Opinion
CIVIL ACTION NO. 02-3794, SECTION "K" (3)
September 30, 2003
ORDER AND REASONS
Before the Court is Process Service Corporation ("PSC") Motion for Leave to File Third Party Complaint (Rec. Doc. No. 10). Plaintiff Air Liquide America L. P. ("Air Liquide") filed an opposition memorandum and the matter came on for oral hearing before the undersigned Magistrate Judge. Having considered the memoranda, the argument of the counsel, the record. and the applicable law, the Court determines that the defendant's motion should be GRANTED for the following reasons.
BACKGROUND
Plaintiff Air Liquide, a Delaware limited partnership with its principal place of business in Houston, Texas, filed the captioned matter seeking declaratory judgment against defendant PSC, a Louisiana corporation with its principal place of business in Baton Rouge. The dispute concerns a January 8, 2001 Agreement for the Sale and Purchase of carbide lime. The original complaint was filed on December 23, 2002 in the Eastern District of Louisiana seeking a declaration of rights and obligations of the parties under the agreement. More particularly, plaintiff seeks judgment finding that PSC breached the agreement and that Air Liquide properly terminated it.
PSC's parallel action filed in the Eighteenth Judicial District for the Parish of West Baton Rouge was removed by Air Liquide claiming fraudulent joinder of its former employee, Frank Whittington ("Whittington"). Air Liquide filed a motion to dismiss, to stay and/or transfer the removed suit to this district. The United States district judge stayed the matter in the Middle District pending the resolution of the instant case, i.e., the first-filed suit.
In case at bar, PSC waived service of process and filed an answer and counter-claim over against Air Liquide, together with a Rule 13(h) third party counterclaim against Whittington. Jurisdiction of the main claim is based on complete diversity of citizenship and the requisite jurisdictional amount pursuant to 28 U.S.C. § 1332.
At issue here is the propriety of PSC's amendment adding Whittington as counterclaim defendant pursuant to Rule 13(h). The allegations against Whittington include that he personally made material misrepresentations to PSC during the negotiation process and actively engaged in conduct thereafter, which prevented PSC from meeting its obligations under the subject purchase/sale agreement. Whether Whittington made the alleged intentional misrepresentations during contract negotiations and/or actively engaged in conduct interfering with PSC's performance of its obligations under the contract and/or committed the aforesaid tortious acts within or without the course and scope of his former employment with Air Liquide is apparently disputed. At the oral hearing, counsel for Air Liquide mentioned that the aforesaid course and scope issue was not the subject of any stipulation.
Air Liquide does not dispute that PSC's counterclaim over against it is compulsory and would be deemed waived if not pled. Nonetheless, Air Liquide opposes the Rule 13(h) joinder of Whittington, citing 28 U.S.C. § 1367(b) as authority prohibiting such an action. Plaintiff argues that the addition of Whittington as a counterclaim defendant pursuant to Rule 13(h) destroys complete diversity,
DISCUSSION
It is axiomatic that federal jurisdiction in the original action exists by virtue of complete diversity of citizenship of the parties (Air Liquide and PSC) and the sufficiency of the amount in controversy. 28 U.S.C. § 1332. Jurisdiction over the defendant's (PSC's) counterclaim against the main plaintiff and defendant's (PSC's) Rule 13(h) counterclaim against the additional party (Whittington) exists by virtue of supplemental jurisdiction pursuant to 28 U.S.C. § 1367(a) — i.e., previously the doctrine of ancillary jurisdiction.
The jurisprudential doctrine of ancillary jurisdiction was explained by one commentator as follows, to wit: "[A] district court acquires jurisdiction of a case or controversy in its entirety, and, as an incident to the disposition of the matter properly before it, it may decide other matters raised by the case of which it could not take cognizance were they independently presented." 13 Wright, Miller Cooper, Federal Practice Procedure § 3523 (1984). In an effort to simplify matters, Congress enacted the Judicial Improvement Act of 1990, codified at 28 U.S.C. § 1367(a), which now provides the starting point for supplemental jurisdiction analysis.
The doctrine of supplemental jurisdiction recognizes that, once proper subject matter jurisdiction of the main claim has been established, the federal court has power to adjudicate related claims incident thereto based wholly upon state law, including one asserted by the defendant against a non-diverse defendant in counterclaim added pursuant to Fed.R.Civ.P. 13(h). Section 1367(a) describes supplemental jurisdiction. Subsections (b) and (c) set forth the exceptions. The Court addresses each in turn.
1. 28 U.S.C. § 1367(a) Governs Jurisdiction over Joinder of Parties 25 U.S.C. § 1367(a) provides:
(a) Except as provided in subsections (b) and (c) or as expressly provided otherwise by Federal statute, 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. § 1367(a) (holding emphasis added).
There is no dispute that this Court has jurisdiction to hear the underlying declaratory judgment action brought by Air Liquide against PSC. As aforestated, because the original parties to the action are citizens of different states, and the amount in controversy exceeds $75,000, diversity jurisdiction is properly invoked pursuant to 28 U.S.C. § 1332. Air Liquide argues that because Whittington and PSC are both citizens of Louisiana, § 1367 does not authorize the exercise of jurisdiction.
Where, as here, jurisdiction is appropriate in the underlying case, § 1367(a) specifically grants jurisdiction over "claims that involve joinder and intervention of additional parties." The statute make makes no distinction in subsection (a) between diversity and federal question jurisdiction. Because the terms of the statute are clear, there is no reason to import any such distinction into the meaning of § 1367(a). 2. Section 1367(b) does not except PSC's Rule 13(h) Third Party Counterclaim Subsection (b) provides:
Id.
(b) In any civil action of which the district courts have original jurisdiction founded solely on section 1332 of this title, the district courts shall not have supplemental jurisdiction under subsection (a) over claims by plaintiffs against persons made parties under Rule 14, 19, 20, or 24 of the Federal Rules of Civil Procedure, or over claims by persons proposed to be joined as plaintiffs under Rule 19 of such rules, or seeking to intervene as plaintiffs under Rule 24 of such rules, when exercising supplemental jurisdiction over such claims would be inconsistent with the jurisdictional requirements of section 1332.
28 U.S.C. § 1367(b) (holding and italicized emphasis added).
The supplemental jurisdiction bestowed via § 1367(a) is not excepted by subsection (b). The jurisdictionally significant procedural fact is that it is the defendant (PSC) seeking to join a non-diverse counterclaim defendant pursuant to Rule 13(h). Air Liquide fails to acknowledge the plain language of subsection (b) which specifically excepts claims by plaintiffs, not defendants. Simply stated, subsection (b) applies only to claims by plaintiffs against new parties whose addition would destroy diversity. The two other exceptions noted above in subsection (b) bear no parallel to the case at bar. Specifically, the claim at issue is not one proposed by Whittington (i.e., the person sought to be added as the plaintiff), and it is not the claim of a person seeking leave to intervene as a plaintiff under Rule 24. Instead, the claim which is the focus of the Air Liquide's opposition and this Court's discussion is a claim by the original defendant, PSC.
The entire thrust of subsection (b) is to prevent the original plaintiff from manufacturing jurisdiction and later interjecting a non-federal claim. In the absence of the exceptions to supplemental jurisdiction provided by subsection (b), by initially filing claims only against diverse parties, the plaintiff could manufacture federal jurisdiction and retain it, notwithstanding the later addition non-diverse parties, whose presence at the outset of the proceeding would have destroyed diversity. Clearly, subsection (b) further diffuses the potential for "collusive joinder" in that a non-diverse individual may not utilize Rule 24 to later intervene as a party-plaintiff, making claims against the original defendant.
As explained in the commentary to § 1367, subsection (b) "is concerned only with the efforts of the plaintiff to smuggle in claims that the plaintiff would not otherwise be able to interpose against certain parties . . . for want of subject matter jurisdiction. The repetition of the word "plaintiffs" at several rule-citing junctures in subdivision (b) makes this clear."
The Hartford Steam Boiler Inspection and Insurance Company v. Quantum Chemical Corporation, 1994 WL 494776 (N.D. Ill.).
In Zurn Industries, Inc. v. Acton Construction Company, Inc., 847 F.2d 234 (5th Cir. 234 (5th Cir. 1988), the Fifth Circuit stated:
Once subject matter jurisdiction is proper, the court may have ancillary jurisdiction over the additional claims and parties it may not have had otherwise. Whether the court has ancillary jurisdiction over the claim or the party depends on the type of claim or party. If the claim is a compulsory counterclaim, Fed.R.Civ.P. 13(a), a cross-claim, Fed.R.Civ.P. 13(g), or if the party is added pursuant to a counterclaim or cross-claim, Fed.R.Civ.P. 13(h) , or impleaded, Fed.R.Civ.P. 14, the court has ancillary jurisdiction over the claim or party even in the absence of an independent basis for federal jurisdiction.
Zurn Industries, Inc., 847 F.2d at 236-237 (holding emphasis added). See also Alfa Insurance Corporation v. Word of Faith Ministries, 139 F.R.D. 350, 353 (S.D. Miss. 1991) (quoting Zurn, supra).
In Alfa Insurance Corporation v. Word of Faith Ministries, 139 F.R.D. 350 (S.D. Miss. 1991), an insurance company brought a diversity suit seeking declaratory judgment regarding the terms and conditions of an insurance policy it issued to the defendant. The defendant counterclaimed against the insurance company, asserting bad faith in the plaintiffs refusal to pay its insurance claim. The defendant also sought to join, as additional Rule 13(h) counterclaim defendants, certain non-diverse adjustment companies which it alleged provided false assessments regarding the damages suffered. The defendant maintained that these necessary parties could not be joined because their addition to the case would destroy diversity, and thus moved for dismissal so that it could pursue its claims against all of the parties in state court. The district court disagreed and held that it had ancillary jurisdiction over the additional parties to the compulsory counterclaim, denied the defendant's motion to dismiss and granted the defendant leave to amend the counterclaim and to add the new parties.
Alfa Insurance Corporation v. Word of Faith Ministries, 139 F.R.D. 350, 353 (S.D. Miss. 1991).
In yet another Rule 13(h) case, Hartford Steam Boiler Inspection and Insurance Company v. Quantum Chemical Corp., 1994 WL 494776 (N.D. Ill.), the court observed:
Support for the exercise of supplemental jurisdiction over additional non-diverse parties to compulsory counterclaims comes also from the leading civil procedure authorities. "[W]here a party asserting a . . . counterclaim of the compulsory type seeks to bring in additional parties [as permitted under Fed.R.Civ.P. 13(h)], no diversity of citizenship between the counterclaimant and the added party is required, whether jurisdiction of the main action is founded on diversity or upon a federal matter." 3 J. Moore R. Freer, Moore's Federal Practice ¶ 13.39, p. 13-236 (2d ed. 1993). Similarly, Wright and Miller's Federal Practice and Procedure informs us that "[u]ncertainty over the potential restrictions . . . on the ability of the courts to assert ancillary jurisdiction over Rule 13(h) parties joined to a compulsory counterclaim was laid to rest by the enactment of a new statutory form of jurisdiction, supplemental jurisdiction, in 1990. That jurisdiction is availabl e for all related claims that form part of the same case or controversy as the original claims." 6 C. Wright A. Miller, Federal Practice and Procedure § 1436, p. 13 (Supp. 1994). As support for this interpretation of § 1367, Wright and Miller expressly note that subsection (a) of § 1367 "expressly provides that `such supplemental jurisdiction shall include claims that involve the joinder . . . of additional parties/" Id. The rationale for allowing supplemental jurisdiction over additional parties to compulsory counterclaims is that, by definition, compulsory counterclaims "involve the same transaction or occurrence as the original action and therefore are closely related to the main claim." Id. at 192 (1971). Permissive counterclaims, by contrast, require independent jurisdictional grounds. 3 Moore Freer, supra ¶ 13.39, at 13-237.
Thus, if PSC's counterclaims against Air Liquide are compulsory, this Court has supplemental jurisdiction over the new party to the counterclaim (Whittington), regardless of the lack of diversity of citizenship.
3. Rule 13(a)(1) Compulsory Counterclaim
It is well-settled that a compulsory counterclaim under Fed. Rule Civ. P. 13(a) is within the ancillary/supplemental jurisdiction of the court because it necessarily arises out of the same transaction or occurrence as the original claim. The liberal test employed by the Fifth Circuit to determine whether counterclaims are compulsory is predicated on the premise that related disputes between parties should be settled in a single lawsuit. There is no serious dispute that PSC's counterclaim back against the original plaintiff is inextricably intertwined with and related to the main claim, i.e., plaintiff Air Liquide's declaratory judgment action regarding the rights and liabilities of the parties to the carbide lime agreement.
See Transitional Hospitals Corp. of Louisiana. Inc. v. DBL North American, Inc., 2002 WL 277767, *2 (E. D. La.) (Barbier, J) (citing Zurn Industries, Inc. v. Acton Construction Co., 847 F.2d 234, 236 (5th Cir. 1988) and Revere Copper and Brass, Inc. v. Aetna Casualty and Surety Co., 426 F.2d 709, 714 (5th Cir. 1970)).
See Alpha Insurance Corporation v. Word of Faith Ministries, 139 F.R.D. 350, 352 (S.D. Miss. 1991) (citing Plant v. Blazer Financial Services, Inc. of Ga, 598 F.2d 1357, 1361 (5th Cir.), reh'g denied, 605 F.2d 555 (5th Cir. 1979). E. g., White v. Imperial Adjustment Corporation, 2002 WL 1809094, *16 (E. D. La.) (Englehardt, J.) (citing Plant v. Blazer, supra).
The Court is not persuaded by any suggestion that PSC's state law counterclaims against Air Liquide are not compulsory because PSC brought these same claims against it in the state court suit, albeit presently removed and stayed, but nevertheless pending in the Middle District of Louisiana. Rule 13(a)(1) states that, in the case of a compulsory counterclaim, the pleader need not state the claim if "at the time the action was commenced the claim was the subject of another pending action." Rule 13(a)(1) simply gives PSC the option not to pursue these claims in this court, an option which it has not exercised. Rule 13(a)(1) does not make PSC's counterclaim non-compulsory.
See Tyler Refrigeration v. Inter-America Sales Co., Inc., 1989 WL 120683 (E. D. La.); H.L. Peterson Co. v. Applewhite, 383 F.2d 430, 433, n. 3. (5th Cir. 1963).
The Fifth Circuit has established a test for determining whether a claim is compulsory. An affirmative answer to any of these four questions indicates that the counterclaim is compulsory:
(1) whether the issues of fact and law raised by the claim and counterclaim largely are the same;
(2) whether res judicata would bar a subsequent suit on defendant's claim absent the compulsory counterclaim rule;
(3) whether substantially the same evidence will support or refute plaintiffs claim as well as the defendant's counterclaim; and
(4) whether there is any logical relationship between the claim and the counterclaim.Underwriters at Interest on Cover Note JHB92M10582079 v. Nautronix, Ltd., 79 F.3d 480, 483 n. 2 (5th Cir. 1996).
At the very least, the logical relationship test is met in this case. The Court observes that it was not PSC's decision to litigate in this Court. Nevertheless, it filed the counterclaims in this Court because it believed them to be compulsory. Indeed, under Fed.R.Civ.P. 13(a), a compulsory counterclaim that is not asserted is barred. Air Liquide rests its opposition to the motion to amend almost entirely on the erroneous assumption that, in addition to claims by plaintiffs against new parties whose joinder would destroy diversity, § 1367(b)'s exception also applies to claims by defendants against new parties whose addition would destroy diversity. As previously explained, the clear and unambiguous terms and provisions of subsection (b) apply solely to joinder claims made by plaintiffs, not defendants.
"McDaniel v. Anheuser-Busch, Inc., 987 F.2d 298, 304 (5th Cir. 1993).
The counterclaims against Air Liquide are compulsory, and thus, the Court has supplemental jurisdiction over the Rule 13(h) counterclaim against Whittington. The existence of supplemental jurisdiction over a claim by a defendant against a new non-diverse party to a counterclaim does not depend on whether Rule 13(h) joinder was necessary pursuant to Rule 19 or permissive pursuant to Rule 20. "Wright and Miller observe that Rule 13(h) does not differentiate between panics added pursuant to Rule 19 and parties added pursuant to Rule 20, and explain that inasmuch as the claim itself is already within the court's ancillary jurisdiction [now codified in § 1367 as supplemental jurisdiction], the party should be added on the same basis in the interests of maximum judicial efficiency and economy." The Hartford court opined: `The fact that Rule 13(h) does not distinguish between Rule 19 and Rule 20 parties taken in conjunction with the purpose of ancillary jurisdiction and the liberal joinder policy encouraged by the federal rules argues for the settlement of as many related claims as possible within the scope of a single action." Air Liquide does not argue that any of the below listed exceptions provided in § 1367(c) exempt PSC's Rule 13(h) counterclaim against Whittington from the broad grant of supplemental jurisdiction set forth in subsection (a). Section 1367(c) provides:
The Hartford Steam Boiler Inspection and Insurance Company, 1994 WL 494776 *4. See also Fidelity and Guaranty Insurance Company v. Reb Steel Equipment Corp., 2000 WL 88688, ** 2-3 n. 1 (N.D. Ill.)
'The Hartford Steam Boiler Inspection and Insurance Company, 1994 WL 494776 * 6 (inner quotation marks omitted).
"Id.
(c) The district courts may decline to exercise supplemental jurisdiction over a claim under subsection (a) if —
(1) the claim raises a novel or complex issue of State law,
(2) the claim substantially predominates over the claim or claims over which the district court has original jurisdiction,
(3) the district court has dismissed all claims over which it has original jurisdiction, or
(4) in exceptional circumstances, there are other compelling reasons for declining jurisdiction.
This Court finds Air Liquide's citations of authority, Hot Springs Associates, Inc. v. Kiesler, 1992 WL 888644 (W. D. Va.) and Mayatextil. S.A. v. Liztex U.S.A., Inc., 1993 WL 180371 (S.D. N. Y.), neither persuasive nor controlling. In each of the Mayatextil and Hot Springs Associates cases, the district judge expressly recognized that Section 1367 did not by its terms apply. Most notably, in neither case did the district court discuss or recognize the express language of § 1367(b)'s restriction of supplemental jurisdiction which applies by its terms only to claims by plaintiffs . The Rule 13(h) counterclaim at issue in this case is one pled by the defendant, PSC.
There is indeed a paucity of jurisprudence directly addressing the issue of Rule 13(h) joinder and whether it invokes the supplemental jurisdiction of the Court. The undersigned Magistrate Judge finds the rationale underpinning the courts' decisions discussed at length above in Zurn, Alpha Insurance Corporation and The Hartford, supra, most persuasive and amply supported by the plain language of the governing statute, 28 U.S.C. § 1367. No longer are courts constrained to navigate the jurisprudential thicket addressing the various related doctrines of ancillary and pendant jurisdiction, which was also sometimes referred to as "pendant party" jurisdiction.
While it is by no means automatic, Rule 15 evinces a bias in favor of leave to amend and provides that it "shall be freely given when justice so requires." Fed.R.Civ.P. 15(a). A motion for leave should not be denied "unless there is a substantial reason to do so." This determination is generally entrusted to the sound discretion of the district judge and requires consideration of the following factors: "undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party, and futility of the amendment." Air Liquide cites none of the aforesaid factors as an impediment to the amendments sought.
See In re Southmark, 88 F.3d 311, 315 (5th Cir. 1996); Wimm v. Jack Eckerd Corp., 3 F.3d 137, 139 (5th Cir. 1993).
"See Stripling v. Jordan Prod. Co., 234 F.3d 863, 872 (5th Cir. 2000); Dussouy v. Gulf Coast Inv. Corp., 660 F.2d 594, 597-98 (5th Cir. 1981). See also Foman v. Davis, 371 U.S. 178, 182 (1962); Price v. Pinnacle Brands, Inc., 138 F.3d 602, 608 (5th Cir. 1998).
Jacobsen v. Osborne, 133 F.3d 315, 318 (5th Cir. 1999") Lefalle v. Dallas Independent School District, 28 F.3d 521, 524 (5th Cir. 1994).
See Price, 138 F.3d at 608; see also Foman, 371 U.S. at 182; Chitimacha Tribe of Louisiana v. Harry L Laws Co., Inc., 690 F.2d 1157, 1163 (5th Cir. 1982).
CONCLUSION
For the reasons discussed above, the Court has determined that the defendant's Rule 13(h) counterclaim against the additional party Whittington invokes the § 1367(a) supplemental jurisdiction of the Court and otherwise comports with the applicable law.
Accordingly,
IT IS ORDERED that the defendant PSC's Motion for Leave to Amend is GRANTED.