Title: Schwartz v. Frankenhoff

State: vermont

Issuer: Vermont Supreme Court

Document:

Schwartz v. Frankenhoff  (98-154); 169 Vt. 287; 733 A.2d 74

[Filed 21-May-1999]

       NOTICE:  This opinion is subject to motions for reargument under
  V.R.A.P. 40 as well as formal  revision before publication in the Vermont
  Reports.  Readers are requested to notify the Reporter  of Decisions,
  Vermont Supreme Court, 109 State Street, Montpelier, Vermont 05609-0801 of
  any  errors in order that corrections may be made before this opinion goes
  to press.

                                 No. 98-154

Jon P. Schwartz	                        Supreme Court

                                        On Appeal from
     v.		                        Windham Superior Court

Arvid and Karen Frankenhoff,	        January Term, 1999
Dover Foods, Inc., Trustee,
Bernard Food Industries, Inc. and
Shefsky & Froelich, Ltd.

John P. Wesley, J.

Alan B. George of Keyser, Crowley, Carroll, George & Meub, P.C.,
Rutland, for  Defendants-Appellants.

Stephen L. Saltonstall, Manchester Village, for Defendants-Appellees.

PRESENT:  Amestoy, C.J., Dooley, Morse, Johnson and Skoglund, JJ.

       DOOLEY, J.   Arvid and Karen Frankenhoff appeal from an order of the
  superior court  dismissing their tort claims against Bernard Food
  Industries, Inc. ("Bernard Foods") and Shefsky  & Froelich, Ltd.  Bernard
  Foods is an Illinois-based food wholesaler; Shefsky & Froelich is a 
  Chicago law firm.  The Frankenhoffs, who were originally named as
  defendants in this  proceeding, impleaded Bernard Foods and Shefsky &
  Froelich as additional defendants in their  counterclaims asserted against
  plaintiff Jon P. Schwartz, but the court concluded it lacked personal 
  jurisdiction over either of the parties it dismissed.  We agree and affirm.

       In granting the two Illinois defendants' motion for dismissal under
  V.R.C.P. 12(b)(2), 

 

  the trial court did not conduct an evidentiary hearing, relying instead on
  the pleadings and  affidavits submitted by the parties.  From those
  sources, we glean the following summary of the  proceeding, claims and
  underlying facts of record. 

       Schwartz originally asserted claims against the Frankenhoffs for
  breach of contract and  deceit.  At issue was a food wholesaling entity
  known as American Quality Foods, Inc. (AQF),  the stock of which Schwartz
  and the Frankenhoffs each owned 50 percent.  According to the  complaint,
  Schwartz and the Frankenhoffs entered into a settlement agreement in 1992
  whereby  Schwartz agreed to sell his shares in the company to the
  Frankenhoffs in exchange for the  Frankenhoffs paying off a $40,000 bank
  note secured by Schwartz.  Schwartz alleged that the  Frankenhoffs breached
  the agreement by failing to pay off the note and then selling the company 
  to an outside purchaser, misrepresenting themselves as sole owners.

       The Frankenhoffs' counterclaim alleged that Schwartz and Arvid
  Frankenhoff had  formerly been employed by Bernard Foods but that both
  eventually left that company's employ.  According to the Frankenhoffs, they
  invited Schwartz to join them as co-owners of AQF in 1990  under a plan
  that called for the Frankenhoffs to remain in Vermont and Schwartz to
  service  midwestern customers from his base in South Dakota.  This business
  arrangement apparently did  not thrive.  According to the counterclaim,
  Schwartz resigned from his positions as director, vice-president and
  employee of AQF in December 1991.  The Frankenhoffs allege that, just prior
  to  Schwartz's resignation, he had engaged in secret negotiations with
  Bernard Foods in order to  rejoin its employ.  Further, they allege that
  Schwartz and Bernard Foods conspired to destroy  AQF, to ruin the
  Frankenhoffs financially and thereby to inflict emotional distress upon
  them.

 

       Various conspiratorial acts are alleged in the counterclaim.  They
  fall in two main groups. The first group of allegations involves actions
  related to AQF's finances.  In order to finance its  activities, AQF had
  two lines of credit from different banks.  One of these lines of credit, 
  according to the Frankenhoffs, was obtained at Schwartz's insistence after
  he began negotiations  with Bernard Foods.  According to the counterclaim,
  shortly before his resignation, Schwartz  acquired blank AQF letterhead, a
  complete statement of its inventory  and a list of its customers.  Shortly
  after his resignation, Schwartz mailed a letter to AQF's midwestern and
  plains state  customers, on AQF letterhead, requesting that they send all
  money owed AQF to one of the banks  which had extended credit to AQF.  The
  Frankenhoffs alleged that this act was done to show  customers that AQF was
  in financial difficulty so that they would switch to Bernard Foods, and 
  was effective to accomplish this purpose.  They alleged that Schwartz also
  contacted the banks that  had extended credit urging them to demand that
  customer payments be made directly to them.  Although AQF was not in
  default, the Frankenhoffs complained that the contacts led the banks  to
  refuse to extend further credit, causing AQF to fail.  Eventually, AQF
  defaulted on its  obligations to one of the banks, and the bank pursued
  collateral in the hands of Schwartz and the  Frankenhoffs.  The
  counterclaim alleges that Schwartz reacquired his collateral by a payment 
  funded by Bernard Foods.

       The counterclaim alleges that Shefsky & Froelich was counsel to
  Bernard Foods and was  intimately involved in the above acts that the
  Frankenhoffs deem unlawful, ostensibly representing  Schwartz in
  communications with AQF customers, the banks and the Frankenhoffs while
  acting  for the conspiracy.  It alleges that in interactions with the
  Frankenhoffs, the conduct 

 

  of a firm lawyer was "outrageous and unprofessional" and "demeaning and
  intimidating" while  also "misrepresent[ing] the true facts."

       The second group of allegations relates to certain of AQF's products
  that, the  Frankenhoffs alleged, were made from proprietary formulas and
  recipes that were trade secrets  of AQF and the Frankenhoffs.  According to
  the Frankenhoffs, Schwartz acquired samples of  these products and gave
  them to Bernard Foods -- which, based on laboratory analysis, was able  to
  produce and sell them under the Bernard Foods label.

       In support of their motion to dismiss, the Illinois defendants
  submitted affidavits executed  by Steven Bernard and Gary Levenstein. 
  Bernard identified himself as president of Bernard  Foods; stated that
  Schwartz was, at the time Bernard executed his affidavit, the company's
  sales  representative in North Dakota, South Dakota and parts of Minnesota;
  and averred that he had  agreed to so employ Schwartz after Schwartz
  severed ties with the Frankenhoffs because both  Schwartz and his father
  had previously worked for the company.  According to Bernard's  affidavit,
  at no time did he and Schwartz discuss, plan or carry out any efforts to
  compete with  or harm either the Frankenhoffs or AQF.  Bernard also stated
  that his company had never engaged  in such an effort.  He further averred
  that Vermont customers represented less than .05 percent  of Bernard Foods'
  total sales; that the company has no offices, property or representatives
  in  Vermont; and that the company's Vermont customers are serviced through
  representatives located  in Massachusetts and New Hampshire.

       Levenstein's affidavit identified him as a partner in the Shefsky &
  Froelich firm.  He  stated that Shefsky & Froelich represented Schwartz and
  not Bernard Foods in connection with  disputes arising out of the failure
  of AQF, although Levenstein conceded his firm has 

 

  represented Bernard Foods on other matters.  Levenstein stated that the
  firm had conducted most  of its negotiations with the Frankenhoffs through
  their attorney, based in Massachusetts.   However, according to Levenstein,
  following the 1993 settlement agreement the Frankenhoffs  ceased to be
  represented by counsel and his firm therefore sent three letters directly
  to them in  Vermont and spoke with them twice by telephone.  Levenstein
  also alluded to telephone and  written contact with AQF's Vermont lenders. 
  According to Levenstein, this contact occurred  "because our client, Mr.
  Schwartz, was personally liable for [AQF's] obligations" and "did not 
  relate to the claims raised by the Frankenhoffs."  Levenstein noted that
  his firm had no lawyers  licensed to practice in Vermont, maintained no
  offices in the state, and had neither clients nor  property in Vermont.

       Both Arvid and Karen Frankenhoff submitted affidavits in opposition to
  the dismissal  motion.  In support of his contention that Shefsky &
  Froelich was "really working as an agent of  Bernard," Arvid Frankenhoff
  appended to his affidavit a facsimile cover sheet from the law firm,  dated
  July 23, 1993 and addressed to Karen Frankenhoff, which lists "Bernard
  Foods" in the  space designated for "client name."  Arvid Frankenhoff noted
  that the firm's client number as it  appears on the form is the same client
  number that appears on other documents the Frankenhoffs  have received from
  the firm.  His affidavit also includes a copy of a letter from the firm,
  dated  September 8, 1993 and addressed to Karen Frankenhoff, indicating
  that copies of the letter were  sent both to Schwartz and to Steven
  Bernard.

       The superior court granted the motions to dismiss of both counterclaim
  defendants.  In an  entry order made before the filing of the Frankenhoff
  affidavits, the court determined that it was  the Frankenhoffs' burden to
  make a prima facie showing of jurisdiction and gave them
 
 
 
  twenty days to submit additional evidence to support the counterclaims,
  specifically "a verified  statement of jurisdictional facts, based on
  personal knowledge, showing specific tortious or  unlawful acts by each of
  the additional defendants, sufficient to demonstrate . . . minimum 
  contacts."  Following the submission of the affidavits, the court dismissed
  the counterclaim as to  the Illinois defendants, concluding that the
  counterclaim and affidavits were "too vague to support  a conclusion that
  any wrongdoing has occurred" and that the claims were not supported by 
  evidence.

       On appeal, the Frankenhoffs argue that the affidavits, and the
  counterclaim which was  verified in an affidavit, made out a conspiracy
  that committed a number of torts: intentional  interference with
  contractual relationships, defamation and disparagement, theft of trade
  secrets  and unfair competition.  They argue that they demonstrated
  sufficient jurisdictional facts to show  personal jurisdiction on the
  theory that counterclaim defendants committed torts within the state. 
  Further, they argue that if their showing was inadequate, they should have
  been allowed  additional time for discovery.
 
       Under the applicable Vermont long-arm statute, a foreign corporation
  is "deemed to be  doing business in Vermont," and thus to have appointed
  the secretary of state as its agent for  service-of-process purposes, if
  the corporation has had "contact with the state," has conducted  "activity
  in the state" or there has been "contact or activity imputable to it . . .
  sufficient to  support a Vermont personal judgment against it . . . arising
  or growing out of that activity."  12  V.S.A. § 855.  Section 855
  "expresses a policy to assert jurisdiction over foreign corporations  to
  the full extent permitted by the Due Process Clause of the Fourteenth
  Amendment."  Chittenden  Trust Co. v. Bianchi, 148 Vt. 140, 141,