Jurisdictional Issues

 

2.01 In General

One area of confusion that often arises in receiverships relates to the basis of jurisdiction which the receiver has over litigation related to his appointment and when the court which oversees the receivership can exercise jurisdiction over property of the receivership that is potentially located all over the country.

As to competing jurisdiction over assets arising between parallel actions, or the effect of the receiver’s intervention in the parallel action, see infraSection 3.01. See also a series of federal district court decisions affirming the United States Supreme Court’sBarton Doctrinesupra page 6.

2.02 Ancillary or Supplemental Jurisdiction

It is well established that “[t]he ancillary jurisdiction of federal courts over actions incident to a receivership established by a federal court has long been recognized. So long as an action commenced by a court appointed receiver seeks “to accomplish the ends sought and directed by the suit in which the appointment was made, such action or suit is regarded as ancillary so far as the jurisdiction of the . . . court of the United States is concerned.’” Tcherepnin v. Franz, 485 F. 2d 1251 (7th Cir. 1973) (citation omitted), quoting Pope v. Louisville, New Albany & Chicago Ry. Co., 173 U.S. 573, 577 (1899). See also Eberhard v. Marcu, 530 F.3d 122, 128-129 (2d Cir. 2008); Am. Freedom Train Found. v. Spurney, 747 F.2d 1069, 1073 (1st Cir. 1984); Merrill Scott & Associates, Ltd. v. Concilium Ins. Servs., 253 F. App’x 756, 761 (10th Cir. 2007). In such situations, the initial suit which results in the appointment of the receiver is the primary action and any suit which the receiver thereafter brings in the appointment court in order to execute his duties is ancillary to the main suit. Haile v. Henderson Nat. Bank, 657 F.2d 816, 822 (6th Cir. 1981). See also S.E.C. v. Bilzerian, 378 F.3d 1100, 1107 (D.C. Cir. 2004); U.S. Small Bus. Admin. v. Integrated Envtl. Solutions, Inc., CIV.A. H-05-3041, 2006 WL 2336446, at *2 (S.D. Tex. Aug. 10, 2006); Quilling v. Cristel, CIV.A. 304CV252, 2006 WL 316981, at *4 (W.D.N.C. Feb. 9, 2006); see also S.E.C. v. Ross, 504 F.3d 1130 (9th Cir. 2007).

A federal district court has subject matter jurisdiction in ancillary actions brought in the court where the receiver is appointed. Thus, it follows that an independent jurisdictional ground is not necessary for an ancillary action by a federal receiver. Therefore, the lack of diversity of citizenship or of a federal question does not prevent a federal court from exercising jurisdiction in an ancillary proceeding. United States v. Franklin Nat’l Bank, 512 F.2d 245, 249 (2d Cir. 1975); Integrated Envtl. Solutions, 2006 WL 2336446, at *2;Cristel, 2006 WL 316981, at *4.

Ancillary jurisdiction became supplemental jurisdiction on December 1, 1990. See § 310(a) of the Judicial Improvement Acts of 1990, 104 Stat. 5089, 28 U.S.C. §1367;10Unique Concepts, Inc. v. Manuel, 930 F.2d 573, 574 (7th Cir. 1991). As a result, for suits filed after December 1, 1990, federal jurisdiction based on the ancillary jurisdiction of the federal courts is now part of the federal courts’ statutory “supplemental” jurisdiction.Scholes v. Lehmann, 56 F.3d 750, 753 (7th Cir. 1995). Generally, 28 U.S.C.A. §1367(a) provides that, except as expressly provided by a Federal Statute, “in any civil action of which the district courts have original jurisdiction, the district courts shall have supplemental jurisdiction over all other claims that are so related to claims in the action within such original jurisdiction that they form part of the same case or controversy under Article III of the United States Constitution.” Exceptions to the general rule found in §1367(a) are found in subsection (b) and (c) of §1367.

Section 1367(c) provides that the federal district court may decline to exercise supplemental jurisdiction over a state claim if “(1) the claim raises a novel or complex issue of State law, (2) the claim substantially predominates over the claim or claims over which the district court has original jurisdiction, (3) the district court has dismissed all claims over which it has original jurisdiction, or (4) in exceptional circumstances, there are other compelling reasons for declining jurisdiction.” 28 U.S.C. §1367(c). However, to decline such jurisdiction, the federal court must have a compelling reason.11

2.03 Personal Jurisdiction/§754

A receiver has complete jurisdiction over property located within the jurisdiction in which he is appointed. If the estate has real or personal property in other jurisdictions, the receiver can obtain “complete jurisdiction” over that property by filing a copy of the complaint and the order of appointment within ten days of his appointment in the district court in which the property is located, pursuant to 28 U.S.C. § 754.12

When §754 applies, its companion statute, 28 U.S.C. § 169213 is triggered. Section 1692 effectively expands the territorial jurisdiction of the court which appoints the receiver to any district in the United States where property believed to be that of the receivership estate is found, provided that the proper documents have been filed in each such district as required by §754.

Once a court has territorial jurisdiction, it may issue a summons on a defendant. Fed. R. Civ. P. 4 contemplates the use of statutes of the United States, such as §1692, which provide for service of process upon a party not an inhabitant of or found within the state in which the district court is held.14

In an action where service of process is effected pursuant to a federal statute which provides for nationwide service of process, the strictures (namely a minimum contacts analysis) of International Shoe v. State of Washington, 326 U.S. 310 (1945) and its progeny do not apply. Haile, 657 F.2d at 821, 826. See Janvey v. Alguire, 846 F. Supp. 2d 662, 668 (N.D. Tex. 2011); Bilzerian, 378 F.3d at 1104, 1106; Terry v. Walker, 369 F. Supp. 2d 818, 821 (W.D. Va. 2005); Integrated Envtl. Solutions, 2006 WL 2336446, at *2; Quilling v. Stark, 3:05-CV-1976-L, 2006 WL 1683442, at *3 (N.D. Tex. June 19, 2006); Quilling v. Cristell, CIV.A. 304CV252, 2006 WL 316981 (W.D.N.C. Feb. 9, 2006);S.E.C. v. Tanner, CIV.A.05-4057 SAC, 2006 WL 1128699, at *2 (D. Kan. Apr. 26, 2006).See also F.T.C. v. Cleverlink Trading Ltd., 05 C 2889, 2006 WL 1735276 (N.D. Ill. June 19, 2006). The Haile Court held that the due process aspects of service of process in that case were to be examined under Mullane v. Central Hanover Bank and Trust, 339 U.S. 306 (1950) and its progeny rather than under International ShoeHaile, 657 F.2d at 826. The Court in Haile concluded that the issue, thus, is one of fairness and notice under the Fifth Amendment. That is, the court should ask whether the service was reasonably calculated to inform the defendants of the pendency of the proceedings against them in order that they might take advantage of the opportunity to be heard in their defense. Id. In footnote 11, the Court stated that if it is demonstrated that service is made in any manner provided in Fed. R. Civ. P. 4, then such service would meet this fairness and notice standard.15

The grant of extraterritorial jurisdiction promotes judicial efficiency by permitting courts to manage claims regarding receivership property in a single forum. Stark, 2006 WL 1683442, at *3; Cristell, 2006 WL 316981, at **2-4.

If a court finds that the filing of a notice of receivership was untimely under §754, it does not necessarily mean that the receiver will lose jurisdiction over the property in that jurisdiction. Instead, most courts allow the receiver to cure this defect by filing within ten days after entry of an order confirming the original appointment. S.E.C. v Vision Commc’ns, Inc., 74 F.3d 287, 291 (D.C. Cir. 1996); Walker, 369 F. Supp. 2d at 819-821;Select Creations, Inc. v. Paliafito America, Inc., 852 F. Supp. 740, 780 (E.D. Wis. 1994);Cristell, 2006 WL 316981, at *2. Furthermore, a court may even allow a receiver to file a notice of receivership after the expiration of the ten day period where it would not prejudice the rights of other parties. Such a situation arose in S.E.C. v. Equity Service Corp., 632 F.2d 1092 (3d Cir. 1980), where the Court ruled that a receiver who fails to file within the ten day period of §754 may reassume jurisdiction by a later filing, as long as the rights of others have not been prejudiced during the intervening period. Id. at 1095. See also S.E.C. v. Infitity Grp. Co., 27 F. Supp. 2d 559 (E.D. Pa. 1998) (holding that a receiver’s failure to comply with 28 U.S.C.A. § 754 does not divest the receiver of jurisdiction in a particular district since it is not economical to force receivers to needlessly expend estate resources to file in every district within the United States).

The court’s extraterritorial jurisdiction may extend to non-parties. See Cleverlink, 2006 WL 1735276.

An additional jurisdictional issue may arise when a receiver pursues litigation. Often, defendants contend that the district court lacks personal jurisdiction by arguing that no “property” (a term used in §754) is situated in that district, that the defendant does not hold any receivership property, and that the defendant does not have any “minimal contacts” with that district. However, in such a situation, the receiver’s property can be characterized as a “chose in action.” Black’s defines “chose” as “a thing; an article of personal property.” Black’s Law Dictionary 219 (5th ed. 1979). It also defines “chose in action” as “a thing in action and is a right of bringing an action or right to recover a debt or money. A right to personal things of which the owner has not the possession, but merely a right of action for their possession.” Id. Accordingly, a receiver’s “chose in action” constitutes personal property. Section 754 expressly includes personal property.

In Haile, 657 F.2d at 820, the United States District Court for the Middle District of Tennessee appointed a receiver for an entity that operated and grew as a result of a fraudulent bond issuance scheme. Haile, 657 F.2d at 818. As part of the litigated action, the receiver brought suit on a promissory note against two defendants who had executed and delivered the note. Id. at 820. The suit on the note in Haile, was brought in the court which appointed the receiver. Id. The defendants were citizens and residents of Huntsville, Alabama, which is located in the Northern District of Alabama, and the receiver timely filed certified copies of the complaint and order appointing him receiver with the clerk of the United States district Court for the Northern District of Alabama in accordance with §754. Id. Although the note was secured by a mortgage on real property located in Huntsville, Alabama, the receiver brought suit on the note, itself.Id. The district court in Haile found that the defendants were non-residents of the state of Tennessee and had no minimal contacts with Tennessee. Id. The district court dismissed the action on the note against the defendants, holding that the §754 did not grant the court personal jurisdiction over the defendants. Id. The Sixth Circuit Court of Appeals reversed the lower court’s decision and held that §754 and 28 U.S.C. §1692 conferred personal jurisdiction upon the appointing court over the defendants and that a “minimum contacts” analysis was not applicable. Id. at 826. In rendering its decision in Haile, the Court of Appeals conducted a thorough review of §754 and its expansion of an appointing court’s territorial jurisdiction to any district where property belonging to the receivership estate is present. Thus, in holding that §754 extended the district court’s territorial jurisdiction into the Northern District of Alabama to reach the defendants, the Court necessarily ruled that the property belonging to the estate resided in the Northern District of Alabama. Since the receiver sued only on the note itself, it is evident that the property which triggered the application of §754 was the right to receive payment from the defendants.

The conclusion in Haile is supported by a commentary by Professor Moore in the Wright & Miller treatise. In discussing the effect of the 1948 revision to §754, Professor Moore states: “as indicated in the Reviser’s Note §754 extends the operation of old §56 . . . Its application is no longer confined to property ‘of a fixed character;’ it applies to any property.” Haile, 657 F.2d at 823 quoting 7-Pt. 2 Moore’s Federal Practice, ¶66.08[1] at 1949-50 (2d ed. 1980).

The Haile result—that the Receivership court has the power to issue process in any district in which the receivership estate has property, which results in the power to make nationwide service of process and in personam jurisdiction so long as the receiver complies with §754 and there are minimal contacts with the United States as a whole, has been approved in many other cases. See e.g.Alguire, 846 F. Supp. 2d at 669;Bilzerian, 378 F.3d at 1104-06; Vision Commc’ns, 74 F.3d at 290; Spurney, 747 F.2d at 1073; Integrated Envtl. Solutions, 2006 WL 2336446, at *2; Cleverlink, 2006 WL 1735276; Walker, 369 F. Supp. 2d 818. See also S.E.C. v. Ross, 504 F.3d at 1145-46;United States v. Arizona Fuels Corp., 739 F.2d 455, 460 (9th Cir. 1984); Tanner, 2006 WL 1128699; Cleverlink, 2006 WL 1735276, at *2.

As to nationwide service of process in actions brought pursuant to the Securities Act of 1933, see S.E.C. v. Ross, 504 F.3d at 1139-1141.

Despite cases to the contrary, the Ninth Circuit has held that intervening as of right, while contesting in personam jurisdiction, is not a consent to personal jurisdiction of the court. Id. at 1148-1151; but see Defenders of Wildlife v. Bureau of Ocean Energy Mgmt., Regulation, & Enforcement, 791 F. Supp. 2d 1158, 1174-75 (S.D. Ala. 2011). Likewise, there must be proper service upon the person against whom relief is sought for personal jurisdiction to exist. Ross, at 1140.

Once nationwide service of process has been authorized under a federal statute, the court has personal jurisdiction over pendent state-law claims as well. Warfield v. Alaniz, 453 F. Supp. 2d 1118 (D. Ariz. 2006), aff’d, 569 F.3d 1015 (9th Cir. 2009).

2.04 Removal and Transfer of Venue

 

Once the receiver is appointed, it is very common for the receivership estate to be sued, both within its jurisdiction of appointment or in other jurisdictions, usually in state court. In such cases, the receiver should immediately file a notice of removal to have the case automatically transferred to the federal court pursuant to 28 U.S.C. § 1441 et. seq. Under 28 U.S.C. § 1446(b), the notice of removal must be filed within 30 days after receipt by the receiver of a copy of the complaint.

After a case has been removed to federal court, the receiver should move to have the case transferred to the jurisdiction where the litigation is pending, and make two arguments to support such a transfer. First, under 28 U.S.C. § 1404(a),16 the court may transfer the suit to another district that will be more convenient for both parties and witnesses, and in the interest of justice. Keep in mind that §1404(a) is the codification of the common law of forum non-conveniens but with a less harsh result (i.e., transfer instead of dismissal). Therefore, courts have applied a lower standard of inconvenience under §1404(a) than under the common law. Norwood v. Kirkpatrick, 349 U.S. 29, 31 (1955). Second, it has been held that when jurisdiction is ancillary, venue is also ancillary. Footnote 6 of the Sixth Circuit’s decision in Haile states “[w]e ascribe to the view, under the facts and circumstances of this case, that where jurisdiction is ancillary, the post-jurisdictional consideration of venue is ancillary as well.” Haile, 657 F.2d at 822. Consequently, when a district court has subject matter jurisdiction based on §1367 via its ancillary jurisdiction, under Haile, this court also has ancillary venue.

The ancillary venue issue most commonly has been addressed in passing in cases that primarily turn upon the question of personal jurisdiction under 28 U.S.C. §§754 and 1692. See supra Section 2.03. However, in Hodgson v. Gilmartin, the Court discussed in detail whether §§754 and 1692 were limited to granting ancillary jurisdiction to the receivership court, or also extended to ancillary venue. Hodgson v. Gilmartin, CIV A 06-1944, 2006 WL 2707397, at *1-7 (E.D. Pa. Sept. 18, 2006) (citing Bilzerian, 378 F.3d at 1107; Scholes, 56 F.3d at 753; and Haile, 657 F.2d at 822 n.6). The Court held that there was such ancillary venue, and that actions could be brought in the receivership court, even though venue would normally not have been appropriate in that court under the general venue statutes. Hodgson, at **1-7. The Hodgson case also held that increased expense and inconvenience to the receiver (and, as a result, to defrauded investors) would weigh strongly in the court’s discretionary decision of whether or not to transfer the case to another district pursuant to 28 U.S.C. § 1404(a). Id. at **14-16. See also Hodgson v. Kottke Associates, LLC, CIV.A 06-5040, 2007 WL 2234525 (E.D. Pa. Aug. 1, 2007).


 

10 1367. Supplemental jurisdiction
(a) Except as provided in subsections (b) and (c) or as expressly provided otherwise by Federal statute, in any civil action of which the district courts have original jurisdiction, the district courts shall have supplemental jurisdiction over all other claims that are so related to claims in the action within such original jurisdiction that they form part of the same case or controversy under Article III of the United States Constitution. Such supplemental jurisdiction shall include claims that involve the joinder or intervention of additional parties.(b) In any civil action of which the district courts have original jurisdiction founded solely on section 1332 of this title, the district courts shall not have supplemental jurisdiction under subsection (a) over claims by plaintiffs against persons made parties under Rule 14, 19, 20, or 24 of the Federal Rules of Civil Procedure, or over claims by persons proposed to be joined as plaintiffs under Rule 19 of such rules, or seeking to intervene as plaintiffs under Rule 24 of such rules, when exercising supplemental jurisdiction over such claims would be inconsistent with the jurisdictional requirements of section 1332.(c) The district courts may decline to exercise supplemental jurisdiction over a claim under subsection (a) if–
(1) the claim raises a novel or complex issue of State law,
(2) the claim substantially predominates over the claim or claims over which the district court has original jurisdiction,
(3) the district court has dismissed all claims over which it has original jurisdiction, or
(4) in exceptional circumstances, there are other compelling reasons for declining jurisdiction.(d) The period of limitations for any claim asserted under subsection (a), and for any other claim in the same action that is voluntarily dismissed at the same time as or after the dismissal of the claim under subsection (a), shall be tolled while the claim is pending and for a period of 30 days after it is dismissed unless State law provides for a longer tolling period.

(e) As used in this section, the term “State” includes the District of Columbia, the Commonwealth of Puerto Rico, and any territory or possession of the United States.

 

11 See Nerney v. Valente & Sons Repair Shop, 66 F.3d 25, 30 (2d Cir. 1995); Murphy, A Federal Practitioner’s Guide to Supplemental Jurisdiction Under 28 U.S.C. § 1367, 78 Marq. L. Rev. 973, 1023 (1995) (explaining that reference in subsection (c)(4) to “other compelling reasons” means “that all declinations of supplemental jurisdiction must be based on a compelling reason).”) (emphasis added)

 

12 28 USC § 754. Receivers of property in different districts

A receiver appointed in any civil action or proceeding involving property, real, personal or mixed, situated in different districts shall, upon giving bond as required by the court, be vested with complete jurisdiction and control of all such property with the right to take possession thereof.

He shall have capacity to sue in any district without ancillary appointment, and may be sued with respect thereto as provided in section 959 of this title.

Such receiver shall, within ten days after the entry of his order of appointment, file copies of the complaint and such order of appointment in the district court for each district in which property is located. The failure to file such copies in any district shall divest the receiver of jurisdiction and control over all such property in that district.

 

13 28 USC §1692. Process and orders affecting property in different districts

In proceedings in a district court where a receiver is appointed for property, real, personal, or mixed, situated in different districts, process may issue and be executed in any such district as if the property lay wholly within one district, but orders affecting the property shall be entered of record in each of such districts.

 

14 Specifically, Fed. R. Civ. P. 4(k)(1)(D) provides:
(k) Territorial Limits of Effective Service
(1) Service of a summons or filing a waiver of service is effective to establish jurisdiction over the person of a defendant
…..
(D) when authorized by a statue of the United States.

 

15 Id. at n.11. The Court in Haile goes on in footnote 11 to state: “If proper service was not made, the receiver should be afforded the opportunity to obtain such service. Id.

 

16 28 U.S.C. § 1404(a) :
For the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought or to any district or division to which all parties have consented.
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