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Article United States: Appeals Court Rules District Court Cannot Exercise Personal Jurisdiction over German Defendant Who Received Funds Allegedly Obtained Through an Illegal Scheme

On February 9, 2024, the United States Court of Appeals for the First Circuit reversed the United States District Court for the District of Massachusetts’ decision to enter a judgment against German citizen and resident Raimund Gastauer. (Securities and Exchange Commission v. Gastauer, No. 22-1865 (1st Cir. 2024).) The circuit court held that the District Court improperly exercised jurisdiction over Gastauer.

Background to the Case

The Securities and Exchange Commission (SEC) filed a complaint against Michael Gastauer, alleging that he transferred approximately $3.3 million in proceeds from illegal schemes to his father, Raimund Gastauer (Gastauer), or transferred the money to accounts held for his father’s benefit. The SEC did not allege that Gastauer knew that the funds were obtained illegally but claimed that he was a “relief defendant” (or a defendant who, while not accused of violating securities laws, is in possession of funds passed to them by a violator) and petitioned the court for an order of disgorgement under 15 U.S.C. § 78u(d)(5). Gastauer filed a motion to dismiss for lack of personal jurisdiction because he is a citizen and resident of Germany who has been to the United States only five times and lacked any business or other contacts with the United States, and because the SEC did not allege that he was involved in his son’s fraudulent activities. When the District Court denied the motion, relying on two nonbinding cases, Gastauer filed an answer again asserting that the court lacked personal jurisdiction. The SEC then moved for summary judgment against Gastauer, claiming that the evidence established that he received $3.3 million from his son. Gastauer opposed the motion by asserting that he had not “received any of his son’s ill-gotten gains.” The District Court denied the motion in part, holding that Gastauer could not contest his liability as to the first $500,000, but there were factual disputes as to the other $2.8 million. The District Court allowed the SEC to take an additional deposition of Gastauer, who refused to sit for it, arguing again that the court lacked personal jurisdiction. The SEC filed a motion, which the District Court granted, for sanctions under Federal Rule of Civil Procedure 37(d) for failure to comply with discovery obligations. The District Court asserted that it had “imputed” personal jurisdiction over Gastauer because jurisdiction over the “defendant-in-interest,” Michael, had been established. In granting the summary judgment motion, the District Court held Gastauer liable for $3,315,305 in disgorgement, plus interest. (Securities and Exchange Commission at 3–6.) Gauster appealed.

Waiver of Personal Jurisdiction Defense

The SEC argued on appeal that Gastauer waived his personal jurisdiction defense when he opposed the motion for summary judgment without repeating his personal jurisdiction arguments. (Securities and Exchange Commission at 6.) A defendant must raise the personal jurisdiction defense in the first defensive move, and Gastuaer did so by filing a motion to dismiss for lack of personal jurisdiction and reasserting the defense in his answer to the SEC’s complaint. (Securities and Exchange Commission at 6–7.) The SEC argued that the defense was forfeited when Gastauer defended the case on substantive grounds; however, the circuit court held that “once the issue of [personal jurisdiction] is litigated to resolution in the district court, a defendant’s pivot to defending on the merits by itself is an insufficient basis for inferring abandonment.” (Securities and Exchange Commission at 7 (citing Shatsky v. Palestine Liberation Org., 955 F.3d 1016, 1032 (D.C. Cir. 2020)).) The SEC also argued that Gastauer had waived the defense because he did not raise the defense again for three years, but the circuit court rejected this argument, finding that Gastauer had fully litigated the issue and reasserted it to justify his refusal to be deposed, so there was no reason he would be required to continue asserting the defense “absent new law, new facts, or other cause.” (Securities and Exchange Commission at 9.) The SEC further claimed that Gastauer had waived the personal jurisdiction defense through his discovery behavior that led to the Rule 37 sanction, but the circuit court concluded that the sanction had nothing to do with Gastauer’s jurisdictional defense. (Securities and Exchange Commission at 10.) The SEC’s final argument was that Gastauer had failed to file an interlocutory appeal, but the circuit court rejected this argument, noting that the circuit generally does not grant interlocutory appeals from the denial of a motion to dismiss; therefore, there was no reason to expect Gastauer to file an interlocutory appeal in this case. (Securities and Exchange Commission at 11.)

Establishing Personal Jurisdiction over the Defendant

Because the circuit court held that Gastauer did not waive the personal jurisdiction defense, it reviewed whether the District Court erred in finding that it had personal jurisdiction over him. Under the Fifth Amendment Due Process Clause, a court can exercise jurisdiction over an out-of-forum defendant only if they have “such ‘contacts’ with the forum [] that the ‘maintenance of the suit’ is ‘reasonable, in the context of our federal system of government’” and “‘does not offend traditional notions of fair play and substantial justice.’” (Securities and Exchange Commission at 12 (citing Ford Motor Co. v. Mont. Eighth Jud. Dist. Ct., 141 S. Ct. 1017, 1024 (2021) (quoting Int’l Shoe Co. v. Washington, 326 U.S. 310, 316-317 (1945)).) For out-of-forum defendants, courts have recognized general jurisdiction, where a party has “continuous and systematic contacts with the forum,” and specific jurisdiction, where there is “an affiliation between the forum and the underlying controversy.” (Securities and Exchange Commission at 13 (citing Bluetarp Fin., Inc. v. Matrix Constr. Co., 709 F.3d 72, 79 (1st Cir. 2013), Bristol-Myers Squibb Co. v. Superior Ct. of Cal., 582 U.S. 255, 262 (2017).) The SEC did not allege that Gastauer had any contacts with the United States, but it argued that the circuit court should “impute” Michael’s contacts to Gastauer because the court could establish personal jurisdiction over Michael as the defendant-in-interest. (Securities and Exchange Commission at 14–15.) The SEC argued that the circuit previously allowed imputation of jurisdictional contacts. (Securities and Exchange Commission at 17 (citing Rogriguez-Miranda v. Benin, 829 F.3d 29, 41 (1st Cir. 2016)).) However, the circuit court distinguished the decision in Rodriguez-Mirenda from the circumstances in Gastauer’s case, noting that Rodriguez-Miranda arose under Federal Rule of Civil Procedure 25(c), which allows for transfer or joinder when a party to the lawsuit transfers an interest during the pendency of the suit or after judgment. (Securities and Exchange Commission at 17.) The court also noted that in Rodriguez-Miranda, the parties were successors in interest to and alter egos of the original defendants, but in the instant case, the SEC did not demonstrate that Gastauer had a similar relationship with the defendant-in-interest or that he was even aware of his son’s illegal activity. (Securities and Exchange Commission at 18.) Having found that Gastauer had insufficient contacts with the jurisdiction and that there was no evidence to support imputation of his son’s contacts to him, the circuit court held that it would violate Gastauer’s due process rights for the court to exercise personal jurisdiction over him. (Securities and Exchange Commission at 23–24.) Accordingly, the circuit court reversed the District Court’s decision to exercise personal jurisdiction over Gastauer and remanded the case. (Securities and Exchange Commission at 24.)

Sarah Friedman, Law Library of Congress
March 19, 2024

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Chicago citation style:

Friedman, Sarah. United States: Appeals Court Rules District Court Cannot Exercise Personal Jurisdiction over German Defendant Who Received Funds Allegedly Obtained Through an Illegal Scheme. 2024. Web Page. https://www.loc.gov/item/global-legal-monitor/2024-03-18/united-states-appeals-court-rules-district-court-cannot-exercise-personal-jurisdiction-over-german-defendant-who-received-funds-allegedly-obtained-through-an-illegal-scheme/.

APA citation style:

Friedman, S. (2024) United States: Appeals Court Rules District Court Cannot Exercise Personal Jurisdiction over German Defendant Who Received Funds Allegedly Obtained Through an Illegal Scheme. [Web Page] Retrieved from the Library of Congress, https://www.loc.gov/item/global-legal-monitor/2024-03-18/united-states-appeals-court-rules-district-court-cannot-exercise-personal-jurisdiction-over-german-defendant-who-received-funds-allegedly-obtained-through-an-illegal-scheme/.

MLA citation style:

Friedman, Sarah. United States: Appeals Court Rules District Court Cannot Exercise Personal Jurisdiction over German Defendant Who Received Funds Allegedly Obtained Through an Illegal Scheme. 2024. Web Page. Retrieved from the Library of Congress, <www.loc.gov/item/global-legal-monitor/2024-03-18/united-states-appeals-court-rules-district-court-cannot-exercise-personal-jurisdiction-over-german-defendant-who-received-funds-allegedly-obtained-through-an-illegal-scheme/>.