Court Opinion

ID: 9392748
Source: CourtListenerOpinion
Date Created: 2023-05-05 21:06:36.823272+00
Date Added: 2024-06-11T17:18:48.431213
License: Public Domain

2023 IL App (1st) 220561-U

                                                                            SIXTH DIVISION
                                                                                May 5, 2023

                                       No. 1-22-0561

NOTICE: This order was filed under Supreme Court Rule 23 and is not precedent except in the
limited circumstances allowed under Rule 23(e)(1).

                                       IN THE
                            APPELLATE COURT OF ILLINOIS
                              FIRST JUDICIAL DISTRICT

 RICHARD T. PEARSON, Individually and on Behalf of         )
 His IRA,                                                  )
                                                           )
        Plaintiff,                                         )      Appeal from the
                                                           )      Circuit Court of
 v.                                                        )      Cook County.
                                                           )
 RICHARD ZAEHRINGER,                                       )
                                                           )      No. 20 L 011647
        Defendant and Third-Party Plaintiff-Appellee,      )
                                                           )
 v.                                                        )      Honorable
                                                           )      James E. Snyder,
 UPSTATE LAW GROUP, LLC; CANDY KERN                        )      Judge Presiding.
 FULLER; and HOWARD E. SUTTER III,                         )
                                                           )
        Third-Party Defendants-Appellants.                 )

      PRESIDING JUSTICE MIKVA delivered the judgment of the court.
      Justices C.A. Walker and Tailor concurred in the judgment.

                                          ORDER

¶1    Held: Where third-party defendants’ motion to dismiss appears to have been ruled on
            prematurely, we reverse the circuit court’s order denying it and remand this matter
            for a ruling following the completion of discovery and briefing on the issue of
            personal jurisdiction.
No. 1-22-0561

¶2     This is an interlocutory appeal by permission from the circuit court’s denial of a motion to

dismiss for lack of personal jurisdiction. The plaintiff in the underlying suit, Richard Pearson, is a

Pennsylvania resident who alleged he was convinced by defendant and third-party plaintiff

Richard Zaehringer, a resident of Illinois, to invest his savings in an annuity scam. Mr. Zaehringer

sued third-party defendants Upstate Law Group (ULG), Candy Kern, and Howard Sutter, all based

in South Carolina, for contribution, alleging that it was they who perpetrated and promoted the

investment scheme.

¶3     Third-party defendants deny that Illinois courts can lawfully exercise jurisdiction over

them in this matter, and accordingly moved to dismiss the claims against them under section 2-301

of the Code of Civil Procedure (Code) (735 ILCS 5/2-301) (West 2020)). The circuit court allowed

limited discovery on the question of personal jurisdiction and set a briefing schedule on the motion.

Briefing was delayed, however, as the parties became embroiled in discovery disputes, and the

circuit court ultimately denied the motion to dismiss before those disputes were resolved and

before a response or reply had been filed.

¶4     For the reasons that follow, we reverse the circuit court’s order denying third-party

defendants’ motion to dismiss and remand this matter for completion of discovery and resolution

of the issue of personal jurisdiction based on a more complete record.

¶5                                      I. BACKGROUND

¶6                                 A. The Underlying Complaint

¶7     Mr. Pearson alleged in his complaint, filed on October 30, 2020, that in 2015 and 2016 Mr.

Zaehringer, an Illinois insurance agent, visited him at his home in Pennsylvania and “aggressively

solicited” him to invest his savings, totaling nearly $800,000, in a “multi-generational legacy plan”

offered by Penn Life Mutual Insurance Company (Penn Life). Mr. Zaehringer promoted the plan

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No. 1-22-0561

as a safe investment that would be “96% liquid from day one” and tax free. Mr. Pearson’s IRA

savings would be held by an entity called IRA Services, and Mr. Zaehringer would be authorized

to draw from that account to make monthly premium payments on a $2 million Penn Life insurance

policy naming Mr. Pearson as beneficiary.

¶8     Mr. Pearson alleged that, unbeknownst to him, his funds were disbursed from IRA Services

to a second entity, Performance Arbitrage Company, Inc. (PAC), which provides high-interest

loans to veterans and other cash-poor beneficiaries of federal pensions. These loans are supposed

to be repaid out of pension payments. Mr. Pearson believed that his signature was forged on a

number of agreements to make these loans in return for pension payments. When the pension

payments were not sufficient to make the full payment due to Mr. Pearson, the IRA Services

account did not pay the full amount of Mr. Pearson’s monthly premiums. Mr. Pearson alleged that

he had to liquidate the insurance policy at a loss of over $600,000, as a result of this scheme. Mr.

Pearson brought claims against Mr. Zaehringer for breach of fiduciary duty, violation of

Pennsylvania’s consumer fraud law, fraudulent misrepresentation, and negligence.

¶9     Mr. Zaehringer unsuccessfully moved to dismiss the complaint against him for failure to

state a cause of action on which relief could be granted. In his answer to the complaint, he denied

every material allegation except that he had explained a “multi-generational legacy” plan offered

by Penn Life to Mr. Pearson and asserted affirmative defenses not relevant to this appeal.

¶ 10                              B. The Third-Party Complaint

¶ 11   On May 24, 2021, Mr. Zaehringer filed the third-party complaint that is the subject of this

appeal, seeking contribution from ULG, a South Carolina law firm organized as a limited liability

company, and its principals, Candy Kern and Howard Sutter, both citizens and residents of South

Carolina. Mr. Pearson alleged that “through various agents”—including PAC, Life Funding

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No. 1-22-0561

Options, and Financial Products Distributors, LLC—Ms. Kern and Mr. Sutter “devised and

operated the pension income stream program at issue in this case.” According to Mr. Zaehringer,

third-party defendants used “their firm’s IOLTA account as the conduit through which the other

parties channel[ed] their monies” and served as the “legal muscle,” facilitating the scheme by

assisting in the execution of the pension-income purchase contracts, suing defaulting pensioners

to enforce those agreements, and opposing attempts to discharge debt through bankruptcy.

¶ 12   Mr. Zaehringer maintained that he “had no dealings” with ULG, Ms. Kern, or Mr. Sutter

and “did not participate in any way in preparing the marketing materials, approving applications,

drafting, or executing any of the contracts associated with the pension stream transactions or

facilitating the exchange of funds.” According to his complaint, his role in the pension-stream

contracts “was limited to referring prospective applicants to M. David Woodard and Financial

Products Distributors, LLC.” Mr. Zaehringer alleged that once he “identified and referred a

prospective applicant, he had no further involvement in the transaction.”

¶ 13   As bases for the court’s personal jurisdiction over third-party defendants, Mr. Zaehringer

alleged that they knew or should have known that he resided in the State of Illinois and transacted

business here, that they themselves transacted business in the State of Illinois, that they breached

fiduciary duties in the State of Illinois, and that they committed torts in the State of Illinois. He

alleged that third-party defendants “made material omissions and false representations in the

marketing materials” by, among other things:

                “a. failing to disclose that the other parties they were involved with had been the

       subject of multiple enforcement actions and cease-and-desist orders issued by several state

       regulatory authorities;

                b. failing to disclose that the pension income stream contracts were of questionable

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No. 1-22-0561

       legality;

                                                      ***

                e. falsely representing that the due diligence process ensured that only sellers most

       able to maintain their financial commitment were approved; and

                f. failing to disclose that up to 80 or 90 percent of sellers defaulted on their

       obligations under the pension income stream contracts.”

These were, according to Mr. Zaehringer, “material omissions and false representations that a

reasonable person in [his] position would have relied upon, and which he did in fact rely upon, in

determining whether to refer clients to Woodard and Financial Products Distributors *** and in

his dealings with [Mr. Pearson].” He maintained that third-party defendants “intended that [he]

rely on their representations in his dealings with [Mr. Pearson].”

¶ 14   On September 30, 2021, third-party defendants moved to dismiss the third-party complaint

for a lack of personal jurisdiction over them. They acknowledged that “twelve (12) income stream

contracts totaling $720,274.30 *** were sold to Plaintiff Pearson’s self-directed IRA by [Mr.

Zaehringer]” and noted that Mr. Zaehringer purported to witness Mr. Pearson’s signature on those

documents and netted significant commissions as a result of those sales. They attached to their

motion more or less identical affidavits emphasizing the South Carolina nature of ULG (which

was by then no longer in existence) and of both individual third-party defendants’ law training and

practice. They averred that they had never traveled to Illinois to promote ULG’s business,

advertised the firm’s services in Illinois, registered to do business in Illinois, or “actively sought”

business for ULG from individuals in the State of Illinois. They also stated that, to the best of their

knowledge, they had never had “any dealings” with Mr. Pearson or Mr. Zaehringer “prior to the

execution of the above-referenced contracts” and that Mr. Woodard, referred to in the complaint,

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No. 1-22-0561

was last known to reside in Texas.

¶ 15   Third-party defendants argued, based on this, that Mr. Zaehringer, who bore the burden of

showing the grounds for Illinois’s jurisdiction over them as nonresidents, had failed to do so. They

argued that his accusations about tortious conduct were conclusory and that he had not alleged that

they had purposefully availed themselves of Illinois’s law and territory in any way.

¶ 16   The circuit court allowed written discovery on the issue of personal jurisdiction, to be

completed by December 13, 2021, and gave Mr. Zaehringer four weeks beyond that deadline, or

until January 10, 2022, to respond to third-party defendants’ motion. Oral argument on the motion

was to take place on January 17, 2022.

¶ 17                    C. Jurisdictional Discovery and the Court’s Ruling

¶ 18   Mr. Zaehringer served third-party defendants with interrogatories and requests for

production in October and November of 2021. They did not answer, and on December 21, 2021,

Mr. Zaehringer moved to compel them to respond.

¶ 19   Third-party defendants then provided a set of responses to the interrogatories on December

30, 2021, and to his requests for production on December 31, 2021. They objected to delivering

documents from their IOLTA account showing all persons with Illinois addresses who deposited

pension funds in it, though they did acknowledge that one Illinois resident deposited funds that

were “involved in the Pearson purchases.” They objected to providing a variety of materials

involving their dealings with Illinois residents as subject to attorney-client privilege. And they

acknowledged acting as an escrow agent for an Illinois resident who had had some dealings with

Mr. Zaehringer, though they maintained this was wholly unrelated to Mr. Pearson’s dealings.

¶ 20   Third-party defendants described their relationship with PAC, the entity that sold the

pension-income loan contracts, as one where they acted as PAC’s corporate counsel, and

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No. 1-22-0561

maintained that all documents relating to PAC were therefore privileged. They denied that Mr.

Woodard ever acted as their agent, explained that they performed legal services for his company,

Financial Product Distributors, and stated that the details of such representation were likewise

protected by attorney-client privilege.

¶ 21    Mr. Zaehringer objected to third-party defendant’s responses to his discovery. The parties

conferred pursuant to Illinois Supreme Court Rule 201(k) (eff. May 29, 2014) in January and

February, and on February 10, 2022, Mr. Zaehringer amended his motion to compel, arguing that

third-party defendants’ privilege log detailing the withheld documents was “grossly deficient.”

¶ 22    On March 16, 2022, the circuit court entered an order requiring third-party defendants to

respond to the amended motion to compel by March 18, giving Mr. Zaehringer until March 25 to

file a reply, and setting a status hearing and argument on the motion for March 29, 2022. On March

18, third-party defendants responded by stating that Ms. Kern’s poor health prevented her from

amending the privilege log or further responding to Mr. Zaehringer’s discovery requests.

¶ 23    On March 29, 2022, the date set for argument on the motion to compel, the court entered a

one-page order (1) finding third-party defendants in default for failing to comply with the court’s

discovery order and barring them from introducing evidence at trial, (2) denying their motion to

dismiss for lack of personal jurisdiction, (3) giving them 21 days to file their answer to the third-

party complaint (which they did on April 19, 2022), and (4) continuing the motion to compel. The

order did not explain the court’s reasoning for any of these rulings and neither party has provided

us with a transcript of that court date.

¶ 24    Thus, it appears from the record that the circuit court ruled in Mr. Zaehringer’s favor

without having ruled on his motion to compel and without giving Mr. Zaehringer a chance to fully

respond to the motion to dismiss. Third-party defendants then petitioned for and were granted

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No. 1-22-0561

leave to bring this interlocutory appeal.

¶ 25                                      II. JURISDICTION

¶ 26    This is an interlocutory appeal by permission from the circuit court’s March 29, 2022,

denial of third-party defendants’ motion to dismiss for lack of personal jurisdiction. Third-party

defendants filed a timely petition for leave to appeal that ruling on April 26, 2022, which this court

granted on May 31, 2022. Our jurisdiction over this appeal is pursuant to Illinois Supreme Court

Rule 306(a)(3) (eff. Oct. 1, 2020).

¶ 27                                        III. ANALYSIS

¶ 28    On appeal, third-party defendants argue that their motion to dismiss for lack of personal

jurisdiction was erroneously denied. We do not have a sufficient factual record to address the

merits of this argument. Because on this record it appears that the circuit court’s order denying the

motion to dismiss was premature, we reverse and remand for the completion of the jurisdictional

discovery and briefing originally ordered.

¶ 29                                   A. Supreme Court Rules

¶ 30    Third-party defendants never filed a reply brief and so they made no objection to Mr.

Zaehringer’s response brief. However, his brief does not comply with Illinois Supreme Court Rule

328 (eff. July 1, 2017) or Illinois Supreme Court Rule 341 (eff. Oct. 1, 2020).

¶ 31    Rule 328 provides that “[a]ny party seeking relief from the reviewing court before the

record on appeal is filed shall file *** an appropriate supporting record containing enough of the

trial court record to show an appealable order or judgment, a timely filed and served notice of

appeal (if required for appellate jurisdiction), and any other matter necessary to the application

made.” Id. The supporting record “must be authenticated by the certificate of the clerk of the trial

court or by the affidavit of the attorney or party filing it.” Id.

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No. 1-22-0561

¶ 32   Here, third-party defendants filed a supporting record that included, among other things,

the circuit court’s order denying their motion to dismiss and the briefing on that motion,

accompanied by the affidavit of their counsel authenticating the contents as true and correct copies

of the relevant pleadings, orders, and motions filed in the circuit court. That was in accordance

with Rule 328.

¶ 33   Several weeks later, Mr. Zaehringer filed an “Additional Supporting Record.” This is also

appropriate under Rule 328. However, the “Additional Supporting Record” included discovery

requests and documents produced during discovery, with no indication whether any of those

documents was ever presented to the circuit court, in connection with briefing on the motion to

dismiss that is at issue in this appeal or otherwise. Indeed, in his accompanying affidavit, Mr.

Zaehringer’s attorney averred only that the documents were true and correct copies of documents

received in discovery. Because there is no indication that these documents were part of the record

before the circuit court, they are not properly part of the record before this court.

¶ 34   Illinois Supreme Court Rule 341 additionally provides that all briefs must contain

“reference to the pages of the record on appeal” in support of any factual statements or arguments.

Ill. S. Ct. R. 341(h)(6)(7), (i). However, in his brief, Mr. Zaehringer, as the appellee, cited and

relied on two documents that were not part of either the supporting record or the additional

supporting record that he had filed. Mr. Zaehringer never sought leave to supplement the record

with these documents. Rather than cite the record, he has simply cited the appendix page of his

own brief when referencing these documents. This violates the requirement that factual citations

be to the record. Those documents are also not properly before us on this appeal.

¶ 35   We raise these concerns to emphasize that we can only consider material that was before

the circuit court and that the parties have the burden of demonstrating to us that everything they

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No. 1-22-0561

rely on in this court was also before the circuit court. We have rendered our decision based on our

review of the material that meets these requirements. As we explain, our view based on the portion

of the record properly before us is that jurisdictional discovery should have been completed before

a decision was rendered. For the reasons we explain, we remand for continuation of that discovery

and a second ruling. In any further briefing in this case, we expect the parties to conform to all

applicable supreme court rules.

¶ 36     B. Third-Party Defendants’ Motion to Dismiss for Lack of Personal Jurisdiction

¶ 37   Third-party defendants brought their motion to dismiss under section 2-301 of the Code,

which provides, with certain exceptions not relevant here, that “[p]rior to the filing of any other

pleading or motion ***, a party may object to the court’s jurisdiction over the party’s person ***

by filing a motion to dismiss the entire proceeding or any cause of action involved in the

proceeding.” 735 ILCS 5/2-301(a) (West 2020). “Unless the facts that constitute the basis for the

objection are apparent from papers already on file in the case, the motion must be supported by an

affidavit setting forth those facts.” Id. In disposing of such a motion, “the court shall consider all

matters apparent from the papers on file in the case, affidavits submitted by any party, and any

evidence adduced upon contested issues of fact.” Id. § 2-301(b). Where the court’s decision is

based solely on documentary evidence, our review is de novo. Madison Miracle Productions, LLC

v. MGM Distribution Co., 2012 IL App (1st) 112334, ¶ 34. If there are disputes regarding issues

of fact on which personal jurisdiction depends, however, the court must conduct an evidentiary

hearing to resolve those disputes. Id. ¶ 35.

¶ 38   Personal jurisdiction is the power of a court to render a binding judgment on a particular

defendant. The constitutional requirement of due process limits the ability of a state’s court system

to exercise jurisdiction over a defendant who lacks some minimum connections with that forum.

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No. 1-22-0561

International Shoe Co. v. Washington, 326 U.S. 310, 316 (1945). It is a protection of the

defendant’s liberty. Insurance Company of Ireland, Ltd. v. Compagnie des Bauxites de Guinee,

456 U.S. 694, 702 (1982). A state may exercise jurisdiction over an out-of-state entity, though, if

the entity has maintained “minimum contacts” with the forum state such that haling it into court

would not offend “traditional notions of fair play and substantial justice.” International Shoe, 326

U.S. at 316, 320. When an entity purposefully avails itself of the benefit of the forum state’s laws

by conducting business there, it may then be subject to the authority of that state’s courts for claims

against it. Hanson v. Denckla, 357 U.S. 235, 253 (1958).

¶ 39   In keeping with these principles, courts may exercise personal jurisdiction over out-of-state

defendants under two theories: general and specific jurisdiction. General jurisdiction exists when

an entity is “at-home” in a state and is therefore amenable to suit for all claims against it. See

Goodyear Dunlop Tires Operations, S.A. v. Brown, 564 U.S. 915, 919 (2011) (“A court may assert

general jurisdiction over foreign *** corporations to hear any and all claims against them when

their affiliations with the State are so ‘continuous and systematic’ as to render them essentially at

home in the forum State.”).

¶ 40   A defendant may also be amenable to suit under the theory of specific jurisdiction when

the claim “arises from” its contacts with the forum state. Specific jurisdiction requires a showing

of minimum contacts that demonstrate the defendant purposefully directed its activities to the

forum state, coupled with a multifactored “fair play and substantial justice” analysis, which takes

into account (1) “the burden on the defendant,” (2) “the forum State’s interest in adjudicating the

dispute,” (3) “the plaintiff’s interest in obtaining convenient and effective relief,” (4) “the

interstate judicial system’s interest in obtaining the most efficient resolution of controversies,” and

(5) the “shared interest of the several States in furthering fundamental substantive social policies.”

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No. 1-22-0561

Burger King Corp. v. Rudzewicz, 471 U.S. 462, 474-75, 477 (1985).

¶ 41    Illinois’s long-arm statute explicitly makes use of the full breadth of personal jurisdiction

that due process allows. See 735 ILCS 5/2-209(c)(West 2020) (providing that “[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”). Thus, the statute’s requirements are said to merge with the

constitutional principles set out above. Russell v. SNFA, 2013 IL 113909, ¶ 30.

¶ 42    The fact that a defendant’s actions affected a plaintiff in or connected to Illinois is not

sufficient to establish personal jurisdiction over that defendant. The inquiry, rather, must take into

account “the relationship among the defendant, the forum, and the litigation” (internal quotation

marks omitted) and how the defendants availed themselves of the forum state. Brook v.

McCormley, 873 F.3d 549, 552-53 (7th Cir. 2017) (citing Advanced Tactical Ordnance Systems,

LLC v. Real Action Paintball, Inc., 751 F.3d 796, 801 (7th Cir. 2014)). As the cases demonstrate,

this analysis is fact-sensitive.

¶ 43    We have held that personal jurisdiction over a defendant may not be conferred by the

unilateral actions of the plaintiff. Morris v. Halsey Enterprices, Ltd., 379 Ill. App. 3 574, 580

(2008). Calls and correspondence sent to a defendant from Illinois, for example, may not be a basis

for the assertion of jurisdiction over that defendant. City of East Moline v. Bracke, Hayes & Miller,

133 Ill. App. 3d 136, 140 (1985).

¶ 44    Here, Mr. Zaehringer bears the burden of establishing a prima facie case that Illinois

jurisdiction over third-party defendants would accord with due process. Russell, 2013 IL

113909, ¶ 28. He could only show general jurisdiction by showing that third-party defendants’

contacts with Illinois were so “continuous and systematic” that it could fairly be said that they are

“at home” in Illinois. Goodyear, 564 U.S. at 919. He could show specific jurisdiction if this case

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No. 1-22-0561

arises from contacts third-party defendants established with Illinois. As the discussion above

shows, this is a fact-sensitive question that requires development of a clear record, full briefing,

and, where appropriate, jurisdictional discovery.

¶ 45    Mr. Zaehringer has alleged torts committed against him by third-party defendants. A tort

directed into or “aimed at” a state may be the basis for specific jurisdiction in that state. Calder v.

Jones, 465 U.S. 783, 789–91 (1984). But the question of whether a tort was directed into a state is

also fact-sensitive: to establish that conduct was “purposefully directed,” the plaintiff must show

that an intentional act was expressly aimed at Illinois with knowledge that injury would be felt

here. See id. (finding jurisdiction where the defendants were alleged to have defamed someone

they knew lived in the forum state, with knowledge that the effects of the defamation would be felt

there). Conversely, if the commission of the tort was not directed at Illinois, the fact that the effects

were felt here cannot form the basis for personal jurisdiction. See Sabados v. Planned Parenthood

of Greater Indiana, 378 Ill. App. 3d 243, 248, 250 (2007) (finding no jurisdiction where the claim

involved a blood clot that developed in Illinois following a procedure at an Indiana clinic.)

¶ 46    From what we can glean from the pleadings here, various agreements may have existed

between third-party defendants and Mr. Pearson, between them and various intermediaries, and

possibly between them or their agents and Mr. Zaehringer. It is the specifics of these agreements,

how they came about, and the activities underlying the tort claims that will substantiate “the

relationship among the defendant, the forum, and the litigation” (internal quotation marks omitted)

that Mr. Zaehringer will need to show to establish a basis for jurisdiction. Brook, 873 F.3d at 552.

¶ 47    Third-party defendants insist both that Mr. Zaehringer’s jurisdictional allegations, made on

information and belief, were insufficient to carry his burden and that he failed to rebut their

uncontroverted affidavits with any of his own. But Mr. Zaehringer was clearly waiting to respond

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No. 1-22-0561

to their motion to dismiss until after he received information through discovery resolving some of

the unanswered questions posed above. For reasons that are not clear from the record, the circuit

court ruled in his favor before his discovery requests were fully answered. Mr. Zaehringer cannot

be expected to object to a ruling in his favor. However, in order to defend that ruling on appeal,

Mr. Zaehringer needs the discovery that he sought below.

¶ 48                                    IV. CONCLUSION

¶ 49   For all of the above reasons, we reverse the circuit court’s order denying third-party

defendants’ motion to dismiss for lack of personal jurisdiction. We remand this matter for the

circuit court to decide the motion after discovery and briefing on the issue of personal jurisdiction

is complete.

¶ 50   Reversed and remanded, with directions.

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