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Rome v. Reyes

Court of Appeals of Colorado, First Division

May 11, 2017

Gerald Rome, Securities Commissioner for the State of Colorado, Plaintiff-Appellant,
Antonio Reyes, Craig Kahler, and Betty Schnorenberg, Defendants-Appellees.


          Announced June 15, 2017

         City and County of Denver District Court No. 15CV32760 Honorable Karen L. Brody, Judge

          Cynthia H. Coffman, Attorney General, Sueanna P. Johnson, Assistant Attorney General, Charles J. Kooyman, Assistant Attorney General, Denver, Colorado, for Plaintiff-Appellant

          Foster Graham Milstein & Calisher, LLP, Chip G. Schoneberger, Denver, Colorado, for Defendants-Appellees


          NAVARRO JUDGE.

         ¶ 1 In this civil enforcement action, plaintiff, Gerald Rome, Securities Commissioner for the State of Colorado (the Commissioner), appeals the district court's judgment dismissing the claims against defendants Antonio Reyes, Craig Kahler, and Betty Schnorenberg. We reverse and remand with directions.

         I. Factual and Procedural History

         ¶ 2 Because the court granted defendants' motions to dismiss, we accept as true the following facts alleged in the Commissioner's complaint. This case arises out of a Ponzi scheme that defrauded at least 255 investors out of $15.25 million dollars. To implement the scheme, defendant Kelly Schnorenberg formed defendant KJS Marketing, Inc., in Colorado to obtain funds for investment in insurance and financial-products sales companies. (Neither Kelly Schnorenberg nor KJS is a party to this appeal.) Kelly 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.

         ¶ 3 Reyes and Kahler represented to potential investors that KJS would direct investment funds to particular companies for the purpose of recruiting and training agents to sell insurance and financial products, and that the investors would receive ten to twelve percent returns from the ensuing commissions. Reyes and Kahler further represented that the investments were risk free and that prominent individuals in the insurance industry were involved. Reyes and Kahler directed out-of-state investors to Kelly Schnorenberg or KJS in Colorado to complete the transactions. The investors, in exchange for their investments, received promissory notes executed by Kelly Schnorenberg and/or KJS in Colorado and governed by Colorado law.

         ¶ 4 The investment scheme was a fraud, according to the Commissioner. Instead of directing most funds to the insurance and financial-products sales companies as promised, Kelly Schnorenberg allegedly converted the investments to personal use, or otherwise distributed the funds to his mother, his girlfriend, or prior investors in the attempt to mollify them while bringing in new investors to continue the scheme.[1] Meanwhile, Reyes and Kahler received transaction-based commissions (from Kelly Schnorenberg, KJS, or other Colorado entities) on the sale of the investments.

         ¶ 5 Seeking to enjoin the scheme, the Commissioner brought claims against Kelly 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 three "relief defendants" who allegedly received some of the improperly obtained investment funds. Betty Schnorenberg, Kelly's mother, is one such relief defendant. She resides in Wyoming.

         ¶ 6 Reyes, Kahler, and Betty Schnorenberg moved to dismiss all claims against them under C.R.C.P. 12(b)(2) for lack of personal jurisdiction. Reyes and Kahler also sought dismissal of the securities fraud claim on the ground that it failed to meet the particularity requirements of C.R.C.P. 9(b).[2] 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. The court certified these rulings as final under C.R.C.P. 54(b).

         II. Personal Jurisdiction

         ¶ 7 The Commissioner contends that the district court erred in dismissing the claims against Reyes, Kahler, and Betty Schnorenberg for lack of personal jurisdiction. We agree.

         A. Rule 12(b)(2) Procedure

         ¶ 8 In its discretion, a district court may address a Rule 12(b)(2) motion before trial based solely on the documentary evidence or by holding an evidentiary hearing. Archangel Diamond Corp. v. Lukoil, 123 P.3d 1187, 1192 (Colo. 2005). Where, as here, the court decides the motion on the documentary evidence alone, the plaintiff need only demonstrate a prima facie showing of personal jurisdiction to defeat the motion. Id.

         ¶ 9 Documentary evidence consists of the complaint's allegations as well as affidavits and any other written material submitted by the parties. Id. The court must accept the complaint's allegations as true to the extent they are not contradicted by the defendant's competent evidence. If the parties' competent evidence presents conflicting facts, the court must resolve such discrepancies in the plaintiff's favor. Id.

         ¶ 10 A prima facie showing exists when the plaintiff raises a reasonable inference that the court has jurisdiction over the defendant. Id.; see also Keefe v. Kirschenbaum & Kirschenbaum, P.C., 40 P.3d 1267, 1272 (Colo. 2002). "This is a light burden intended only to 'screen out "cases in which personal jurisdiction is obviously lacking, and those in which the jurisdictional challenge is patently bogus."'" Found. for Knowledge in Dev. v. Interactive Design Consultants, LLC, 234 P.3d 673, 677 (Colo. 2010) (citations omitted).

         ¶ 11 We review de novo whether the plaintiff established a prima facie case of personal jurisdiction. Id.

         B. Legal Standard

         ¶ 12 To exercise jurisdiction over a nonresident defendant, a Colorado court must comply with Colorado's long-arm statute and constitutional due process. § 13-1-124, C.R.S. 2016; Magill v. Ford Motor Co., 2016 CO 57, ¶ 14. Because the long-arm statute extends jurisdiction to the maximum extent allowed by the Due Process Clause, the due process inquiry is controlling. New Frontier Media, Inc. v. Freeman, 85 P.3d 611, 613 (Colo.App. 2003).

         ¶ 13 To permit jurisdiction over a nonresident defendant, due process requires that the defendant have certain minimum contacts with the forum. Int'l Shoe Co. v. Washington, 326 U.S. 310, 316 (1945). The quantity and nature of the minimum contacts required depends on whether the plaintiff alleges specific or general jurisdiction. Archangel, 123 P.3d at 1194. Here, the Commissioner relies on specific jurisdiction.

         ¶ 14 Specific jurisdiction is properly exercised over a defendant where the injuries triggering litigation arise out of and are related to significant activities directed by the defendant toward the forum state. Id.; see Day v. Snowmass Stables, Inc., 810 F.Supp. 289, 292 (D. Colo. 1993). "As such, the minimum contacts inquiry in regard to specific jurisdiction is essentially a two[-]part test assessing, (1) whether the defendant purposefully availed himself of the privilege of conducting business in the forum state, and (2), whether the litigation 'arises out of' the defendant's forum-related contacts." Archangel, 123 P.3d at 1194. The contacts must be established by the defendant himself. Day, 810 F.Supp. at 292. "The unilateral activity of those who claim some relationship with a nonresident defendant cannot satisfy the requirement of contact with the forum state." Id. (quoting Hanson v. Denckla, 357 U.S. 235, 253 (1958)).

         ¶ 15 Once it is established that a defendant has the requisite minimum contacts, those contacts must be considered in light of other factors to determine whether the assertion of personal jurisdiction would comport with notions of fair play and substantial justice (i.e., whether jurisdiction over the defendant would be reasonable). Youngquist Bros. Oil & Gas, Inc. v. Miner, 2017 CO 11, ¶ 13. These factors may include the burden on the defendant, the forum state's interest in resolving the controversy, and the plaintiff's interest in attaining effective and convenient relief. Archangel, 123 P.3d at 1195. "[A]n especially strong showing of reasonableness may serve to fortify a borderline showing of minimum contacts." Id. (citations omitted); see Keefe, 40 P.3d at 1271-72. Conversely, when a defendant who purposefully directed his activities at a forum seeks to defeat jurisdiction, he must present a compelling case that the presence of some other considerations would render jurisdiction unreasonable. Keefe, 40 P.3d at 1272.

         C. Reyes and Kahler

         1. The Affidavits

         ¶ 16 The Commissioner alleged in his complaint that Reyes and Kahler directly solicited investors in Colorado, among other states. Reyes and Kahler submitted affidavits in support of their motions to dismiss in which they denied soliciting investors in Colorado.[3]Though the Commissioner submitted affidavits from his investigator in response, we will accept as true Reyes's and Kahler's assertions on this point. See Archangel, 123 P.3d at 1192 ("[T]he allegations in the complaint must be accepted as true to the extent they are not contradicted by the defendant's competent evidence[.]").[4]

         ¶ 17 For its part, the district court seemed to disregard entirely the investigator's affidavits addressing Reyes and Kahler. The court found that the investigator's statements were not based on personal knowledge of the facts alleged and, therefore, they did not qualify as "competent evidence." The Commissioner contends that the court erred in that ruling. We need not resolve this dispute, however, because the Commissioner made a prima facie showing of personal jurisdiction over Reyes and Kahler even without considering the investigator's affidavits concerning them. We now turn to that jurisdictional analysis.

         2. Jurisdiction Under A Statute

         ¶ 18 The Commissioner first argues that the Colorado Securities Act (CSA), §§ 11-51-101 to -908, C.R.S. 2016, contemplates personal jurisdiction over Reyes and Kahler. To the extent the Commissioner contends that, if he sufficiently alleged that Reyes and Kahler violated the CSA, his allegations against them also satisfied Colorado's long-arm statute, we agree.

         ¶ 19 According to the long-arm statute, the transaction of business within the state may submit a person to the jurisdiction of the courts of this state. § 13-1-124(1)(a). According to the CSA, "[a]ny violation of this article shall be deemed to constitute the transaction of business within this state for the purpose of section 13-1-124, C.R.S." § 11-51-706(4), C.R.S. 2016.

         ¶ 20 The Commissioner alleged that Reyes and Kahler violated the CSA, whether or not they were physically present in Colorado, because the transactions at issue pertained to securities that originated in Colorado. § 11-51-102(1), C.R.S. 2016 (providing that the relevant CSA provisions "apply to persons who sell or offer to sell when an offer to sell is made in this state or when an offer to purchase is made and accepted in this state"); § 11-51-102(3) (confirming that "an offer to sell or to purchase is made in this state, whether or not either party is then present in this state, when the offer originates from this state"). In support, the Commissioner asserted that the ...

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