September 24, 2017

Colorado Court of Appeals: Plaintiff Need Only Demonstrate Prima Facie Showing of Personal Jurisdiction to Defeat Rule 12(b) Motion to Dismiss

The Colorado Court of Appeals issued its opinion in Rome v. Reyes on Thursday, June 15, 2017.

Ponzi Scheme—Investments—Insurance—Fraud—Personal Jurisdiction—Long Arm Statute—Colorado Securities Act—C.R.C.P. 12(b)(2)—C.R.C.P. 9(b).

This case arises out of a Ponzi scheme that defrauded at least 255 investors out of $15.25 million dollars. To implement the scheme, Schnorenberg formed KJS Marketing, Inc. in Colorado to obtain funds for investment in insurance and financial products sales companies. Schnorenberg hired Reyes, a California resident, and Kahler, a Wyoming resident, to solicit investor funds on behalf of KJS and its successor company, James Marketing. Rome, the Securities Commissioner for the State of Colorado, brought claims against Schnorenberg, Reyes, and Kahler for securities fraud, offer and sale of unregistered securities, and unlicensed sales representative activity. The Commissioner also sought a constructive trust or equitable lien against Schnorenberg’s mother (among others), who resides in Wyoming, as a “relief defendant,” based on allegations that she received some of the improperly invested funds. Reyes, Kahler, and Schnorenberg’s mother moved to dismiss all claims against them under C.R.C.P. 12(b)(2) for lack of jurisdiction. Reyes and Kahler also sought dismissal of the securities fraud claim on the ground that it failed to meet the C.R.C.P. 9(b) particularity requirements. (Neither Schnorenberg nor KJS is a party to this appeal.) The district court granted all of these motions without conducting an evidentiary hearing. In written orders, the court concluded that it lacked personal jurisdiction over each of the nonresident defendants, and that the Commissioner’s securities fraud claim failed to “link any particular factual allegations to actual false representations” made by Reyes or Kahler.

On appeal, the Commissioner contended that the district court erred in dismissing the claims against Reyes, Kahler, and Schnorenberg’s mother for lack of personal jurisdiction. Here, the Commissioner sufficiently alleged that Reyes and Kahler violated the Colorado Securities Act (CSA) because the transactions at issue pertained to securities that originated in Colorado. Taking the allegations together, the activities of Reyes and Kahler made it reasonably foreseeable that they could be haled into a Colorado court to answer the allegations. Further, the exercise of jurisdiction over them does not offend due process principles. Schnorenberg’s mother received funds from her son that had been transferred from Colorado accounts, and she knew or should have known that the money came from investors in her son’s “Colorado-based investment scheme.” The Commissioner’s action against Schnorenberg’s mother arises from her activities’ consequences in Colorado, and it is reasonable to exercise jurisdiction over her, despite the somewhat limited nature of her direct contacts with Colorado.

The Commissioner also argued that the district court erred in dismissing the claims against Reyes and Kahler under the CSA on the ground that the Commissioner failed to meet his pleading burden under Rule 9(b). The Commissioner’s complaint provided sufficient particularity to give Reyes and Kahler fair notice of the claim for securities fraud and the main facts or incidents upon which it is based.

The judgment was reversed and the case was remanded.

Summary provided courtesy of The Colorado Lawyer.

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