Development Finance Corp. v. Alpha Housing & Health Care, Inc.

Opinions of the United
1995 Decisions States Court of Appeals
for the Third Circuit
4-26-1995
Development Fin. Corp. v Apha Housing & Health
Care, Inc.
Precedential or Non-Precedential:
Docket 94-3519
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 94-3519
DEVELOPMENT FINANCE CORPORATION;
THE NATIONAL HOUSING AND HEALTH CARE TRUST, INC.,
Appellees,
v.
ALPHA HOUSING & HEALTH CARE, INC.,
Appellee,
v.
JOHN SOWER; WILBUR DOVE,
Third Party Defendants.
SYLVAN ASSOCIATES, INC.,*
(*Pursuant to Rule 12(a), F.R.A.P.)
Appellant.
ON APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF PENNSYLVANIA
(D.C. No. 94-cv-00627)
Argued March 10, 1995
Before: HUTCHINSON, ALITO, and SAROKIN, Circuit Judges
(Opinion filed: April 26, 1995)
John Alan Conte
Robert A. Krebs (argued)
Conte, Melton & D'Antonio
300 Ninth Street
Conway, PA 15207
Attorneys for Appellant
George E. Pallas (argued)
Andrea B. Dillon
Cohen & Huntington, P.C.
1515 Market Street, Suite 818
Philadelphia, PA 19102
Attorneys for Appellees
Development Finance Corp.
and The National Housing
and Health Care Trust,
Inc.
Louis Pomerico
Pomerico, Leymarie, Clark &
Punture
1406 East Washington Street
New Castle, PA 16101
Attorney for Appellee
Alpha Housing & Health
Care, Inc.
OPINION OF THE COURT
SAROKIN, Circuit Judge:
Sylvan Associates, Inc. ("Sylvan" or "applicant"), the sole
member of defendant Alpha Housing & Health Care, Inc. ("Alpha"),
a nonprofit corporation, appeals from the denial of its motion to
intervene as a third-party plaintiff in an action for breach of
contract. Sylvan wishes to argue that the contracts between
plaintiffs and defendant were ultra vires, a claim that defendant
itself is prohibited from raising under Pennsylvania law.
I.
Plaintiff Development Finance Corp. ("DEFCO") entered into a
contract to assist defendant in arranging financing for the
acquisition of nursing home facilities. After defendant
purchased two facilities, it entered into a contract with
plaintiff The National Housing and Health Care Trust, Inc.
("National Housing") whereby National Housing would assist in the
management of the nursing homes. DEFCO and defendant
subsequently executed another contract providing for revised
terms of payment for DEFCO's services. DEFCO and National
Housing now sue for defendant's alleged breach of the agreements.
Federal jurisdiction for the original claims is based on the
diversity of citizenship between plaintiffs and defendant,
pursuant to 28 U.S.C. §1332.
Sylvan first moved to intervene as of right as a defendant,
in order to assert as a defense that the agreements between
plaintiffs and defendant were ultra vires. The district court
denied the motion, Appendix ("App.") at 63, and Sylvan did not
appeal.
Recasting its argument, Sylvan again moved to intervene as
of right, this time as a third-party plaintiff, in an effort to
enjoin performance of defendant's contracts with plaintiffs
pursuant to 15 Pa.C.S. §5503(a)(1). The action asked the
district court to grant plaintiffs only "such compensation as may
be equitable," as the Pennsylvania statute provides. The
district court denied the motion without a written decision.
App. at 111. Sylvan filed a timely notice of appeal, and we have
jurisdiction under 28 U.S.C. §1291 because the denial of a motion
to intervene as of right is a final, appealable order. United
States v. Alcan Aluminum, Inc., 25 F.3d 1174, 1179 (3d Cir.
1994).
II.
We review the denial of a motion to intervene as of right
for abuse of discretion. Alcan Aluminum, 25 F.3d at 1179; Brody
v. Spang, 957 F.2d 1108, 1115 (3d Cir. 1992). However, we will
reverse "only if we find the district court 'has applied an
improper legal standard or reached a decision we are confident is
incorrect.'" Alcan Aluminum, 25 F.3d at 1179 (quoting Brody, 957
F.2d at 1115).
We must begin with a jurisdictional issue. As the party
asserting jurisdiction, Sylvan bears the burden of showing that
its claims are properly before the district court. Packard v.
Provident Nat'l Bank, 994 F.2d 1039, 1045 (3d Cir.), cert.
denied, 114 S.Ct. 440 (1993).
Sylvan and Alpha are both incorporated under the laws of
Pennsylvania. It is axiomatic that the federal judiciary's
diversity jurisdiction depends on complete diversity between all
plaintiffs and all defendants. See 28 U.S.C. §1332; Strawbridge
v. Curtiss, 7 U.S. (3 Cranch) 267 (1806); Singh v. Daimler-Benz
AG, 9 F.3d 303, 305 (3d Cir. 1993). Sylvan concedes that there
is no diversity of citizenship between itself and Alpha; both are
Pennsylvania corporations. Intervenor's Brief at 20.
Sylvan contends that the district court has supplemental
jurisdiction over its claim pursuant to 28 U.S.C. §1367(a), the
recent codification of common law "pendent" and "ancillary"
jurisdiction. Section 1367(a) provides
Except as provided in subsections (b) and (c) . . . in any
civil action of which the district courts have original
jurisdiction, the district courts shall have supplemental
jurisdiction over all other claims that are so related to
claims in the action within such original jurisdiction that
they form part of the same case or controversy under Article
III of the United States Constitution. Such supplemental
jurisdiction shall include claims that involve the joinder
or intervention of additional parties.
28 U.S.C.A. §1367(a) (1993).
A. §1367(b)
Subsection (b)'s limitation on the general grant of
supplemental jurisdiction raises the most obvious problems for
Sylvan:
In any civil action of which the district courts have
original jurisdiction founded solely on section 1332 of this
title, the district court shall not have supplemental
jurisdiction . . . over claims by persons . . . seeking to
intervene as plaintiffs under Rule 24, when exercising
supplemental jurisdiction over such claims would be
inconsistent with the jurisdictional requirements of section
1332.
28 U.S.C.A. §1367(b) (1993) (emphasis added). Sylvan does not
dispute that the district court's original jurisdiction was
"founded solely on section 1332" and that Sylvan has captioned
its motion as one to intervene as a plaintiff. App. at 64. At
first glance, then, §1367(b) would appear to deprive the district
court of jurisdiction over Sylvan's claim against Alpha.
District courts considering §1367(b) have generally
concluded that in a diversity action, the section eliminates
supplemental jurisdiction over the claims of a plaintiff-
intervenor who shares citizenship with a defendant. See Deere &
Co. v. Diamond Wood Farms, 152 F.R.D. 158, 160 (E.D.Ark. 1993);
Yorkshire Partnership v. Pacific Capital Partners, 154 F.R.D.
141, 142 (M.D.La. 1993); MCI Telecommunications Corp. v. Logan
Group, 848 F.Supp. 86, 87-89 (N.D.Tex. 1994); Manhattan Fire &
Marine Ins. Co. v. Northwestern Regional Airport Comm'n, 1993
U.S. Dist. LEXIS 6858 at *4 (W.D.Mich. March 25, 1993). See also
Krueger v. Cartwright, 996 F.2d 928, 933 n.6 (7th Cir. 1993)
(§1367(b) would have deprived court of supplemental jurisdiction
over claim of party who shared citizenship with defendant in
diversity action, had party moved to intervene as plaintiff).
We are aware of only one case to the contrary. See Colonial
Penn Ins. Co. v. American Centennial Ins. Co., 1992 WL 350838 at
*3-4 (S.D.N.Y. 1992).
Leading commentators generally agree that in a diversity
action, §1367(b) eliminates supplemental jurisdiction over claims
of plaintiff-intervenors who share citizenship with a defendant.
See 7C Charles A. Wright, Arthur R. Miller & Mary K. Kane,
Federal Practice and Procedure, §1917 at 47 (1994 Supp.) (Section
1367(b) "specifically prohibits the exercise of [supplemental]
jurisdiction in diversity cases for persons seeking to intervene
as plaintiffs under Rule 24"); 3B James Wm. Moore et al., Moore's
Federal Practice ¶24.18 (2d ed. 1993), at 24-182 ("§1367(b) makes
one change in prior practice by eliminating supplementary
jurisdiction over a party who intervenes, even if by right, as a
plaintiff in a diversity action if that party does not meet the
requirements for diversity jurisdiction"); 28 U.S.C.A. §1367(1993), David Siegel, Practice Commentary, "The 1990 Adoption of
§ 1367, Codifying 'Supplemental' Jurisdiction" ("Practice
Commentary"), at 833.
1. Alignment
Before rushing to deny Sylvan's bid to participate in this
action, however, we must consider a fundamental principle of
federal jurisdiction, a principle associated with, but not
limited to, diversity jurisprudence. In determining the
alignment of the parties for jurisdictional purposes, the courts
have a "duty" to "'look beyond the pleadings and arrange the
parties according to their sides in the dispute.'" Indianapolis
v. Chase Nat'l Bank, 314 U.S. 63, 69 (1941) (quoting Dawson v.
Columbia Trust Co., 197 U.S. 178, 180 (1905)). Opposing parties
must have a "'collision of interests'" over the "'principal
purpose of the suit.'" Id. (quoting Dawson, 197 U.S. at 181 and
East Tennessee, V. & G. R. v. Grayson, 119 U.S. 240, 244 (1886)).
In this circuit we have described the alignment inquiry as
one which "obliges the court to penetrate the nominal party
alignment and to consider the parties' actual adversity of
interest." In re Texas Eastern Transmission Corp. PCB
Contamination Ins. Coverage Litigation, 15 F.3d 1230, 1240-41 (3d
Cir.), cert. denied, ___ U.S. ___, 115 S.Ct. 291 (1994). See
also Employers Ins. of Wausau v. Crown Cork & Seal Co., 905 F.2d
42, 46 (3d Cir. 1990).
In Texas Eastern, we determined that a district court had
"erroneously reasoned that realignment was a principle associated
exclusively with diversity jurisdiction." 15 F.3d at 1242(emphasis added). Realignment "in fact represents a broader
principle of judicial interpretation of statutes conferring
jurisdiction in federal courts, where the statutory conferral of
jurisdiction is predicated upon the adversarial relationship of
the parties." Id. at 1240. Thus, "where party designations have
jurisdictional consequences," we must align the parties before
determining jurisdiction. Texas Eastern, 15 F.3d at 1241(realigning partes for jurisdictional analysis under Foreign
Sovereign Immunities Act, 28 U.S.C. §1330). See also Chicago, R.
I. & P. R. Co. v. Stude, 346 U.S. 574 (1954) (realigning parties
for jurisdictional analysis under the removal statute, 28 U.S.C.
§1440).
Under §1367(b), party designations clearly have profound
jurisdictional consequences. In two recent cases we have noted
the strikingly different treatment §1367(b) affords the claims of
plaintiffs as opposed to those of defendants. See Texas Eastern,
15 F.3d at 1237-38; Janney Montgomery Scott, Inc. v. Shepard
Niles, Inc., 11 F.3d 399 (3d Cir. 1993). See also Practice
Commentary at 832 ("[§1367(b)] is concerned only with efforts of
a plaintiff to smuggle in claims that the plaintiff would not
otherwise be able to interpose . . . The repetition of the word
'plaintiff' at several rule-citing junctures in subdivision (b)
makes this clear"). Accordingly, we must align the parties
before applying §1367(b).
The "principal purpose" of the suit by DEFCO and National
Housing is to enforce their agreements with Alpha. Both Alpha
and Sylvan seek to set aside the agreements, paying at most the
"equitable compensation" required by 15 Pa.C.S. §5503(a).
Although Sylvan's claim nominally opposes Alpha, in fact the
basic interests of Alpha and Sylvan coincide with each other and
collide with those of DEFCO and National Housing over the
principal issue of the case. The "actual adversity of interest"
pits Alpha and Sylvan against DEFCO and National Housing.
Consequently, Sylvan must be aligned with Alpha as a defendant.
Sylvan's motion to intervene should be treated as raising a
cross-claim against Alpha and a counterclaim against DEFCO and
National Housing.
2. Counterclaims and cross-claims of an intervenor-defendant
The plain language of §1367(b) limits supplemental
jurisdiction over claims of plaintiffs against "persons made
parties under Rule 14, 19, 20, or 24," and of parties who join or
intervene as plaintiffs pursuant to Rule 19 or 24. 28 U.S.C.A.
§1367(b). The section has little to say about defendants.
We have twice held that in a diversity action, the district
court has jurisdiction over a defendant's counterclaim against
non-diverse parties joined as third-party defendants to the
counterclaim. Texas Eastern, 15 F.3d at 1237-38; FDIC v.
Bathgate, 27 F.3d 850, 874 (3d Cir. 1994). In Texas Eastern we
specifically pointed out that §1367(b) "by its terms" does not
extend to a defendant's counterclaims, and further that the
joinder of "non-diverse counterclaim defendants do[es] not
destroy diversity jurisdiction . . . because there is complete
diversity of citizenship between the original parties." Texas
Eastern, 15 F.3d at 1238.
Similarly, in Janney Montgomery Scott, an investment banker
sued an obligor for breach of contract in a diversity action. In
holding that a co-obligor was not a necessary party to the
action, we stated that if defendant moved to implead the co-
obligor on a claim for contribution, the district court would
have supplemental jurisdiction, despite the common citizenship of
the defendant/third-party plaintiff and the third-party
defendant. Janney Montgomery Scott, 11 F.3d at 412, n.15.
When faced by a party alignment very similar to the one
here, the district court in Colonial Penn concluded that §1367(b)
did not eliminate jurisdiction over a claim asserted by a non-
diverse intervenor against the original plaintiff. The district
court aligned the intervenor as a defendant though the party
called itself a plaintiff, treated its claim as a counterclaim,
and exercised jurisdiction. 1992 WL 350838 at *3-4. See also
Practice Commentary at 833 (suggesting §1367(b) does not
eliminate supplemental jurisdiction over counterclaim raised by
non-diverse defendant-intervenor).
We are aware of only one case in which a court considered
the application of §1367(b) to a cross-claim by one co-defendant
against another, non-diverse co-defendant, where federal
jurisdiction over the original claims depended on §1332. There,
a district court held that §1367(b) does not eliminate
supplemental jurisdiction. Meritor Sav. Bank v. Camelback Canyon
Investors, 783 F.Supp. 455, 457 (D.Ariz. 1991).
Considerations of judicial economy also counsel in favor of
limiting §1367(b) to its plain language, rather than extending
its jurisdictional bar to claims raised by intervening
defendants. Where an intervenor's claims are so entangled with
the original claims and parties, banishing the non-diverse claim
to state court would not serve the goal of judicial efficiency,
Finally, we have held that the 1990 Judicial Improvement Act
codified the Supreme Court's treatment of ancillary jurisdiction.
Texas Eastern, 15 F.3d at 1237-38 and n.7. Extending §1367(b) to
bar a counterclaim or cross-claim by an intervening defendant
would contradict the pre-1990 common law of "ancillary
jurisdiction," which encompassed counterclaims by a defending
party pulled into court against his will, as well as claims by
another person whose rights might be irretrievably impaired
unless he could assert them in an existing federal court action.
Owen Equipment and Erection Co. v. Kroger, 437 U.S. 365, 375-76
(1978). As discussed infra, applicant's rights could be
irretrievably impaired if it is excluded from the instant
proceeding.
We conclude that §1367(b) does not deprive the district
court of supplemental jurisdiction over a counterclaim or cross-
claim raised by an intervening defendant, even where the
intervenor shares citizenship with an original party.
B. §1367(a)
Turning to §1367(a) itself, the parties do not dispute that
district court had original jurisdiction over the claims against
Alpha brought by DEFCO and National Housing, pursuant to 28
U.S.C. §1332. We conclude easily that because the claims of
DEFCO, National Housing, and Sylvan all concern performance of
the agreements with Alpha, Sylvan's claims are "so related to
claims in the original action . . . that they form part of the
same case or controversy."
Having determined that (1) the jurisdictional principle of
alignment applies to §1367(b); (2) proper alignment requires us
to treat applicant as a defendant; (3) §1367(b) does not
eliminate supplemental jurisdiction over a cross-claim or
counterclaim raised by an intervening defendant; and (4)
applicant has satisfied the elements of §1367(a), we conclude
that a failure to exercise supplemental jurisdiction over
Sylvan's claims would be an abuse of discretion.
III.
Sylvan moved to intervene pursuant to Fed. R. Civ. P.
24(a)(2).1 Rule 24(a) authorizes intervention where
(1) the application for intervention is timely; (2) the
applicant has a sufficient interest in the litigation; (3)
the interest may be affected or impaired, as a practical
matter by the disposition of the action; and (4) the
interest is not adequately represented by an existing party
in the litigation.
Alcan Aluminum, 25 F.3d at 1181.
1Rule 24(a)(2) provides:
Upon timely application anyone shall be permitted to
intervene in an action . . . when the applicant claims an
interest relating to the property or transaction which is
the subject of the action and the applicant is so situated
that the disposition of the action may as a practical matter
impair or impede the applicant's ability to protect that
interest, unless the applicant's interest is adequately
represented by existing parties.
DEFCO and National Housing concede that Sylvan's application
is timely and that it has an interest in the transactions which
are the subject of the litigation. Plaintiffs' Brief at 8. To
address the final two elements of Sylvan's proof, however, we
must clarify the interest conceded by plaintiffs.
Sylvan asserts it has an interest "in maintaining Alpha's
continued viability and tax exempt status in addition to insuring
[sic] that Alpha acts in accordance with its corporate purposes
and powers." Intervenor's Brief at 11. We agree that Sylvan
shares with Alpha an interest in the latter's "continued
viability," which may be threatened by specific performance of
the contracts, as well as limiting Alpha to actions authorized by
its charter and by-laws.
Regarding defendant's tax-exempt status, the same statute
that confers the exemption also mandates that "no part of the net
earnings of [the corporation] inures to the benefit of any
private shareholder or individual." 26 U.S.C.A. §501(c)(3)
(1988). DEFCO is itself a nonprofit corporation, so its contract
with Alpha may comply with the private inurement rule; on the
other hand, the text of the contracts may violate the rule. See
App. at 18, 21, 27-28. We express no opinion on this ultimate
issue, nor as to whether partial payment on the contracts
violates §501(c)(3).
Sylvan also refers us to unspecified U.S. Department of
Treasury regulations which may be implicated by Alpha's
contracts. In its Answer, Alpha invoked "OMB A-122." App. at
41. We take this as a reference to Office of Management and
Budget Circular A-122, "Cost Principles for Nonprofit
Organizations," 45 Fed.Reg. 46022 (July 8, 1980). Neither Alpha
nor Sylvan refers to a particular passage in this lengthy
document, but we note that the Circular mandates that only
"reasonable" costs for professional services are allowable uses
of certain government grants, contracts or awards. Id., 45
Fed.Reg. at 46023, 46031. Presumably Alpha and Sylvan wish to
argue that the agreements with DEFCO and National Housing provide
"unreasonable" compensation for professional services, as the
government defines "reasonable," and thus court-ordered payment
of "unreasonable" compensation would violate the Circular. We
again express no opinion as to whether performance of the
contracts has or would violate OMB Circular A-122. Whether the
threat arises under §501(c)(3) or OMB Circular A-122, we do agree
that Sylvan has an interest in preserving defendant's tax
exemption.
A. impairment of interest
We have held that the third element of intervention pursuant
to Rule 24(a)(2) requires us to assess the practical consequences
of the litigation. Incidental effects on legal interests are
insufficient; "rather, there must be 'a tangible threat' to the
applicant's legal interest." Brody, 957 F.2d at 1122-23 (quoting
Harris v. Pernsley, 820 F.2d 592, 601 (3d Cir.), cert. denied,
484 U.S. 947 (1987)). We have also pointed out that the
possibility of a subsequent collateral attack by an applicant
will not preclude an applicant from demonstrating that his
interest would be impaired, particularly in light of "our policy
preference which, as a matter of judicial economy, favors
intervention over subsequent collateral attacks." Brody, 957
F.2d at 1123.
The instant litigation presents a "tangible threat" to
Sylvan's interest in the preservation of Alpha's tax exemption
and in the corporation's continued viability. Moreover, an
adjudication of Alpha's obligations to DEFCO and National Housing
could preclude Sylvan from maintaining a state court action
pursuant to 15 Pa.C.S. §5503 to ensure that Alpha acts pursuant
to its corporate powers and purposes. Thus, Sylvan's legal
interests could be impaired by disposition of the instant case.
B. Inadequacy of representation
Finally, an applicant has "'[t]he burden, however minimal .
. . to show that his interests are not adequately represented by
the existing parties.'" Brody, 957 F.2d at 1123 (quoting Hoots
v. Pennsylvania, 672 F.2d 1133, 1135 (3d Cir. 1982)).
In its Answer, Alpha does not defend on the grounds that its
contracts with DEFCO and National Housing are void as illegal.
App. at 40-42.2 The Pennsylvania Supreme Court applies "the
general rule that an agreement which violates a provision of a
statute, or which cannot be performed without violation of such a
provision, is illegal and void." American Ass'n of Meat
Processors v. Casualty Reciprocal Exch., 588 A.2d 491, 495, 527
Pa. 59, 68 (1991). An illegal contract can never provide the
2
Alpha does raise the defense of impossibility of performance
because the "trust agreements" themselves prevent private
inurement. See Answer ¶38, App. at 41.
basis for a cause of action: "The law when appealed to will have
nothing to do with it, but will leave the parties just in the
condition in which it finds them." Id. (quoting Dippel v.
Brunozzi, 74 A.2d 112, 114-15, 365 Pa. 264 (1950)). Alpha is not
barred from contending that the contracts violate §501(c)(3) or
OMB Circular A-122, but its Answer does not set forth the
defense.3
If the district court determines that Alpha's contracts
violated §501(c)(3) or OMB Circular A-122, however, the contracts
might still be enforceable; Alpha would simply lose its tax
exemption. Hence Sylvan wishes to argue that, even if not void
as illegal, Alpha's contracts are voidable as unauthorized by its
corporate charter or by-laws. See, e.g., Bolduc v. Board of
Supervisors, 618 A.2d 1188, 1190-91, 152 Pa.Commw. 248 (Pa.Commw.
1992)(contract voidable when entered into by township acting
beyond its corporate powers), appeal denied, 625 A.2d 1195, 533
Pa. 662 (1993). Alpha has not and may not raise the defense of
ultra vires. 15 Pa.C.S. §5503; Downing v. School Dist., 61 A.2d
133, 138, 360 Pa. 29, 40 (1948)("a corporation which has received
and retained the benefits and advantages of a contract should not
be allowed to escape its obligations upon a plea of ultra
vires"); Wagner v. Somerset County Memorial Park, Inc., 93 A.2d
3Under the Pennsylvania and federal rules, illegality is an
affirmative defense which must be pleaded, but under Pennsylvania
law the defense is not waived by failure to plead it.
Fed.R.Civ.P. 8(c); Pa.R.Civ.P. 1030(a); American Ass'n of Meat
Processors, 588 A.2d at 495-96.
440, 442, 372 Pa. 338 (1953); American Mut. Liability Ins. Co. v.
Bollinger Corp., 402 F.Supp. 1179, 1186 (W.D.Pa. 1975).
Sylvan alleges that defendant's charter empowers it to
undertake only those activities permitted by §501(c)(3), and thus
a transaction yielding private inurement would be ultra vires.
See Motion to Intervene, App. at 71-72.4 See also By-Laws,
Supplemental Appendix ("S.A.") at 143. In addition, Sylvan
alleges that the charter authorizes Alpha to pay only reasonable
compensation for services rendered. App. at 72. See also By-
Laws, S.A. at 144.
Consequently, we conclude that Alpha has not and cannot
adequately represent Sylvan's interests, as defendant has failed
to raise the defense of illegality and is statutorily prohibited
from arguing that the contracts are ultra vires. In sum, Sylvan
has satisfied its burden under Rule 24(a)(2), and it was an abuse
of discretion to deny its motion for intervention.
IV.
For the foregoing reasons we will reverse the order of the
district court and remand for further proceedings consistent with
this opinion.
4
The appellate record does not include the corporate charter.