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Trial Court Should Have Given Effect to Federal Pleadings on Remand, and Should Have Allowed Jurisdictional Discovery on Defendants’ Motions to Dismiss for Lack of Personal Jurisdiction
Swarey v. Stephenson
Available at: http://www.mdcourts.gov/opinions/cosa/2015/1272s13.pdf
For more information, contact Paul N. Farquharson at (410) 576-4742.
In Swarey v. Stephenson, No. 1272 (Court of Special Appeals of Maryland, Apr. 1, 2015), Plaintiffs allegedly fell prey to purportedly false asseverations about investment opportunities in undercapitalized shell companies owned and operated by Defendants. Plaintiffs alleged that in searching for secure sources of retirement income in 2008, they were induced by Defendants to invest substantial sums in real estate projects that never developed and companies that were either bankrupt, without assets, or had ceased to exist. Ultimately, the Plaintiffs lost $3.7 million, including their home.
Plaintiffs filed a 21-count Complaint in the Circuit Court for St. Mary’s County, Maryland, alleging, inter alia, fraud, embezzlement, elder abuse, conspiracy to commit fraud, violations of the Consumer Protection Act, and violation of the federal Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. §§ 1961 to 1968. The initial Complaint named a total of nine (9) Defendants; although, this appeal only concerned three (3) of the initial Defendants—the Parriotts and Stephenson. The issues in this case arose from the removal of the case from state court to federal court.
The Parriott Defendants removed the case to federal court. Upon removal, they filed separate motions to dismiss for lack of personal jurisdiction, and Defendant Stephenson filed an Answer to the Complaint. The federal court dismissed the RICO claim and remanded the remaining state law claims back to the circuit court.
The appeal in this case concerned three (3) orders of the state circuit court dismissing the Complaints against the Defendants for lack of personal jurisdiction and for insufficiency of service of process as to Defendant Stephenson.
As to sufficiency of service on Defendant Stephenson, and after the case was remanded back to state court, Defendant Stephenson argued that, although he was served with a federal summons, he was never served with state court process; he never filed an Answer in state court (although, he did file an Answer in federal court); and because the Supreme Court has left it to the states to decide what effect to give federal pleadings on remand, and because Maryland courts had yet to address this issue specifically, the circuit court should decline to exercise jurisdiction predicated on federal service on him. The circuit court agreed, and found that it was not required to accept the federal pleadings on remand. The appellate court disagreed, and determined that Defendant Stephenson was properly served with a federal summons and answered the Complaint, including all state law claims. Defendant therefore waived the defense of insufficiency of service of process and was barred from raising it for the first time upon remand to the circuit court. The Court’s holding in this regard was a matter of first impression in Maryland, and something that had seldom been addressed in other jurisdictions; although, the Court noted that other courts presented with the issue of pleadings filed in federal court prior to a remand to state court have routinely given full effect to the pleadings filed in federal court prior to remand. To the appellate court, service under the federal rules, with a federal summons, of the very same complaint that was filed in state court prior to removal, satisfied the requirement of due process. Requiring re-service of a state summons and the Complaint upon the Defendant upon remand, would unnecessarily favor form over substance, where there was no readily discernible prejudice to the Defendant. Therefore, the Court held that service of the federal court summons and complaint filed in state court prior to removal was sufficient to bring Defendant Stephenson properly before the state trial court on remand. Further, Defendant waived the right to assert the insufficient service defense because he did not raise it in his federal court Answer, which responded to all state law and federal law claims. Under the Maryland Rules, insufficiency of service of process must be raised through preliminary motion prior to the defendant’s Answer, and under the Federal Rules, it must be raised as part of the Answer. Defendant waived the defense of insufficient service of process by not raising it either prior to, or in, his Answer to the Complaint in federal court. Therefore, the circuit court erred by granting Defendant’s motion to dismiss on insufficient service of process grounds.
The circuit court further abused its discretion by failing to give Plaintiffs an opportunity to obtain responses to their jurisdictional discovery requests which were specifically aimed at determining the quantity and quality of Defendants’ contacts for the purpose of Maryland long-arm jurisdiction, prior to granting Defendants’ motions to dismiss for lack of personal jurisdiction. The Plaintiffs had made a prima facie jurisdictional showing, which warranted jurisdictional discovery, via production of evidence tending to establish the following: 1) the Defendants maintained long-term business relationships with Maryland residents and entities; (2) Defendants’ solicitations resulted in the Plaintiffs sending approximately $3,700,000.00 to the out-of-state Defendants via checks and wire transfers; (3) Defendants regularly communicated with the Plaintiffs in Maryland by mail, e-mail, and telephone; (4) Defendants sent emails to parties in Maryland soliciting investment business; and (5) Defendant Stephenson sent joint venture agreements to the Plaintiffs to be executed in Maryland. The appellate record also provided “glimpses” of other material that may have been available to the circuit court had discovery been conducted prior to the court’s ruling. The circuit court should have allowed discovery on the factual, jurisdictional issues raised, prior to ruling on the motion to dismiss for lack of personal jurisdiction. Failing to allow same was an abuse of discretion.
Accordingly, the appellate court reversed the judgments of the circuit court and remanded the case back to the circuit court for further proceedings.
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