients for many years,
and Gramercy engaged in continued efforts to solicit more
business from us. Gramercy had been communicating,
corresponding, and dealing with us in Illinois on a regular basis.
BDO and Gramercy further advised me—in communications with
me when I was in Illinois—that the 2003 Distressed Debt Strategy
was legal and provided the same tax benefits found in the 2002
Distressed Debt Strategy. So, based on the advice of BDO,
Gramercy (being my attorney-in-fact) and others, Plaintiffs
decided to participate in the 2003 Distressed Debt Strategy."
(Again, the IRS audit was not until 2005.)
¶ 60 H. The Implementation of the 2003 Distressed Debt Strategy
¶ 61 1. The Investment Management Agreement of 2003
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¶ 62 On May 21, 2003, Khan entered into an investment management agreement with
Gramercy Asset Management, in which he agreed to "allocate to the Account the initial amount
of $7,000,000." He appointed Gramercy Asset Management as his attorney-in-fact, giving it the
same powers he had given Gramercy under the investment management agreement of 2001. The
investment management agreement of 2003 contained the same exculpatory provision, paragraph
7(c), as the investment management agreement of 2001—except that paragraph 7(c) in the
agreement of 2003 included the additional language that defendants mistakenly say was in the
agreement of 2001.
¶ 63 At the same time that Khan signed the investment management agreement of
2003, he signed a "side letter" addressed to Gramercy Asset Management and stating:
"The undersigned further represents and acknowledges
that: (a) it has consulted with its own financial, tax[,] and legal
advisors with respect to the Transactions and, in particular, the
effect of the tax laws and regulations and the impact of any notices
or announcements issued by the IRS, (b) neither the Investment
Manager nor any of its affiliates, including, but not limited to,
Gramercy Advisors LLC, Tall Ships Capital Management LLC,
Hatteras Capital Management LLC[,] or Outer Banks Capital
Management LLC, ('Affiliates') nor any of the members, officers,
employees[,] or agents of the Investment Manager of Affiliates
(individually, an 'Affiliated Party') has made any oral or written
statement to the undersigned as to the potential tax consequences
of the Transactions[,] and the undersigned has not relied on the
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Investment Manager, any Affiliate, or any Affiliated Party for any
financial, tax[,] or legal advice with respect to the Transactions,
and (c) it shall not have any claim against the Investment Manager,
any Affiliate[,] or any Affiliated Party, in the event that any tax
liability, problem[,] or issue should arise in connection with the
Transactions other than as a direct result of any gross negligence of
the Investment Manager, any Affiliate[,] or Affiliated Party, in
effecting the investments pursuant to the Agreement."
¶ 64 2. The Steps of the 2003 Distressed Debt Strategy
¶ 65 On March 25, 2003, the Brazilian companies contributed "certain emerging
market receivables," or notes, to ANGLAISE LLC (ANGLAISE) in exchange for membership
interests therein. Gramercy Asset Management was the sole managing member of ANGLAISE.
¶ 66 On April 15, 2003, Gramercy Asset Management and ANGLAISE entered into an
operating agreement, by which they formed JONCTION, of which Gramercy Asset Management
likewise was the sole managing member. That same day, ANGLAISE contributed the Brazilian
distressed receivables to JONCTION in return for a membership interest therein.
¶ 67 Gramercy then sent to Khan, in Illinois, a proposed interest transfer agreement for
his signature. On May 21, 2003, he signed it, buying an 89.01% interest in JONCTION from
ANGLAISE.
¶ 68 That same day, JONCTION (of which Khan now was the majority owner)
contributed the Brazilian distressed receivables to LEMAN in return for a 98.9% interest in
LEMAN, with Gramercy Asset Management owning the remaining 1.1% interest.
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¶ 69 An "Amended and Restated Operating Agreement" for JONCTION, sent to Khan
in Illinois and signed by him there on May 21, 2003, established the Khans' address in
Champaign, Illinois, as the "principal office" of JONCTION. As a result, Gramercy Asset
Management became a member of a limited liability company that had its principal office in
Illinois.
¶ 70 On December 26, 2003, LEMAN exchanged the Brazilian distressed receivables
for receivables held by Gramercy Financial. This exchange triggered a built-in loss.
¶ 71 Gramercy again hired Financial Strategy Group, this time to prepare the 2003
return and Schedule K-1 relating to JONCTION. Again, Gramercy provided Financial Strategy
Group with "summary data sheets" so that Financial Strategy Group could insert the data into the
tax forms. After preparing the JONCTION return and the Schedule K-1, Financial Strategy
Group sent them to Gramercy, which in turn sent them to the Khans in Illinois.
¶ 72 In their federal and Illinois individual income tax returns for 2003, the Khans
claimed the losses set forth in the Schedule K-1. After the audit of 2005, the IRS disallowed
these losses generated by the 2003 Distressed Debt Strategy, just as it disallowed the losses
generated by the 2002 Distressed Debt Strategy. Consequently, the Khans had to pay further
back taxes, interest, and penalties.
¶ 73 I. Gramercy Requests From BDO Its Share of
Khan's Fee for the 2003 Distressed Debt Strategy
¶ 74 On June 11, 2003, Gramercy sent an invoice to Jones at BDO's office in Chicago,
requesting a payment of $400,000 as its share of Khan's fee for the 2003 Distressed Debt
Strategy.
¶ 75 II. ANALYSIS
¶ 76 A. General Jurisdiction and Specific Jurisdiction
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¶ 77 General or all-purpose jurisdiction is "jurisdiction over a defendant based on a
forum connection unrelated to the underlying suit (e.g., domicile)." Walden v. Fiore, 57 U.S.
___, ___n.6, 134 S. Ct. 1115, 1121 n.6 (2014). The forum state has general jurisdiction over a
foreign corporation if its "affiliations with the State are so continuous and systematic as to render
[it] essentially at home in the forum State." (Internal quotation marks omitted.) Daimler AG v.
Bauman, 571 U.S. ___, ___, 134 S. Ct. 746, 749 (2014).
¶ 78 Specific or case-linked jurisdiction, by contrast, "depends on an affiliatio[n]
between the forum and the underlying controversy (i.e., an activity or occurrence that takes place
in the forum State and is therefore subject to the State's regulation)." (Internal quotation marks
omitted.) Walden, 571 U.S. at ___n.6, 134 S. Ct. at 1121 n.6. As our supreme court said:
"Specific jurisdiction requires a showing that the defendant
purposefully directed its activities at the forum state and the cause
of action arose out of or relates to the defendant's contacts with the
forum state. [Citation.] Under specific jurisdiction, a nonresident
defendant may be subjected to a forum state's jurisdiction based on
certain single or occasional acts in the state but only with respect to
matters related to those acts. [Citation.]" (Internal quotation
marks omitted.) Russell v. SNFA, 2013 IL 113909, ¶ 40.
¶ 79 The parties agree there is no general jurisdiction over defendants in this case. The
dispute is whether there is specific jurisdiction.
¶ 80 B. The Illinois Long-Arm Statute and Constitutional Due Process
¶ 81 The Illinois long-arm statute, section 2-209 of the Code of Civil Procedure (735
ILCS 5/2-209 (West 2014)), governs the exercise of personal jurisdiction by an Illinois court
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over a nonresident. Russell, 2013 IL 113909, ¶ 29. In the past, Illinois courts used a two-step
analysis when deciding whether to exercise personal jurisdiction over a nonresident: they first
decided whether a specific provision of section 2-209 was satisfied, and if it was, only then did
they proceed to the further question of whether exercising personal jurisdiction over the
nonresident would be consistent with the due process clauses of the United States and Illinois
Constitutions (U.S. Const., amend. XIV; Ill. Const. 1970, art. I, § 2). Russell, 2013 IL 113909,
¶ 29.
¶ 82 On September 17, 1989, however, a statutory amendment went into effect that
added a catchall provision, subsection (c) (Ill. Rev. Stat. 1991, ch. 110, ¶ 2-209(c)), to section 2-
209. Russell, 2013 IL 113909, ¶ 30. Under the catchall provision, a court "may also exercise
jurisdiction on any other basis now or hereafter permitted by the Illinois Constitution and the
Constitution of the United States." Ill. Rev. Stat. 1991, ch. 110, ¶ 2-209(c) (now 735 ILCS 5/2-
209(c) (West 2014)). Thus, the catchall provision makes the long-arm statute coextensive with
the federal and Illinois constitutions, "collaps[ing] the jurisdictional inquiry into the single issue
of whether a defendant's Illinois contacts are sufficient to satisfy federal and Illinois due
process." Russell, 2013 IL 113909, ¶ 30.
¶ 83 C. The Fiduciary Shield Doctrine
¶ 84 Johnston invokes the fiduciary shield doctrine, arguing it would be unfair and
unreasonable, under Illinois law, to exercise personal jurisdiction over him, considering that the
contacts he allegedly made with Illinois were in his capacity as an agent of Gramercy, not in his
individual capacity.
¶ 85 The fiduciary shield doctrine does not protect Johnston. The reason is that, under
Rollins v. Ellwood, 141 Ill. 2d 244, 280 (1990), Illinois courts lack personal jurisdiction over any
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"individual who seeks the protection and benefits of Illinois law, not to serve his personal
interests, but to serve those of his employer or principal." As a comanaging member of
Gramercy, Johnston presumably was entitled to share in its profits, as a partner would be entitled
to share in the profits of a partnership (see Conn. Gen. Stat. § 34-222 (2015); Del. Code Ann. tit.
6, § 18-503 (2012)), and consequently Johnston must have been acting in his own personal
interest, as much as in the interest of Gramercy, when he helped to promote the 2002 and 2003
Distressed Debt Strategies. See Rollins, 141 Ill. 2d at 279-80 ("Because Ellwood's conduct in
Illinois was a product of, and was motivated by, his employment situation and not his personal
interests, we conclude that it would be unfair to use this conduct to assert personal jurisdiction
over him as an individual."). The fiduciary shield doctrine is intended to protect employees,
such as the police officer in Rollins, who, in making contact with the forum state, were merely
following orders on pain of being fired. See id. at 280. The doctrine is inapplicable to partners
or comanaging members of a limited liability corporation. Johnston is not comparable to
Baltimore police sergeant John S. Ellwood, the individual shielded in Rollins.
¶ 86 D. The Procedure for Adjudicating
Disputes Over Personal Jurisdiction
¶ 87 Because the trial court decided the jurisdictional question solely on the basis of
the documentary submissions, our standard of review is de novo. See Aasonn, LLC v. Delaney,
2011 IL App (2d) 101125, ¶ 10. De novo review means using the same analysis a trial court
would use (Khan v. BDO Seidman, LLP, 408 Ill. App. 3d 564, 578 (2011)); therefore, we have to
be clear on the burden of coming forward and other procedural rules governing the determination
of personal jurisdiction in the trial court.
¶ 88 The procedure begins with the complaint. If, on its face, a complaint lacks factual
allegations on the basis of which an Illinois court could legitimately exercise personal
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jurisdiction over the defendant, the complaint is subject to dismissal upon the defendant's
motion, even if the motion is unaccompanied by any supporting affidavit. Heller Financial, Inc.
v. Conagra, Inc., 166 Ill. App. 3d 1, 5 (1988). Unless the record—such as the facial deficiency
of the complaint—already supports the defendant's objection to personal jurisdiction, the
defendant must do so by an affidavit (735 ILCS 5/2-301(a) (West 2014)) "made on the personal
knowledge of the [affiant]" (Ill. S. Ct. R. 191(a) (eff. Jan. 4, 2013)). The trial court should
accept as true any facts in the defendant's affidavit that the plaintiff does not contradict by a
counteraffidavit (TCA International, Inc. v. B&B Custom Auto, Inc., 299 Ill. App. 3d 522, 531
(1998); Johnson v. Ortiz, 244 Ill. App. 3d 384, 388 (1993)), which likewise must be "made on
the personal knowledge of the [affiant]" (Ill. S. Ct. R. 191(a) (eff. Jan. 4, 2013)).
¶ 89 But what if the plaintiff's affidavit and the defendant's affidavit clash on a material
issue of fact? The supreme court says: "Any conflicts in the pleadings and affidavits must be
resolved in the plaintiff's favor ***." Russell, 2013 IL 113090, ¶ 28. Defendants question the
fairness of a procedure by which the plaintiff's affidavit automatically trumps the defendant's
affidavit. See TCA International, Inc. 299 Ill. App. 3d at 533 ("Such a rule would allow a
plaintiff to hale any defendant into court simply by filing one perjurious affidavit, which cannot
be condoned.").
¶ 90 The short answer is that we have no power to review decisions by the supreme
court. Perhaps, however, we can somewhat allay defendants' concerns about procedural fairness
by observing that the relevant factual issues on which the affidavits clash really are not
dispositive; that is, they do not have to be resolved in this appeal; the jurisdictional question does
not turn on their resolution.
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¶ 91 What are the factual issues that emerge from the competing affidavits? We see
two relevant issues, neither of which is critical to the outcome in this appeal.
¶ 92 Khan claims, in his affidavit, that a partner from Gramercy visited him in Urbana
in the summer of 2001. On the other hand, all eight persons who worked for Gramercy in the
summer of 2001 insist, in their affidavits, that they never met with Khan in Illinois and that they
know of no one else from Gramercy who did so, either.
¶ 93 Also, Khan claims, in his affidavit, that during a telephone conversation in August
2001, Johnston represented to him that the 2001 Foreign Currency Derivative Strategy could
"legally reduce Plaintiffs' capital gains and income tax burden." But further down in the same
paragraph of his affidavit, Khan states: "They [(Shanbrom and Johnston)] later repeated these
statements with respect to the Distressed Debt Strategies (sometimes collectively referred to as
the 'Strategies')." We assume that, by "later," Khan means later in the conference call. On the
other hand, Johnston, in his affidavit of November 13, 2014, denies that, in the conference call,
he "made statements to Khan regarding the legality and tax implications of Khan and BDO's tax
strategies."
¶ 94 Russell would require us to hold that Khan's affidavit automatically prevails. See
Russell, 2013 IL 113909, ¶ 28. Actually, however, we can sidestep these two factual issues
because, as it happens, personal jurisdiction does not turn on their resolution. In a moment, we
will discuss the other minimum contacts.
¶ 95 E. The Most Recent Decision by the Supreme Court
on Personal Jurisdiction, Walden
¶ 96 1. The Lesson of Walden
¶ 97 Defendants repeatedly invoke the Supreme Court's statement in Walden, 571 U.S.
at ___, 134 S. Ct. at 1125, that when deciding whether to exercise personal jurisdiction over a
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nonresident defendant, a court must not "[attribute] a plaintiff's forum connections to the
defendant and [make] those connections decisive in the jurisdictional analysis." (Internal
quotation marks omitted.) Defendants criticize the trial court in this case for "not [addressing]
Walden at all, even though it is the most recent authority from the U.S. Supreme Court
addressing the minimum contacts standard for specific jurisdiction." (Emphasis in original.)
¶ 98 Let us consider Walden and see what light it sheds on this appeal. In Walden, 571
U.S. at ___, 134 S. Ct. at 1119, the respondents, Gina Fiore and Keith Gipson, were at the airport
in San Juan, Puerto Rico, getting ready to fly back to Nevada, where they resided, when agents
of the Transportation Security Administration searched their carry-on bags and found $97,000 in
cash. The respondents explained to the agents that they had been gambling at the El San Juan, a
casino in San Juan. Id. at ___, 134 S. Ct. at 1119. Although the respondents were cleared for
departure, a law enforcement officer at the San Juan airport alerted the Drug Enforcement
Administration (DEA) in Atlanta, Georgia, that the respondents were on their way to Atlanta to
catch a connecting flight to Las Vegas, Nevada, and that they were carrying $97,000 in cash. Id.
at ___, 134 S. Ct. at 1119.
¶ 99 When the respondents arrived at the airport in Atlanta, the petitioner, Anthony
Walden, an agent of the DEA, approached them and questioned them about the large amount of
cash they were carrying. Id. at ___, 134 S. Ct. at 1119. The respondents explained to him that
they were professional gamblers and that the cash consisted of their winnings and the reserve out
of which they gambled. Id. at ___, 134 S. Ct. at 1119. After using a drug-sniffing dog, the
petitioner seized the cash and told the respondents it would be returned to them if they later
proved they had obtained it from a legitimate source. Id. at ___, 134 S. Ct. at 1119. The
respondents boarded their flight to Nevada. Id. at ___, 134 S. Ct. at 1119.
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¶ 100 The next day, the petitioner received a phone call from the respondents' attorney
in Nevada, requesting the return of the cash. Id. at ___, 134 S. Ct. at 1119. Also, on two
occasions over the next month, the petitioner received documentation from the attorney
regarding the legitimate origin of the cash. Id. at ___, 134 S. Ct. at 1119.
¶ 101 Sometime after seizing the cash, the petitioner helped draft a probable cause
affidavit in support of a proposal that the respondents forfeit the cash to the federal government
as ill-gotten gains, and he forwarded the affidavit to a United States Attorney in Georgia. Id. at
___, 134 S. Ct. at 1119. Ultimately, no forfeiture complaint ever was filed, and the DEA
returned the cash to the respondents some six months after the petitioner seized it. Id. at ___,
134 S. Ct. at 1120.
¶ 102 The respondents then sued the petitioner in the federal district court of Nevada,
alleging he had violated their rights under the fourth amendment (U.S. Const., amend. IV) by
seizing their cash without probable cause, writing a false affidavit, keeping their cash after
concluding it had not come from drug-related activity, and withholding exculpatory information
from the United States Attorney. Walden, 571 U.S. at ___, 134 S. Ct. at 1120.
¶ 103 The district court granted the petitioner's motion for dismissal, concluding that his
seizure of the cash in Georgia did not justify the exercise of personal jurisdiction over him in
Nevada. Id. at ___, 134 S. Ct. at 1120 "The court concluded that even if [the] petitioner [had]
caused harm to [the] respondents in Nevada while knowing they lived in Nevada, that fact alone
did not confer jurisdiction." Id. at ___, 134 S. Ct. at 1120.
¶ 104 The federal court of appeals disagreed with the district court. It reasoned that the
petitioner had " 'expressly aimed' his submission of the allegedly false affidavit at Nevada by
submitting the affidavit with knowledge that it would affect persons with a 'significant
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connection' to Nevada." Id. at ___, 134 S. Ct. at 1120 (quoting Fiore v. Walden, 688 F.3d 558,
581 (9th Cir. 2011)). Delaying the return of the cash had caused " 'foreseeable harm' " to the
respondents in Nevada (id. at ___, 134 S. Ct. at 1120 (quoting Fiore, 688 F.3d at 582)), and in
the opinion of the court of appeals, it would be "otherwise reasonable" of the district court in
Nevada to exercise personal jurisdiction over the petitioner (id. at ___, 134 S. Ct. at 1120).
Therefore, the court of appeals reversed the district court's judgment and held that the district
court "could properly exercise jurisdiction over 'the false probable cause affidavit aspect of the
case.' " Id. at ___, 134 S. Ct. at 1120 (quoting Fiore, 688 F.3d at 577).
¶ 105 The Supreme Court disagreed with the court of appeals and agreed with the
district court. Id. at ___, 134 S. Ct. at 1121. Exercising personal jurisdiction over a nonresident
had to be consistent with due process, the Supreme Court explained, and although due process
did not require the nonresident's physical presence in the forum state, the nonresident had to have
made "minimum contacts" with the forum state "such that the maintenance of the suit [would]
not offend traditional notions of fair play and substantial justice." (Internal quotation marks
omitted.) Id. at ___, 134 S. Ct. at 1121. The exercise of specific jurisdiction was consistent with
due process only if "the defendant's suit-related conduct [had] create[d] a substantial connection
with the forum State." Id. at ___, 134 S. Ct. at 1121.
¶ 106 The Supreme Court emphasized two points about this substantial connection with
the forum state. "First, the relationship [had to] arise out of contacts that the 'defendant himself '
create[d] with the forum State." (Emphasis in original.) Id. at ___, 134 S. Ct. at 1122 (quoting
Burger King Corp. v. Rudzewicz, 471 U.S. 462, 475 (1985)). The communications— the
telephone call and the letters—that the respondents' attorney, in Nevada, had directed to the
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petitioner, in Georgia, did not count as minimum contacts because they were not contacts by the
petitioner himself with Nevada. Id. at ___, 134 S. Ct. at 1125.
¶ 107 "Second, [the Supreme Court's] 'minimum contacts' analysis look[ed] to the
defendant's contacts with the forum State itself, not the defendant's contacts with persons who
reside[d] there." Id. at ___, 134 S. Ct. at 1122. Although the petitioner knew that the
respondents were Nevada residents and that his actions in Georgia probably would affect them
financially in Nevada (just as it would have affected them financially in whatever state they
happened to reside), it did not follow that he had made contact with Nevada. Id. at ___, 134 S.
Ct. at 1124-25. All of his suit-specific conduct was in Georgia. Id. at ___, 134 S. Ct. at 1124.
He "never traveled to, conducted activities within, contacted anyone in, or sent anything or
anyone to Nevada." Id. at ___, 134 S. Ct. at 1124. He did things exclusively in Georgia that
harmed the respondents, who happened to reside in Nevada. Id. at ___, S. Ct. at 1124. To have
based the exercise of personal jurisdiction merely on the foreseeability of harm to Nevada
residents, without requiring any minimum contacts with Nevada itself, would have "improperly
attribute[d] a plaintiff's forum connections to the defendant and [would have made] those
connections decisive in the jurisdictional analysis." (Internal quotation marks omitted.) Id. at
___, 134 S. Ct. at 1125.
¶ 108 This was not to say that effects felt within the forum state were always irrelevant;
it was just that these effects had to arise from the defendant's contacts with the forum state. Id. at
___, 134 S. Ct. at 1125. Effects felt by the plaintiff in the forum state are not necessarily
minimum contacts by the defendant with the forum state. For example, A could pick B's pocket
while B is visiting Florida, and after B returns home to South Carolina, he might well, as a
consequence, suffer a paucity of funds there—he might default on his cell phone contract—but
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that does not mean that A had any contact with South Carolina. That hypothetical is Walden
stripped to its essentials. As the Supreme Court put it:
"[M]ere injury to a forum resident is not a sufficient connection to
the forum. Regardless of where a plaintiff lives or works, an injury
is jurisdictionally relevant only insofar as it shows that the
defendant has formed a contact with the forum State. The proper
question is not where the plaintiff experienced a particular injury
or effect but whether the defendant's conduct connects him to the
forum in a meaningful way." Id. at ___, 134 S. Ct. at 1125.
¶ 109 2. The Application of Walden to the Three Affiliates of Gramercy
¶ 110 Gramercy Asset Management, Gramercy Financial, and Tall Ships are limited
liability companies, and they are affiliates of a fourth limited liability company, Gramercy. See
Black's Law Dictionary 59 (7th ed. 1999) (defining "affiliate" as "[a] corporation that is related
to another corporation by shareholdings or other means of control; a subsidiary, parent, or sibling
corporation"). All four of these limited liability companies are organized under the laws of
Delaware, and therefore the laws of Delaware "govern [their] organization and internal affairs
and the liability of [their] managers, members, and their transferees." 805 ILCS 180/45-1(a)
(West 2014) ("Law governing foreign limited liability companies"). Under Delaware law, a
member of a limited liability company cannot be held liable for the debts, obligations, and
liabilities of the limited liability company. Del. Code Ann. tit. 6, § 18-303(a) (2013). Thus, even
if Delaware limited liability companies are affiliated—even if one limited liability company is a
member of (that is, owns an interest in) another limited liability company—the two limited
liability companies are separate legal entities. See id. Because Delaware limited liability
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companies, though affiliated, are separate legal entities, the minimum contacts of one are not the
minimum contacts of another. "[P]ersonal jurisdiction is a defendant-specific inquiry," and
instead of "simply aggregat[ing] the defendants' contacts under the general rubric of" the 2002
and 2003 Distressed Debt Strategies, we have to determine whether "each defendant, taken
individually, has sufficient minimum contacts with Illinois to satisfy due process." Richard
Knorr International, Ltd. v. Geostar, Inc., No. 08-C-5414, 2010 WL 1325641, at *4 (N.D. Ill.
Mar. 30, 2010); see also Calder v. Jones, 465 U.S. 783, 790 (1984) ("Each defendant's contacts
with the forum State must be assessed individually.").
¶ 111 Let us begin with the three affiliates of Gramercy—Gramercy Asset Management,
Gramercy Financial, and Tall Ships—taking them one at a time.
¶ 112 a. Gramercy Asset Management
¶ 113 The only thing Gramercy Asset Management did was enter into an agreement
with ANGLAISE, thereby forming JONCTION, the second-tier partnership in the 2003
Distressed Debt Strategy. We are aware of no evidence that Gramercy Asset Management,
headquartered in Greenwich, Connecticut, entered into this agreement in Illinois. It is true that
JONCTION was formed for Khan, pursuant to the 2003 Distressed Debt Strategy, and in that
respect, the formation of JONCTION was relevant to him, in Illinois. But the effect on an
Illinois resident of conduct occurring exclusively outside Illinois is not a minimum contact with
Illinois. See Walden, 571 U.S. at ___, 134 S. Ct. at 1124-25. "[T]he plaintiff cannot be the only
link between the defendant and the forum." Id. at ___, 134 S. Ct. at 1122.
¶ 114 Granted, by the amendment of its operating agreement, JONCTION moved its
principal office to Illinois. But it is unclear that Gramercy Asset Management, as the owner of a
mere 1.1% interest in JONCTION, had any real say in that decision.
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¶ 115 In the absence of minimum contacts by Gramercy Asset Management with
Illinois, exercising personal jurisdiction over Gramercy Asset Management would violate due
process. See International Shoe Co. v. State of Washington, Office of Unemployment
Compensation & Placement, 326 U.S. 310, 316 (1945).
¶ 116 b. Gramercy Financial
¶ 117 All Gramercy Financial did was (1) sell options to Khan and (2) exchange its own
receivables for LEMAN's receivables. We are aware of no evidence that either of these
transactions happened in Illinois (Khan bought the options through his attorney-in-fact,
Gramercy). These transactions affected Khan in Illinois, as the 2003 Distressed Debt Strategy
contemplated they would do—but, again, an effect felt in Illinois without any contacts by the
defendant with Illinois does not justify the exercise of personal jurisdiction (see Walden, 571
U.S. at ___, 134 S. Ct. at 1125). In the absence of any minimum contacts by Gramercy Financial
with Illinois, exercising personal jurisdiction over Gramercy Financial would violate due
process. See International Shoe, 326 U.S. at 316.
¶ 118 c. Tall Ships
¶ 119 All Tall Ships did was enter into (1) an operating agreement with lower-tier
partnerships to create the second-tier partnership UVIADO and (2) a contribution agreement
between Khan and UVIADO, whereby Khan contributed the Refco options to UVIADO. Again,
these transactions, which were in implementation of the 2002 Distressed Debt Strategy, affected
Khan in Illinois, but when accomplishing these transactions, Tall Ships made no contact with
Illinois. These transactions are further instances of conduct occurring entirely outside Illinois
that happened to affect someone in Illinois because of the fortuity of his residing here. See
Walden, 571 U.S. at ___, 134 S. Ct. at 1125. In the absence of any minimum contacts by Tall
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Ships with Illinois, exercising personal jurisdiction over Tall Ships would violate due process.
See International Shoe, 326 U.S. at 316.
¶ 120 F. How Gramercy and Johnston Differ From the Three Affiliates:
They Reached Out and Made Minimum Contacts With Illinois
Instead of Merely Causing an Effect Here
¶ 121 Unlike the three affiliates we just finished discussing, Gramercy and Johnston
made contact with this state. We are unconvinced by their comparison of themselves to the DEA
agent in Walden, who never, in any way, reached out beyond the borders of Georgia. It is not
that Gramercy and Johnston engaged in a course of conduct that was hermetically sealed in
Connecticut or some other nonforum state, the effect of which the Khans just happened to feel in
Illinois because of the fortuitous fact that they resided here. Gramercy and Johnston reached out
to Illinois.
¶ 122 For one thing, BDO, by agreement with Gramercy, served as Gramercy's
advertiser in Illinois. Gramercy solicited business in Illinois through BDO. Also, Johnston
made a tortious misrepresentation to Khan in Illinois, namely, that the 2002 and 2003 Distressed
Debt Strategies had economic substance.
¶ 123 Let us discuss those minimum contacts one at a time.
¶ 124 1. The Agreement Between BDO and Gramercy
To Jointly Promote and Implement
"Tax-Advantaged Strategies"
¶ 125 a. Defendants' Claim of Forfeiture
¶ 126 Defendants complain that, "[o]n April 23, 2015, more than five months after
briefing on Gramercy's Motion to Dismiss for Lack of Personal Jurisdiction closed," plaintiffs
submitted documentary evidence "that BDO and Gramercy were engaged in a joint venture."
The evidence, specifically, was Shanbrom's affidavit of April 21, 2015, and Jones's e-mail of
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January 22, 2001. Defendants assert that this " 'new' evidence is cumulative and waived" (by
which they evidently mean "forfeited" (see Pinske v. Allstate Property & Casualty Insurance
Co., 2015 IL App (1st) 150537, ¶ 18 (explaining the difference between waiver and forfeiture)).
¶ 127 Defendants do not cite the pages of the record where the briefing schedule may be
found, but we note that, in a docket entry for November 12, 2014, the trial court extended the
deadline for the reply brief to November 17, 2014. Because the reply brief typically is the final
brief to be filed, we infer that briefing closed on November 17, 2014—and April 23, 2015, would
have been, as defendants say, "more than five months after" that date.
¶ 128 On April 23, 2015, plaintiffs filed a document entitled "Plaintiffs' Motion For
Leave To Supplement Their Responses in Opposition to Gramercy's Motions To Dismiss For
Lack of Personal Jurisdiction." In that motion, plaintiffs told the trial court they still were
reviewing more than 800,000 pages of documents produced to them in November 2014 by a
former defendant in this case, Morgan, Lewis & Bockius, LLP (Morgan), and that, among those
documents, they had found the e-mail of January 22, 2001, from Jones approving a bonus of
$100,000 for Shanbrom in recognition of "his achievement in re-negotiating the joint venture
between Gramercy and Tax Solutions." Also, they had found an e-mail of December 12, 2001,
from Johnston to Jones, billing BDO $250,000 as Gramercy's share of the fee for "Shahid Khan"
in connection with the 2001 Foreign Currency Derivative Strategy. Finally, according to this
motion, plaintiffs' counsel had been conducting discovery in a case against BDO in Arkansas,
and on February 5, 2015, in that case, BDO produced the handwritten note by Shanbrom in
which he memorialized the fee-splitting agreement with Johnston.
¶ 129 On the basis of this additional evidence, plaintiffs invoked the joint-venture
theory of personal jurisdiction, under which "the minimum contacts of one co-venturer" (in this
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case, BDO) "[were] attributable to other co-venturers" (Gramercy) "such that personal
jurisdiction over one [meant] personal jurisdiction over all." Hill v. Shell Oil Co., 149 F. Supp.
2d 416, 418 (N.D. Ill. 2001).
¶ 130 On May 1, 2015, in response to this motion by plaintiffs, defendants sent a letter
to the trial court, in which they requested the entry of an order that would have done the
following (we quote from defendants' letter): "(i) require Plaintiffs to provide Gramercy with the
[Morgan] document production referenced in their motion; and (ii) grant Gramercy 90 days to
review the nearly 800,000 pages of documents therein, and an additional 30 days to respond to
Plaintiffs' motion (without prejudice to Gramercy's right to request additional time.)." Noting
that plaintiffs had previously refused to turn over to them these 800,000 pages of documents,
defendants argued: "Without such relief, Gramercy will undoubtedly be prejudiced by Plaintiffs'
motion, which references documents withheld from Gramercy in violation of the law, and raises
new arguments against Gramercy's motion to dismiss to which it is entitled to respond with the
benefit of the same discovery materials available to Plaintiffs."
¶ 131 It does not appear that the trial court ever ruled on this motion to compel
production. Instead, on May 15, 2015, the trial court denied defendants' motion for dismissal. In
its order, the court remarked: "In the Gramercy matter, after time for briefing had expired[,]
counsel has sent the Court letters and emails regarding trial court decisions across the country
and most recently, beginning April 23, 2015[,] correspondence regarding Plaintiffs' Request for
Leave to Supplement Responses to Defendants' motions. The Court felt obligated to at least
review all of this documentation, none of which will be relied on for this order."
¶ 132 Now that we are clear what happened in the trial court, we are in a position to
observe that, in their letter to the trial court, defendants did not take the position they take now,
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that plaintiffs should be barred from presenting the additional documentary evidence because
they did not present it within the time limits of the briefing schedule. Instead, defendants sought
to compel plaintiffs to turn over the documents they had obtained from Morgan, and defendants
sought additional time to review those documents once plaintiffs turned them over. Thus, in the
proceedings below, the ground for defendants' objection was not a violation of the briefing
schedule but, rather, the withholding of the documents that Morgan had produced to plaintiffs.
And the remedy Gramercy requested was not plaintiffs' forfeiture of the additional evidence but,
rather, the production of the documents from Morgan and time to review them. Instead of
claiming forfeiture in the trial court, Gramercy moved to compel discovery. Defendants cannot,
for the first time on appeal, request a remedy they did not request below. See Feeley v. Michigan
Avenue National Bank, 141 Ill. App. 3d 187, 188 (1986); Bell v. Yale Development Co., 102 Ill.
App. 3d 108, 112 (1981). We could not reasonably fault the trial court for omitting to declare a
forfeiture that defendants never sought.
¶ 133 Setting aside the problem that defendants are requesting a new remedy, they cite
no authority for this new remedy: they cite no case holding that the expiration of a briefing
schedule precludes the presentation of additional documentary evidence. See Ill. S. Ct. R.
341(h)(7) (eff. Feb. 6, 2013) ("Argument, *** with citation of the authorities *** relied on.").
As a matter of English, a "briefing schedule" applies to briefs, not evidence. We are aware of no
decision holding otherwise.
¶ 134 The only authority that defendants offer in support of their claim of forfeiture is a
decision by the circuit court of Cook County in Kaufman v. BDO Seidman, LLP, No. 12-L-
13292, (Cook Co. Cir. Ct.) a copy of which they have attached as an appendix to their reply
brief. First, decisions of a circuit court have no precedential value (Delgado v. Board of the
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Election Commissioners of the City of Chicago, 224 Ill. 2d 481, 488 (2007))—and the same goes
for Coe v. BDO Seidman, LLP, No. 12-L-013691 (Cook Co. Cir. Ct.), another circuit court case
that defendants cite in their brief. Second, even if the circuit court's decision in Kaufman had any
precedential value, the decision is inapposite: when refusing to consider Shanbrom's affidavit
regarding the "joint venture," the circuit court in Kaufman was ruling on a petition for relief from
judgment (735 ILCS 5/2-1401 (West 2014)), which required a showing that, in the exercise of
due diligence, the plaintiff could not have presented Shanbrom's affidavit before the entry of the
judgment. But plaintiffs in this case filed no section 2-1401 petition. They did not seek to
vacate a judgment that was more than 30 days old. Rather, they submitted their additional
evidence before the trial court made its decision.
¶ 135 When reviewing the record de novo (see McNally v. Morrison, 408 Ill. App. 3d
248, 254 (2011)), we do not see how defendants suffered any prejudice from the additional
evidence, considering that, as they themselves claim, the additional evidence was merely
"cumulative," and considering that defendants had ample time to file a counteraffidavit if they
had seen fit to do so. Plaintiffs filed the additional evidence on April 23, 2015, and the trial court
made its decision on May 15, 2015. Thus, if Shanbrom was inaccurate in his recollection of the
deal he had struck with Johnston, Gramercy had three weeks to obtain an affidavit to that effect
from Johnston. No such counteraffidavit was forthcoming.
¶ 136 It is unclear why defendants would have needed to review the 800,000 pages of
documents from Morgan to determine (1) the terms of the oral agreement that Johnston had
reached with Shanbrom and (2) the amount that BDO had paid to Gramercy as Gramercy's share
of Khan's fee. In sum, we see no reason to disregard evidence of the fee-sharing agreement
between BDO and Gramercy, an agreement that defendants apparently do not dispute.
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¶ 137 It is true that, after reviewing the additional evidence, the trial court chose not to
rely on it as a basis for its ruling. But "this court reviews the determination of the trial court, not
its reasoning, and therefore we may affirm on any basis in the record[,] [regardless of] whether
*** the trial court relied on that basis or its reasoning was correct." Antonacci v. Seyfarth Shaw,
LLP, 2015 IL App (1st) 142372, ¶ 21. (We hasten to add that we imply no criticism against the
trial court. We can see that Judge Ford has labored heroically in these complicated cases, and we
commend him for his work.)
¶ 138 b. Gramercy's Purposeful Availment, Through BDO,
of the Privilege of Conducting Activities in Illinois
¶ 139 In federal case law, there is such a thing as the joint-venture theory of personal
jurisdiction, whereby the actions of one coventurer in the forum state are automatically imputed
to another coventurer (Gross v. GGNSC Southaven, LLC, No. 3:14CV00037-M-A, 2014 WL
4418051, at *3 (N.D. Miss. Sept. 8, 2014); Wendt v. Handler, Thayer & Duggan, LLC, 613 F.
Supp. 2d 1021, 1030 (N.D. Ill. 2009)), but defendants dispute that Gramercy's relationship with
BDO met all the elements of a joint venture as defined by Illinois case law.
¶ 140 We are leery of using a checklist of common-law elements to decide whether the
exercise of personal jurisdiction comports with constitutional due process. That, basically, is
what the joint-venture theory of jurisdiction would do. Such an approach is too mechanical. See
Burger King Corp., 471 U.S. at 478-79 (personal jurisdiction does not turn on "mechanical
tests"). Even if, technically, Gramercy's relationship with BDO "[fell] slightly outside the
confines" of a "joint venture" as defined by Illinois law, "the question before us is whether a
sufficient relationship exist[ed] under the Due Process Clause to permit the exercise of
jurisdiction, not whether a partnership, joint venture, or other particular agency relationship
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between [them] exist[ed]." Daynard v. Ness, Motley, Loadholt, Richardson & Poole, P.A., 290
F.3d 42, 56-57 (1st Cir. 2002).
¶ 141 Two parties can have a relationship or contractual understanding that
contemplates one party's acting for the benefit of them both in the forum state. A nondomiciliary
can take advantage of legal rights and protections in the forum state by arranging for a
domiciliary to act there on his behalf or for his benefit. Burger King, 471 U.S. at 479 n.22. "[I]t
is essential in each case that there be some act by which the defendant purposefully avail[ed]
himself of the privilege of conducting activities within the forum State, thus invoking the
benefits and protections of its laws." Hanson v. Denckla, 357 U.S. 235, 253 (1958). This
purposeful availment need not be direct; it can be through someone else, as long as this someone
else makes contact with the forum state bilaterally rather than unilaterally. See Burger King, 471
U.S. at 479 n.22 ("We have previously noted that when commercial activities are carried on in
behalf of an out-of-state party[,] those activities may sometimes be ascribed to the party
[citation], at least where he is a primary participant[t] in the enterprise and has acted purposefully
in directing those activities [citation]." (Internal quotations marks omitted.)); Helicopteros
Nacionales de Colombia, S.A. v. Hall, 466 U.S. 408, 417 (1984) ("[The] unilateral activity of
another party or a third person is not an appropriate consideration when determining whether a
defendant has sufficient contacts with a forum State to justify an assertion of jurisdiction."
(Emphasis added.)); World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 295 (1980)
(Petitioners carry on no activity whatsoever in Oklahoma; they close no sales and perform no
services there, avail themselves of none of the privileges and benefits of Oklahoma law, and
solicit no business there either through salespersons or through advertising reasonably
calculated to reach the State. Nor does the record show that they regularly sell cars to Oklahoma
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residents or that they indirectly, through others, serve or seek to serve the Oklahoma market. Itel
Containers International Corp. v. Atlanttrafik Express Service, Ltd., 116 F.R.D. 477, 480
(S.D.N.Y. 1987).
¶ 142 In the plurality decision of Asahi Metal Industry Co. v. Superior Court of
California, 480 U.S. 102 (1987), Justice O'Connor set forth various relationships between a
resident and nonresident by which the nonresident could purposefully make minimum contacts
with the forum state. Id. at 112 (opinion of O'Connor, J., joined by Rehnquist, C.J., and Powell
and Scalia, JJ.). But first, let us recount the facts of Asahi.
¶ 143 Gary Zurcher lost control of his motorcycle and crashed when the tube in the rear
tire of his motorcycle blew out. Id. at 106 (majority opinion). He filed a product-liability action
in California, where the accident occurred, naming, among others, Cheng Shin Rubber Industrial
Co., Ltd. (Cheng Shin), the Taiwanese manufacturer of the tube. Id. at 105-06. Cheng Shin in
turn brought an action for indemnification against the manufacturer of the tube's valve assembly,
a Japanese corporation, Asahi Metal Industry Co., Ltd. (Asahi). Id. at 106. Asahi moved to
quash Cheng Shin's service of summons, arguing that the due process clause of the fourteenth
amendment (U.S. Const., amend. XIV) forbade California to exercise personal jurisdiction over
Asahi. Asahi, 480 U.S. at 106.
¶ 144 The Supreme Court agreed that "the exercise of personal jurisdiction by a
California court over Asahi in this instance would be unreasonable and unfair" and, hence, a
violation of due process. Id. at 114. (opinion of O'Connor, J., joined by Rehnquist, C.J., and
Brennan, White, Marshall, Blackmun, Powell, and Stevens, JJ.). Due process required not only
minimum contacts but also fair play and substantial justice. Burger King, 471 U.S. at 476.
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Haling a Japanese corporation, Asahi, into a California court would have been, in the
circumstances of this case, unjust.
¶ 145 The Supreme Court was divided, though, on whether the mere act of placing a
product in the stream of commerce, with the expectation that it would be purchased in the forum
state, qualified as a minimum contact with the forum state for purposes of International Shoe.
Justice Brennan thought it did, and Justices White, Marshall, and Blackmun agreed with him.
Asahi, 480 U.S. at 121 (Brennan, J., concurring in part and concurring in the judgment, joined by
White, Marshall, and Blackmun, JJ.).
¶ 146 Justice O'Connor thought, however, that, to make minimum contact with the
forum state, the nonresident defendant had to do something "more purposefully directed at the
forum State than the mere act of placing a product in the stream of commerce," and Chief Justice
Rehnquist and Justices Powell and Scalia agreed with her. Id. at 110 (opinion of O'Connor, J.,
joined by Rehnquist, C.J., and Powell and Scalia, JJ.). Justice O'Connor wrote:
"The placement of a product into the stream of commerce, without
more, is not an act of the defendant purposefully directed toward
the forum State. Additional conduct of the defendant may indicate
an intent or purpose to serve the market in the forum State, for
example, designing the product for the market in the forum State,
advertising in the forum State, establishing channels for providing
regular advice to customers in the forum State, or marketing the
product through a distributor who has agreed to serve as the sales
agent in the forum State." Id. at 112.
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Asahi, Justice O'Connor observed, did no business in California; nor did it have any agents or
property there. Id. Nor did Asahi "advertise or otherwise solicit business in California." Id.¶ 147 Thus, in Asahi, there are two competing standards: the broad stream-of-
commerce standard and the narrow stream-of-commerce standard. Under the broad stream-of-
commerce standard, championed by Justice Brennan, the exercise of personal jurisdiction
comports with due process if the defendant was aware that the product was being marketed in the
forum state. Russell, 2013 IL 113909, ¶ 68. But under the narrow stream-of-commerce
standard, championed by Justice O'Connor, such awareness is not enough: the defendant must
do something more, such as advertising in the forum state, marketing the product in the forum
state through a distributor, or establishing channels for regularly providing advice to customers
in the forum state. Id. ¶ 47. (Subsequently, in J. McIntyre Machinery, Ltd. v. Nicastro, 564 U.S.
___, 131 S. Ct. 2780 (2011), another plurality decision, a majority of the Supreme Court did not
come down clearly in favor of either the broad or the narrow stream-of-commerce standard in
Asahi. Russell, 2013 IL 113909, ¶¶ 59, 70.)
¶ 148 We conclude, in our de novo review (Innovative Garage Door Co. v. High
Ranking Domains, LLC, 2012 IL App (2d) 120117, ¶ 11) that the undisputed facts in this case
satisfy Justice O'Connor's narrow stream-of-commerce standard. Ipso facto, they satisfy Justice
Brennan's broad stream-of-commerce standard. Russell, 2013 IL 113909, ¶ 78.
¶ 149 For one thing, defendants entered into an agreement with BDO, an Illinois
partnership, to jointly promote "investment strategies," such as the 2002 and 2003 Distressed
Debt Strategies. "By engaging a business entity located in Illinois, defendant[s] undoubtedly
benefitted from Illinois' system of laws, infrastructure, and business climate." Id. ¶ 81. See
Burger King, 471 U.S. at 475 (explaining that, for specific jurisdiction, " 'it is essential in each
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case that there be some act by which the defendant purposefully avails itself of the privilege of
conducting activities within the forum State, thus invoking the benefits and protections of its
laws' " (quoting Hanson, 357 U.S. at 253)). Because BDO was headquartered in Chicago, it
would have been reasonable to suppose that many of BDO's clients resided in Illinois.
Gramercy's agreement with BDO enabled Gramercy to tap into BDO's client base in Illinois, a
client base established by virtue of the benefits and protections of Illinois law.
¶ 150 Second, defendants engaged BDO to act as Gramercy's advertiser, and the target
audience was BDO's wealthy accounting clients. Under the agreement between BDO and
Gramercy, BDO, in return for a share of the client's fee, was to refer the client to Gramercy for
the investment and transactional aspects of the tax shelter. See Asahi, 480 U.S. at 112 (opinion
of O'Connor, J., joined by Rehnquist, C.J., and Powell and Scalia, JJ.) (the something "more"—
the "act[s] of the defendant purposefully directed toward the forum State"—may include
"advertising in the forum State, establishing channels for providing regular advice to customers
in the forum State, or marketing the product through a distributor who has agreed to serve as the
sales agent in the forum State"). Because BDO was headquartered in Chicago, defendants no
doubt expected and intended that many of the accounting clients whom BDO referred to
Gramercy would be Illinois residents. Through BDO, Gramercy "solicit[ed] business in"
Illinois. Id.¶ 151 It is true that the "unilateral activity of *** a third person is not an appropriate
consideration when determining whether a defendant has sufficient contacts with a forum State
to justify an assertion of jurisdiction" (emphasis added), but BDO did not approach the Khans
unilaterally; rather, BDO approached them pursuant to its agreement with Gramercy.
Helicopteros, 466 U.S. at 417. Through BDO, which is an Illinois partnership, Gramercy
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"purposefully reach[ed] out beyond [its] State and into" Illinois, "deliberately exploit[ing] a
market in" Illinois, namely, BDO's accounting clients in Illinois. (Internal quotation marks
omitted.) Walden, 571 U.S. at ___, 134 S. Ct. at 1122. Therefore, Gramercy's contacts with
Illinois were not "random, fortuitous, or attenuated." (Internal quotation marks omitted.) Burger
King, 471 U.S. at 475.
¶ 152 Far from it. Not only did Gramercy have a fee-sharing agreement with BDO,
under which BDO was to steer Illinois clients, such as the Khans, in Gramercy's direction, but
once BDO did the steering, Gramercy was to establish a fiduciary relationship with these clients
and give them "regular advice" on how to accomplish the various transactional steps of the tax
shelters. Asahi, 480 U.S. at 112 (opinion of O'Connor, J., joined by Rehnquist, C.J., and Powell
and Scalia, JJ.). These were minimum contacts with Illinois.
¶ 153 Gramercy disputes that it made contact with Illinois through BDO. To hold that it
did so would be inconsistent, Gramercy argues, with our decision in Estate of Isringhausen v.
Prime Contractors & Associates, Inc., 378 Ill. App. 3d 1059 (2008). It is true that Isringhausen,
like the present case, involved a go-between. In Isringhausen, though, it is unclear that when the
go-between reached out to Illinois, he did so at the behest of his employer, the Florida defendant.
The go-between in Isringhausen was Dan Wilmath, who wore two hats, so to speak: he was an
employee of the defendant, APM Custom Homes (APM), a Florida corporation; and at the same
time, he was the realtor of Lee Isringhausen, an Illinois resident. Id. at 1060-61. More precisely,
Wilmath was the realtor who assisted Isringhausen with buying property in Marco Island,
Florida. Id. at 1061. "Wilmath put Isringhausen in contact with APM" (id.); and then
Isringhausen hired APM to build a house on Marco Island (id.); and then Isringhausen died (id.
at 1062); and then the executor of his estate sued APM, in Illinois, for breach of contract (id.). In
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affirming the dismissal of the case for lack of personal jurisdiction (id. at 1068), we remarked
that "Isringhausen [had been] put into contact with APM through a third party, Dan Wilmath"
(id. at 1067), and we concluded that this was not a minimum contact of APM with Illinois (id. at
1068). Judging, however, from the facts recounted in the decision, there was no evidence that
soliciting clients in Illinois had been part of Wilmath's job description or that he and his
employer, APM, had agreed that he would reach out to Illinois on APM's behalf. In other words,
the record contained no evidence that APM had purposefully reached out to Illinois through
Wilmath.
¶ 154 By contrast, in the present case, BDO and Gramercy had a contractual agreement
that BDO would solicit its clients to approach Gramercy—including, necessarily, BDO's Illinois
clients. We said in Isringhausen: "Illinois would have a strong interest in adjudicating a dispute
where an Illinois resident was specifically targeted and allegedly victimized, as compared to the
situation in our case where APM did not seek out and target Isringhausen." Id. at 1068.
¶ 155 Gramercy tries to create the impression that it was simply minding its own
business in Connecticut when, out of the blue, BDO happened to call Gramercy and refer Khan.
Gramercy presents itself as an unconnected, innocent bystander who was passively acted upon,
in Connecticut, by BDO and Khan. The undisputed facts in this case tell a different story. BDO
and Gramercy, in tandem, targeted Khan in Illinois, repeatedly. See id.
¶ 156 c. The Conspiracy Theory of Jurisdiction
¶ 157 As defendants understand the complaint, plaintiffs accuse them of being in a civil
conspiracy with BDO to sell and implement illegal tax shelters. Defendants argue that by
exercising personal jurisdiction over them on the basis of what their alleged coconspirator, BDO,
did in Illinois, we would resort to the conspiracy theory of jurisdiction, the constitutional validity
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of which we called into question in Ploense v. Electrolux Home Products, Inc., 377 Ill. App. 3d
1091, 1106 (2007).
¶ 158 We disagree we would thereby fall afoul of Ploense. As we explained in Ploense,
the problem with the conspiracy theory of jurisdiction is that it "would allow the exercise of
personal jurisdiction over a nonresident defendant who had no minimum contacts with the forum
state." Id. For example, A and B could enter into a civil conspiracy in Indiana, and then B,
unilaterally and without A's knowledge, could go to Texas and commit a wrongful act there in
furtherance of the conspiracy. If the conspiracy theory of jurisdiction were valid, B's contacts
with Texas would be automatically attributed to A—even if A never wanted, never intended, and
never expected B to go to Texas and do anything in that state. See id. Attributing B's Texas
contacts to A simply because they had entered into a conspiracy in Indiana, without their having
reached any agreement or having had any discussion regarding Texas, would dispense with the
constitutional requirement that A make minimum contacts with Texas, or purposefully reach out
to Texas, before that state exercised personal jurisdiction over him. See Knaus v. Guidry, 389
Ill. App. 3d 804, 824 (2009).
¶ 159 Defendants seem to reason as follows: the conspiracy theory of jurisdiction is
constitutionally unsound; ergo, a conspirator cannot ever have minimum contacts with Illinois
through a coconspirator. That is a non sequitur. Minimum contacts do not have to be direct. A
person can purposefully make minimum contacts with the forum state through someone else.
See Asahi, 480 U.S. at 112 (opinion of O'Connor, J.) ("advertising in the forum State *** or
marketing the product through a distributor who has agreed to serve as the sales agent in the
forum State"); Spinozzi v. ITT Sheraton Corp., No. 93 C 0885, 1994 WL 559110, at *5 (N.D. Ill.
Oct. 6, 1994) ("The solicitation of business in Illinois is obviously completed with the intent of
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convincing Illinois consumers to purchase the advertised product. When ITT Sheraton caused
the brochure advertising International's Acapulco Resort to appear in Illinois, it intended Illinois
consumers, like the plaintiffs, to make reservations at that resort. Therefore, International, the
beneficiary of the marketing performed by ITT Sheraton, should have anticipated being haled
into an Illinois court.").
¶ 160 By agreement between BDO and Gramercy, BDO acted as Gramercy's advertiser.
Gramercy purposefully solicited business in Illinois through BDO. See Asahi, 480 U.S. at 112(opinion of O'Connor, J., joined by Rehnquist, C.J., and Powell and Scalia, JJ.). Gramercy must
have known and expected that much of this advertising would be done in Illinois, since BDO
was headquartered in Chicago and inevitably had accounting clients in Illinois. Pursuant to its
agreement with Gramercy, BDO referred Khan to Gramercy for the investment and transactional
services necessary to the distressed debt strategies. Therefore, Gramercy, the beneficiary of the
marketing performed by BDO in Illinois, reasonably should have anticipated being haled into an
Illinois court if the distressed debt strategies caused harm to the Khans, whom BDO and
Gramercy jointly targeted in Illinois. See World-Wide Volkswagen, 444 U.S. at 297; Spinozzi,
1994 WL 559110, at *5.
¶ 161 2. A Tort Purposefully Directed at the Khans, in Illinois
¶ 162 "A State generally has a manifest interest in providing its residents with a
convenient forum for redressing injuries inflicted by out-of-state actors." (Internal quotation
marks omitted.) Burger King, 471 U.S. at 473. One such injury is a resident's detrimental
reliance on a misrepresentation that a nonresident, from outside the forum state, purposefully
directed at the resident within the forum state, with the intention that the resident rely on the
misrepresentation. See Rose v. Franchetti, 713 F. Supp. 1203, 1213 (N.D. Ill. 1989).
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¶ 163 Defendants argue that "the transmission of communications and money to and
from the State, even if done frequently and over an extended period of time, are insufficient to
meet the federal due process requirement for specific jurisdiction," and they provide
approximately three pages of citations for that sweeping proposition. See Ill. S. Ct. R. 341(h)(7)
(eff. Feb. 6, 2013) ("Citation of numerous authorities in support of the same point is not
favored."). If, as defendants argue, a telephone call to the forum state and a resulting
transmission of money out of the forum state could never justify the exercise of personal
jurisdiction in the forum state, a con artist in Oregon, posing as the representative of an
investment firm, could telephone someone in Vermont and induce him to send his life savings,
and when the victim figures out he has been duped, he could not sue the con artist in Vermont
but would have to sue him in Oregon. That is not a plausible account of the law. Triad Capital
Management, LLC v. Private Equity Capital Corp., No. 07 C 3641, 2008 WL 4104357, at *5
(N.D. Ill. Aug. 25, 2008) ("[E]ven when contact takes place only via telephone or email, it can
create a substantial connection between the defendant and the forum state ***.").
¶ 164 None of the numerous cases that defendants cite appear to involve a tortious
misrepresentation, at least as the subject of the action—not even Marathon Oil Co. v. A.G.
Ruhrgas, 182 F.3d 291 (5th Cir. 1999). The parenthetical summary that defendants provide for
that case is: "no specific jurisdiction where plaintiff alleged that '[defendant] effectuated fraud
by conducting three meetings in Houston, Texas[,] and sending a great deal of correspondence to
[plaintiff]' in its home state of Texas"; but, significantly, the court in Marathon said: "[The]
mere presence [of Rurhgas] at the three meetings in Houston, together with the noted
correspondence and phone calls, is not sufficient to establish the requisite minimum contacts
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because the record is devoid of evidence that Ruhrgas made false statements at the meetings or
that the alleged tortious conduct was aimed at activities in Texas." (Emphasis added.) Id. at 295.
¶ 165 Marathon is a case from the Fifth Circuit, and instead of holding that telephone
calls to the forum state are, per se, jurisdictionally insignificant, the Fifth Circuit has held that
"[a] single act" by the nonresident defendant, such as a telephone call, "can be enough to confer
personal jurisdiction if that act gives rise to the claim being asserted." Lewis v. Fresne, 252 F.3d
352, 358-59 (5th Cir. 2001). If the communication with someone in the forum state "did not
actually give rise to a cause of action"—if the communication "merely solicited business from
the forum [state], negotiated a contract, formed an initial attorney-client relationship, or involved
services not alleged to form the basis of the complaint"—it would not justify the exercise of
personal jurisdiction there. Wien Air Alaska, Inc. v. Brandt, 195 F.3d 208, 213 (5th Cir. 1999);
see also Isringhausen, 378 Ill. App. 3d at 1067. But "[i]n cases alleging the intentional tort of
fraud, the defendant's participation in a single telephone call is enough to establish personal
jurisdiction if the content of the call gave rise to the fraud claim." FCA Investments Co. v.
Baycorp Holdings, Ltd., No. 01-20717, 2002 WL 31049442, at *2 (5th Cir. Aug. 29, 2002); see
also Cox v. Foundation Surgery Center of San Antonio, L.L.P., No. 1:06CV97-D-D, 2006 WL
3246390, at *3 (N.D. Miss. Nov. 8, 2006).
¶ 166 Likewise, the First District has held: "[I]n cases of fraudulent misrepresentation,
reaching out to Illinois residents, whether by mail, telephone, telex[,] or facsimile, with an intent
to affect Illinois interests, can be a sufficient basis for exercising personal jurisdiction over a
nonresident defendant." Zazove v. Pelikan, Inc., 326 Ill. App. 3d 798, 806 (2001). Only a trivial,
formalistic distinction can be made between someone who utters a fraudulent misrepresentation
in person and someone who does so on the phone. See Burger King, 471 U.S. at 476 ("[I]t is an
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inescapable fact of modern commercial life that a substantial amount of business is transacted
solely by mail and wire communications across state lines, thus obviating the need for physical
presence within a state in which business is conducted. So long as a commercial actor's efforts
are purposefully directed toward residents of another state, we have consistently rejected the
notion that an absence of physical contacts can defeat personal jurisdiction there." (Internal
quotation marks omitted.)); cf. Advanced Tactical Ordnance Systems, LLC v. Real Action
Paintball, Inc., 751 F.3d 796, 802 (7th Cir. 2014) (the defendant's maintenance of an e-mail list,
which consumers can sign up for online, wherever they happen to be, and which allows the
defendant, via the Internet, to "shower past customers and other subscribers with company-
related emails[,] does not show a relation between the [defendant] and Indiana" or the
defendant's purposeful exploitation of the Indiana market in particular).
¶ 167 As we said, we choose not to base our analysis on the misrepresentation that
Johnston allegedly made to Khan, in the telephone conference of August 2001, that the distressed
debt strategies could legally reduce his income tax. But according to Khan's affidavit, the
telephone conference of August 2001 was not the only occasion when Gramercy made that
misrepresentation to him. Khan also states that, as of 2003, Gramercy had "engaged in
continued efforts to solicit more business from [him and his wife]" and that, in the spring of that
year, "BDO and Gramercy further advised [him]—in communications with [him] when [he] was
in Illinois— that the 2003 Distressed Debt Strategy was legal and provided the same tax benefits
found in the 2002 Distressed Debt Strategy." In his affidavit, Johnston denies that, in the
telephone conference of August 2001, he touted the tax benefits of Gramercy investments, but he
does not deny that, on these other occasions, in spring 2003, Gramercy touted the tax benefits of
the 2003 Distressed Debt Strategy.
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¶ 168 Setting aside the question of whether Johnson himself ever touted the tax benefits
of the distressed debt strategies, it is unrebutted that he touted their financial benefits. According
to the complaint, Johnston told Khan "that the Investment Strategies had the required business
purpose and economic substance" and that "there was a reasonable likelihood of making a profit
on the 'investment' component of the Investment Strategies." Also, in his affidavit, Khan alleges
that Johnston told him the distressed debt strategies "could yield a substantial profit." These
characterizations of the distressed debt strategies as transactions of economic substance were
knowingly false, according to the complaint.
¶ 169 It is important to understand that representations about the economic substance of
the strategies were just as significant, if not more so, than representations about the tax benefits
of the strategies, because the lack of economic substance is precisely why the losses did not
count as deductions. The IRS disallowed the losses because the transactions could not possibly
have had any legitimate business purpose, any profit motive. As the Seventh Circuit has said:
"A transaction that would make no commercial sense were it not for the opportunity it created to
beat taxes doesn't beat them. Substance prevails over form. [Citations.] The question is
'whether the partners really and truly intended to join together for the purpose of carrying on
business and sharing in the profits or losses or both.' [Citation.] Superior Trading, LLC v.
Commissioner of Internal Revenue Service, 728 F.3d 676, 680 (7th Cir. 2013). That is why it
mattered whether the distressed debt strategies had a purpose other than dodging taxes, as
Johnston represented they had.
¶ 170 Part of Gramercy's contractual performance, under its fee-sharing agreement with
BDO, was "assisting in marketing the [t]ransactions to clients" (to quote Shanbrom's affidavit).
To do that, Gramercy surely had to say something in favor of the proposed transactions, and the
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only imaginable selling points are that they could (1) yield a substantial profit or (2) reduce
taxes. Presumably, as Khan's fiduciary, Gramercy would not have kept telephoning him in
Illinois and giving him step-by-step instructions on how to implement the distressed debt
strategies but for an underlying understanding with him that the strategies had either of those two
virtues.
¶ 171 Khan states in his affidavit:
"Gramercy's representatives also participated in many telephone
conversations with me (directly and through Plaintiffs'
representatives) regarding the implementation of the 2002
Distressed Debt Strategy. During these telephone conversations,
Gramercy's representatives, including Johnston, advised me as to
the status of the 2002 Distressed Debt Strategy and Plaintiffs'
investments in distressed debt and instructed Plaintiffs with respect
to carrying out each of the steps of the Distressed Debt Strategies,
including when to dispose of distressed debt. I was present in
Illinois during these calls."
By these instructional telephone calls, Johnston and others at Gramercy induced the Khans to
increase their financial commitment to the distressed debt strategies, leading them deeper into the
morass. See Asahi, 480 U.S. at 112 (opinion of O'Connor, J., joined by Rehnquist, C.J., and
Powell and Scalia, JJ.) ("establishing channels for providing regular advice to customers in the
forum State"); Burger King, 471 U.S. at 473 ("And with respect to interstate contractual
obligations, we have emphasized that parties who reach out beyond one state and create
continuing relationships and obligations with citizens of another state are subject to regulation
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and sanctions in the other State for the consequences of their activities." (Internal quotation
marks omitted.)).
¶ 172 G. The Choice-of-Law Clause
in the Investment Management Agreement
¶ 173 Defendants emphasize that the Investment Management Agreement contains a
New York choice-of-law clause: "This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, without regard to the principles of conflict of
laws thereof."
¶ 174 By drafting and entering into an agreement stipulating that the agreement was to
be "governed by and construed in accordance with the laws of the State of New York," Gramercy
purposefully availed itself of the benefits and protections of New York laws. See id. at 482. But
that in no way detracts from the fact that defendants also purposefully availed themselves of the
benefits and protections of Illinois laws, as we have discussed (taking the undisputed facts to be
true).
¶ 175 By agreeing, in the investment management agreements, that New York law
would govern the interpretation of the agreements, Khan did not agree to refrain from seeking a
remedy in Illinois courts. "The issue is personal jurisdiction, not choice of law." Hanson, 357
U.S. at 254; cf. Isringhausen, 378 Ill. App. 3d at 1066 ("[A] choice-of-law provision in a contract
is a relevant, though not a determinant, factor in establishing jurisdiction."). Illinois courts are
capable of applying New York law.
¶ 176 The law regards a choice-of-law clause and a forum-selection clause as two
separate and distinct things. In re Marriage of Walker, 287 Ill. App. 3d 634, 639 (1997). If a
choice-of-law clause were effectively a forum-selection clause, there would be no such thing as a
forum-selection clause as distinct from a choice-of-law clause.
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¶ 177 H. The Exculpatory Provisions and the Disclaimers
¶ 178 Gramercy and Johnston invoke the exculpatory clauses in the investment
management agreements. But exculpatory clauses pertain to liability, not jurisdiction.
"[J]urisdiction and liability are two separate inquiries." Central States, Southeast & Southwest
Areas Pension Fund v. Reimer Express World Corp., 230 F.3d 934, 944 (7th Cir. 2000); see also
Gramercy Advisor LLC v. R.K. Lowery, No. 01-14-00904-CV, 2015 WL 3981610, at *12 (Tex.
App. June 30, 2015) (by invoking a contractual clause in which the plaintiffs disclaimed reliance
on Gramercy's tax advice, the Gramercy defendants "conflate liability with jurisdiction"); Tex.
R. App. Proc. 47.7(b) (eff. Sept. 30, 2002) (in Texas civil cases, all opinions issued after January
1, 2003, have precedential value).
¶ 179 Gramercy and Johnston also invoke the side letters, in which Khan disclaimed
reliance on Gramercy's financial advice. But if, in fact, Khan did not rely on Gramercy's
financial advice—if the transactional steps of the distressed debt strategies were all his idea—
that fact likewise would be irrelevant to jurisdiction because reliance or nonreliance is what
Khan did in Illinois. Personal jurisdiction must be based on the defendant's contacts with the
forum state, not on what the plaintiff did or did not do in the forum state. Walden, 571 U.S. at
___, 134 S. Ct. at 1122.
¶ 180 I. The Reasonableness of Requiring
Gramercy and Johnston To Litigate in Illinois
¶ 181 Having decided that Gramercy and Johnston have made minimum contacts with
Illinois, we now must decide whether it would be reasonable to require them to litigate in
Illinois. See Russell, 2013 IL 113909, ¶ 87. In making that decision, we consider (1) the burden
imposed on defendants by requiring them to litigate in a foreign forum; (2) the forum state's
interest in resolving the dispute; (3) plaintiffs' interest in obtaining relief; and (4) the interests of
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the other affected forums in the efficient judicial resolution of the dispute and advancement of
substantive social policies. See id. (by "defendants," we mean, at this point, Gramercy and
Johnston).
¶ 182 Because defendants have procured hundreds of thousands of dollars from the
Khans in Illinois, requiring defendants to litigate in Illinois would not burden them excessively,
especially considering that Illinois has a substantial interest in protecting its citizens from fraud.
Rose, 713 F. Supp. at 1213.
¶ 183 More than once in their briefs, defendants refer to the Khans' wealth. "Absent
compelling circumstances," however, "a defendant who has purposefully derived commercial
benefit from his affiliations in a forum may not defeat jurisdiction there simply because of his
adversary's greater net wealth." Burger King, 471 U.S. at 483 n.25. Illinois has a substantial
interest in protecting its citizens from fraud (Rose, 713 F. Supp. at 1213), even its wealthy
citizens. Because the 2002 and 2003 Distressed Debt Strategies have caused the Khans great
financial loss, they have a strong interest in obtaining relief. The interest of Illinois in this case is
greater than the interest of Connecticut because the fraud was perpetrated in Illinois and the tax
shelter implicated Illinois tax revenues.
¶ 184 In sum, "where a defendant who purposefully has directed his activities at forum
residents seeks to defeat jurisdiction, he must present a compelling case that the presence of
some other considerations would render jurisdiction unreasonable." Burger King, 471 U.S. at
477. Gramercy and Johnston have not made that compelling case. We are unconvinced it would
be unfair, oppressive, or unreasonable to require them to litigate in Illinois. The exercise of
personal jurisdiction over them, here in Illinois, does not offend due process.
¶ 185 III. CONCLUSION
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¶ 186 For the foregoing reasons, we affirm the trial court's judgment in part and reverse
it in part: as to Gramercy and Johnston, we affirm the denial of the motion for dismissal, but as
to Gramercy Asset Management, Gramercy Financial, and Tall Ships, we reverse the denial of
the motion for dismissal.
¶ 187 Affirmed in part and reversed in part.
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¶ 188 STEIGMANN, J., specially concurring.
¶ 189 I fully agree with the majority, as well as the majority's commending the trial
court for its detailed, thoughtful analysis that was helpful in resolving this case. Nonetheless, I
write this special concurrence because I disapprove strongly of the sealing of court records that
occurred in this case at the trial level, as well as the sealing of the briefs the parties filed in this
court. In my judgment, both violated settled law.
¶ 190 A statute and several cases address the sealing of court files, and none supports
the sealing that occurred in this case, either by the trial court or by this court.
¶ 191 The statute involved is section 16(6) of the Clerks of Courts Act (705 ILCS
105/16(6) (West 2014)), which carries a strong presumption that all court records shall be public
and open to inspection. That statute reads as follows:
"All records, dockets and books required by law to be kept by such
clerks shall be deemed public records, and shall at all times be
open to inspection without fee or reward, and all persons shall have
free access for inspection and examination to such records, docket
and books, and also to all papers on file in the different clerks'
offices and shall have the right to take memoranda and abstracts
thereto." Id.¶ 192 Over 23 years ago, this court reversed an order of the circuit court of Champaign
County that impounded various materials in connection with a personal injury and marital
dissolution case. See In re Marriage of Johnson, 232 Ill. App. 3d 1068 (1992). The first two
sentences of that opinion state the question before this court: "This appeal raises the issue of the
public's right of access to trial court records and transcripts. The questions presented are whether
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what goes on in court is the people's business, and what burden is placed on those who seek to
restrict access to public records." Id. at 1069.
¶ 193 At issue in Johnson was the settlement of a personal injury action brought by the
husband, who was a party in the marital dissolution case. The trial court found the personal
injury claim to be marital property, and the parties in the dissolution case presented the
settlement to the court relating to the distribution of the settlement proceeds from the personal
injury case. "The settlement included a term that all documents in the entire file were to be
sealed." (Emphasis in original.) Id. at 1070. The court approved the settlement and sealed the
entire court file in both the marital case and the personal injury case. Id. The News-Gazette
challenged the impoundment orders by asserting a public right of access to court records and the
transcripts in the two cases based on the common law, statutory provisions, and the first
amendment. This court's opinion agreed with the newspaper across the board, and we reversed.
Id. at 1070, 1075.
¶ 194 Although I concurred fully with the judgment of the court in Johnson, I wrote a
special concurrence to emphasize that, in my judgment, it was not a close case. Without
repeating everything I wrote in that special concurrence (to which I still completely adhere), I
reiterate the following points: "Whatever the basis for [the parties' preference for sealing a court
file]—facilitating settlement, desire for privacy, possible embarrassment of the parties—such
preference can never demonstrate the compelling interest required to overcome the strong
presumption in favor of total access to all documents of whatever nature in a court file."
(Emphasis in original.) Id. at 1075-76 (Steigmann, J., specially concurring). I wrote that the
type of documents that might meet the standard of being both privileged and seriously damaging
or embarrassing are psychiatric records revealing aberrational behavior or thinking and the
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treatment thereof, as well as medical records revealing that a particular person had a sexually
transmitted disease. Id. at 1076.
¶ 195 Eight years after this court's decision in Johnson, the Supreme Court of Illinois
addressed the sealing of court files in Skolnick v. Altheimer & Gray, 191 Ill. 2d 214 (2000). That
court cited Johnson (seemingly approvingly) (id. at 231), and held that "the availability of court
files for public scrutiny is essential to the public's right to 'monitor the functioning of our courts,
thereby insuring quality, honesty[,] and respect for our legal system.' " Id. at 230 (quoting In re
Continental Illinois Securities Litigation, 732 F.2d 1302, 1308 (7th Cir. 1984)). The supreme
court noted further that there is a parallel right of access to court records embodied in the first
amendment, which presumes a right to inspect court records. Id. at 231-32. The supreme court
also rejected the appellate court's conclusion in Skolnick that the counterclaim at issue was
properly placed under seal because it referred to financial records belonging to one of the parties.
Id. at 235.
¶ 196 In A.P. v. M.E.E., 354 Ill. App. 3d 989 (2004), the First District Appellate Court
similarly rejected and overruled the trial court's sealing of records involved in litigation
concerning Pritzker family trusts.
¶ 197 Interestingly, this court had a similar experience with Pritzker family interests in
Linn v. Department of Revenue, 2013 IL App (4th) 121055. The appeal in Linn involved some
Pritzker family interests in Texas and whether they could be taxed by Illinois authorities. The
appellants, representing the Pritzker interests, moved in February 2013 for leave to file their
briefs under seal. This court initially granted that motion but issued a rule to show cause in
October 2013 against appellants as to why this court's order sealing the briefs should remain in
effect. The following month, this court vacated the order that sealed the briefs.
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¶ 198 In the present case, the trial court entered a stipulated protective order that sealed
the documents the parties filed. In their joint motion to this court, the parties essentially cited the
trial court's action and requested the same action by this court. Regrettably, that request was
granted, and the parties were permitted to file their briefs under seal. However, as in Linn, this
court later issued a rule to show cause against both parties as to why this court's order sealing the
briefs should remain in effect. Not surprisingly, the parties in response did not even attempt to
justify the sealing of the briefs, and this court vacated that order. I say "not surprisingly" because
the parties possessed no colorable basis whatsoever—before either the trial court or this court—
to justify the extraordinary step of sealing court records or briefs.
¶ 199 I write specially because if the experienced, well-regarded trial judge in this case
did not understand how the sealing of an entire court file can never be appropriate, then the
message must be reiterated yet again. Further, I wish to emphasize that both the trial court and
this court were disserved by attorneys who should have known better than to even ask for the
sealing of court records and briefs.
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