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October 17, 1978

ENERGY RESERVES GROUP, INC., et al., Plaintiffs,
The SUPERIOR OIL COMPANY and Superior Overseas Development Company, Ltd., Defendants

The opinion of the court was delivered by: THEIS


This matter comes before the Court on the motion of defendant Superior Overseas Development Company Ltd. (hereinafter "Superior Overseas") to dismiss this action pursuant to Rule 12(b)(2), Federal Rules of Civil Procedure, for lack of personal jurisdiction. This Court has previously disposed of two motions of defendant Superior Oil Company (hereinafter "Superior") in an order dated January 5, 1978, which set for hearing the instant motion of Superior Overseas. This hearing was held on January 19, 1978. Counsel for both sides were then granted additional time within which to file supplemental briefs on the personal jurisdiction question before the Court. Having examined the parties' briefs and having heard their oral argument, this Court finds that the matter is now ready for resolution.

 This is a declaratory judgment action brought for common law breach of contract. Subject matter jurisdiction is predicated on the diversity statute, 28 U.S.C. § 1332(a). Both defendants are Nevada corporations. Superior has its principal place of business in Texas, and Superior Overseas has its principal place of business in London, England. Superior is authorized to do, and for many years has done, extensive business in Kansas in the oil and gas industry. It appears that plaintiffs obtained service of process in Kansas on Superior's resident agent for service. Superior does not contest personal jurisdiction. Superior Overseas was served in Houston, Texas, pursuant to the Kansas long-arm statute. K.S.A. § 60-308(b) (1976), and Rule 4(e), Federal Rules of Civil Procedure.

 The dispute between the parties arises from the contractual arrangements made by plaintiffs to finance the exploration, development and production of License P-244, which covers certain blocks in the North Sea area of the United Kingdom continental shelf. Plaintiffs hold a percentage working interest in the license which conveys rights for oil and gas exploration in the North Sea. Plaintiffs and defendants have entered into agreements to provide financing for the development of the Clinton interest in License P-244, to provide between the parties for the distribution of the earnings expected to flow from that development, and to provide for control of the voting rights attending plaintiffs' interest in the development of P-244.

 Plaintiffs are allegedly under contractual obligations to the other owners of interest in the same areas. Plaintiffs allege that the defendants' refusal to participate in decisions made by the majority interest holders of P-244 has jeopardized the plaintiffs' license interest and has exposed plaintiffs to severe monetary penalties and possible forfeiture of their interest. Plaintiffs allege that defendants' failure to participate in the development of exploratory wells, in conformity with the majority vote of interest holders, is a material breach of their agreement with the defendants which excuses them from performance of their obligations under the contract. Plaintiffs allege in a separate count of their complaint that the defendants' conduct constitutes a default under the terms of the contracts and permits plaintiffs to terminate or rescind the agreements between the parties. Plaintiffs seek declaratory relief in a judgment ruling that the defendants' rights or interests under the contracts have terminated.

 Superior Overseas has moved to dismiss on grounds of lack of personal jurisdiction. Superior Overseas has been served pursuant to the Kansas long-arm statute as one who has contracted with a Kansas resident for partial performance in the state. In the alternative, Superior Overseas has been served as one who transacts business in the forum through the agent or instrumentality of its parent corporation, Superior. Plaintiffs also allege that Superior Overseas is the mere "alter ego" of its parent and that jurisdiction over Superior, without more, provides jurisdiction over its absent subsidiary. Plaintiffs therefore urge this Court on corporate law principles to pierce the corporate veil between the two affiliated defendant corporations.

 Defendants have responded that the two corporations have scrupulously maintained their separate corporate identities and that plaintiffs have demonstrated none of those facts necessary for a finding that the corporate veil may be pierced. Superior Overseas further contends that it lacks contacts with the forum sufficient to render proper this Court's exercise of jurisdiction over its person. Superior Overseas contends that it lacks Any physical contact with Kansas and that its sole relationship with this forum is a signed contract which it mailed into the state for acceptance and final execution here by one of the plaintiffs. Superior Overseas strenuously argues that this sole act is insufficient to render the exercise of personal jurisdiction consistent with traditional notions of fair play and substantial justice as set forth in International Shoe Co. v. Washington, 326 U.S. 310, 66 S. Ct. 154, 90 L. Ed. 95 (1945), and Shaffer v. Heitner, 433 U.S. 186, 97 S. Ct. 2569, 53 L. Ed. 2d 683 (1977).

 The Court thus decides two jurisdictional questions. The Court first holds that the long-arm statute, which authorizes service on anyone who commits certain acts "through an agent or instrumentality," permits service of process on a non-resident corporation which has in the forum an affiliated corporation that has committed one of those acts at the direction or for the benefit of the non-resident corporation. The statutory language "agent or instrumentality" extends service beyond non-resident corporations who act merely as "alter egos" of an affiliated corporation in the forum and thus permits service on the non-resident corporation without a determination whether the corporate veil might be pierced. This Court concludes that the Kansas legislature did not intend to restrict the reach of the long-arm statute only to those who commit the enumerated acts through a corporate "alter ego," a concept which derived from principles of corporate law unrelated to the limitations on quasi-sovereign states to issue service of process beyond their territorial borders.

 The Court secondly holds that formal separation of corporate identities does not raise a constitutional barrier to the exercise of jurisdiction over a non-resident whose affiliated corporation has a substantial nexus with the forum. This follows from the conclusion that the time-honored doctrine of Cannon Manufacturing Co. v. Cudahy Packing Co., 267 U.S. 333, 45 S. Ct. 250, 69 L. Ed. 634 (1925), must no longer be followed. The Court finds Cannon to be limited in scope or modified in holding by International Shoe and its progeny. Reliance on the rule of Cannon is unsound when extraterritorial service is authorized by statute and when personal jurisdiction is predicated on the due process standards of International Shoe.

 The Court concludes that the constitutional analysis under International Shoe permits consideration of a non-resident's relationship with an affiliated corporation in the forum, notwithstanding their proper maintenance of separate corporate identities. The Court may also consider as "affiliating circumstances" with the forum the contacts or activities of the affiliated corporation itself where those activities are intended to bestow a benefit upon the non-resident corporation that the latter has purposefully sought or might reasonably foresee. The relative significance of these factors are dependent upon the facts of each given case. They assume greater significance where, as here, the domestic corporation's activities are substantially related to the obligations giving rise to plaintiffs' claims against the non-resident subsidiary corporation. The Court considers these contacts relevant to any realistic judgment of the relative fairness of requiring Superior Overseas to defend itself in this forum on the contracts in question. It considers these activities of the parent corporation notwithstanding any lawful and viable separation of corporate identities maintained between the defendants.


 The facts of the instant case that are material to the jurisdictional issue are not substantially in dispute. All parties place great reliance on similar factual developments to reach opposite conclusions on the propriety of jurisdiction. Before developing that factual background, however, the Court must detail the elaborate and complex intercorporate relationships which give rise to the contracts in question and which identify each of the parties before the Court.

 Plaintiff Energy Reserves Group, Inc. is the successor corporation of the Clinton Oil Company, and the rights and obligations of the two are the same with regard to the issues in this action. For the sake of simplicity and clarity in the discussion of the contracts in question, Energy Reserves Group, Inc. is hereinafter identified as "Clinton." It is a Delaware corporation with its principal place of business in Kansas. Plaintiff Clinton International Corporation (hereinafter "Clinton International") is also a Delaware corporation with its principal place of business in Kansas. Clinton owns 90% Of the outstanding capital stock of Clinton International, and Richard Volk, who testified at the hearing on the instant motion, is president of both corporations. Plaintiff Clinton International (England) Ltd. (hereinafter "Clinton England") is a wholly owned subsidiary of Clinton International and has its principal places of business in Kansas and London. A related corporation, but not a party here, is Clinton International North Sea Ltd. (hereinafter "Clinton North Sea"), also a wholly owned subsidiary of Clinton International and a corporation organized under the laws of the United Kingdom.

 As noted above, Superior is a Nevada corporation which has done extensive business in Kansas in the oil and gas industry. It is authorized to do business here and it owns numerous interests in oil and gas fields in the state. Its principal place of business is in Houston, Texas. Superior Overseas is also a Nevada corporation and a wholly owned subsidiary of Superior and has its principal place of business in London.

 Clinton North Sea was the owner of the P-244 license interest in offshore oil development which is the subject of this controversy. Clinton North Sea owned that interest subject to the terms of an operating agreement with the other percentage interest holders in the same license. In a contract in March, 1972, Clinton North Sea agreed to transfer to Clinton England a substantial beneficial interest in the proceeds from the license development. Clinton England essentially agreed that it would perform and discharge all the obligations of Clinton North Sea under the latter's license, subject to the operating agreement which Clinton North Sea had signed with the majority percentage interest holders of the same license.

 This type of intercorporate organization is apparently common in the international industry of oil and gas exploration, development and production. For purposes of tax advantages it is deemed advisable to have a separate foreign corporation own the license interest for oil development. The Court was also informed at the hearing that the laws of the United Kingdom, as well as those of many other foreign countries, require or encourage the holders of oil license interests to be domestic corporations of the particular nation. Clinton North Sea is such a corporation. Clinton International is a holding company specifically designed to own Clinton's various foreign oil companies that hold licenses for oil exploration in different countries around the world. Clinton International is, of course, a subsidiary of Clinton and they both share the same offices in Kansas. In this manner Clinton itself ultimately retains control over its percentage interest in the P-244 license in the North Sea area. Mr. Volk also indicated that in a like manner Clinton controls other licenses in different countries around the world.

 As the defendants have illustrated in an exhibit before the Court, Clinton sought financial backing to develop:

"(its) holdings in the North Sea . . . (permitting Clinton) through its subsidiary Clinton International . . . (to) participate in the drilling of a well . . . in the United Kingdom sector of the North Sea."
(Clinton Oil Company, Letter to Shareholders, Defendants' Exhibit A.)

 Superior first offered that financial backing. Joe Reid, Vice President of Superior and President of Superior Overseas, first telephoned Volk from Houston, Texas, in September, 1973, to explore the possibilities of participation in Clinton's interest in P-244 in the North Sea area. Reid expressed an interest in meeting Volk regarding Clinton's North Sea interests, and Reid traveled to Wichita, Kansas, and met with Volk on October 31, 1973. Reid signed into the office as a representative of Superior. Negotiations continued between the two corporations and culminated in a meeting in June, 1974, between Volk and Reid in Houston, where both parties reached an agreement regarding Superior's participation in the North Sea development.

 Volk's notes from that meeting reflect that he and Joe Reid, of Superior, agreed that "Superior assumes Clinton's full obligation" for exploration, production, and development under Clinton's license interests. Superior received as consideration for financing the project a "call on Clinton's share of the oil." The notes further reflect that:

"Clinton will assign its interest in the license to Superior or, if possible, sufficient ownership of the subsidiaries holding title and the illustrative agreement to enable Superior and Clinton to take full advantage of the tax laws of the countries involved."
(Plaintiffs' Exhibit No. 2, Plaintiffs' Brief in Opposition to Defendants' Motion.)

 Following the meeting a "letter of intent" was mailed by Mr. Clark, as senior vice president of Superior, to Volk, as president of Clinton. In essence, the letter was a contract to enter into a further and more detailed contract at a later date. It stated:

"Subject to entering into a more detailed and definitive agreement within 30 days from today and being subject to Superior acquiring acceptable U.K. ownership in the licenses or Superior acquiring acceptable ownership of the subsidiary holding title to the licenses, Superior is willing to do the following." (Emphasis added.)

 The letter then set forth terms substantially the same as those which Volk's notes had indicated to be the agreement reached in Houston. This "letter of intent" contained an acceptance block which Volk signed as President of Clinton on July 1, 1974. The time limitation of the "letter of intent" was later extended beyond the initial thirty-day period in a separate agreement signed by Reid and Volk representing Superior and Clinton.

 Throughout the entire negotiations Superior and Clinton significantly bargained over "Clinton's interest" in P-244, "Clinton's obligations" and "Clinton's rights" to proceeds thereunder. Superior initially contacted Clinton to inquire about its participation in "Clinton's interest" in the North Sea area. Every step of these negotiations reflects in substance the arrangements of two parent corporations to dispose of certain rights and duties. Clinton, of course, did not own any interest in, nor did it have any rights to or obligations under the United Kingdom license and operating agreements. Clinton North Sea and Clinton England held those interests, rights and obligations. Both of these corporations were owned by Clinton International, which, in turn, was owned by Clinton. It is also apparent that Superior was aware of these facts. Superior's "letter of intent" clearly contemplated that Clinton would cause its subsidiaries to transfer to Superior an interest in the license itself, or that Clinton would cause Clinton International to transfer to Superior "acceptable ownership" of Clinton England and Clinton North Sea. In a similar regard, Clinton was advised by Reid that Superior would likely not itself accept such ownership or title, but rather would place it in a foreign subsidiary for tax purposes. Clinton was, therefore, likewise on notice that the ultimate execution of the arrangements with Superior would likely be achieved through the employment of subsidiary corporations.

 Two contracts ultimately arose from these and further negotiations between the two parent corporations. The contract anticipated in the "letter of intent" was executed October 29, 1974, and was identified by the parties as the "letter agreement" of that date. On the same day each company's subsidiary, Clinton England and Superior Overseas, entered into a contract referred to as the "Main Agreement." The "letter agreement" constituted a binding bilateral contract wherein both parent corporations exchanged promises of performance on their own behalf and on behalf of their subsidiaries. The "letter agreement" was signed by Superior in Texas and was accepted and finally executed both by Clinton and by Clinton International in Kansas on October 31, 1974. Superior Overseas was not a party to this contract, nor was Clinton England or Clinton North Sea.

 A cursory review of the terms of the instant contracts is in order. In a document known as the "Illustrative Agreement," Clinton England contracted with Clinton North Sea, the English subsidiary holding title to the P-244 license, to provide the funds and equipment necessary for the exploration, production and development of the license interest in conformity with the operating agreement between all percentage holders of the interest. In exchange, Clinton England received a five-sevenths interest in the 25% Working interest of Clinton North Sea in P-244.

 Under the Main Agreement, Clinton England contracted with Superior Overseas to obtain assistance in discharging its obligations under the "Illustrative Agreement" to develop the P-244 license. Superior Overseas agreed to provide the funds and equipment required of Clinton England to develop P-244 under its contract with Clinton North Sea. After Superior Overseas' recoupment of its initial outlay, both Superior Overseas and Clinton England were to share equally in the expenses and the proceeds under the license interest. The contract stated that all notices and communications required under the agreement must be mailed to specified offices of Superior Overseas, Clinton England, and to the Kansas office of Clinton International. The Main Agreement contract substantially controlled the flow of funds to and from plaintiff Kansas corporations, and further required substantial communication with corporations in this form, i. e., Kansas. This is the sole partial performance contemplated under the contract which has any physical connection with this forum.

 The "letter agreement" between Superior, Clinton and Clinton International added material terms to the Main Agreement between the two subsidiaries. Each subsidiary gained rights and obligations under this contract although the subsidiaries themselves were not parties to the contract. Rather, they were committed under this letter agreement to the performance of certain obligations undertaken "by (them) or by the parties hereto for and on behalf of their respective . . . subsidiaries." The contract was executed by Superior in Houston and by Clinton and Clinton International in Kansas.

 Beginning at paragraphs five and six of the contract, Clinton and Clinton International expressly promised that they would "cause Clinton England . . . (and) Clinton North Sea" to undertake various activities. They authorized Superior Overseas "on behalf and in the name of Clinton North Sea or Clinton England" to take any action necessary to maintain the license interest, provided notice was first given to Clinton and Clinton International. Clinton International agreed to permit Superior Overseas to designate 50% Of the members of the Board of Directors of both Clinton England and Clinton North Sea. Clinton International also agreed that upon certain conditions, either it would transfer to Superior Overseas half-ownership of Clinton North Sea and cause Clinton England to assign a one-half interest in its license, or it would cause Clinton North Sea to assign to a corporation designated by Superior Overseas a one-half interest in the license. The parents lastly guaranteed the performance of the obligations imposed on their subsidiaries under this letter agreement to which the subsidiaries were not party.

 The record before this Court makes it clear that underlying all these transactions is a bargain between two parent corporations to control and develop a license interest in North Sea oil operations. For reasons of tax advantage and compliance with foreign law, both parents chose to proceed in their endeavors through subsidiary corporations. Clinton held the license in its subsidiary corporation, Clinton North Sea, but Clinton's exploitation of that interest was arranged through its chain of corporate ownership. Clinton desired assistance from other companies to develop its license. Superior offered this assistance with the announced intention of either receiving part ownership of the Clinton subsidiaries or accepting and placing partial ownership of the license interest in a Superior subsidiary. Ultimately, Clinton's subsidiaries conveyed certain rights to Superior's subsidiary which, in exchange, promised the financial and mechanical support required to develop those rights. Each subsidiary acted in reliance upon the representations and guarantees of the parent corporation controlling the respective subsidiary.

 It is even more indubitably clear that the agreement at the subsidiary level was bargained for and agreed upon at the parent level by the officers of the parents acting on behalf of both the parent corporations and their subsidiaries. Indeed, there is not a scintilla of evidence in the record to show that the subsidiaries Ever negotiated directly between themselves independently of their parents' negotiations. Both parents caused their subsidiaries to enter into a contract at the subsidiary level. The parents conducted their negotiations on behalf of the subsidiaries. The parents further contracted between themselves to cause their subsidiaries to perform in a certain manner under the subsidiaries' contract. The parents contracted between themselves that they would cause their subsidiaries to perform additional obligations imposed on the subsidiaries by the parents' contract to which the subsidiaries were not party. Indeed, the very ownership of the Clinton subsidiaries, and the right to elect the directors of those subsidiaries, were main elements in the bargaining between the parents.

 Having found that Superior Overseas is subject to service of process, both under subsections (b)(1) and (b)(5) of the Kansas long-arm statute, the Court secondly relies on this factor of control to give substantial weight to those contacts of Superior with this forum which are intimately connected with plaintiffs' claims. This consideration is but one of several which support the conclusion that the exercise of personal jurisdiction so invoked satisfies the constitutional test of fundamental fairness and substantial justice. Personal jurisdiction over Superior Overseas is therefore proper.


 Superior Overseas has argued extensively that all preliminary negotiations on the instant contracts were undertaken by its parent, Superior. Superior Overseas resists the attribution of Superior's contacts with this forum, and argues that personal jurisdiction may not be constitutionally predicated on the single contact of Superior Overseas with Kansas a contract substantially governing the rights and duties of two subsidiary corporations in oil drilling operations in the North Sea area of the United Kingdom. Superior Overseas argues that the plaintiffs may prevail only upon showing that the corporate veil between the defendant corporations may be pierced, that the subsidiary corporation is the mere "alter ego" of the parent, and that this Court may therefore treat the two as one and consider the parent's relationship with this forum in order to establish jurisdiction over the non-resident subsidiary. Defendants rely heavily on the rule of Cannon Mfg. Co. v. Cudahy Packing Co., supra, as adopted and applied by Kansas in Farha v. Signal Companies, Inc., 216 Kan. 471, 532 P.2d 1330, modified, 217 Kan. 43, 535 P.2d 463 (1975).

 Plaintiffs argue to the contrary on these same facts. Superior and Superior Overseas have substantially the same officers and directors. Mr. Reid, who primarily negotiated the instant contracts, was an officer of both corporations. Superior did all the bargaining on the instant contracts and "held itself out" as the real party behind the subsidiary's contract. Superior thereby led plaintiffs to believe that they were in fact dealing with Superior, and the plaintiffs relied on that belief. Plaintiffs argue that Superior Overseas was used at the last moment as the "mere instrumentality" or "alter ego" of its parent corporation in order to effectuate the ultimate goal of Superior's negotiations. Plaintiffs therefore urge this Court to pierce the corporate veil between the two corporations and exercise jurisdiction over the non-resident subsidiary by virtue of this Court's conceded jurisdiction over the parent corporation in this forum.

 As stated previously, this Court finds it unnecessary to reach the issue whether on these facts it might permissibly pierce the corporate veil and find Superior Overseas to be the "alter ego" of its parent, Superior. The Court finds, instead, that the rule of Cannon is no longer viable in jurisdictional analysis. While the rule of Cannon, and alter ego analysis generally, may in some situations retain statutory value, they no longer have any bearing on the constitutionality of jurisdiction over a defendant who is properly served.

 After the decision in International Shoe, the "presence" of a non-resident, as measured under the old quantitative "doing business" standard, was no longer necessary to a state court's exercise of personal jurisdiction over that non-resident. The rule of Cannon thus lost its constitutional significance when extraterritorial service of process was authorized by statute and when the constitutionality of the exercise of the jurisdiction so invoked was measured under the new qualitative fundamental fairness test of International Shoe.

 After the recent decision in Shaffer, the "presence" of a non-resident in the forum is neither necessary nor sufficient to render constitutional the exercise of jurisdiction, whether invoked pursuant to extraterritorial service on the non-resident or domestic service on the non-resident's designated agent for service of process. All exercise of state court jurisdiction, and impliedly the exercise of personal jurisdiction in federal court pursuant to Rule 4(d)(7) or 4(e), must be analyzed under the standards of International Shoe. Reliance on the rule of Cannon to determine a non-resident's "presence" is therefore no longer relevant to the proper inquiry into whether the exercise of personal jurisdiction offends traditional notions of fair play and substantial justice, notwithstanding the non-resident's presence or lack thereof in the forum. With the demise of the territorial power theory of state court jurisdiction, and the concomitant demise of the necessity or sufficiency of "presence" as a precondition to the exercise of personal jurisdiction, the rule of Cannon no longer plays a viable role in jurisdictional analysis. A review of the context in which Cannon was decided is necessary.

 The decision in Cannon predates International Shoe by twenty years and falls among those cases that examined whether a corporation was "doing business" in the forum and therefore "present" there. Although often cited for the proposition that the mere presence of a subsidiary corporation within a state does not provide a basis for personal jurisdiction over a non-resident parent corporation, Cannon specifically held that the business of a subsidiary in the state did not constitute sufficient "doing business" in that state by the parent to warrant an inference of the parent's "presence" there. Thus, local service of process on the domestic subsidiary was held insufficient as a means to invoke jurisdiction over the non-resident parent. The narrowness of this holding, and the jurisdictional context in which it arose, are crucial to an understanding of the propriety of jurisdiction when invoked under modern long-arm statutes.

 Cannon was a breach of contract action where a North Carolina corporate plaintiff brought suit against Cudahy Packing Company, a Maine corporation, and against Cudahy of Alabama, a wholly-owned subsidiary of Cudahy, and the "instrumentality employed to market Cudahy products within the state." Cannon, supra, 267 U.S. at 335, 45 S. Ct. at 251. The subsidiary acted in a role not uncommon to many present distributorship arrangements. The subsidiary bought products from its non-resident parent and in turn sold them to dealers within the forum. All the products, however, were shipped by Cudahy directly to the buyers in North Carolina, where the subsidiary would collect the purchase price. The subsidiary, however, was not found to be the agent of its parent, and the Court found that the subsidiary was both financially and commercially preserved as a distinct corporate entity in all respects. Although the parent completely dominated and controlled the subsidiary, "the corporate separation, though perhaps merely formal, was real. It was not pure fiction." 267 U.S. at 337, 45 S. Ct. at 251.

 At the time Cannon was decided, plaintiff could only invoke jurisdiction over the non-resident parent corporation by finding it "present" in the forum. Domestic service was had on the subsidiary alone, and although the Court stated that the claim for jurisdiction was not based on any state statute, the Court referred to the non-existence of a statute that specifically authorized service based on the presence of a subsidiary corporation in the forum. See Empire Steel Corp. v. Superior Court, 56 Cal.2d ...

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