HALLWOOD REALTY PARTNERS, L.P. v. GOTHAM PARTNERS

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

OPINION

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, ...