S.E.C. v. Internet Solutions for Business Inc.

• Citation: 509 F.3d 1161
• Decision Date: 11 December 2007
• Docket Number: No. 06-15204.,06-15204.
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. INTERNET SOLUTIONS FOR BUSINESS INC., Defendant.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

509 F.3d 1161

SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. INTERNET SOLUTIONS FOR BUSINESS INC., Defendant.

No. 06-15204.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted November 8, 2007.

Filed December 11, 2007.

David C. Amesbury (argued), Sandra L. Stewart, Amesbury & Schutt, Las Vegas, NV, for the appellant.

Brian G. Cartwright, Jacob H. Stillman, Susan S. McDonald (argued), Securities and Exchange Commission, Washington, D.C., for the appellee.

Appeal from the United States District Court for the District of Nevada; Roger L. Hunt, District Judge, Presiding. D.C. No. CV-01-00225-RLH.

Before: SIDNEY R. THOMAS, RICHARD C. TALLMAN, and SANDRA S. IKUTA, Circuit Judges.

TALLMAN, Circuit Judge:

The Securities and Exchange Commission (SEC or Commission) filed a civil enforcement action against Lawrence Shaw. The SEC asserts it served Shaw through a British process server, who found and served Shaw with a copy of the SEC complaint at Shaw's foreign business address in England. Shaw failed to appear, and the district court entered final judgment against him. More than three and a half years after default judgment was entered, Shaw moved to set it aside. The district court denied the motion and Shaw appeals, arguing that the judgment is void for lack of personal jurisdiction because he was never served with process, or, if he was served with process, that it was insufficient because it did not comply with the Hague Convention. The district court ruled that Shaw did not meet his burden to prove that he was not properly served.

We join our sister circuits in holding that a defendant moving to vacate a default judgment based on improper service of process, where the defendant had actual notice of the original proceeding but delayed in bringing the motion until after entry of default judgment, bears the burden of proving that service did not occur. See Burda Media, Inc. v. Viertel, 417 F.3d 292, 299 (2d Cir.2005); Bally Export Corp. v. Balicar, Ltd., 804 F.2d 398, 400-01 (7th Cir.1986) (holding defendants had burden to prove court lacked jurisdiction due to insufficient service of process and pursuant to Illinois longarm statute); Jones v. Jones, 217 F.2d 239, 242 (7th Cir.1954). We also hold that a signed return of service constitutes prima facie evidence of valid service which can be overcome only by strong and convincing evidence. See O'Brien v. R.J. O'Brien & Assocs., Inc., 998 F.2d 1394, 1398 (7th Cir.1993); Hicklin v. Edwards, 226 F.2d 410, 414 (8th Cir.1955). Here, the burden was on Shaw to prove by strong and convincing evidence that he was not served with process. As the district court correctly found, he failed to meet that burden. Shaw also waived any argument that service of process was insufficient under the Hague Convention by failing to raise it before the district court. The district court had jurisdiction to enter default judgment against Shaw and properly refused to set it aside. We affirm.

I

Lawrence Shaw was the founder, president, chief executive officer, and largest shareholder of Internet Solutions for Business, Inc. (ISFB), a Nevada corporation with its headquarters in Coventry, England. The SEC alleged that from March 1999 to October 2000 ISFB and Shaw violated the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 (SEC Act) by falsely promoting ISFB stock to the public. Shaw became aware of the SEC's investigation in the spring of 2000 when he was served with an investigative subpoena. He also traveled to New York in June 2000 to testify before the Commission. In October 2000 the SEC's staff provided Shaw and Shaw's corporate attorney in the United States, Joseph Sierchio, with a Wells Notice, informing Shaw that the staff intended to recommend that the SEC authorize the filing of a civil action against ISFB and Shaw. Shaw made a Wells Submission in response, explaining why the Commission should not accept the staff's recommendation.¹

On February 28, 2001, the SEC filed its complaint against ISFB and Shaw in the United States District Court for the District of Nevada.² Shaw knew that the complaint had been filed and that he was a named party. However, he neither authorized his corporate attorney nor designated an agent to accept service of process on his behalf in the United States. The SEC sought to serve Shaw in England and sent the summons and complaint to BMI, a British process service company it hired to serve Shaw. Keith Johns, BMI's process server, submitted an affidavit stating that he served Shaw personally at the ISFB headquarters at Internet House, Canal Basin, Coventry, on May 14, 2001. Shaw denies that he was ever served with process and claims that he was in a meeting in London at the time he ostensibly was served in Coventry.

Shaw never responded to the SEC's complaint and on June 27, 2001, the SEC filed motions for entry of default and default judgment against Shaw. Default was entered by the clerk on June 29, and the district court granted the motion for default judgment on July 6, 2001. On January 23, 2002, the court entered final judgment against Shaw permanently enjoining him from future violations of the SEC Act and ordering him to pay a civil penalty of $110,000.

On August 29, 2005, more than three and a half years after final judgment was entered, Shaw filed a motion to set aside the default judgment.³ He claimed that the judgment should be vacated, denying that he had ever been served with process and maintaining that he was "taken by surprise when he learned of [the judgment] against him as he was never served with any documentation referencing [the] litigation," and that the SEC obtained the default judgment by fraudulently representing to the court that it had served him with process. The district court held that Shaw provided insufficient evidence to meet his burden to prove that he was not served, and thus found that the SEC properly served Shaw. It also ruled that there was insufficient evidence to support Shaw's claims of surprise or fraud.

Applying the standards applicable to motions to vacate for surprise and fraud, see Direct Mail Specialists, Inc. v. Eclat Computerized Tech., Inc., 840 F.2d 685, 690 (9th Cir.1988), the district court found that Shaw failed to present evidence that he had a viable defense against the SEC's claims and that the SEC would be highly prejudiced if default judgment were set aside. The district court therefore denied Shaw's motion to vacate. Shaw filed this timely appeal.

II

A district court may set aside a default judgment "in accordance with" Federal Rule of Civil Procedure 60(b). Fed.R.Civ.P. 55(c).⁴ Rule 60(b) provides in part, "the court may relieve a party ... from a final judgment . . . for the following reasons: (1) mistake, inadvertence, surprise, or excusable neglect; . . . (3) fraud ... misrepresentation, or other misconduct of an adverse party; (4) the judgment is void . . . ." A final judgment is void, and therefore must be set aside under Federal Rule of Civil Procedure 60(b)(4), "only if the court that considered it lacked jurisdiction ... over the parties to be bound." United States v. Berke, 170 F.3d 882, 883 (9th Cir.1999).

While a motion to vacate for lack of jurisdiction may be made at any time, a motion to vacate on two of the three grounds Shaw raised below, surprise and fraud, must be made within one year of the entry of default judgment. Fed.R.Civ.P. 60(b). Shaw moved to vacate three and a half years after default judgment was entered so the district court could not have granted his motion on those grounds. See id. Because the only basis upon which the district court could have properly granted the motion was that the judgment was void for lack of service of process, the district court was without its normal discretion to grant or deny the motion and, therefore, consideration of the merits of the defense, prejudice, or culpability was not proper. See Thomas P. Gonzalez Corp. v. Consejo Nacional de Produccion de Costa Rica, 614 F.2d 1247, 1256 (9th Cir.1980). Although the district court did weigh such considerations in its order, we may affirm the district court on any ground supported by the record even if the district court "relied upon a wrong ground or gave a wrong reason." See id. (quotations and citations omitted).

A

We review de novo whether default judgment is void because of lack of personal jurisdiction due to insufficient service of process. Mason v. Genisco Tech. Corp., 960 F.2d 849, 851 (9th Cir.1992). However, the "district court's factual findings regarding jurisdiction are reviewed for clear error." Panavision Int'l, L.P. v. Toeppen, 141 F.3d 1316, 1320 (9th Cir.1998).

B

The SEC argues, and the district court held, that Shaw, as the party moving to have the default judgment set aside, has the burden to establish that he was not served with process. Shaw asserts that the SEC, as the plaintiff, bears the burden of proving that service of process was effected.

Although Shaw is correct that the plaintiff generally has the burden to establish jurisdiction, see Forsythe v. Overmyer, 576 F.2d 779, 781 (9th Cir.1978), we believe the better rule in this context is that a defendant moving to vacate a default judgment based on improper service of process, where the defendant had actual notice of the original proceeding but delayed in bringing the motion until after entry of default judgment, bears the burden of proving that service did not occur. This rule has been adopted by the Second and Seventh Circuits and a number of district courts. See Burda Media, Inc., 417 F.3d at 299; Jones, 217 F.2d at 242 ("The burden was upon the defendant to show that the judgment was void for lack of service...."); Moss v. Indus. Leasing Corp., No. CV-93-136-CI, 2005 WL 3050277, at *2 (E.D.Wash. Nov. 15, 2005); see also Bally Export Corp., 804 F.2d at 401; Theresa L. Kruk, Annotation, Who Has Burden of Proof in Proceeding Under Rule 60(b)(4...