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Media Alerts - NewGen, LLC v. Safe Cig, LLC
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November 1, 2016
  NewGen, LLC v. Safe Cig, LLC
Headline: After plaintiff's complaint failed to properly allege the citizenship of the defendant LLC to invoke diversity jurisdiction and a $1.5 million default judgment entered, the district court properly granted plaintiff leave to amend its complaint to correct the defective jurisdictional allegation and denied defendant's 60(b) motion to set aside the default judgment.

Areas of Law: Federal Civil Procedure: Diversity Jurisdiction

Issues Presented: (1) Whether the district court erred in permitting the plaintiff to amend its original complaint to cure the defective allegations of diversity jurisdiction under 28 U.S.C. § 1653, without reopening the default judgment. (2) Whether Safe Cig challenged the factual basis for diversity jurisdiction, triggering an obligation on the part of NewGen to offer supplemental evidence proving jurisdiction. (3) Whether the district court abused its discretion in the denial of relief from the default judgment.

Brief Summary: The Ninth Circuit panel affirmed the district court's grant of an approximately $1.5 million default judgment against Safe Cig, LLC ("Safe Cig") and in favor of NewGen, LLC ("NewGen") after accepting NewGen's amended allegations of diversity citizenship as true.

The Ninth Circuit panel held that the district court properly allowed NewGen to amend its original complaint pursuant to 28 U.S.C. § 1653 to properly allege diversity jurisdiction under 28 U.S.C. § 1332 after entry of the default judgment, finding that the operative statute, § 1653, applies to both judgments on the merits and default judgments.

Next, the Ninth Circuit panel held that the district court had subject matter jurisdiction, reasoning that Safe Cig's initial appeal and its Fed. R. Civ. P. 60(b) motion raised only facial, not factual, challenges to the district court's subject matter jurisdiction. Because a facial attack that challenges the legal sufficiency of the jurisdictional allegations warrants only leave to amend the allegations of diversity jurisdiction, not wholesale revival of a defaulted defense and an obligation to supplement the record, the panel held that "the amended allegations - which were undoubtedly legally sufficient - resolved the only question ever raised regarding the district court's subject matter jurisdiction."

Finally, after weighing the factors set forth in Eitel v. McCool, 782 F.2d 1470 (9th Cir. 1986), the panel that the district court's decision to enter default judgment was not an abuse of discretion.

Significance: Ninth Circuit panel holds that 28 U.S.C. § 1653 allows a plaintiff to amend its original complaint to cure defective allegations of diversity jurisdiction after default judgment has been entered where the defendant's 60(b) motion and appeal raises only facial challenges to the court's subject matter jurisdiction. Defendant's assertion that it is "without knowledge or information sufficient to form a belief" as to the domiciles of its members does not controvert the complaint's jurisdictional allegations and, therefore, does not impose a burden on the plaintiff to come forward with evidence to prove subject matter jurisdiction.

Extended Summary: NewGen, LLC ("NewGen"), a Wisconsin limited liability company, is an online marketing agency that contracted with the Safe Cig, LLC ("Safe Cig"), a California limited liability company, to promote the sale of Safe Cig's electronic cigarettes. The terms of the relationship were set out in two separate agreements - an Affiliate Agreement and a Consulting Agreement - under which NewGen agreed to attract online customers to Safe Cig's website.

NewGen alleged that Safe Cig breached both agreements by failing to: (1) pay NewGen its lifetime 20% commission on all sales resulting from NewGen's referrals, (2) grant NewGen access to its sales records to verify those commissions, (3) pay NewGen in exchange for not launching a competitor, and (4) pay NewGen for general marketing and business consultant services.

Three days after NewGen filed this complaint, NewGen properly served Safe Cig with process by serving Safe Cig's registered agent, notwithstanding resistance on the agent's part. Safe Cig thereafter failed to respond to the complaint on ground that service of process had been effective.

NewGen filed an application for default judgment, which the district court entered.
On the same day that the default judgment was entered, Safe Cig contacted NewGen and offered a deal: it would not contest service in exchange for a 60-day extension to respond to the complaint. NewGen rejected Safe Cig's offer, and the default judgment was entered. The district court found that service was effective and that it had diversity jurisdiction.

In response to the default judgment, Safe Cig launched a two-pronged attack: (1) Safe Cig appealed to the Ninth Circuit, claiming relief from judgment because the entry of default was an abuse of discretion under Eitel v. McCool, 782 F.2d 1470 (9th Cir. 1986) and (2) Safe Cig filed in the district court a Rule 60(b) motion for relief from the judgment, requesting the district court to declare the default judgment void for lack of subject matter jurisdiction.

Both parties and the district court agreed that the original complaint failed to properly plead diversity jurisdiction. Instead of alleging the citizenship of the members of the limited liability companies, the complaint improperly alleged that NewGen was a Wisconsin limited liability company with its principal place of business in Wisconsin, and that Safe Cig was California limited liability company with its principal place of business in California The district court granted NewGen leave to amend the complaint to cure the defective allegations because: (1) the record established that "none of the members of Safe Cig were domiciliaries of Wisconsin when the case was filed, "and thus, "ecause NewGen and Safe Cig were not citizens of the same state when the case was filed, the [district court] had jurisdiction over the matter;" (2) NewGen did not have affirmative duty to prove diversity with affidavits because Safe Cig had not denied NewGen's factual allegations of diversity; and (3) NewGen "could have met [Safe Cig's] facial challenge simply by amending the jurisdictional allegations of the complaint." Thus, the district court denied the Rule 60(b) motion on condition that NewGen amend its complaint to cure the original, "defective" allegations of jurisdiction pursuant to 28 U.S.C. § 1653.

NewGen thereafter filed its amended complaint properly alleging diverse citizenship. Safe Cig filed an answer challenging the allegations based on Safe Cig's purported lack of knowledge and information about the citizenship of its members. Because the district court found that Safe Cig had not challenged the veracity of NewGen's allegations of citizenship, it likewise found that the answer did not upset "the Court's previous finding that the judgment in this case was not void for want of subject matter jurisdiction."
The Ninth Circuit panel first held that the district court acted within its statutory authority under 28 U.S.C.§ 1653 to permit NewGen to amend its complaint to correct its jurisdictional allegations, interpreting the text of section 1653 to be a "liberal amendment rule" that "permits a party who has not proved, or even alleged, that diversity exists to amend his pleadings even as late as on appeal." Furthermore, the panel interpreted the intent of section 1653 to avoid the needless expenditure of judicial resources where a court can instead "permit the action to be maintained if it is at all possible to determine from the record that jurisdiction does in fact exist."

The panel rejected Safe Cig's assertion that section 1653 applies only to judgments on the merits and not default judgments, finding nothing in the text of section 1653 to not justify exempting default judgments from § 1653.

The panel next considered whether Safe Cig successfully challenged the factual basis of NewGen's complaint alleging diversity jurisdiction thereby triggering an obligation on the part of NewGen to offer supplemental evidence proving jurisdiction. Noting that a "Rule 60(b) motion may encompass a claim that the district court acted in excess of its jurisdiction," the panel reasoned that only upon a factual attack does a plaintiff have an affirmative obligation to support jurisdictional allegations with proof. Letite v. Crane Co., 749 F.3d 1117, 1121 (9th Cir. 2004). Conversely, a facial attack is easily remedied by leave to amend jurisdictional allegations pursuant to § 1653.

The panel rejected Safe Cig's argument that its lack of knowledge about the citizenship of its own members raised a jurisdictional challenge that shifted the burden to Safe Cig to come forward with evidence that jurisdiction was wanting, finding that: (1) at no point did Safe Cig assert that any of its members were citizens of Wisconsin, or argue that NewGen's sole member was not a citizen of Wisconsin; (2) Safe Cig never challenged or questioned any of the factual predicates to diversity jurisdiction: and (3) most importantly, Safe Cig never asked for discovery to clarify the issue.

Accordingly, the panel held that, "because the only real challenge to jurisdiction concerned the sufficiency of the pleadings, the amended allegations - which were undoubtedly legally sufficient - resolved the only question ever raised regarding the district court's subject matter jurisdiction." Satisfied that the district court had subject matter jurisdiction and that the amended complaint corrected any defect in the pleadings, the panel then reviewed whether the district court abused its discretion in denying the defendants request for relief from the default judgment.

Finally, the panel rejected the Safe Cig's contention that the district court abused its discretion in denying Safe Cig's motion to vacate the default judgment. The panel considered the following factors: (1) the possibility of prejudice to the plaintiff, (2) the merits of plaintiff's substantive claim, (3) the sufficiency of the complaint, (4) the sum of money at stake in the action, (5) the possibility of a dispute concerning material facts, (6) whether the default was due to excusable neglect; and (7) the strong policy underlying the Federal Rules of Civil Procedure favoring decisions on the merits. Eitel, 782 F.2d at 1471-72.

In weighing the Eitel factors, the Ninth Circuit panel found that numerous factors weighed in favor of entry of default judgment, such as: (1) Safe Cig's blatant attempt to resist service, despite being properly served; (2) Safe Cig's failure respond to the complaint; (3) Safe Cig's failure to give any "credible, good faith explanation" for its apparent bad faith "intention to take advantage of the opposing party, interfere with judicial decisionmaking, or otherwise manipulate the legal process; (4) Safe Cig's failure to "present specific facts that would constitute a defense" or that would substantially alter the liability at stake; and (5) the fact that Safe Cig's counsel waited until default was entered to finally contact NewGen's attorneys..

Observing that that it was not the appellate court's role to second-guess the district court's weighing of the Eitel factors, the panel held that the district court's decision to enter default judgment was not an abuse of discretion.

To read the full opinion, please visit:

https://cdn.ca9.uscourts.gov/datastore/opinions/2016/09/07/13-56157.pdf

Panel: M. Margaret McKeown and Sandra S. Ikuta, Circuit Judges, and Robert W. Pratt, District Judge.

Argument Date: February 11, 2016

Date of Issued Opinion: September 7, 2016

Docket Number: 13-56157; 14-57015; 13-56225

Decided: Affirmed the district court's grant of default judgment against Safe Cig, LLC and in favor of NewGen, LLC, holding that the district court had subject matter jurisdiction to enter the judgment because both Safe Cig's initial appeal and its Fed. R. Civ. P. 60(b) motion were facial and not factual attacks on the district court's subject matter jurisdiction, and that Safe Cig never called into question the factual predicates to establish diversity jurisdiction, nor did the district court abuse its discretion is denying Safe Cig's request for relief from default judgment.

Case Alert Author: Sean Kurdoglu

Counsel:
Ricardo P. Cestero (argued) and Daniel G. Stone, Greenberg Glusker Fields Claman & Machtinger LLP, Los Angeles, California; for Appellant/Cross-Appellee.

Harry E. Van Camp (argued) and Deborah C. Meiners, DeWitt Ross & Stevens S.C., Madison, Wisconsin, for Appelle/Cross-Appellant.

Author of Opinion: Judge M. Margaret McKeown

Case Alert Supervisor: Professor Glenn Koppel

    Posted By: Glenn Koppel @ 11/01/2016 04:35 PM     9th Circuit  

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