Spectacor Mgt Grp v. Brown ( 1997 )

Opinions of the United
1997 Decisions States Court of Appeals
for the Third Circuit
11-24-1997
Spectacor Mgt Grp v. Brown
Precedential or Non-Precedential:
Docket
96-1969
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Filed November 24, 1997
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 96-1969
SPECTACOR MANAGEMENT GROUP
v.
MATTHEW G. BROWN,
Appellant.
Appeal from the United States District Court
for the Eastern District of Pennsylvania
(D.C. Civil No. 93-5246)
Argued
June 24, 1997
Before: GREENBERG, McKEE, Circuit Judges, and
WELLFORD,* Senior Circuit Judge
(Filed November 24, 1997)
GARY GREEN, ESQ. (Argued)
Sidkoff, Pincus & Green
1101 Market Street
Suite 2700
Philadelphia, PA 19107
Attorney for Appellant
_________________________________________________________________
*The Honorable Harry W. Wellford of the United States Court of Appeals
of the Sixth Circuit, sitting by designation.
IRA B. SILVERSTEIN, ESQ. (Argued)
Fox, Rothschild, O'Brien &
Frankel
2000 Market Street
Philadelphia, PA 19103
Attorney for Appellee
OPINION OF THE COURT
McKEE, Circuit Judge.
Spectacor Management Group ("Spectacor") initiated this
diversity action as a result of a disagreement with a former
senior level executive over severance pay and benefits. The
defendant counterclaimed, alleging that Spectacor had
breached an oral contract with him and owed him money
as a result. Following a bench trial, the district court
entered judgment for the defendant but in an amount that
was substantially less than the amount of his counterclaim.
The defendant appeals. We will affirm the judgment of the
district court without further comment, as it is based upon
that court's assessment of the evidence, and find no clear
error.1 However, the jurisdictional issues raised by this
appeal require us to discuss the district court's exercise of
subject matter jurisdiction. Accordingly, we will discuss
whether the amount in controversy requirement of 28
U.S.C.A. S 1332(a) has been satisfied.
I.
Spectacor, a Pennsylvania joint venture engaged in the
business of managing public assembly facilities, such as
stadiums, arenas, and convention centers, brought this
diversity action in an attempt to recoup severance benefits
paid to defendant Matthew Brown, a New Jersey citizen,
following his termination as Executive Vice-President of
Spectacor. Spectacor's complaint alleged that it paid Brown
$42,500 in benefits and $4,921.04 for medical insurance.
The resulting total ($47,421.04) was, therefore, less than
_________________________________________________________________
1. See Anderson v. Bessemer City, 470 U.S. 564 (1985).
2
the $50,000 minimum required for diversity jurisdiction
when the suit was filed. Spectacor, however, also alleged
that it was entitled to recoup an additional $3,287.21 it
had paid in payroll taxes. This additional sum brought the
amount that Spectacor claimed to $50,708.25 exclusive of
costs and interest.
Brown argues that Spectacor included the amount of the
payroll taxes as a "sham" to manufacture federal
jurisdiction in a preemptive attempt to prevent him from
suing Spectacor in state court. Brown further argues that
Spectacor conceded that even Spectacor's claim to recover
benefits from Brown was a "sham" because Spectacor
stipulated in the district court that it owed him $50,000 in
benefits plus $15,692 in vacation pay. See Appellant's Br.
at 5. Spectacor maintained that it retained the money that
it owed Brown as a set off against payments it had made to
Brown that he was obligated to repay. Thus, Brown's
response to the suit was twofold. He claimed that Spectacor
manipulated the payroll tax claim as a contrivance to
manufacture the amount in controversy needed for diversity
jurisdiction and that Spectacor owed him more than he
owed it. However, rather than filing a motion to dismiss
Spectacor's complaint for lack of jurisdiction in the district
court under Fed. R. Civ. P. 12(b)(1), Brown filed an answer
in which he denied jurisdiction, and counterclaimed against
Spectacor for the amount Spectacor allegedly owed him for
severance pay ($135,000), sales commissions ($837,000),
an earned bonus ($70,720), unused vacation days and
unreimbursed business expenses ($17,550).
Spectacor argues that it included payroll taxes in good
faith and the jurisdictional amount therefore appears on
the face of the complaint. Spectacor maintains that, in any
event, Brown's counterclaim can be considered in
calculating the amount in controversy. That counterclaim
easily surpasses the $50,000 threshold needed for diversity
jurisdiction. Brown counters by arguing that Spectacor's
allegation of damages in the amount of $50,708.25 fails to
satisfy the jurisdictional amount as the claim was not made
in good faith and that his counterclaim cannot be
considered in calculating the amount in controversy.
3
We hold that where, as here, a defendant elects not to file
a motion to dismiss for lack of jurisdiction, but answers a
complaint by asserting a compulsory counterclaim, 2 the
amount of that counterclaim may be considered by the
court in determining if the amount in controversy exceeds
the statutory requirement for diversity jurisdiction.
Accordingly, since the amount in controversy easily clears
the jurisdictional hurdle when Brown's counterclaims are
included, we need not reach the novel and interesting issue
of whether the payroll taxes can be considered in
calculating the amount in controversy.
II.
Federal courts have diversity jurisdiction where there is
complete diversity among the parties, and the amount in
controversy meets the jurisdictional minimum. See 28
U.S.C. S 1332(a). At the time this case wasfiled that
amount was $50,000.3 As a general rule, that amount is
determined from the good faith allegations appearing on the
face of the complaint. See St. Paul Mercury Indemnity Co. v.
Red Cab Co., 303 U.S. 283, 288 (1938). A complaint will be
deemed to satisfy the required amount in controversy
unless the defendant can show to a legal certainty that the
plaintiff cannot recover that amount. Id. at 289.
In a cause instituted in the federal court the plaintiff
chooses his forum. He knows or should know whether
his claim is within the statutory requirement as to
amount. His good faith in choosing the federal forum is
open to challenge not only by resort to the face of his
complaint, but by the facts disclosed at trial, and if
from either source it is clear that his claim never could
have amounted to the sum necessary to give
jurisdiction there is no injustice in dismissing the suit.
Red Cab, 303 U.S. at 290. As noted above, Brown
challenged the district court's jurisdiction by way of an
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2. We note that this case only presents the question of whether
compulsory counterclaims can be considered. Our holding does not
extend to permissive counterclaims.
3. That amount has since been increased to $75,000.
4
averment in his answer. At P 16 of his answer, under the
section of the answer captioned "DEFENSES", Brown
states: "[t]he Court lacks jurisdiction over the subject
matter in that the amount in controversy does not exceed
$50,000.00." See app. at 16. Under Rule 12 of the Federal
Rules of Civil Procedure, Brown could have filed a motion
to dismiss for lack of jurisdiction and not filed an answer
unless that motion was denied.
Every defense, in law or fact, to a claim for relief in any
pleading . . . shall be asserted in the responsive
pleading thereto if one is required except that the
following defenses may at the option of the pleader be
made by motion: (1) lack of jurisdiction over the
subject matter . . ."
Fed. R. Civ. P. 12(b) (emphasis added). Brown elected not to
exercise that option. Instead, he asserted a counterclaim
against Spectacor based upon the same transactions that
gave rise to Spectacor's suit against him.
Federal Rule of Civil Procedure 13 provides in part as
follows:
A pleading shall state as a counterclaim any claim
which at the time of serving the pleading the pleader
has against any opposing party, if it arises out of the
transaction or occurrence that is the subject matter of
the opposing party's claim and does not require for its
adjudication the presence of third parties of whom the
court cannot acquire jurisdiction . . . .
Fed. R. Civ. P. 13. Brown's claim against Spectacor is a
compulsory counterclaim within the scope of this Rule.
Where the circumstances surrounding a plaintiff 's claim
require a defendant to assert a counterclaim under Rule
13(a), defendant's claim is part of the controversy set forth
in the plaintiff 's complaint. The complaint initiates the
legal action, but it is not the totality of the controversy. It
is merely the portion of the controversy for which plaintiff
seeks relief. However, the substance of the controversy
extends to any compulsory counterclaim brought under
Rule 13(a).4
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4. The same is not true of counterclaims brought under Rule 13(b) as
"permissive counterclaims" are simply "any claim against an opposing
5
[I]f the jurisdictional amount requirement serves any
salutary function it is to measure the substantiality of
the claim. We believe that the substantiality of the
claim can best be gauged by reference to what is
actually at stake in the litigation rather than by strict
reference to plaintiff's claim for relief.
1A James Wm. Moore et al., Moore's Federal Practice,
P 0.167[8] (2d ed. 1991).
The allegations of the instant suit demonstrate the
wisdom of that approach. Spectacor alleges that it
continued to pay Brown his salary and medical insurance
after he was terminated "as an advance against the overall
settlement then being negotiated." It maintains that such
payments were a "demonstration of good faith and subject
to reimbursement if agreement was not reached on all
issues" regarding the termination of his employment. (See
app. at 10; Compl. P 10.). Its suit is an attempt to recover
those funds pursuant to the alleged agreement as
settlement of the dispute was apparently never negotiated.
Brown, on the other hand, asserts that Spectacor breached
a contract in which it agreed to pay him certain amounts in
the event that his employment was terminated, and that he
was entitled to certain other payments by virtue of his
performance while still employed at Spectacor. He
specifically alleges that "[Spectacor] has breached the
Employment Contract by not paying Brown sums
[Spectacor] promised to pay upon his termination," (See
app. at 18; Answer P 36), and "[Spectacor] has stopped
Brown's medical insurance coverage, and it therefore owes
him a yet to be liquidated sum for its replacement." (See
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party not arising out of the . . . occurrence that is the subject matter
of
the opposing party's claim." Fed. R. Civ. P. 13(b). Thus, by definition,
permissive counterclaims are not usually part of the controversy brought
into court by plaintiff 's complaint.
However, we do not today decide whether a permissive counterclaim
could ever bear such a nexus to a plaintiff's claim as to allow a court to
consider it in determining if the amount in controversy exceeded the
jurisdictional amount. Resolution of that question must await a more
appropriate case.
6
app. at 19; Answer P 37; see also app. at 19-20; Answer
PP 38-43).
Other courts have held that a compulsory counterclaim
can satisfy the jurisdictional amount even where the
defendant has not objected to jurisdiction. See Fenton v.
Freedman, 748 F.2d 1358 (9th Cir. 1984) (considered
counterclaim where defendant had not objected to
jurisdiction prior to filing compulsory counterclaims);
Roberts Mining & Milling Co. v. Schrader, 95 F.2d 522 (9th
Cir. 1938) (considered counterclaim where defendant did
not object to jurisdiction, but instead filed counterclaim in
an amount adequate to support jurisdiction);5 Motorists
Mutual Ins. Co. v. Simpson, 404 F.2d 511 (7th Cir. 1968)
(holding that compulsory counterclaim was not to be
considered where defendant objected to jurisdiction before
filing a counterclaim, but noting that if no objection had
been made, consideration of compulsory counterclaim was
permissible).6
_________________________________________________________________
5. We note that the Roberts Mining court did not explicitly hold that the
counterclaim was compulsory. However, the initial claim by the plaintiff
was to quiet title to six mines while the counterclaim asserted that the
mines were owned by the defendant. Such a counterclaim would be
considered compulsory under the modern Rule 13(a). The claim was also
compulsory under the procedural rules that prevailed at the time. While
the decision was handed down in 1938, the year that the federal courts
of equity and law were unified into the modern system governed by the
Federal Rules of Civil Procedure, the suit was filed prior to such
unification and thus was one brought "in equity." 95 F.2d at 522. Such
actions were governed by procedural rules that, unlike the rules
governing actions at law, recognized compulsory counterclaims. See
Equity Rule 30 (" ``The answer must state in short and simple form any
counterclaim arising out of the transaction which is the subject-matter
of the suit ...."). American Mills Co. v. American Surety Co., 260 U.S.
360,
365 (1922) (noting that it is imperative to limit the preclusive effect of
counterclaims to those which are equitable, as opposed to legal in
nature); Michael D. Conway, Narrowing of the Scope of Rule 13(a), 60 U.
Chi. L. Rev. 141, 154 (1993) ("Prior to 1938, there was no rule requiring
the pleading of compulsory counterclaims at law.")(citing American Mills,
supra).
6. Spectacor also points to National Union Fire Ins. Co. of Pittsburgh v.
Russell, 972 F.2d 628 (5th Cir. 1992), which held that where an insurer
challenges an award under the Texas Worker's Compensation Act in
7
Prior to the 1938 unification of the law and equity courts
and the adoption of the Federal Rules of Civil Procedure,
this court held that a counterclaim of sufficient value could
bring a case within the jurisdiction of the court regardless
of the amount of plaintiff's claim. See Home Life Ins. Co. v.
Sipp, 11 F.2d 474, 476 (3d Cir. 1926).
In Home Life, Sipp was the beneficiary of a life insurance
policy that the defendant insurance company had issued on
her mother's life. Following her mother's death, Sipp sued
to recover the amount of the policy ($3,000) plus interest
and costs. At the time, a claim had to exceed $3,000
exclusive of interest and costs to satisfy the amount
required for diversity jurisdiction. The insurance company
filed a counterclaim for a loan on the policy that remained
outstanding in the amount of $423. Sipp subsequently
attempted to amend her claim to include premiums that
were paid for the period following her mother's death.
However, the court ruled that the amount of "unearned
premiums" could not be included as "the premium is
earned the instant the risk attaches and is not returnable
thereafter." Id. at 475. Moreover, even if the premium could
be recovered, that amount would go to the estate of the
deceased, and not to the plaintiff beneficiary. Thus, the
amount of the premium could not count toward the
jurisdictional minimum. Moreover, the amount of the
counterclaim could not be added to the $3,000 claim to
satisfy jurisdiction because the counterclaim was in the
nature of a set-off to be subtracted from, not added to, any
recovery. Accordingly, the counterclaim served only to
reduce the amount in controversy. However, in deciding the
case we stated:
when the jurisdictional amount is in question, the
tendering of a counterclaim in an amount which in
itself, or added to the amount claimed in the petition,
_________________________________________________________________
federal court, the defendant's counterclaim could be considered for
purposes of the jurisdictional amount. However, that case relies
specifically on Horton v. Liberty Mut. Ins. Co., 367 U.S. 348 (1961),
which
dealt with the Texas Worker's Compensation Act and which, as
discussed below, we do not rely upon here. See n.9 infra.
8
makes up a sum equal to the amount necessary to the
jurisdiction of this court, jurisdiction is established,
whatever may be the state of the plaintiff's complaint.
Id.Brown suggests that Home Life held that a counterclaim
did not suffice to give a court jurisdiction where the
plaintiff 's initial claim could not. See Appellant's Sup. Br.
at 6. He points out that we also stated: "[a] party . . .
cannot by filing a counterclaim give jurisdiction to a court
when a statute denies it jurisdiction. In other words, a
defendant's consent to the court's jurisdiction as to
amount, signified by the filing of the counterclaim cannot
confer jurisdiction." Home Life, 11 F.2d at 476. However,
that portion of the opinion merely rejects plaintiff 's
argument that defendant should be estopped from
challenging jurisdiction once he or she pleads a
counterclaim. It does not address the issue of whether the
amount of the counterclaim is included in the amount in
controversy for jurisdictional purposes.
We concluded that the jurisdictional prerequisites were
not satisfied in Home Life, because the counterclaim
reduced the amount that the "defendant admits it owes"
and was not an independent claim for recovery.
Accordingly, we stated "[a]t no time and under no
arrangement of the figures [had] the amount in controversy
exceeded $3,000." Id. Although cases of such ancient
vintage do not always guide subsequent inquiries with
precision (especially in view of the evolving nature of federal
jurisdiction), we think that our analysis in Home Life, along
with similar holdings from our sister circuit courts of
appeals, counsel us here. Cf. Fenton, 748 F.2d at 1359(holding that the circuit was bound to follow prior 1938
precedent of Roberts Mining, which was considered a "suit
in equity" and, like Home Life, was decided under
procedural law applicable before the federal system was
unified). Moreover, the discussion in Home Life remains
viable under today's unified federal court system.
Other courts have noted practical reasons for counting
compulsory counterclaims toward the jurisdictional
amount. In Roberts Mining, the court reasoned that
9
consideration of the counterclaim was permissible because
the counterclaim was the equivalent of a second,
independent suit in which the defendant of the initial
action was the plaintiff, 95 F.2d at 524 (citing Merchants'
Heat & Light Co. v. James B. Clow & Sons, 204 U.S. 286(1907)), and that the matter in controversy was the same in
each of these suits. Id. Therefore, because the court would
have jurisdiction over this second suit, the court saw no
impediment to asserting jurisdiction over the entirety of the
initial action. Id. This reasoning is echoed in more recent
cases where courts have noted that where there is no
objection to jurisdiction and where the counterclaim
independently meets the required amount, one can assume
that the defendant would have chosen the federal forum
and there is no reason not to exert jurisdiction simply
because the plaintiff won the race to the courthouse. See
Motorists Mutual Ins., 404 F.2d at 514-15.7
Of course, we do not mean to suggest that parties can
agree to the jurisdiction of a federal court and thereby
confer jurisdiction that would not otherwise exist. That is
clearly not the case. Federal jurisdiction arises under the
constitution. It is not created by contract or waiver. In
Fenton, the court stated:
[e]ach of the . . . compulsory counterclaims exceeded
$10,000. In Roberts Mining & Milling Co. v. Schrader,
we stated that a counterclaim that exceeded the
necessary amount in controversy was sufficient to
bring the entire case within the jurisdiction of the
district court, regardless of the lack of jurisdictional
averments in the . . . complaint . . . . The [defendants
here] did not object to the district court's exercise of
_________________________________________________________________
7. We realize that Brown is here arguing that he intended to sue in state
court and that Spectacor raced into federal court as a preemptive strike
to avail itself of a more favorable forum, see Appellant's Br. at 6, and
therefore this presumption does not apply here. In the situation here, if
Brown had sued in a Pennsylvania state court, Spectacor, as a
Pennsylvania citizen, would not have been able to remove the case to the
district court. See 28 U.S.C. S 1441(b). Nevertheless, these policy
implications are still relevant to our discussion. In noting them, we do
not suggest that there is any merit to the belief of either party here
that
a federal or state forum will benefit either side.
10
jurisdiction prior to the filing of their compulsory
counterclaim but, rather, raised the issue for thefirst
time on appeal.
748 F.2d at 1358 (citations and internal quotation marks
omitted). However, the court could not have intended to
suggest that jurisdiction can be waived. Rather, we
conclude that the court was simply noting that the
defendants there had done nothing to prevent the amount
of their counterclaim from becoming part of the controversy
that was initiated by the plaintiff's suit, and that the
counterclaim was therefore properly considered in
determining the amount in controversy. Similarly, Brown
did object to jurisdiction, but he did not do so in a manner
that kept his counterclaim from being before the court.
When a defendant elects that option afforded under Rule 12
and decides not to move to dismiss for lack of subject
matter jurisdiction, but asserts a compulsory counterclaim
against the plaintiff instead, the defendant thereby places
the amount of the counterclaim into controversy, and the
court must consider that amount in determining if it has
jurisdiction under 28 U.S.C.A. S 1332(a). This is true
whether or not the defendant also attacks subject matter
jurisdiction in his or her answer or in any other manner
that does not prevent the counterclaim from being before
the court.8
In arguing that we should not consider compulsory
counterclaims, Brown also points to Oliver v. Haas, 777 F.
Supp. 1040 (D.P.R. 1991); Michael F. Ronca & Sons, Inc. v.
Monarch Water Systems, 1990 WL 140154 (E.D. Pa. 1990);
P.S. Group v. Aladdin Engineering and Manufacturing, Inc.,
1990 WL 122938 (E.D. Pa. 1990); and Cabe v. Pennwalt,
372 F. Supp. 780 (W.D.N.C. 1974). See Appellant's Sup. Br.
at 6. Each of these cases was decided in the context of
removal and each holds that counterclaims cannot be
considered when determining whether an action has been
_________________________________________________________________
8. Here, in addition to a statement in his answer challenging
jurisdiction,
Brown subsequently moved for sanctions under Fed. R. Civ. P. 11 when,
in response to Brown's summary judgment motion, Spectacor conceded
that it owed Brown more than he owed it. See Appellant's Br. at 6.
However, that does not alter our analysis.
11
properly removed. Although there is authority to the
contrary, see, e.g., Swallow & Assoc. v. Henry Molded
Products, Inc., 794 F. Supp. 660 (E.D. Mich. 1992) (holding
that in the removal context "substantiality of claim" should
be gauged by considering the compulsory counterclaim),
the cases to which Brown points appear to represent the
majority view that inclusion of counterclaims should not be
permitted in the removal context. Wright, supra, at 124
(collecting cases). However, removal is governed by
considerations inapplicable to cases involving the exercise
of original jurisdiction. In Shamrock Oil Corp. v. Sheets, 313
U.S. 100, 107-109 (1941), the Supreme Court noted that
the legislative history and language of the removal statute
shows that Congress intended to limit removal. The Court
reasoned that removal was statutory and not constitutional,
and that removal jurisdiction must, therefore, be narrowly
construed in favor of the non-removing party to prevent,
inter alia, encroachment on the right of state courts to
decide cases properly before them. The contrary
consideration is present when we consider a court's
exercise of original jurisdiction. Thus, in the abstention
context, the Court has stated:
[T]he federal courts have a virtually unflagging
obligation to exercise their jurisdiction except in those
extraordinary circumstances where the order to the
parties to repair to the State court would clearly serve
an important countervailing interest.
Deakins v. Monaghan, 484 U.S. 193, 202 (1988) (internal
quotation marks omitted). Furthermore, "if compulsory
counterclaims were considered for purposes of jurisdiction,
federal subject matter jurisdiction would be reliant on state
law distinctions between compulsory and permissive
counterclaims." Meridian Aviation Service v. Sun Jet Int'l,
886 F.Supp. 613, 615 (S.D.Tex. 1995). Accordingly, Brown's
reliance upon cases addressing issues surrounding removal
jurisdiction does not assist us.
Here, Brown submitted his compulsory counterclaim to
the district court thereby putting the amount of that
counterclaim in controversy. The amount of his
counterclaim must be considered in determining whether
12
the district court had subject matter jurisdiction. See also
Horton, 367 U.S. 348 (1961).9
_________________________________________________________________
9. In Horton an insurance company filed suit in federal court, alleging
diversity jurisdiction, to challenge a $1,050 award given by the Texas
Industrial Accident Board pursuant to the Texas Workman's
Compensation Act. In its complaint, the company also asserted that the
defendant would assert a compulsory counterclaim that he was entitled
to an award of $14,035. In response, the defendant filed a motion to
dismiss for failure to satisfy the amount in controversy and filed an
answer, subject to the motion to dismiss, containing the $14,035
conditional compulsory counterclaim just as plaintiff had predicted.
Although the amount of the insurance company's claim clearly did not
meet the amount in controversy minimum that was then an amount in
excess of $10,000, the Supreme Court held that the jurisdictional
requirement was met because of the $14,035 counterclaim. The Court
stated:
The complaint of the respondent company filed in the District
Court,
while denying any liability at all and asking that the award of
$1,050 against it be set aside, also alleges that petitioner Horton
has claimed, now claims and will claim that he has suffered total
and permanent disability and is entitled to a maximum recovery of
$14,035, which, of course, is in excess of the $10,000 requisite to
give a federal court jurisdiction of this controversy. No denial of
these allegations in the complaint has been made, no attempted
disclaimer or surrender of any part of the original claim has been
made by petitioner, and there has been no other showing, let alone
a showing ``to a legal certainty,' of any lack of good faith on the
part
of the respondent in alleging that a $14,035 claim is in
controversy.
It would contradict the whole record as well as the allegations of
the
complaint to say that this dispute involves only $1,050. The claim
before the [Texas Industrial Accident] Board was $14,035; the state
court suit of petitioner asked that much; the conditional
counterclaim in the federal court claims the same amount. Texas
law under which this claim was created and has its being leaves the
entire $14,035 claim open for adjudication in a de novo court
trial,
regardless of the award. Thus the record before us shows beyond a
doubt that the award is challenged by both parties and is binding
on neither; that petitioner claims more than $10,000 from the
respondent and the respondent denies it should have to pay
petitioner anything at all. No matter which party brings it into
court,
the controversy remains the same; it involves the same amount of
money and is to be adjudicated and determined under the same
rules. Unquestionably, therefore, the amount in controversy is in
excess of $10,000.
13
III.
For the reasons set forth above, we will affirm the
judgment of the district court.
_________________________________________________________________
367 U.S. at 353-54.
As the dissent noted, Horton can be read as holding that if a plaintiff
asserts in the complaint that a counterclaim will be brought in an
amount above the jurisdictional minimum, then the amount in
controversy has been satisfied. Yet, that is clearly contrary to the well-
established rule (developed in the context of federal question
jurisdiction)
that a plaintiff cannot create federal jurisdiction by anticipating
federal
defenses that a defendant may assert. See id. at 358-59 (citing Skelly Oil
Co. v. Phillips Petroleum Co., 339 U.S. 667 (1950); First National Bank of
Canton, Pa. v. Williams, 252 U.S. 504 (1920); Louisville & N.R. Co. v.
Mottley, 211 U.S. 149 (1908); Taylor v. Anderson, 234 U.S. 74 (1914)).
Perhaps because Horton has so troubled commentators and courts, it
has been conspicuously absent from discussions of the effect of
counterclaims upon the amount in controversy. See, e.g., Fenton, 748
F.2d 1358; Motorists Mutual, 404 F.2d 511. Only two reported cases
outside the Texas Compensation Act context cite Horton in regard to the
counterclaims and the jurisdictional amount. See Emland Builders, Inc.
v. Shea, 359 F.2d 927 (10th Cir. 1966); Russell, 972 F.2d 628. In
Emland Builders, the court found Horton to be of dubious instruction
and held that, in any event, the complaint sufficed to meet the
jurisdictional requirement.
Although the holding in Horton supports our analysis, we need not rely
upon it for the decision we reach here. (Horton has been described as
"baffling" by respected legal commentators, see Wright, supra at 111,
and we include it only for the sake of the thoroughness of our
discussion).
14
WELLFORD, Senior Circuit Judge, dissenting:
I respectfully dissent from the decision in this case based
on what I believe to be a serious question about lack of
jurisdiction. Spectacor proceeded in the federal court in its
chosen venue, asserting diversity jurisdiction and more
than the required jurisdictional amount, but only barely, on
the face of the complaint. The defendant Brown filed an
answer affirmatively stating "[t]he Court lacks jurisdiction
over the subject matter in that the amount of controversy
does not exceed $50,000." He added, among other things:
Plaintiff has failed to state a valid claim upon which
relief can be granted.
. . .
Plaintiff was already obligated to provide the sums
and benefits to Defendant.
. . .
Plaintiff's Complaint was filed in bad faith to harass
Defendant.
Defendant contemporaneously filed a counterclaim, seeking
a substantially greater amount than was requested in the
original complaint.
The district court found that the action was notfiled in
bad faith because "[s]ums owed by a plaintiff to the
defendant are not subtracted from the amount of plaintiff's
claim when calculating the jurisdictional amount. Savarese
v. Edrick Transfer & Storage, Inc., 513 F.2d 140, 142 (9th
Cir. 1975)." In my view, however, the facts of Savarese are
materially different from those presented by the
jurisdictional issue in this case. In that case, the plaintiff
sought $11,901 from the defendant who did not contest the
claim. Additionally, the plaintiff acknowledged that he held
some $2,578 that belonged to the defendant, which he
sought to apply against the debt owed him. The defendant
conceded that the amount sought by Savarese was above
the jurisdictional minimum amount.1 The defendant did not
_________________________________________________________________
1. The Savarese court acknowledged that had plaintiff initially demanded
a judgment of $9,323 (the difference after application of an offset), the
district court would have lacked jurisdiction, citing Kansas City
Philharmonic Ass'n v. Greyhound Lines, 257 F.Supp. 941 (W.D. Mo.
1966); C. Wright, Federal Courts, 116-17 and n.52, 134 (2d ed. 1970).
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challenge, in a timely fashion, jurisdiction in its responsive
pleading.
In the instant case, even if Brown had not pleaded lack
of jurisdiction, a challenge to subject matter jurisdiction is
not waivable; and when a challenge is made, it must be
fully considered. United States ex rel Coffey v. Austin
Construction, 436 F.Supp. 626 (W.D. Okla. 1977). Whether
federal jurisdiction exists is determined as of the time the
action is filed, not after the responsive pleading is filed.
Wright, Miller and Cooper, Federal Practice and Procedure,
Vol. 13B S 3608, Vol. 14A S 3702. The party seeking to
invoke federal jurisdiction, once challenged, "has the
burden of proving its existence." Id., S 3702.
In a suit for a sum certain that is less than the
jurisdictional amount, adding a claim for punitive damages
so that the jurisdictional amount may be exceeded may be
insufficient to establish jurisdiction. Wiggins v. N.A.
Equitable Life Ins. Co., 644 F.2d 1014 (4th Cir. 1981).
Furthermore, "the extent to which a counterclaim can be
considered in determining the amount in controversy never
has been determined satisfactorily by the federal courts."
Wright, Miller and Cooper, Federal Practice and Procedure,
Vol. 14, S 3706. "Defendant can object to the court's
jurisdiction over the original claim in the answer and plead
the counterclaim in the alternative." Id., S 3706.
Here, the district court acknowledged that Spectacor
admitted "that it does not ``own' the set-off funds," but,
rather than holding that that fact barred the claim, the
court held that Spectacor took a "strategic action" to
"obtain what it perceives to be a more amenable forum."
Brown argued (I think plausibly) that Spectacor genuinely
claimed only $47,421 in "salary advances" and "medical
insurance premiums" made for his benefit. Brown
complained, however, about the asserted "payroll tax
liabilities" of $3,287, arguing that this additional claim was
a " ``sham' to manufacture federal court jurisdiction." The
district court never decided whether, in fact, the so-called
"payroll tax liability" portion of the complaint, which was
necessary to exceed the jurisdictional amount of $50,000
was something other than a "sham" or a "contrivance" to
establish federal jurisdiction. The district court merely held,
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without elaboration, that the suit was filed in good faith
and not for the purpose of harassing the defendant.
The majority holds that because defendant did not file a
motion to dismiss for lack of jurisdiction and asserted a
compulsory counterclaim, that it would consider the
amount of the counterclaim in determining the amount in
controversy, citing Fenton v. Freedman, 748 F.2d 358 (9th
Cir. 1984). But, as the majority acknowledged, Fenton
involved a situation where defendant had not first objected
to jurisdiction. It is therefore distinguishable from this case,
as is the earlier Ninth Circuit case, Roberts Mining Co. v.
Schrader, 95 F.2d 522 (9th Cir. 1996), for the same reason.
The remaining case cited by the majority for this
jurisdictional holding was Motorists Mutual Ins. Co. v.
Simpson, 404 F.2d 511 (7th Cir. 1969). That court held
contrary to the majority's interpretation:
When a claim over which there is otherwise
jurisdiction does not embrace an amount in
controversy in excess of that required by the statute,
the "plaintiff-viewpoint" rule, under which jurisdiction
is determined on the basis of what the plaintiff claims,
requires dismissal of the claim. A problem arises,
however, when although the plaintiff 's claim does not
involve the requisite jurisdictional amount, a
compulsory counterclaim is filed which independently
meets the required amount. There are cases which
hold that in such a situation federal jurisdiction should
be sustained.
But irrespective of the holding in those cases, we
believe that a compulsory counterclaim should not be
held to give rise to federal jurisdiction where the
defendant-counterclaimant has objected from the
beginning to the federal court's assumption of
jurisdiction over the plaintiff's main action on the
ground that the amount in controversy in that action
is insufficient and additionally, after his jurisdictional
objection is overruled, files a compulsory counterclaim
even though the amount therein involved exceeds
$10,000 exclusive of interest and costs.
17
Simpson, 404 F.2d at 514 (emphasis added) (footnotes
omitted).
The Simpson court, moreover, in the type of situation
existing in this case, observed that "[s]ince, however,
defendant did not originally choose the federal forum, the
option should be his whether or not to keep the action in
federal court," citing 1 J. Moore, Federal Practice P 0.98[1],
at 896 (2d ed. 1964). Simpson held that it was without
jurisdiction to proceed unless the original claim exceeded
the jurisdictional amount. I would agree with this
assessment, and I would question the authority of Home
Life Ins. Co. v. Sipp, 11 F.2d 474 (3d Cir. 1926), to the
extent that it indicates a contrary rule.2
The majority properly concedes that there is a "well-
established rule" that a plaintiff cannot create federal
jurisdiction by anticipating federal defenses. Like the
majority, I perceive no persuasive basis for considering
Horton v. Liberty Mutual Ins. Co., 367 U.S. 348 (1961), as
authority in this case. The district court made no reference
to any of these authorities except Savarese, which is easily
distinguishable.
In my view, the determinative question as to adequacy of
the jurisdictional amount asserted in the complaint has not
been determined. Spectacor could have filed a declaratory
judgment action to have avoided these problems, but it did
not. It also could have sought removal from state court to
federal court had Brown sued as he indicated he would. I
disagree with the majority view that Brown should lose the
jurisdictional argument because he did not file a motion to
dismiss, when he objected to the court's jurisdiction
affirmatively in his answer. Federal courts are courts of
limited jurisdiction, and I believe we should strictly
construe jurisdictional requirements.
The question of whether "payroll tax liability" is a proper
_________________________________________________________________
2. I would agree that Sipp correctly held that neither unearned premiums
nor a policy loan could be added to the then minimum jurisdictional
amount requirement ($3,000 plus) involving a $3,000 face amount life
insurance policy to establish federal jurisdiction; and (2) filing of the
defendant's counterclaim could not confer jurisdiction.
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claim against Brown is a novel one and I see no easy
answer. Was this liability actually paid or incurred, or was
it a mere bookkeeping entry? Did it constitute a part of the
"advance" to Brown? Was Brown liable to repay that
amount to Spectacor, the IRS, or the State, if Spectacor had
later deemed the salary to have been erroneously paid? In
addition, I would call upon the district court to consider the
"good faith" question in view of the circumstances and give
an explanation for its determination in this regard. I would,
therefore, REMAND to the district court for a thorough
consideration of the jurisdictional issue for the reasons
stated.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
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