Opinion
Civil Action No. 3:00CV-154-H
February 1, 2002
MEMORANDUM OPINION
This case comes before the Court in an unusual posture. In September 2000, the Court entered a default judgment in the amount of $98,630 against Defendants Quest Healthcare, Inc. ("Quest"), and Michael Carlow ("Carlow") on the breach of contract and fraud claims of Plaintiff Medical Distribution, Inc. ("MDI"). In July 2001, the Court held Carlow in contempt of court for failing to appear at a deposition scheduled as part of post-judgment discovery. Subsequently, Plaintiff has successfully executed on the original judgment through proceedings in Florida. Defendants now move the Court to vacate those judgments as void for lack of personal jurisdiction pursuant to Fed.R.Civ.P. 60(b)(4). The motion raises difficult questions about the scope of this Court's personal jurisdiction.
I.
Defendant Quest is a Florida corporation with its principal place of business in Florida. Defendant Carlow, also a Florida citizen and resident, is the registered agent for and a principal of Quest. Between September 1998 and April 1999, Quest ordered certain blood-related medical products from Plaintiff, a Kentucky corporation engaged in the sale and shipment of blood-related medical products, by calling a toll-free number which Plaintiff operated in Kentucky. During this seven-month span, Quest placed thirty-two orders with MDI, worth approximately $1.32 million in sum. MDI fulfilled the orders by shipping the purchased products from one of its three warehouses, two of which are in Kentucky, to Quest in Florida. MDI claims that it delivered to Quest certain items — totaling $98,630.00 in value — for which Quest has never paid. Additionally, MDI alleges that, before it contracted with Quest, it previously had transacted business with another corporation operated by and on behalf of Carlow, that this corporation was delinquent in payment, and that MDI would never have engaged in business with Quest absent security for payment had it known that Carlow was a principal in Quest. MDI claims that Quest and Carlow defrauded MDI by concealing this fact.
MDI filed suit in this Court against Quest and Carlow in March 2000, and served Carlow with process. Neither Quest nor Carlow answered MDI's complaint, and the Court consequently entered a default order and judgment. Defendants now challenge these orders.
II.
Fed.R.Civ.P. 60(b)(4) provides that a court "may relieve a party . . . from a final judgment, order, or proceeding [if] the judgment is void." Notwithstanding the use of the word "may," which indicates that the Court reserves discretion, "[a] void judgment is a legal nullity and a court considering a motion to vacate has no discretion in determining whether it should be set aside." Jordon v. Gilligan, 500 F.2d 701, 704 (6th Cir. 1974) (citation omitted); see also Wright and Miller, Federal Practice and Procedure, Civil 2d § 2862 (1995).
While Rule 60(b) requires motions under subsections (1), (2), and (3) to be made not more than one year after the judgment challenged, motions under subsection (4) are excepted, and thus may be brought at any time. See Wright and Miller, supra; see also United States v. Studak, 1994 U.S. Dist. LEXIS 12959, *4-*5 (E.D.Mich. 1994) (permitting motion for vacatur nearly six decades after judgment entered). This is true even "in situations where the defendants have failed to answer and thus made no challenge to personal jurisdiction prior to default judgment being entered against them." Rockwell Int'l Corp. v. KND Corp., 83 F.R.D. 556, 559 (N.D.Tex. 1979); see also Reynolds v. International Amateur Athletic Fed'n, 23 F.3d 1110, 1120 (6th Cir. 1994) ("courts have generally held that defects in personal jurisdiction . . . are not waived by default when a party fails to appear or to respond.") (quotation, citation omitted).
Plaintiff says that Carlow's failure to challenge the Court's jurisdiction at his deposition on September 24, 2001, constitutes a waiver of his right and that of Quest to pose such a challenge. However, Fed.R.Civ.P. 12(h)(1)(B) says otherwise. It provides that a challenge to personal jurisdiction is waived "if it is neither made by motion under this rule nor included in a responsive pleading or an amendment thereof . . ." Certainly, Defendants raised this issue in their motion, dated November 15, 2001, to set aside the Court's prior judgments.
Citing Marical Ucin, S. A. v. SS Galicia, 723 F.2d 994 (1st Cir. 1983), Plaintiff next argues that Carlow's appearance at deposition was the functional equivalent of a responsive pleading. Having reviewed Marical Ucin, in which the defendant's counsel attended thirteen depositions and waited four years before invoking his client's due process right of personal jurisdiction, the Court is not persuaded that Carlow waived this right, on his own behalf or on behalf of Quest. Carlow attended one deposition and Defendants timely moved thereafter for vacatur. Indeed, Marical Ucin notes explicitly that "general appearance by a defendant does not constitute a waiver of the defense of lack of jurisdiction over the person." Id. at 997 (citation omitted). Only because, in that case, the defendant's tactics were "dilatory and inconsistent with its assertion of lack of in personam jurisdiction" did the First Circuit make an exception to this rule. Id.
These Defendants had notice of the lawsuit and intentionally declined to answer. This was a great risk and it has some consequences. However, under federal law each Defendant may challenge the Court's jurisdiction over their persons even after entry of default judgment and execution on that judgment.
By neglecting to contest Plaintiff's allegations in court and opting instead to challenge the Court's jurisdiction after final judgment, Defendants have conceded the verity of the complaint's substantive allegations. Nishimatsu Constr. Co. v. Houston Nat'l Bank, 515 F.2d 1200, 1206 (5th Cir. 1975) ("The defendant, by his default, admits the plaintiff's well-pleaded allegations of fact . . ."); In re Evans, 1999 Bankr. LEXIS 1921, *3 (Bankr.E.D.Ky. 1999) ("failure to respond operates . . . as an admission of the well-pleaded factual allegations contained in the complaint.") (citing Nishimatsu).
III.
The Court considers first whether it had personal jurisdiction over Quest. The parties differ over who bears the burden of showing personal jurisdiction or lack thereof in the context of a Rule 60(b)(4) motion. So do the courts. In any event, both parties have thoroughly briefed the issue of jurisdiction and the Court is able to adjudicate this case without deciding this question.
See, e. g., Rockwell Int'l Corp., supra, at 559, n. 1 (placing burden on Rule 60(b)(4) movant "would reverse the normal placement when a party challenges the existence of in personam jurisdiction through a Rule 12 motion to dismiss. . . . [I]t is the plaintiff who must shoulder the task of showing facts that permit an affirmative jurisdictional finding, a burden that may not be shifted.") (citation omitted); compare with Rohm Haas Co. v. Aries, 103 F.R.D. 541, 544 (S.D.N.Y. 1984) ("Should the burden of proof be lodged with the plaintiff, severe prejudice can result when evidence needed to prove jurisdiction is no longer available due to the passage of time. Accordingly, it is not unfair to place the burden on a defendant who has chosen to contest jurisdiction after judgment under Rule 60(b) rather than at the time of trial pursuant to Rule 12. This, of course, presumes that defendant was on notice at the time of the original proceedings.") See generally Theresa L. Kruk, Who Has Burden of Proof in Proceeding Under Rule 60(b)(4) of Federal Rules of Civil Procedure to Have Default Judgment Set Aside on Ground that it is Void for Lack of Jurisdiction, 102 A.L.R. Fed. 811 (1991).
"In determining whether personal jurisdiction exists over a nonresident defendant in a diversity case, a district court applies the law of the state in which it sits subject to due process limitations." Welsh v. Gibbs, 631 F.2d 436, 439 (6th Cir. 1980). That law is K.R.S. § 454.210(2)(a), which, in pertinent part, provides that "[a] court may exercise personal jurisdiction over a person who acts directly or by an agent, as to a claim arising from the person's . . . [t]ransacting any business in this Commonwealth."
The Kentucky "long-arm" statute's limits are "coextensive with the boundaries of the due process clause." Davis H. Elliot Co. v. Caribbean Utilities Co., 513 F.2d 1176, 1180-81 (6th Cir. 1975). Well-settled Supreme Court jurisprudence requires that "in order to subject a defendant to a judgment in personam, if he be not present within the territory of the forum, he [must] have certain minimum contacts with it such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice." International Shoe Co. v. Washington, 326 U.S. 310, 316 (1945) (quotation, citation omitted). The Sixth Circuit has employed a three-part test to determine whether such minimum contacts are present:
First, the defendant must purposefully avail himself of the privilege of acting in the forum state or causing a consequence in the forum state. Second, the cause of action must arise from the defendant's activities there. Finally, the acts of the defendant or consequences caused by the defendant must have a substantial enough connection with the forum state to make the exercise of jurisdiction over the defendant reasonable.Southern Machine Co. v. Mohasco Industries, Inc., 401 F.2d 374, 381 (6th Cir. 1968) (footnote omitted). The requirement of purposeful availment "ensures that a defendant will not be haled into a jurisdiction solely as a result of random, fortuitous, or attenuated contacts." Burger King Corp. v. Rudzewicz, 471 U.S. 462, 475 (1985) (quotations, citations omitted). Indeed, "the defendant's conduct and connection with the forum State [must be] such that he should reasonably anticipate being haled into court there." Id. at 474. Determination of purposeful availment requires no mechanical test, but rather a "highly realistic" evaluation of the parties' "prior negotiations and contemplated future consequences, along with the terms of the contract and the parties' actual course of dealing . . ." Id. at 478-79.
In the context of ascertaining personal jurisdiction under the Kentucky long-arm statute, the Court of Appeals of Kentucky has noted a distinction between nonresident buyers and nonresident sellers:
[O]n the one hand the non-resident seller is actively promoting the sales of its products in the forum state and invoking the benefits and protections of its laws while the non-resident purchaser occupies a passive role and usually enjoys no particular privilege or protection in purchasing products from a resident seller.First National Bank of Louisville v. Shore Tire Co., 651 S.W.2d 472, 473 (Ky.Ct.App. 1982) (citations omitted). In Shore Tire, the Court of Appeals noted its holding in Tube Turns Div. of Chemetron Corp. v. Patterson Co., 562 S.W.2d 99 (Ky.Ct.App. 1978), that jurisdiction over a nonresident buyer was inappropriate where, on the basis of negotiations by mail and telephone, the buyer had placed a single, not particularly large order for goods which the resident seller had not specially manufactured.
However, in Shore Tire the Court found that personal jurisdiction existed over a nonresident buyer who had engaged with a resident seller in a continuing business relationship which "involved a number of transactions over an extended period of time." 651 S.W.2d at 473. Our case resembles Shore Tire more than it resembles Tube Turns, because Quest placed multiple orders over a period of time for a cumulatively substantial amount of money.
Quest avers that Shore Tire is inapposite because Quest ordered from the American Red Cross, not MDI, and that consequently the relationship between the parties is too attenuated to indicate purposeful availment by Quest. As evidence of this, however, Quest offers only a general affidavit by Carlow based upon the supposed knowledge of third parties. This self-serving hearsay affidavit does not change the objective facts of an ongoing relationship between MDI and Quest. MDI operated the toll-free telephone line which Quest called on numerous occasions to place orders. MDI sent sales invoices to Quest. While each invoice features the trademark of the American Red Cross, the maker and addressor is clearly MDI. The top of the invoice shows the MDI trademark, the Kentucky business address of MDI, and the admonition to make checks payable to MDI. Quest received numerous product shipments from Kentucky. The Court finds it inconceivable that Quest, throughout the duration of its seven-month relationship with MDI, was unaware that it was engaged in an ongoing business relationship with a Kentucky corporation.
In Burger King, supra, the Supreme Court emphasized that "parties who reach out beyond one state and create continuing relationships and obligations with citizens of another state are subject to regulation and sanctions in the other State for the consequences of their activities." 475 U.S. at 473 (quotation, citation omitted). The facts, essentially uncontroverted, indicate that Quest reached out to MDI and created a continuing relationship and obligations with a Kentucky corporation, and thus purposefully availed itself of the privilege of acting in Kentucky.
The Court must now decide whether its exercise of jurisdiction is reasonable. The Sixth Circuit Court of Appeals has noted that where a court has found that purposeful availment and a consequent cause of action exist, meeting the first two prongs of the test in Mohasco, supra, "an inference arises that this third factor [of reasonableness] is also present. A court must consider several factors in this context, including the burden on the defendant, the interest of the forum state, the plaintiff's interest in obtaining relief, and the interest of other states in securing the most efficient resolution of controversies." CompuServe, Inc. v. Patterson, 89 F.3d 1257, 1268 (6th Cir. 1996) (quotation, citations omitted).
At this juncture, the burden on Quest to submit to jurisdiction is not unduly onerous. Because Quest has admitted by default to MDI's allegations, there are no issues of fact to be litigated and thus no trial is necessary. Clearly, MDI has a substantial interest in obtaining relief, and just as clearly, "Kentucky has a legitimate interest in seeing that its citizens receive compensation for their injuries, especially when . . . the brunt of the injury may be felt in Kentucky, that is, upon a Kentucky corporation." Auto Channel, Inc. v. Speedvision Network, L. L. C., 995 F. Supp. 761, 766 (W.D.Ky. 1997). In fact, Kentucky has at least as much an interest in the resolution of the controversy as Florida has, and probably more.
Accordingly, the Court finds that it may exercise personal jurisdiction over Quest, and its judgments and orders as to Quest are valid and enforceable.
IV.
The Court now considers whether it properly exercised jurisdiction over Carlow. MDI alleges that Carlow misrepresented his affiliation with Quest, and that MDI relied on this misrepresentation to its detriment. The misrepresentation here is one of omission: neither Quest nor Carlow informed MDI of their connection with one another. By this omission, Defendants induced MDI to enter the business relationship with Quest. Fraudulent inducement of contract occurs "[w]here one party to a contract knows that the other relies on him to disclose all facts material to execution thereof, [and] the duty rests on him not to conceal anything material to the bargain . . ." Faulkner Drilling Co. v. Gross, 943 S.W.2d 634, 638 (Ky.Ct.App. 1997). The circumstances and the allegations raise difficult issues about the extent to which an individual subjects himself to personal jurisdiction by acting through a corporation.
Carlow argues that the fiduciary shield doctrine bars the Court from exercising personal jurisdiction based upon his acts as a corporate agent or fiduciary. The Sixth Circuit Court of Appeals has rejected the fiduciary shield doctrine, saying that a court may exercise personal jurisdiction over a corporate agent who was actively and personally involved in conduct in the forum state giving rise to the claim. Balance Dynamics Corp. v. Schmitt Industries, Inc., 204 F.3d 683, 697-98 (6th Cir. 2000). Carlow, however, has made no contacts with Kentucky, individually or acting in his corporate capacity. He made no direct representations in any capacity to MDI either in Kentucky or Florida. Indeed, MDI has not alleged that it relied upon any assurances or materially incomplete representations by Carlow in transacting business with Quest. Quest, not Carlow, reached out to Kentucky to make the alleged misrepresentations. Apparently, Quest employees other than Carlow made these minimum contacts with Kentucky. Consequently, Carlow's individual contacts with Kentucky fall far short of those necessary for it to sustain long-arm jurisdiction over him.
In such circumstances, one can find sufficient contacts by Carlow only by attributing Quest's corporate actions to Carlow. The Court can make such an attribution only if Quest is Carlow's alter ego. The Sixth Circuit has not specifically approved such an approach. However, at least one district court in this Circuit has endorsed the use of the alter ego theory to exercise personal jurisdiction. See Warren v. Dynamics Health Equipment Mfg. Co., 483 F. Supp. 788, 792-93 (M.D.Tenn. 1980). This Court believes that such an approach makes common sense, and concludes that it may exercise personal jurisdiction over an individual premised on his corporate contacts with the forum state where the complaint alleges facts sufficient to prove that the corporation was a mere sham or where it served as an alter ego for the individual's benefit. See also Weller v. Cromwell Oil Co., 504 F.2d 927, 931 (6th Cir. 1974).
In this case, however, MDI has not alleged facts suggesting Quest was an alter ego of Carlow. Rather, the complaint merely alleged that Carlow was a principal in Quest, an allegation which offers no grounds for piercing the corporate veil. Allegations that Carlow formed a legitimate Florida corporation for a fraudulent purpose constitute neither conduct sufficient to support any alter ego finding nor conduct in Kentucky sufficient to support personal jurisdiction over Carlow individually. Without allegations of alter ego, Carlow's mere knowledge of or direction of Quest's actions in Kentucky is not enough to support personal jurisdiction over him in this forum.
Because Defendant Carlow does not have minimum contacts with Kentucky, and the Court cannot impute Quest's minimum contacts to Carlow, it would be unreasonable for this Court to exercise personal jurisdiction over him.
The Court will enter an Order consistent with this Memorandum Opinion.
ORDER
Defendants have moved the Court to vacate its default judgment of September 21, 2000, and its order of July 6, 2001, as void for lack of personal jurisdiction. For the reasons set forth in the accompanying Memorandum Opinion, and being otherwise sufficiently advised,
IT IS HEREBY ORDERED that the Court has personal jurisdiction over Defendant Quest Healthcare, Inc., and its motion for vacatur based on the absence of personal jurisdiction is DENIED.
IT IS FURTHER ORDERED that the Court does not have personal jurisdiction over Defendant Michael Carlow, and his motion for vacatur based on the absence of personal jurisdiction is SUSTAINED. Therefore, the prior judgment and the contempt order as to Carlow are vacated.