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United States District Court, Southern District of New York

July 10, 2000


The opinion of the court was delivered by: Kaplan, District Judge.


This is an action by Hallwood Realty Partners, L.P. ("Hallwood") charging, inter alia, that defendants Gotham Partners, L.P. and Gotham Partners, Ill, LP. (collectively "Gotham"), EFO Reality, Inc. ("EFO"), Private Management Group, Inc. ("PMG") and others have violated Section 13(d) of the Securities and Exchange Act of 1934*fn1 (the "Exchange Act") by working secretly as a group to purchase Hallwood's shares for the purpose of taking control of and fundamentally changing or liquidating Hallwood. Hallwood's allegations are set out in an opinion of this Court dated May 2, 2000, familiarity with which is assumed.*fn2 The matter now is before the Court on PMG's motion to dismiss for lack of personal jurisdiction over it or, in the alternative, to sever the claims against it and transfer them to the Central District of California.*fn3

Personal Jurisdiction

PMG challenges personal jurisdiction on the ground that it lacks minimum contacts with New York State as it claims is required under International Shoe Co. v. Washington*fn4 and its progeny. Hallwood responds that PMG was duly served under a federal statute providing for nationwide service of process and, in consequence, that this Court properly may exercise personal jurisdiction over it. The issue, therefore, is the extent and basis of constitutional limitations on the exercise of personal jurisdiction by federal courts in cases in which a federal statute provides for nationwide service of process. Its resolution requires close attention to the evolution of expanded concepts of personal jurisdiction and the constitutional limits on its exercise.

A state court's exercise of personal jurisdiction historically was understood to derive from the court's territorial power over the defendant's person.*fn5 The limits on its exercise grew from the principle that states, as separate sovereigns in a federal system, were wholly authoritative within their own territories but without power to encroach on the territorial authority of other states.*fn6 On this basis, state courts were permitted to exercise jurisdiction over any person served within the forum.*fn7

Over time, developments in commerce and transportation began to highlight the limited nature of this territorial conception. The requirement that the exercise of jurisdiction stem from the forum's exercise of sovereign power over a defendant within its territory meant that many doing business or traveling within a state were able to escape judgment of the courts of that state, even on claims stemming from their in-state activities, merely because they were not served with process in the jurisdiction.

In response, the Supreme Court began to proffer several new theories. It developed first the notion of implied consent. If a defendant conducted certain activities in the forum state, he or she was found impliedly to have consented to the jurisdiction of the courts of that state.*fn8 This approach began to address situations not covered by the older territorial view, as it permitted a state court to exercise personal jurisdiction over a defendant who had not been served in the state, but who nonetheless had conducted significant activities there. Nevertheless, the implied consent theory ultimately proved unsatisfactory. As a legal fiction, it provided no rigorous way to create principled constitutional limitations on jurisdiction. The doctrine therefore continued to evolve.

The Court next developed what has been called the "presence" theory, which based amenability to service on the nature and frequency of a defendant's activities in the forum state.*fn9 This approach addressed some of the concerns associated with the implied consent theory, as the notion of voluntary submission was discarded. However, no clear standard governing the level of contacts required for legal presence emerged. Consequently, lower courts divided sharply about how this doctrine should operate.

After several decades of divergent lower court opinions, the Supreme Court in 1945 attempted to define the doctrine more clearly in International Shoe v. State of Washington, which held that state courts may exercise personal jurisdiction over a defendant only where that defendant has "minimum contacts" with the forum such that maintenance of the suit does not offend "traditional notions of fair play and substantial justice."*fn10 This approach required consideration not only of the extent and frequency of a defendant's contacts with the forum state, but also of the nature of those contacts and the relationship between them and the subject matter of the litigation.*fn11

International Shoe and its progeny have grounded their limitations on the exercise of personal jurisdiction over absent defendants in two dominant themes. Limitations on state courts' exercise of personal jurisdiction were said to stem in part from the Fourteenth Amendment's restrictions on the sovereign powers of the states in a federal system. *fn12 But they have rested also on a view of the Fourteenth Amendment as protecting a defendant's liberty interest in not being forced to litigate in a forum with which he or she has no ties.*fn13 These themes remain salient parts of Fourteenth Amendment personal jurisdiction jurisprudence to this day.

Federal courts of course are not subject to the constraints of the Fourteenth Amendment, which control only state action. They are subject instead to the Due Process Clause of the Fifth Amendment,*fn14 and it is far from clear whether that provision imposes identical limitations on their exercise of personal jurisdiction in federal question cases. Indeed, the question does not often arise. Under the Federal Rules of Civil Procedure, a defendant must be served either in the judicial district where he or she is found or pursuant to the long-arm statute of the forum state unless a federal statute provides for broader territorial limits.*fn15 As state long-arm statutes almost invariably allow service outside the judicial district in which the federal court sits, the International Shoe standard or, indeed, an even narrower state long-arm statute*fn16 usually controls the exercise of personal jurisdiction by federal district courts. However, where the governing federal statute provides for nationwide service of process, as does the Exchange Act,*fn17 the question arises whether the Fifth Amendment permits the exercise of jurisdiction by federal courts in circumstances in which a state court of the forum state would be proscribed from proceeding pursuant to International Shoe.*fn18

The issue has arisen most frequently in connection with the question whether foreigners, in order to be subjected to the personal jurisdiction of a federal court, need only have minimum contacts with the United States as a whole as opposed to minimum contacts with the forum state. Cases addressing this issue generally have fallen into one of two camps, with each drawing differently on the two dominant themes outlined above. Most have adopted the view that minimum contacts with the United States satisfy the Fifth Amendment in cases arising under federal law,*fn19 just as minimum contacts with the forum state satisfy the Fourteenth Amendment in actions arising under state law.*fn20 This national contacts approach stems in large part from the notion that concerns about state sovereignty and federalism are absent in federal question cases, in contrast to cases in which the cause of action is based on state law.*fn21 As these concerns drop out, so the argument goes, the exercise of personal jurisdiction in federal question cases need not be limited by the extent of defendant's contacts with the forum state.*fn22 Most of these cases, moreover, have undertaken little independent inquiry into the fairness of subjecting the defendant to the jurisdiction of the forum.*fn23 Rather, they generally find these issues to be addressed adequately by limitations on plaintiffs' choices of venue.*fn24

Courts in the second group, in contrast, view the Fifth Amendment as imposing far more substantial restrictions on the exercise of personal jurisdiction.*fn25 This approach has its origins in World-Wide Volkswagen Corp. v. Woodson, which found the personal jurisdiction inquiry under the Fourteenth Amendment to be driven by concerns not only with federalism and state sovereignty, but also with protecting the defendant's liberty interest in not being forced to litigate in a distant forum.*fn26 Although state sovereignty concerns are absent in federal question cases, a defendant's liberty interest exerts an independent limitation on the court's exercise of personal jurisdiction. This interest, therefore, conceivably could constrain the exercise of jurisdiction even if service otherwise were proper under a federal statute providing for nationwide service of process.

This latter approach finds support in Insurance Corp. of Ireland v. Compagnie des Bauxites,*fn27 where the Court went beyond Volkswagen and suggested in dicta that the defendant's individual liberty interest is the sole Fourteenth Amendment constraint on a court's exercise of personal jurisdiction.*fn28 Taken to an extreme, the language in Bauxites suggests that the Fifth Amendment's limitations on the exercise of personal jurisdiction are coextensive with those under the Fourteenth Amendment. Under such a view, the minimum contacts test developed in International Shoe would apply equally to federal and state claims, including those brought under federal statutes providing for nationwide service, where jurisdiction would be based on a defendant's contacts with the forum state, rather than with the United States as a whole, as required by the pure national contacts approach.

This interpretation of Bauxites would undercut severely the efficacy of nationwide service provisions. It would undermine the Walsh Act, which permits service abroad of subpoenas on nationals and residents of the United States,*fn29 despite the fact that the Supreme Court previously has upheld its constitutionality against a due process challenge on the ground "that one of the duties which the citizen owes to his government is to support the administration of justice by attending its courts and giving his testimony whenever he is properly summoned." *fn30 It would have dramatic implications for criminal cases as well, as the Federal Rules of Criminal Procedure provide for nationwide service of subpoenas in criminal matters.*fn31 Construction of Bauxites to preclude, on due process grounds, the exercise of personal jurisdiction absent minimum contacts with the forum state often would leave criminal defendants and the government unable to procure the live testimony of reluctant witnesses notwithstanding the strong public interest in both fairness to those accused of crimes and in enforcement of our criminal laws.

This Court is unwilling to read Bauxites so broadly. The Supreme Court's dicta in that case never have been applied by the Court in the manner in which PMG here seeks to apply it. It stands in serious tension with a long line of precedent, including World-Wide Volkswagen, in which the Fourteenth Amendment limitations on the exercise of personal jurisdiction were grounded in significant measure in constraints on state sovereignty, not merely on considerations of fairness to defendants sued in inconvenient fora. In consequence, this Court holds that International Shoe and its progeny, which rest on the Fourteenth Amendment, may not simply be transplanted to limit the exercise of personal jurisdiction in federal question cases.

This is not to say that the liberty interests of persons sought to be subjected to personal jurisdiction by federal law in federal question cases are not appropriate considerations nor that International Shoe and other Fourteenth Amendment cases are utterly irrelevant. The Fifth Amendment stands as a bulwark against the arbitrary exercise of governmental power,*fn32 and the Fourteenth Amendment cases demonstrate that the determination of what is arbitrary requires consideration of the individual's interest in fundamental fairness, the forum's interest in adjudicating the dispute, the plaintiff's interest in obtaining effective and convenient relief, the judicial system's interest in obtaining the most efficient resolution of controversies, and the interest of the forum in furthering substantive social policies.*fn33 But the interest of the federal government is not cabined by the need for the exercise of personal jurisdiction by state courts to respect the sovereignty and legitimate interests of other states. Moreover, the obligation of a citizen served with federal process to the issuing authority, the United States of America, is qualitatively different than that of a person served with process issued under the authority of a state of which that person is not a citizen or resident.*fn34 Hence, the balance between West [ Page 286]

individual and governmental concerns necessarily differs in this context.

Nationwide service provisions in federal statutes reflect Congress' determination that the carrying out of the policies those statutes implement is served by facilitating enforcement without regard to state boundaries.*fn35 Those determinations are entitled to some deference. Moreover, it cannot be gainsaid that nationwide service provisions often are central to major federal regulatory efforts in areas at the core of Congress' power under the Commerce Clause, including antitrust and securities regulation.*fn36 In cases brought under these and comparable statutes, the personal jurisdiction analysis must give appropriate consideration to the strong federal concerns involved.

This framework casts the personal jurisdiction inquiry in this case into clearer relief. PMG, a California corporation that allegedly invests in real estate and related businesses, *fn37 is a United States entity. It enjoys the benefits of a vast and dynamic national market fostered by the national authority over interstate commerce that replaced the balkanization that prevailed under the Articles of the Confederation.*fn38 The federal interest in adjudicating the dispute is clear and substantial-Hallwood's claims against PMG are brought under the federal securities laws, *fn39 an are a of strong federal concern that falls at the center of Congress' commerce power.*fn40 PMG does not allege any extraordinary burden from having to defend this lawsuit in New York; it adverts only to a modest inconvenience of litigating here rather than in California.*fn41 This burden does not appear excessive, particularly in an age of electronic mail, facsimile transmission, videoconferencing and frequent coast to coast air service. Indeed, the burden of having PMG, a California defendant, in the case at the pretrial stage probably will fall at least as heavily on plaintiff as on PMG, as plaintiff will be forced to conduct depositions of PMG in California.*fn42 In any case, PMG is a business enterprise, not an individual of limited means who could not readily cope with being forced to defend a lawsuit far from home. In the last analysis, the question is whether the burden on PMG of litigating this case in New York is so severe that the exercise of personal jurisdiction over it is arbitrary, shocks the conscience, or offends fundamental principles of ordered liberty, notwithstanding the strong federal interest in efficient and effective enforcement of the securities laws.*fn43 PMG has not even approached such a showing.

This is not to say that personal jurisdiction will lie in every case in which a comparable federal interest is advanced. There doubtless will be defendants who show sufficient hardship from being subjected to the jurisdiction of a geographically remote court to overcome even a strong federal interest. This, however, is not such a case. In consequence, PMG's due process objection to the exercise of personal jurisdiction is rejected.

Motion to Sever and Transfer

PMG moves in the alternative, pursuant to Rule 12(b)(3), to sever the claims against it and transfer them to the Central District of California on the grounds that venue is improperly laid in this district, for the convenience of parties and witnesses and in the interest of justice, or for forum non conveniens


Section 27 of the Exchange Act*fn44 provides in relevant part that an action to enforce any liability or duty under the Act may be brought in "the district wherein any act or transaction constituting the violation occurred" or "the district wherein the defendant is found or is an inhabitant or transacts business . . ." In a multidefendant action where a common scheme is alleged, venue is proper as to all defendants in any district in which any defendant performed an act or transaction in furtherance of the scheme, even in absence of contact with that district by one or more other defendants.*fn45

As discussed above, Gotham consists of two New York based limited partnerships. PMG, EFO and others are alleged to have worked secretly as a group with Gotham to purchase Hallwood Units on the American Stock Exchange in New York in violation of the Exchange Act.*fn46 This clearly satisfies the requirements of Section 27. In consequence, venue is proper in this district as to all defendants.

Convenience of the Parties and Witnesses

Rule 21 of the Federal Rules of Civil Procedure authorizes the severance of any claim against a party in order that it be transferred pursuant to Section 1404(a) of the Judicial Code.*fn47 Section 1404(a), in turn, permits the Court to transfer any civil action to any other district where it might have been brought "[f]or the convenience of parties and witnesses, in the interest of justice."*fn48

Severance under Rule 21 generally appropriate if venue is improper as to one or more defendant or a party has been joined improperly under Rule 20.*fn49 However, in a multi-defendant case, the Court may sever and transfer a claim against one or more defendants where "the administration of justice would be materially advanced" thereby.*fn50 This analysis requires the Court to consider:

"(1) whether the issues sought to be tried separately are significantly different from one another, (2) whether the separable issues require the testimony of different witnesses and different documentary proof, (3) whether the party opposing the severance will be prejudiced if it is granted and (4) whether the party requesting the severance will be prejudiced if it is not granted."*fn51

Plaintiff in this action alleges that defendants worked together in a group to purchase Hallwood Units for the purpose of taking control of and dismantling it.*fn52 The issues involving PMG therefore are quite closely related to those concerning the other defendants, as they involve an alleged scheme common to all defendants. It is evident also that the proof against PMG is likely to overlap significantly with the proof against the other defendants. PMG has not shown that it would suffer any measurable degree of prejudice if the case against it were allowed to remain in this district.*fn53 Conversely, plaintiff would be prejudiced substantially if the case against PMG were severed, as it would be forced to litigate the existence of the scheme in two separate fora. In consequence of these considerations, severance of the claims against PMG is unwarranted.

As severance is inappropriate, the Court need not consider whether transfer of the claims against PMG to the Southern District of California is warranted under Section 1404(a). Suffice it to say, in light of the foregoing, that it is highly unlikely that the interest of justice would be served by a transfer.

Forum Non Conveniens

Since the enactment of Section 1404(a), "it is only when the more convenient forum is in a foreign country — or, perhaps, under rare circumstances, in a state court or a territorial court — that a suit brought in a proper federal venue can be dismissed on the grounds of forum non conveniens."*fn54 Here, PMG makes no such claim. Dismissal for forum non conveniens is not warranted.


PMG's motion to dismiss or, in the alternative, to sever the claims against it and transfer them to the Southern District of California is denied.


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