NEW WELLINGTON FINANCIAL CORPORATION v. FLAGSHIP RESORT DEVELOPMENT CORPORATION FIRST FLAGSHIP FINANCIAL SERVICES CORPORATION, — AND ATLANTIC PALACE DEVELOPMENT, L.L.C.

Citations: 416 F.3d 290; 2005 U.S. App. LEXIS 14814Docket: 04-2216

Court: Court of Appeals for the First Circuit; July 21, 2005; Federal Appellate Court

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The United States Court of Appeals for the Fourth Circuit affirmed the district court's decision to decline personal jurisdiction over out-of-state defendants Flagship Resort Development Corp., First Flagship Financial Services Corp., and Atlantic Palace Development, L.L.C. Wellington Financial Corporation alleged that these entities violated their agency agreement by claiming Wellington took undisclosed payments from lenders. The dispute arose after Flagship and Atlantic Palace sent letters terminating their relationship with Wellington and sought cooperation from lenders to investigate the alleged payments. Wellington filed a complaint for a declaratory judgment asserting no agency relationship existed and that it owed no money to the defendants. The court determined that personal jurisdiction was not established, as the case was parallel to a state-court matter and the district court acted within its discretion to abstain from hearing the case. The judges involved included Circuit Judges Motz and Gregory, and Senior Circuit Judge Hamilton, with Judge Gregory authoring the opinion.

Flagship and Atlantic Palace filed a lawsuit against Wellington, Finova, and two Wellington officers in New Jersey, alleging fraud, commercial bribery, racketeering, breach of contract, breach of the implied covenant of good faith, and breach of fiduciary duty, with both parties acknowledging that the underlying conduct is the same in both cases. On April 30, 2004, Flagship moved to dismiss the Virginia case, citing the parallel New Jersey suit and lack of personal jurisdiction. Wellington initially argued that personal jurisdiction was established only under a specific subsection of Virginia's long-arm statute but later contended both relevant subsections. However, Wellington submitted a supplemental memorandum supporting its argument under one subsection only after the deadline and oral arguments had occurred, which it admitted was untimely.

Wellington also acknowledged it had released the claim for tortious interference regarding a contract with Liberty due to a settlement and claimed it would amend its complaint to include a claim of tortious interference concerning Finova. Despite being aware of possible tortious interference for at least three months, Wellington did not motion to amend its complaint. On August 19, 2004, the district court dismissed the case, stating that since Wellington had withdrawn its claim against Flagship for tortious interference and failed to seek amendments for the Finova claim, the remaining claim was merely for declaratory relief. The court determined that personal jurisdiction was lacking as no claim of tortious injury remained, and even if jurisdiction were established, it would decline to hear the case due to the ongoing New Jersey litigation. The case is now under appeal, focusing on the existence of personal jurisdiction over Flagship, with the legal question reviewed de novo and factual conclusions for clear error.

When a defendant files a motion to dismiss for lack of personal jurisdiction, the plaintiff must prove the existence of jurisdiction by a preponderance of the evidence to the district court. If the court evaluates the motion based solely on written submissions and the complaint's allegations, the plaintiff only needs to demonstrate a prima facie case for jurisdiction. In such instances, courts must interpret the allegations favorably for the plaintiff, assuming their credibility and drawing beneficial inferences.

Federal courts, following state law, first assess if Virginia law allows for jurisdiction over the defendant. If permissible, they then determine if exercising such jurisdiction aligns with the Due Process Clause of the Fourteenth Amendment. Virginia's long-arm statute permits personal jurisdiction for individuals who conduct business or cause tortious injury within the state under specified conditions.

In this case, only specific jurisdiction is asserted, which requires a three-part evaluation: the defendant's purposeful engagement in state activities, the connection of the plaintiffs' claims to those activities, and the constitutional reasonableness of exercising jurisdiction. Wellington attempted to establish specific jurisdiction under two subsections of Virginia’s long-arm statute; however, its argument for subsection 1 was improperly introduced at oral argument and later submitted in an untimely supplemental memorandum, which the court deemed inappropriate.

Furthermore, the district court found that Wellington had effectively released its tortious interference claim due to settlement discussions and was not entitled to reinterpret its complaint or previously submitted declarations to assert a new claim after a significant delay without seeking to amend the complaint.

Wellington argues that its declaratory judgment action is grounded in a tortious injury, specifically alleging that Flagship's correspondence with Finova disparages Wellington's business. Despite the brevity of this claim, it can be interpreted as potentially constituting defamation, allowing the declaratory judgment claim to meet the requirements of Virginia law under subsection 4. The district court has discretion in deciding whether to entertain declaratory judgment actions, especially when a parallel state court proceeding exists. Federal courts are not mandated to exercise jurisdiction over such actions, and the decision is reviewed for an abuse of discretion. Factors influencing this discretion include the state’s interest in resolving the issues, efficiency of state court resolutions, potential entanglement of state and federal issues, and the possibility of forum-shopping. The court concluded that the district court did not abuse its discretion in declining jurisdiction based on these considerations.

New Jersey has a significant interest in resolving the disputes stemming from lawsuits involving New Jersey companies, as the conduct relates to loans for New Jersey property and involves state law claims, including complex issues of commercial bribery and New Jersey RICO. The federal court should refrain from intervening in these matters unless there is a strong federal interest, as emphasized in Mitcheson v. Harris. 

Additionally, the New Jersey state court can address the issues more efficiently, particularly since other parties involved in the New Jersey case could not be joined in the federal case without jeopardizing subject-matter jurisdiction. Wellington's actions demonstrate that Atlantic Palace is considered a proper party in the New Jersey suit, and its inclusion could disrupt diversity jurisdiction in the federal action. 

The presence of additional parties and issues in the state case makes it more appropriate for resolution in New Jersey, avoiding fragmented and inefficient adjudication. The district court's decision to decline jurisdiction for the declaratory judgment action, based on principles of federalism, comity, and efficiency, is affirmed.

Flagship is incorporated in New Jersey and Florida, while Atlantic Palace's citizenship remains unclear due to its limited involvement in the case. Jurisdiction in Virginia can be established if a person causes tortious injury in the Commonwealth through actions outside it, provided they regularly conduct business there, or derive substantial revenue from goods or services in the Commonwealth (Va. Code Ann. 8.01-328.1(A)(4)). Additionally, jurisdiction can arise from transacting business within the Commonwealth (Va. Code Ann. 8.01-328.1(A)(1)). The declaration indicates that FINOVA renegotiated loan agreements with the defendants and Atlantic Palace, allowing for loan prepayment and reduced fees to Wellington. However, a preliminary finding of personal jurisdiction does not conclusively establish it; the plaintiff must prove jurisdiction by a preponderance of the evidence at trial or a pretrial hearing (Production Group Int'l v. Goldman). Non-resident defendants may meet due process standards without fulfilling Virginia's long-arm statute specifics, but claims must fall under the asserted provision of the statute (Bochan v. LaFontaine; Blue Ridge Bank v. Veribanc, Inc.). A late-filed supplemental memorandum by the plaintiff was not considered by the district court, reinforcing that timely responses are critical (O.V. Foy v. Norfolk & Western R. Co.). Wellington expressed intent to amend its claim to include tortious interference with another bank, but did not formally file a motion to amend, leading the district court to deny the proposed amendment due to lack of proper procedure. Wellington argued that mere delay shouldn't bar amendment, but without a valid motion, this argument was insufficient; improperly filed briefs are disregarded by the court.

Wellington has maintained its defamation argument throughout the proceedings, initially presenting it in response to the motion to dismiss and reiterating it during oral arguments. Wellington claims that Flagship sent derogatory letters about it from New Jersey, constituting business defamation and interference with business relations. Although Wellington did not list business defamation as a separate count in its original and amended claims, it asserted that the allegation is included. Under Virginia law, statements that harm a person's profession or trade can be considered defamatory per se, and such statements can be implied rather than stated directly. Additionally, Wellington's counsel acknowledged an error in claiming that Atlantic Palace would destroy diversity in the case; he argued that Atlantic Palace is actually diverse and should be re-joined to the suit. The court emphasized that attorney representations have consequences and clarified that the filing of this action does not constitute mere procedural fencing.