Defendant Who Unsuccessfully Moves to Dismiss on Personal Jurisdiction Grounds, Then Withdraws from Litigation, Cannot Appeal Ensuing Default Judgment on Personal Jurisdiction Grounds

From City of N.Y. v. Mickalis Pawn Shop, LLC, 2011 U.S. App. LEXIS 9104 (2d Cir. May 4, 2011):

These appeals present what appear to be two issues of first impression in this Circuit. First, whether a defendant who repeatedly moves to dismiss for lack of personal jurisdiction, but then withdraws from the litigation after those motions are denied, is permitted to attack an ensuing default judgment on the grounds that it is void for lack of personal jurisdiction. Second, whether a federal district court may exercise personal jurisdiction over an out-of-state firearms dealer under the New York long-arm statute, N.Y. C.P.L.R. § 302, based solely on the fact that the dealer's unlawful sales practices have facilitated the trafficking of guns by third parties to New York State, where those guns contribute to a public nuisance. Because we resolve the first question in the negative, we do not reach the second.

The City of New York (the "City") instituted this lawsuit in May 2006 against fifteen federally licensed retail firearms dealers operating from stores in Georgia, Ohio, Pennsylvania, South Carolina, and Virginia. The defendants-appellants, Mickalis Pawn Shop, LLC ("Mickalis Pawn") and Adventure Outdoors, Inc. ("Adventure Outdoors") ... [e]ach separately moved to dismiss the City's complaint against it on the theory that the district court lacked personal jurisdiction over it. The district court (Jack B. Weinstein, Judge), denying those motions, concluded that the City had made at least a prima facie showing of personal jurisdiction, but left the final determination of personal jurisdiction for trial.

After additional rounds of motion practice and varying amounts of discovery, the two defendants each moved to withdraw their respective counsel and announced to the district court that they would proceed no further in the litigation. The district court entered a default against each of them. Eventually, after proceedings before a magistrate judge, the court entered a default judgment and ordered permanent injunctive relief against both defendants.

Both defendants now appeal from the default judgment... [T]hey assert that their withdrawal from the litigation did not justify the district court's entry of default or the issuance of a default judgment against them. ***

We conclude that the district court did not abuse its discretion in entering a default and issuing a default judgment against each of the defendants. We also conclude that the defendants forfeited the defense of lack of personal jurisdiction and any other defenses they may have had by willfully abandoning their defense of the litigation. The default judgment against them is therefore not void.***

Adventure Outdoors and Mickalis Pawn did not, for example, move before the district court to vacate or set aside the default judgment, as is permitted by Federal Rules of Civil Procedure 55(c) and 60(b). Instead, they appealed directly from the entry of judgment. "[I]t is possible, although unusual, for defendants to skip the motion to vacate the default judgment and instead directly appeal the entry of a default judgment." Pecarsky v. Galaxiworld.com Ltd., 249 F.3d 167, 170-71 (2d Cir. 2001); see also Swarna v. Al-Awadi, 622 F.3d 123, 140 (2d Cir. 2010) ("[A] default judgment, like any other judgment, can be appealed to this Court."). As a technical matter, therefore, we review not whether the district court abused its discretion in declining to vacate the default judgment, but whether it abused its discretion in granting a default judgment in the first instance. See Swarna, 622 F.3d at 133; Pecarsky, 249 F.3d at 171; cf. Paddington Partners v. Bouchard, 34 F.3d 1132, 1147 (2d Cir. 1994) (collecting cases distinguishing appellate review of the denial of a Rule 60(b) motion from review of the merits of the underlying judgment itself).

"Federal Rule of Civil Procedure 55 is the basic procedure to be followed when there is a default in the course of litigation." Vt. Teddy Bear Co. v. 1-800 Beargram Co., 373 F.3d 241, 246 (2d Cir. 2004). Rule 55 provides a "two-step process" for the entry of judgment against a party who fails to defend: first, the entry of a default, and second, the entry of a default judgment. New York v. Green, 420 F.3d 99, 104 (2d Cir. 2005).

The first step, entry of a default, formalizes a judicial recognition that a defendant has, through its failure to defend the action, admitted liability to the plaintiff. The entry of default is governed by Rule 55(a), which provides:

When a party against whom a judgment for affirmative relief is sought has failed to plead or otherwise defend, and that failure is shown by affidavit or otherwise, the clerk must enter the party's default.

Fed. R. Civ. P. 55(a). Although Rule 55(a) contemplates that entry of default is a ministerial step to be performed by the clerk of court, see Pinaud v. Cnty. of Suffolk, 52 F.3d 1139, 1152 n.11 (2d Cir. 1995) (describing "the entry of a default" as "largely a formal matter" (internal quotation marks omitted)), a district judge also possesses the inherent power to enter a default, see Beller & Keller v. Tyler, 120 F.3d 21, 22 n.1 (2d Cir. 1997). The entry of a default, while establishing liability, "is not an admission of damages." Finkel v. Romanowicz, 577 F.3d 79, 83 n.6 (2d Cir. 2009).

The second step, entry of a default judgment, converts the defendant's admission of liability into a final judgment that terminates the litigation and awards the plaintiff any relief to which the court decides it is entitled, to the extent permitted by Rule 54(c). Under Rule 55(b), a default judgment ordinarily must be entered by the district judge, rather than by the clerk of court, except in certain circumstances provided for by the rule and not present here. A district court is empowered under Rule 55(b)(2), in the exercise of its discretion, to "conduct hearings or make referrals" as may be necessary, inter alia, to determine the amount of damages or establish the truth of the plaintiff's allegations. Fed. R. Civ. P. 55(b)(2)(B)-(C). "A default judgment is a final action by the district court in the litigation [and] one that may be appealed." Enron Oil Corp. v. Diakuhara, 10 F.3d 90, 95 (2d Cir. 1993). ***

"In an appeal from a default judgment, the court may review both the interlocutory entry of default and the final [default] judgment." Enron Oil Corp., 10 F.3d at 95.

The defendants argue that the district court abused its discretion by treating their withdrawal from the litigation as a basis for entering default against them. They assert that because over the course of several years they appeared in the litigation, repeatedly moved to dismiss, eventually filed an answer, and vigorously defended themselves in discovery, they did not "fail[] to plead or otherwise defend" within the meaning of Rule 55(a). They argue that Rule 55(a) therefore did not apply, and that the City was required to proceed to trial and prove its case, including the existence of personal jurisdiction over the defendants, by a preponderance of the evidence.

We disagree. To be sure, the "typical Rule 55 case [is one] in which a default has entered because a defendant failed to file a timely answer." Brock v. Unique Racquetball & Health Clubs, Inc., 786 F.2d 61, 64 (2d Cir. 1986). Nonetheless, a district court is also empowered to enter a default against a "defendant [that] has failed to . . . 'otherwise defend.'" Id. (quoting Fed. R. Civ. P. 55(a)).

We have embraced a broad understanding of the phrase "otherwise defend."***

We also find persuasive the Third Circuit's analysis in Hoxworth v. Blinder, Robinson & Co., 980 F.2d 912 (3d Cir. 1992). There, the district court entered a default judgment against defendants who had failed to comply with discovery orders and to appear for trial. On appeal, the defendants protested — as Adventure Outdoors and Mickalis Pawn do here — that "Rule 55 cannot be used to impose a default against a defendant who has filed an answer and actively litigated during pretrial discovery." Id. at 917.

The Court of Appeals affirmed. It decided that the plain meaning of the phrase "otherwise defend" was broad enough to support entry of default even after a defendant had filed an answer asserting affirmative defenses. Id. Relying upon our decisions in Brock and Au Bon Pain, as well as similar decisions in three other circuits, the Third Circuit concluded that "the district court's power to maintain an orderly docket justifies the entry of a default against a party who fails to appear at trial" or to "meet other required time schedules." Id. at 918.

We similarly conclude that the district court did not abuse its discretion in entering a Rule 55(a) default against either Adventure Outdoors or Mickalis Pawn.

First, each defendant affirmatively signaled to the district court its intention to cease participating in its own defense, even after the defendant was clearly warned that a default would result. The defendants' refusal to proceed to trial places this case squarely within our rulings in Brock and Au Bon Pain.

Second, in the case of Mickalis Pawn, a Rule 55(a) default was also proper under Eagle Associates and like cases insofar as this defendant withdrew its counsel without retaining a substitute. See Lattanzio v. COMTA, 481 F.3d 137, 140 (2d Cir. 2007) (per curiam) ("[A] limited liability company . . . may appear in federal court only through a licensed attorney.").

Finally, both defendants clearly indicated that they were aware that their conduct likely would result in a default.

In arguing that the district court nonetheless erred by entering a default, both Adventure Outdoors and Mickalis Pawn rely on a Fifth Circuit case from 1949: Bass v. Hoagland, 172 F.2d 205 (5th Cir.), cert. denied, 338 U.S. 816 (1949). There, a split panel of the Fifth Circuit decided that a default could not be entered against a defendant who had failed to appear for trial. The court concluded that "[t]he words 'otherwise defend' refer to attacks on the service, or motions to dismiss, or for better particulars, and the like." Id. at 210. In the court's view, these words did not refer to circumstances in which a defendant filed an answer and only later failed to appear in court. Id. But this interpretation of Rule 55 has not been embraced by this Court. See Brock, 786 F.2d at 64; Au Bon Pain, 653 F.2d at 65. Nor has it found favor in a majority of our sister circuits. See, e.g., Goldman, Antonetti, Ferraiuoli, Axtmayer & Hertell v. Medfit Int'l, Inc., 982 F.2d 686, 692-93 (1st Cir. 1993); Hoxworth, 980 F.2d at 918 (3d Cir. 1992) (expressly declining to follow Bass); Home Port Rentals, Inc. v. Ruben, 957 F.2d 126, 133 (4th Cir.), cert. denied, 506 U.S. 821 (1992); Ackra Direct Mktg. Corp. v. Fingerhut Corp., 86 F.3d 852, 856 (8th Cir. 1996); Ringgold Corp. v. Worrall, 880 F.2d 1138, 1141-42 (9th Cir. 1989) (per curiam). But see Seven Elves, Inc. v. Eskenazi, 635 F.2d 396, 400 n.2 (5th Cir. 1981) ("Although Bass has been criticized . . . it nevertheless remains as binding precedent in this circuit." (citation omitted)); Solaroll Shade & Shutter Corp. v. Bio-Energy Sys., Inc., 803 F.2d 1130, 1134 (11th Cir. 1986) ("If the defendant has answered the complaint but fails to appear at trial, issue has been joined, and the court cannot enter a [Rule 55] default judgment.").

[Footnote] 18 Adventure Outdoors and Mickalis Pawn note that several leading treatises approve of Bass's logic. For example, Wright & Miller, following Bass, counsel that once a defendant has "participated throughout the pretrial process and has filed a responsive pleading," any failure by the defendant to appear thereafter should not result in a concession of liability, but rather, "the court should require plaintiff to present evidence supporting liability . . . and a judgment should be entered in plaintiff's favor only if the evidence supports it." 10A Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice & Procedure § 2682, at 18 (3d ed. 1998). Likewise, Moore's Federal Practice, identifying a circuit split concerning whether a defendant's failure to defend after the pleadings stage can be grounds for a Rule 55(a) default, concludes that "[t]he better view is that Rule 55(a)'s 'otherwise defend' language may not be extended to justify a default once there has been an initial responsive pleading or an initial action that constitutes a defense." 10-55 James Wm. Moore et al., Moore's Federal Practice § 55.11[2][b][iii]; see also Am. Jur. 2d Judgments § 263. However, these authorities do not reflect the law of this Circuit by which we are bound.

***

The defendants argue that the district court erred by failing to make findings, based on a preponderance of the evidence, that the court had personal jurisdiction over each defendant. Both defendants contend that such findings are a procedural prerequisite to entering default judgment under Rule 55(b)(2). And Mickalis Pawn argues that it was "a per se abuse of discretion" not to have done so.... The defendants also assert that they did not intend to abandon their objections to the district court's exercise of personal jurisdiction upon their default. They point out that they continued to press their jurisdictional defense in their submissions to the district court and magistrate judge throughout the Rule 55 proceedings.

"[B]efore a court grants a motion for default judgment, it may first assure itself that it has personal jurisdiction over the defendant." Sinoying Logistics Pte Ltd. v. Yi Da Xin Trading Corp., 619 F.3d 207, 213 (2d Cir. 2010). We have, however, left open the question "whether a district court must investigate its personal jurisdiction over defendant before entering a default judgment." Id. at 213 n.7 (emphasis in original). But see Credit Lyonnais Sec. (USA), Inc. v. Alcantara, 183 F.3d 151, 154 (2d Cir. 1999) (vacating default judgment and instructing district court to determine whether the plaintiffs could "prove the jurisdictional facts by a preponderance of the evidence"). Several of our sister circuits appear to impose such a requirement. See, e.g., Mwani v. bin Laden, 417 F.3d 1, 6-7 (D.C. Cir. 2005); Sys. Pipe & Supply, Inc. v. M/V Viktor Kurnatovskiy, 242 F.3d 322, 324 (5th Cir. 2001); In re Tuli, 172 F.3d 707, 712 (9th Cir. 1999); Dennis Garberg & Assocs., Inc. v. Pack-Tech Int'l Corp., 115 F.3d 767, 772 (10th Cir. 1997).

Personal jurisdiction, unlike subject-matter jurisdiction, can, however, be purposely waived or inadvertently forfeited. "Because the requirement of personal jurisdiction represents first of all an individual right, it can, like other such rights, be waived." Ins. Corp. of Ireland v. Compagnie des Bauxites de Guinee, 456 U.S. 694, 703 (1982); see also id. at 706 (cautioning that there is nothing "unique about the requirement of personal jurisdiction, which prevents it from being established or waived like other rights"); Sinoying Logistics, 619 F.3d at 213; "R" Best Produce, Inc. v. DiSapio, 540 F.3d 115, 123 (2d Cir. 2008); Transaero, Inc. v. La Fuerza Aerea Boliviana, 162 F.3d 724, 729 (2d Cir. 1998), cert. denied, 526 U.S. 1146 (1999). Therefore, "a district court should not raise personal jurisdiction sua sponte when a defendant has appeared and consented, voluntarily or not, to the jurisdiction of the court." Sinoying Logistics, 619 F.3d at 213 (emphasis in original).

"[I]n determining whether waiver or forfeiture of objections to personal jurisdiction has occurred, 'we consider all of the relevant circumstances.'" Mattel, Inc. v. Barbie-Club.com, 310 F.3d 293, 307 (2d Cir. 2002) (quoting Hamilton v. Atlas Turner, Inc., 197 F.3d 58, 61 (2d Cir. 1999), cert. denied, 530 U.S. 1244 (2000)). It is well established that a party forfeits its defense of lack of personal jurisdiction by failing timely to raise the defense in its initial responsive pleading. See Fed. R. Civ. P. 12(h). But there are "various [additional] reasons a defendant may be estopped from raising the issue." Ins. Corp. of Ireland, 456 U.S. at 704. A court will obtain, through implied consent, personal jurisdiction over a defendant if "[t]he actions of the defendant [during the litigation] . . . amount to a legal submission to the jurisdiction of the court, whether voluntary or not." Id. at 704-05; see also Peterson v. Highland Music, Inc., 140 F.3d 1313, 1318 (9th Cir.) ("Most defenses, including the defense of lack of personal jurisdiction, may be waived as a result of the course of conduct pursued by a party during litigation."), cert. denied, 525 U.S. 983 (1998). For example, we have held that a defendant that asserted a jurisdictional defense in its answer, but failed actively to litigate that defense until four years later, forfeited the defense by forgoing the opportunity to raise it sooner. Hamilton, 197 F.3d at 60-62; accord Cont'l Bank, N.A. v. Meyer, 10 F.3d 1293, 1297 (7th Cir. 1993); Yeldell v. Tutt, 913 F.2d 533, 538-39 (8th Cir. 1990).

In addition, other circuits have held that a defendant who unsuccessfully raises a jurisdictional objection at the outset, but later creates the impression that he has abandoned it, may not seek to renew his jurisdictional argument on appeal following an adverse determination on the merits. See Rice v. Nova Biomed. Corp., 38 F.3d 909, 914-15 (7th Cir. 1994), cert. denied, 514 U.S. 1111 (1995); see also Peterson, 140 F.3d at 1318 (9th Cir.) (describing this strategy as "sandbagging"). ***

[I]n this case, Adventure Outdoors and Mickalis Pawn initially litigated their jurisdictional defense, but later changed course, announcing to the district court that they would cease defending even though a default would likely result. Spamhaus Project [e360 Insight v. Spamhaus Project, 500 F.3d 594 (7th Cir. 2007)] is persuasive authority for the proposition that a defendant forfeits its jurisdictional defense if it appears before a district court to press that defense but then willfully withdraws from the litigation and defaults, even after being warned of the consequences of doing so. We, like the Seventh Circuit, "see no reason to require the district court to raise sua sponte" the defense of lack of personal jurisdiction on behalf of parties who have "elect[ed] not to pursue those defenses for [themselves]." Id. at 599.

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