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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.
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
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
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
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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