Court Opinion

ID: 2968262
Source: CourtListenerOpinion
Date Created: 2015-09-22 04:40:02.522778+00
Date Added: 2024-06-11T15:28:31.583956
License: Public Domain

PUBLISHED

UNITED STATES COURT OF APPEALS
                FOR THE FOURTH CIRCUIT

DAVID PARTINGTON, Reverend; LESLIE      
S. HOLLOWELL; ELVIS H. HESTER, JR.;
PHYL WIGAL; THOMAS H. ADAMS;
DAVID L. ARMBRISTER; JACQUELINE
M. ARMBRISTER; LARRY W.
ARMBRISTER; CAROLYN Q.
ARMBRISTER; SHERMAN H.
BLANKENSHIP; ALICE S. CARR;
FRANCIS LENTZ; HELEN LENTZ; ALLEN
E. SMITH; DRAPER VALLEY BAPTIST                 No. 04-2279
CHURCH,
               Plaintiffs-Appellants,
                 v.
AMERICAN INTERNATIONAL SPECIALTY
LINES INSURANCE COMPANY; AIG
TECHNICAL SERVICES, INCORPORATED,
              Defendants-Appellees.
                                        
            Appeal from the United States District Court
       for the Middle District of North Carolina, at Durham.
               Frank W. Bullock, Jr., District Judge.
                         (CA-03-1084-1)

                      Argued: October 26, 2005

                      Decided: March 30, 2006

   Before LUTTIG, MICHAEL, and GREGORY, Circuit Judges.

Affirmed in part, vacated in part, and remanded by published opinion.
Judge Gregory wrote the opinion, in which Judge Luttig and Judge
Michael joined.
2        PARTINGTON v. AMERICAN INT’L SPECIALTY LINES INS.
                             COUNSEL

ARGUED: John Francis Bloss, Sr., CLARK, BLOSS & WALL,
P.L.L.C., Greensboro, North Carolina, for Appellants. Bradley Reed
Johnson, WOMBLE, CARLYLE, SANDRIDGE & RICE, P.L.L.C.,
Winston-Salem, North Carolina, for Appellees. ON BRIEF: Allan R.
Gitter, Ronald R. Davis, WOMBLE, CARLYLE, SANDRIDGE &
RICE, P.L.L.C., Winston-Salem, North Carolina, for Appellees.

                             OPINION

GREGORY, Circuit Judge:

   The Reverend David Partington and fourteen others (collectively
"the Appellants") appeal the decision of the District Court for the
Middle District of North Carolina to dismiss their case under Federal
Rule of Civil Procedure 12(b)(6). In prior litigation, Partington
obtained a default judgment against Charterhouse Group, Ltd.
("Charterhouse") in favor of himself and a class of similarly situated
persons. The Appellants seek to use the default judgment to stand in
the place of Charterhouse to recover from Charterhouse’s insurers,
American International Specialty Lines Insurance Company and AIG
Technical Services, Inc. (collectively "the Insurers"). The North Caro-
lina district court below reasoned that the Appellants had failed to
state a claim upon which relief could be granted because the proffered
default judgment was: (1) void for lack of subject matter jurisdiction;
and (2) unenforceable in that it awarded damages to an uncertified
putative class.

   For the reasons discussed below, we conclude that the district court
erred in holding the default judgment void. In addition, we hold that
although the judgment is unenforceable with respect to the putative
class members, Partington himself has a valid judgment in his favor.
Accordingly, we affirm the dismissal with respect to the plaintiffs
other than Partington, but vacate the dismissal and remand with
respect to Partington’s individual claim.
           PARTINGTON v. AMERICAN INT’L SPECIALTY LINES INS.                 3
                                       I.

   This appeal arises from a somewhat complicated procedural history
as two lawsuits with various defendants are relevant to our discussion.1
The facts giving rise to the first suit, which we will refer to as "the
Virginia litigation," began when Partington, a Presbyterian minister,
decided to plan for his retirement. To that end, Partington’s church
engaged the services of Charterhouse, a provider of trustee services,
in establishing a trust for Partington. However, in 1999, Partington’s
financial plans fell through when Charterhouse used the trust pro-
ceeds to purchase investments that time revealed were worthless.

   When Partington discovered the following year that the money in
the trust was lost, he brought suit in the United States District Court
for the Western District of Virginia against Charterhouse and its indi-
vidual officers and directors. He premised liability on violations of
the Securities Act of 1933 ("the Act" or "the 1933 Act") and various
state law claims. J.A. 114-32. Partington brought that suit on behalf
of himself, his trust, and a putative class of similarly situated individ-
uals.

   When Charterhouse notified the Insurers about the lawsuit, they
refused to defend or indemnify Charterhouse, claiming that its actions
were not covered by the insurance agreement. Thereafter, Charter-
house did not appear in the Virginia litigation, and the clerk entered
its default.

  Meanwhile, Partington’s suit proceeded against the individual
defendants who did appear to defend the action. They separately filed
motions to dismiss on various grounds, including that Partington was
not the true purchaser of the securities. Under the Act,

      Any person who . . . offers or sells a security in violation
      of section 77e of this title . . . shall be liable . . . to the per-
      son purchasing such security from him, who may sue either
      at law or in equity in any court of competent jurisdiction, to
  1
   Because this appeal arises on a motion to dismiss, we recite the facts
as alleged by the Appellants. See Venkatraman v. REI Sys., Inc., 417
F.3d 418, 420 (4th Cir. 2005).
4         PARTINGTON v. AMERICAN INT’L SPECIALTY LINES INS.
     recover the consideration paid for such security with interest
     thereon, less the amount of any income received thereon,
     upon the tender of such security, or for damages if he no
     longer owns the security.

15 U.S.C. § 77l(a) (emphasis added). The district court denied the
individual defendants’ motions to dismiss on March 21, 2001, reason-
ing that "many of the Defendants’ arguments are simply premature
and factually based." J.A. 263-64.

   Thereafter, on November 8, 2001, the Virginia district court
ordered that a default judgment be entered against Charterhouse in
favor of "plaintiff and the class of similarly situated persons as
defined in the Second Amended Complaint." Id. at 27-28. The district
court set the amount of the judgment at $8,476,979.53. The record
contains several lists of Charterhouse investors, whose investments
total that amount. See id. at 30-38.

   Several months later, on February 15, 2002, the Virginia district
court reconsidered, sua sponte, the individual defendants’ motions to
dismiss and converted them to motions for summary judgment. It
stated, "[t]he Court’s consideration of the entire record and the argu-
ments before it makes it believe that it erred in failing to dismiss the
entire claim at an earlier stage of the litigation." Id. at 161. It held that
Partington was not the "person purchasing" the securities under the
Act, and therefore did not have standing to bring his claim. Id. at 164-
65.

   At that time, the Virginia district court also ruled on Partington’s
previously filed motion for class certification. Because Partington was
not a "person purchasing" under the Act, the court determined that he
was not typical of the class he sought to represent under Federal Rule
of Civil Procedure 23. Moreover, the court decided that even if
brought by a proper plaintiff, a class action would not be the superior
method for adjudicating the controversy. It therefore declined to cer-
tify the class. Also, because the district court dismissed the federal
question claim over which it had original jurisdiction, it dismissed
Partington’s remaining state-law claims without prejudice pursuant to
28 U.S.C. 1367(c)(3). The district court made no reference to the
effect of its decision on the previously entered default judgment
          PARTINGTON v. AMERICAN INT’L SPECIALTY LINES INS.                5
against Charterhouse. On appeal, the Fourth Circuit affirmed the
determination that Partington lacked standing under the Act and the
resulting denial of class certification. Smith v. Pennington, 352 F.3d
884, 886 (4th Cir. 2003).

   The second lawsuit, which is the one presently before us and which
we will refer to as "the North Carolina litigation," arose from the
Appellants’ attempts to recover on the default judgment. The Appel-
lants filed this suit as a putative class action in North Carolina state
court against the Insurers. They alleged that as Charterhouse’s judg-
ment creditors, they were entitled to stand in the place of Charter-
house to sue the Insurers. To that end, the Appellants alleged that the
Insurers breached their contract with Charterhouse when they refused
to defend or indemnify it in the Virginia litigation.2

   The Insurers removed the action to the United States District Court
for the Middle District of North Carolina on the basis of diversity
jurisdiction and moved to dismiss. After receiving the Recommenda-
tion of the United States Magistrate Judge, the North Carolina district
court adopted the Recommendation and granted the Insurers’ motion
under Rule 12(b)(6). J.A. 315-16. The district court based its conclu-
sion that the Appellants failed to state a claim on two independent
reasons. First, the district court believed that because Partington
lacked standing under the Act to bring his claim, the Virginia district
court never possessed subject matter jurisdiction over the case. There-
fore, the default judgment was void in that the Virginia district court
had no power to enter it. Second, the district court reasoned that the
default judgment was unenforceable because it purported to award
damages to a class that was never formally certified. Id. at 182-98.
This appeal followed.

                                     II.

  We review a district court’s Rule 12(b)(6) dismissal of a complaint
de novo. Myers v. Loudoun County Pub. Sch., 418 F.3d 395, 401 (4th
  2
   The complaint also asserted a claim for breach of duty of good faith
and fair dealing/bad faith refusal to settle. J.A. 9. The district court dis-
missed this claim on the merits, see id. at 186, and that dismissal is not
on appeal here.
6         PARTINGTON v. AMERICAN INT’L SPECIALTY LINES INS.
Cir. 2005). "In general, a motion to dismiss will not be granted unless
a plaintiff can prove no set of facts which would support his claim
and entitle him to relief." Venkatraman v. REI Sys., Inc., 417 F.3d
418, 420 (4th Cir. 2005) (citing Conley v. Gibson, 355 U.S. 41, 45-46
(1957)). "In considering a motion to dismiss, we accept as true all
well-pleaded allegations and view the complaint in the light most
favorable to the plaintiff." Id. (citing Mylan Labs., Inc. v. Matkari, 7
F.3d 1130, 1134 (4th Cir. 1993)).

                                    III.

   The Appellants first challenge the North Carolina district court’s
conclusion that the default judgment against Charterhouse was void
for lack of subject matter jurisdiction. They argue that the Virginia
district court possessed jurisdiction to enter the default judgment, not-
withstanding its subsequent determination that Partington lacked
standing under the Act.3 We agree.

   After we heard oral argument in this case, the United States
Supreme Court issued its decision in Arbaugh v. Y & H Corp., 126
S. Ct. 1235 (2006), and thereby clarified the distinction between the
requirements for federal subject matter jurisdiction and the elements
of a federal claim for relief. The Arbaugh case involved an action
under Title VII of the Civil Rights Act of 1964, which prohibits dis-
crimination by "an employer." Id. at 1239 (quoting 42 U.S.C. 2000e-
2(a)(1)). Under Title VII, the term "employer" is defined to include
persons that have at least fifteen employees. Id. (quoting 42 U.S.C.
    3
    We note that although there was some disagreement between the par-
ties as to the procedural vehicle through which the North Carolina dis-
trict court below entertained this collateral challenge, the court correctly
identified the "independent action" in equity preserved by Federal Rule
of Civil Procedure 60(b) as the source of its authority. See J.A. 188-93.
See also Morrel v. Nationwide Mut. Fire Ins. Co., 188 F.3d 218 (4th Cir.
1999) (using a Rule 60(b) independent action as the basis for a court’s
review of a judgment in similar circumstances). Because we conclude, as
discussed below, that the Virginia district court possessed jurisdiction,
we do not reach the question of whether the lack thereof would be an
appropriate ground on which to grant relief in a Rule 60(b) independent
action.
          PARTINGTON v. AMERICAN INT’L SPECIALTY LINES INS.              7
2000e(b)). Because the defendant waited until after a jury verdict in
the plaintiff’s favor to assert that it was not an "employer," the out-
come in Arbaugh turned upon whether the employee-numerosity
requirement was a limitation on federal subject matter jurisdiction and
thus an issue that could be raised at that late stage of the proceedings.
Id. at 1241, 1242.

   After acknowledging the lack of clarity in the jurisprudence regard-
ing the distinction between restrictions on federal jurisdiction and the
ingredients of a federal claim, the Court in Arbaugh announced a
"readily administrable bright line" to resolve future confusion. Id. at
1245. The Court held: "when Congress does not rank a statutory limi-
tation on coverage as jurisdictional, courts should treat the restriction
as nonjurisdictional in character." Id. It reasoned that "[i]f the Legisla-
ture clearly states that a threshold limitation on a statute’s scope shall
count as jurisdictional, then courts and litigants will be duly instructed
and will not be left to wrestle with the issue." Id. (footnote omitted).
Noting that the provision of Title VII establishing the fifteen-
employee threshold did not speak in jurisdictional terms, the Court
held that this was not a limitation on jurisdiction, but an element of
a plaintiff’s claim for relief. Id.

    Applying this "bright line" to the present case, we conclude that
Congress did not clearly indicate that the failure of a plaintiff to qual-
ify as a "person purchasing" was a jurisdictional limitation. Rather,
the statute simply provides that the "person purchasing such security
. . . may sue either at law or in equity in any court of competent juris-
diction." 15 U.S.C. 77l. This language, therefore, does not restrict the
federal courts’ power to hear 1933 Act claims to cases brought by
"person[s] purchasing." Cf. Arbaugh, 126 S.Ct. at 1245 n.11 (citing
statutes in which Congress clearly did limit jurisdiction on the basis
of certain factors). As a result, the provision makes the plaintiff’s pur-
chase an ingredient of the claim for relief, but does not curtail the
broad jurisdictional grants that otherwise apply—namely, 28 U.S.C.
1331 (federal question jurisdiction) and 15 U.S.C. 77v (the jurisdic-
tional provision of the 1933 Act).

  Under Arbaugh, therefore, we are satisfied of the Virginia district
court’s jurisdiction throughout the litigation and conclude that the
8         PARTINGTON v. AMERICAN INT’L SPECIALTY LINES INS.
North Carolina district court below erred in dismissing the Appel-
lants’ case on this basis.4

                                    IV.

   Having determined that the Virginia court did not lack subject mat-
ter jurisdiction to enter the default judgment, we turn to the second
basis on which the district court found that the Appellants had failed
to state a claim: the default judgment purported to award damages to
a class that the court later expressly refused to certify. The order of
default judgment provided, "Plaintiff has established that defendant
Charterhouse is liable to plaintiff and the class of similarly situated
persons as defined in the Second Amended Complaint for damages in
the amount of $8,476,979.53." J.A. 28.5

   The Appellants characterize the lack of formal class certification as
a "procedural defect[ ]" that the Insurers have no right to attack this
in collateral litigation. Br. of Appellants 22. They also submit that the
Virginia district court implicitly certified a class action through its
class-wide award of damages. For the reasons discussed herein, we
conclude that the putative class members cannot use the default judg-
ment to establish that they are judgment creditors of Charterhouse.
However, we disagree with the district court and the Insurers that
Partington himself has failed to state a claim.
    4
     The Insurers also argue that because Partington was not a "person
purchasing," he lacked the Article III standing requirements of injury in
fact, causation, and redressability. However, in granting and affirming
summary judgment, and not a jurisdictional dismissal, the courts in the
Virginia litigation correctly treated Partington’s inability to show that he
was the "person purchasing" the securities as a failure to demonstrate an
element of his claim. A plaintiff does not lack Article III standing simply
because he has failed to state a claim. We therefore find this argument
unpersuasive.
   5
     The class definition contained in the Second Amended Complaint
stated that it would consist of "all persons on behalf of whom Charter-
house and its agents negligently purchased viatical settlements as invest-
ment vehicles and ‘Notes’ as investment vehicles, as described herein."
J.A. 209. We will assume in their favor that the plaintiffs other than Part-
ington would be members of this putative class.
          PARTINGTON v. AMERICAN INT’L SPECIALTY LINES INS.           9
                                  A.

   The Appellants premise their ability to sue the Insurers for breach
of their contract with Charterhouse on the Appellants’ status as judg-
ment creditors of Charterhouse. See, e.g., Am. Auto. Ins. Co. v. Ful-
cher, 201 F.2d 751, 757 (4th Cir. 1953) (stating that a judgment
creditor "stands in the same position insured would have acquired if
the insured had paid the judgment . . . and then sued the defendant
[insurer]"). However, the instant complaint’s fourteen named plain-
tiffs (aside from Partington) and the putative class they and Partington
seek to represent do not have an enforceable judgment in their favor.
This conclusion is not an impermissible collateral attack; on its face,
the Virginia default judgment order is insufficient to show that the
Virginia district court had the authority to bind any plaintiff other
than Partington by its decision, for he was the only one who was a
party to the suit.

   Federal courts may only adjudicate the rights of putative class
members upon certification of that class under Federal Rule of Civil
Procedure 23. See Washington v. Finlay, 664 F.2d 913, 928 (4th Cir.
1981) (noting that members of an uncertified putative class are not
bound by, and obtain no legal benefit from, a judgment on the merits).
Certification is contingent upon the trial court’s satisfaction "after a
rigorous analysis, that the prerequisites of Rule 23(a) have been satis-
fied." Gen. Tel. Co. of the Sw. v. Falcon, 457 U.S. 147, 161 (1982).
Accord Davis v. Hutchins, 321 F.3d 641, 649 (7th Cir. 2003); Davis
v. Romney, 490 F.2d 1360, 1366 (3d Cir. 1973); Zepeda v. INS, 753
F.2d 719, 728 (9th Cir. 1984). This analysis is designed to protect
absent class members whose rights could be affected by the certifica-
tion. See Hutchins, 321 F.3d at 649. Compliance with Rule 23 must
be "actual, not presumed." Gen. Tel. Co., 457 U.S. at 160.

  The Appellants do not suggest that the Virginia district court ever
explicitly certified Partington’s class. However, they argue that the
very act of awarding class-wide relief demonstrates that the court
implicitly found the Rule 23 factors satisfied. We disagree.

   As the Appellants correctly note, the Fourth Circuit has never
allowed the rigorous Rule 23 analysis to be accomplished implicitly.
See, e.g., Nance v. Union Carbide Corp., 540 F.2d 718, 724 (4th Cir.
10        PARTINGTON v. AMERICAN INT’L SPECIALTY LINES INS.
1976) (declining to recognize implied class certification on the facts
presented), vacated on other grounds by 431 U.S. 952 (1977). Even
if we were to permit such a practice, we would not do so under the
circumstances presented here.

   The courts that have found a class to be certified even though no
formal certification order was entered have done so only in the con-
text of contested actions where the parties and the court acted at all
times as though a class existed. See, e.g., Doe v. Bush, 261 F.3d 1037,
1049-52 (11th Cir. 2001); Navarro-Ayala v. Hernandez-Colon, 951
F.2d 1325, 1334 (1st Cir. 1991); Senter v. General Motors Corp., 532
F.2d 511, 521-22 (6th Cir. 1976); Bing v. Roadway Express, Inc., 485
F.2d 441, 446 (5th Cir. 1973).

   In addition, the Seventh Circuit—the only circuit to address the
question of implicit certification in the context of a default judgment
—refused to allow it. See Hutchins, 321 F.3d at 649. We agree with
its reasoning that although a default judgment has the effect of deem-
ing all factual allegations in the complaint admitted, it does not also
have the effect of "admitting" the independent legal question of class
certification. See id. at 648-49 ("Rule 23(c) imposes an independent
duty on the district court to determine by order that the requirements
of Rule 23(a) are met regardless of the defendant’s admissions.").

   The default judgment order here is at best ambiguous about
whether the court engaged in a Rule 23 analysis sufficient to certify
the class to which it awarded damages. Where a judgment or order is
ambiguous, "a court ‘must construe its meaning, and in so doing may
resort to the record upon which the judgment was based.’" Colonial
Auto Ctr. v. Tomlin (In re Tomlin), 105 F.3d 933, 940 (4th Cir. 1997)
(quoting Sec. Mut. Cas. Co. v. Century Cas. Co., 621 F.2d 1062, 1066
(10th Cir. 1980)). Upon review of the later judgment entered by the
Virginia district court, that ambiguity must be resolved against the
Appellants’ claims of implicit certification. As the North Carolina dis-
trict court below correctly noted, the Virginia district court decided
to deny Partington’s motion for class certification. Thus, when the
Virginia district court did engage in an analysis of the Rule 23
requirements, it explicitly found them not to be met. See J.A. 166-67.
          PARTINGTON v. AMERICAN INT’L SPECIALTY LINES INS.            11
It is therefore clear that the Virginia district court did not implicitly
engage in this inquiry at the default judgment stage.6

   We therefore conclude that to the extent the North Carolina district
court found that the putative class members failed to state a claim, its
dismissal of their claims should be affirmed.

                                   B.

   Although the Virginia district court had no power to bind the puta-
tive class members, the same cannot be said for Partington himself.
The district court below seemed to assume that because the Virginia
court purported to enter judgment jointly to Partington and the class,
it was unenforceable in its entirety. This is not the case.

   Partington was a party to the original lawsuit and the Virginia court
ordered a default judgment in his favor. Doing so rendered all the fac-
tual allegations in Partington’s complaint established, such that the
court held Charterhouse liable to Partington. That the award to the
class is invalid does not affect the status of Partington’s judgment.
Even on direct review, the courts refusing to award class damages
absent formal certification have not invalidated awards to the individ-
ual plaintiff in the same judgment. See, e.g., Hutchins, 321 F.3d at
649; Romney, 490 F.2d at 1366; Zepeda, 753 F.2d at 727.

   The only potential problem with the order is that the amount of the
default judgment is awarded jointly to Partington and all other mem-
bers of the class, rendering ambiguous the amount intended for Part-
ington individually. We do not believe this is fatal to the viability of
  6
   The Appellants attempt to support their argument for implicit certifi-
cation by contending that the Virginia district court judge would not have
certified the default judgment for enforcement in another court if he did
not believe class-wide relief was appropriate. We find this unpersuasive.
The order granting the Appellants’ motion for a certified copy of the
default judgment is a pro forma, seven-line order that does not directly
comment on the judgment itself. J.A. 78. Whatever inference can be
drawn about the judge’s views on the propriety of class-wide relief from
that order is certainly outweighed by the reasoned opinion denying class
certification for failure to satisfy the Rule 23 requirements.
12        PARTINGTON v. AMERICAN INT’L SPECIALTY LINES INS.
Partington’s claim. To the extent the district court deems it necessary
to separate out Partington’s portion of the $8 million award, as dis-
cussed above, it may look to the record to resolve this ambiguity.7 See
In re Tomlin, 105 F.3d at 940. See also Spearman v. J & S Farms,
Inc., 755 F. Supp. 137, 141 (D.S.C. 1990) (examining the record in
collateral litigation to determine how to allocate an award between
co-plaintiffs).

   We therefore cannot conclude on this basis that Partington has
failed to state a claim.

                                  V.

  For the foregoing reasons, we affirm the district court’s dismissal
with respect to all plaintiffs except Partington. We vacate the dis-
missal of Partington’s individual claim and remand it to the district
court for further proceedings consistent with this opinion.

                                    AFFIRMED IN PART, VACATED
                                       IN PART, AND REMANDED
  7
   Without expressing any opinion on this point, we note that the amount
awarded appears to correspond to lists referenced by and attached to the
Appellants’ complaint allocating amounts to Partington and others. See
J.A. 30-38.