Partington v. American Intern. Specialty Lines
| Decision Date | 30 March 2006 |
| Docket Number | No. 04-2279.,04-2279. |
| Citation | 443 F.3d 334 |
| Parties | David PARTINGTON, Reverend; Leslie S. Hollowell; Elvis H. Hester, Jr.; Phyl Wigal; Thomas H. Adams; David L. Armbrister; Jacqueline M. Armbrister; Larry W. Armbrister; Carolyn Q. Armbrister; Sherman H. Blankenship; Alice S. Carr; Francis Lentz; Helen Lentz; Allen E. Smith; Draper Valley Baptist Church, Plaintiffs-Appellants, v. AMERICAN INTERNATIONAL SPECIALTY LINES INSURANCE COMPANY; AIG Technical Services, Incorporated, Defendants-Appellees. |
| Court | U.S. Court of Appeals — Fourth Circuit |
John Francis Bloss, Sr., Clark, Bloss & Wall, P.L.L.C., Greensboro, North Carolina, for Appellants. Bradley Reed Johnson, Womble, Carlyle, Sandridge & Rice, P.L.L.C., Winston-Salem, North Carolina, for Appellees.
ON BRIEF:
Allan R. Gitter, Ronald R. Davis, Womble, Carlyle, Sandridge & Rice, P.L.L.C., Winston-Salem, North Carolina, for Appellees.
Before LUTTIG, MICHAEL, and GREGORY, Circuit Judges.
Affirmed in part, vacated in part, and remanded by published opinion. Judge GREGORY wrote the opinion, in which Judge LUTTIG and Judge MICHAEL joined.
The Reverend David Partington and fourteen others (collectively "the Appellants") appeal the decision of the District Court for the Middle District of North Carolina to dismiss their case under Federal Rule of Civil Procedure 12(b)(6). In prior litigation, Partington obtained a default judgment against Charterhouse Group, Ltd. ("Charterhouse") in favor of himself and a class of similarly situated persons. The Appellants seek to use the default judgment to stand in the place of Charterhouse to recover from Charterhouse's insurers, American International Specialty Lines Insurance Company and AIG Technical Services, Inc. (collectively "the Insurers"). The North Carolina district court below reasoned that the Appellants had failed to state a claim upon which relief could be granted because the proffered default judgment was: (1) void for lack of subject matter jurisdiction; and (2) unenforceable in that it awarded damages to an uncertified putative class.
For the reasons discussed below, we conclude that the district court erred in holding the default judgment void. In addition, we hold that although the judgment is unenforceable with respect to the putative class members, Partington himself has a valid judgment in his favor. Accordingly, we affirm the dismissal with respect to the plaintiffs other than Partington, but vacate the dismissal and remand with respect to Partington's individual claim.
This appeal arises from a somewhat complicated procedural history as two lawsuits with various defendants are relevant to our discussion.1 The facts giving rise to the first suit, which we will refer to as "the Virginia litigation," began when Partington, a Presbyterian minister, decided to plan for his retirement. To that end, Partington's church engaged the services of Charterhouse, a provider of trustee services, in establishing a trust for Partington. However, in 1999, Partington's financial plans fell through when Charterhouse used the trust proceeds to purchase investments that time revealed were worthless.
When Partington discovered the following year that the money in the trust was lost, he brought suit in the United States District Court for the Western District of Virginia against Charterhouse and its individual officers and directors. He premised liability on violations of the Securities Act of 1933 ("the Act" or "the 1933 Act") and various state law claims. J.A. 114-32. Partington brought that suit on behalf of himself, his trust, and a putative class of similarly situated individuals.
When Charterhouse notified the Insurers about the lawsuit, they refused to defend or indemnify Charterhouse, claiming that its actions were not covered by the insurance agreement. Thereafter, Charterhouse did not appear in the Virginia litigation, and the clerk entered its default.
Meanwhile, Partington's suit proceeded against the individual defendants who did appear to defend the action. They separately filed motions to dismiss on various grounds, including that Partington was not the true purchaser of the securities. Under the Act,
Any person who ... offers or sells a security in violation of section 77e of this title ... shall be liable ... to the person purchasing such security from him, who may sue either at law or in equity in any court of competent jurisdiction, to recover the consideration paid for such security with interest thereon, less the amount of any income received thereon, upon the tender of such security, or for damages if he no longer owns the security.
15 U.S.C. § 771(a) (emphasis added). The district court denied the individual defendants' motions to dismiss on March 21, 2001, reasoning that "many of the Defendants' arguments are simply premature and factually based." J.A. 263-64.
Thereafter, on November 8, 2001, the Virginia district court ordered that a default judgment be entered against Charterhouse in favor of "plaintiff and the class of similarly situated persons as defined in the Second Amended Complaint." Id. at 27-28. The district court set the amount of the judgment at $8,476,979.53. The record contains several lists of Charterhouse investors, whose investments total that amount. See id. at 30-38.
Several months later, on February 15, 2002, the Virginia district court reconsidered, sua sponte, the individual defendants' motions to dismiss and converted them to motions for summary judgment. It stated, "[t]he Court's consideration of the entire record and the arguments before it makes it believe that it erred in failing to dismiss the entire claim at an earlier stage of the litigation." Id. at 161. It held that Partington was not the "person purchasing" the securities under the Act, and therefore did not have standing to bring his claim. Id. at 164-65.
At that time, the Virginia district court also ruled on Partington's previously filed motion for class certification. Because Partington was not a "person purchasing" under the Act, the court determined that he was not typical of the class he sought to represent under Federal Rule of Civil Procedure 23. Moreover, the court decided that even if brought by a proper plaintiff, a class action would not be the superior method for adjudicating the controversy. It therefore declined to certify the class. Also, because the district court dismissed the federal question claim over which it had original jurisdiction, it dismissed Partington's remaining state law claims without prejudice pursuant to 28 U.S.C. 1367(c)(3). The district court made no reference to the effect of its decision on the previously entered default judgment against Charterhouse. On appeal, the Fourth Circuit affirmed the determination that Partington lacked standing under the Act and the resulting denial of class certification. Smith v. Pennington, 352 F.3d 884, 886 (4th Cir.2003).
The second lawsuit, which is the one presently before us and which we will refer to as "the North Carolina litigation," arose from the Appellants' attempts to recover on the default judgment. The Appellants filed this suit as a putative class action in North Carolina state court against the Insurers. They alleged that as Charterhouse's judgment creditors, they were entitled to stand in the place of Charterhouse to sue the Insurers. To that end, the Appellants alleged that the Insurers breached their contract with Charterhouse when they refused to defend or indemnify it in the Virginia litigation.2
The Insurers removed the action to the United States District Court for the Middle District of North Carolina on the basis of diversity jurisdiction and moved to dismiss. After receiving the Recommendation of the United States Magistrate Judge, the North Carolina district court adopted the Recommendation and granted the Insurers' motion under Rule 12(b)(6). J.A. 315-16. The district court based its conclusion that the Appellants failed to state a claim on two independent reasons. First, the district court believed that because Partington lacked standing under the Act to bring his claim, the Virginia district court never possessed subject matter jurisdiction over the case. Therefore, the default judgment was void in that the Virginia district court had no power to enter it. Second, the district court reasoned that the default judgment was unenforceable because it purported to award damages to a class that was never formally certified. Id. at 182-98. This appeal followed.
We review a district court's Rule 12(b)(6) dismissal of a complaint de novo. Myers v. Loudoun County Pub. Sch., 418 F.3d 395, 401 (4th Cir.2005). "In general, a motion to dismiss will not be granted unless a plaintiff can prove no set of facts which would support his claim and entitle him to relief." Venkatraman v. REI Sys., Inc., 417 F.3d 418, 420 (4th Cir.2005) (citing Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957)). "In considering a motion to dismiss, we accept as true all well-pleaded allegations and view the complaint in the light most favorable to the plaintiff." Id. (citing Mylan Labs., Inc. v. Matkari, 7 F.3d 1130, 1134 (4th Cir.1993)).
The Appellants first challenge the North Carolina district court's conclusion that the default judgment against Charterhouse was void for lack of subject matter jurisdiction. They argue that the Virginia district court possessed jurisdiction to enter the default judgment, not withstanding its subsequent determination that Partington lacked standing under the Act.3 We agree.
After we heard oral argument in this case, the United States Supreme Court issued its decision in Arbaugh v. Y & H Corp., ___ U.S. ___, 126 S.Ct. 1235, 163 L.Ed.2d 1097 (2006), and thereby clarified the distinction between the requirements for federal subject matter jurisdiction and the elements of a federal claim...
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