Second Circuit Finds Mid-Case Default Forfeits Defendants' Right to Appeal

 

Second Circuit Finds Mid-Case Default Forfeits Defendants' Right to Appeal from Rulings That Statute Creates a Cause of Action and that Personal Jurisdiction Was Present; Remands for Reconsideration of Remedy

By Louis M. Solomon

In cases where there are solid grounds to believe personal jurisdiction is missing, the strategic decision whether to appear and contest personal jurisdiction or whether to stay out of a jurisdiction altogether is among the hard questions facing litigants in international litigation practice.  The Second Circuit's decision in City of New York v. Mickalis Pawn Shop, LLC, et al., Dkt. Nos. 08-4804-cv (consolidated) (2d Cir. Apr. 2011) [enhanced version available to lexis.com subscribers / unenhanced version available from lexisONE Free Case Law], raises the stakes for litigating and then defaulting. 

Mickalis involved claims against retail firearms dealers, one in South Carolina and one in Georgia.  New York City sued each for public nuisance on the theory that they "intentionally or negligently sell firearms in a manner susceptible to illegal trafficking to New York City".   Both defendants moved to dismiss on grounds of failure of personal jurisdiction.   Both defendants might have thought they had colorable if not sound grounds to assert the absence of personal jurisdiction.  The Georgia business, for example, was a Georgia corporation, its principal and sole place of business in Georgia, all its revenues came from people personally visiting the store in Georgia, and did "not ship its goods out of state, nor does it sell firearms at gun shows". 

After unsuccessful motions to dismiss on grounds of no personal jurisdiction, both defendants announced to the District Court that they had "decided that it does not intend to further defend this case".   They understood that default was the "obvious consequence".  And the question to the Second Circuit is what flows from entry of the default judgment, which the District Court entered. 

Noteworthy international practice rulings in this decision are:

First, the Court of Appeals felt it needed to decide the question whether the Protection of Lawful Commerce in Arms Act (PLCAA), 15 U.S.C. sec. 7901, et seq. barred prosecution of these cases by New York City - more specifically, whether the question whether the prosecution was barred was one implicating the subject matter jurisdiction of the Court of merely one implicating whether a cause of action existed.  The preclusion, if there was one, flowed from the fact that the statute provided that a "qualified civil liability action may not be brought in any Federal or State court", and the statute defined "qualified civil liability action" as an action "brought by any person against a manufacturer or seller of [a firearm] . . . [arising] from the criminal or unlawful misuse of [the firearm] by th person or a third party".  The Court of Appeals quoted the recent decision of the U.S. Supreme Court in Henderson v. Shinseki, 131 S. Ct. 1197 (2011), that "[b]randing a rule as going to a court's subject-matter jurisdiction alters the normal operation of our adversarial system", and "because the consequences that attach to the jurisdictional label may be so drastic", the Court in recent years has tried "to bring some discipline to the use of this term".  See our discussion of the Supreme Court's treatment of the subject matter vs. cause of action issue in our e-book, International Practice: Topics and Trends.  Here the Court of Appeals follows the articulation of the standard in Arbaugh v. Y&H Corp., 546 U.S. 500 (2006) [enhanced version  / unenhanced version ],  that the question will be address as subject-matter jurisdictional only when the Legislature "clearly states that a threshold limitation . . . shall count as jurisdictional", even though Congress "need not use magic words in order to speak clearly".  Here the Court of Appeals found the issue not to be subject matter jurisdictional and would ordinarily then ask if the claims asserted stated a cause of action.  The Court did not do so but rather asked if the default judgment had been properly granted and, finding that it was, did not inquire further into the merits of the defenses.

Second, in addressing whether the default judgments were properly granted, the Court of Appeals noted that ordinarily, "[b]efore a court grants a motion for a default judgment, it may first assure itself that it has personal jurisdiction over the defendant".  Because the personal jurisdiction defense can be waived or forfeited, the Court of Appeals found that the intentional abandonment mid-litigation constituted just such forfeiture.  The Court of Appeals reached a similar conclusion with respect to the argument that the default judgment was void for lack of personal jurisdiction.  This defense, too, was forfeited by the withdrawal.  The Court drew a "critical distinction" between defendants who appear in court - "even if only to challenge the court's jurisdiction" and those who stay out altogether - the latter "does not, by defaulting, forfeit its right to challenge any ensuing default judgment for lack of personal jurisdiction". 

Third, though most Circuits "appear to have held expressly that a district court may not enter a default judgment unless the plaintiff's complaint states a valid facial claim for relief", and even the Second Circuit has held that, "prior to entering default judgment, a district court is 'required to determine whether the [plaintiff's] allegations establish [the defendant's] liability as a matter of law", the Court of Appeals finds these defenses forfeited as well - this time because the defenses were addressed only in a footnote.

Finally, the Court held however that the defendant did not forfeit the right to challenge the lawfulness of the injunctions.  And in fact the Court of Appeals remanded the question of remedy to the District Court.

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