Jacobs v. Patent Enforcement Fund

• Decision Date: 13 October 1980
• Parties: (2nd Cir. 2000) JOSEPH J. JACOBS, Trustee of the Jacobs Family Trust of
• Court: U.S. Court of Appeals — Second Circuit

Page 565

230 F.3d 565 (2nd Cir. 2000)

JOSEPH J. JACOBS, Trustee of the Jacobs Family Trust of 10/13/80, DENNIS P.A. TOBIN, DIXON FRICK BURDEN, Plaintiffs Appellees, v. PATENT ENFORCEMENT FUND, INC, a Delaware Corp, ROBERT L. HILL, FRED SINGER, VALUTRON, NV, a Netherlands Antilles Business Corp., BONNYBROOK CHARITABLE TRUST, JOANNE LABELLA, Defendants, DAVID L. HILL, HARBOR RESEARCH CORP., Defendants Appellants.

Docket No. 99-9237

August Term, 2000

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

Argued: September 5, 2000

Decided: September 27, 2000

Appeal from entry of a default judgment. Dismissed.

JAY W. EISENHOFER, Grant and Eisenhofer, P.A., Wilmington, DE, for defendants-appellants.

BEVERLY S. KNAPP, Shrader and Knapp, Westport, CT, and STEVEN M. FEDER, Smith McCullough PC, Denver, CO, for plaintiffs-appellees.

Before: CALABRESI, and SOTOMAYOR, Circuit Judges, and TRAGER, District Judge.¹

CALABRESI, Circuit Judge:

I.

This appeal involves a shareholder derivative action brought by (among other plaintiffs) Carl Johnston, Dixon Burden, and Dennis Tobin ("plaintiffs"), in their capacities as shareholders of Patent Enforcement Fund, Inc. ("PEF"), to recover damages from Harbor Research Corporation ("HRC"). Plaintiffs alleged that through a series of fraudulent business transactions (mostly fraudulent loans) among PEF, HRC, a third business organization called Valutron, and an individual named David Hill ("Hill"),² monies rightfully belonging to PEF had been siphoned, through Valutron and HRC, to Hill.

Plaintiffs began this diversity action in the United States District Court for the District of Connecticut on January 14, 1998, and on January 28, HRC was served with a summons and complaint (return of service, indicating service on Hill for HRC, was received by the district court on February 6). HRC failed to file an answer, and on April 13, 1998, the clerk of the court entered a default against HRC. On April 14, Hill moved to intervene as a defendant, and on June 2, 1998 this motion was granted. Meanwhile, plaintiffs had, on May 26, moved for entry of a default judgment against HRC, and supplemented their motion with substantial written submissions. Although Hill (after being permitted to intervene) opposed the motion, the district court (Judge Peter Dorsey) entered a default judgment of $4,039,800.30 against HRC and in favor of plaintiffs on March 31, 1999.

Hill moved for reconsideration of the default judgment on April 12, 1999, and on September 2, Judge Dorsey simultaneously granted Hill's motion for reconsideration and summarily concluded that "since [Hill] has raised no issues not previously considered by the Court, the prior Ruling is adhered to." Finally, on October 4, a notice of appeal was timely filed by "David L. Hill, Intervenor Defendant and on behalf of Harbor Research Corp." Hill and HRC (together "appellants") contend that the district court committed reversible error both in entering the default judgment without holding a hearing on damages and in denying the motion to vacate the default judgment.

II.

Before we may reach any of the other issues raised by this appeal, we must first deal with an exceedingly nice jurisdictional question. The question arises because on appeal, this court, nostra sponte, pointed out to the parties (as we are obligated to do), that plaintiffs had failed adequately to allege diversity in their original complaint. See E.R. Squibb & Sons, Inc. v. Accident & Cas. Ins. Co., 160 F.3d 925, 929 (2d Cir. 1998). Specifically they had alleged only the residence, and not the citizenship (or domicile), of the parties. Most importantly, one of the plaintiffs stated only that he was a resident of London, England, raising the concern that he might be a United States citizen domiciled abroad, and therefore necessarily non-diverse. See Cresswell v. Sullivan & Cromwell, 922 F.2d 60, 68-69 (2d Cir. 1990) (holding that a United States citizen domiciled abroad cannot ever be diverse from any opposing party).

Pursuant to this court's authority under 28 U.S.C. §1653, which provides that "[d]efective allegations of jurisdiction may be amended, upon terms, in the trial or appellate courts," we requested supplemental briefing on the question of the existence of jurisdiction. Plaintiffs' response, and the affidavits they have submitted in support of that response, show that the requisites for diversity jurisdiction are in fact present. This does not, however, settle the difficulty raised by plaintiffs' failure originally to plead jurisdiction properly, because it does not determine whether plaintiffs may cure the defect in their pleadings at this late stage without unsettling the judgment reached earlier in the case. We conclude that plaintiffs can indeed do this, but some explanation of why that is so is called for.

The root of the problem is that we must determine whether an adequate pleading of diversity is itself a necessary element of diversity jurisdiction, and therefore a pre-requisite for there being diversity jurisdiction in a case at all, or whether it is merely an allegation informing the court that diversity jurisdiction independently exists. If the first of these alternatives were correct -- if adequate pleading of diversity were itself a necessary element of diversity jurisdiction -- then there would be, at this moment, no federal jurisdiction in this case. Accordingly, we would have to decide whether we might allow plaintiffs to cure this defect (not simply in their allegation of jurisdiction but in jurisdiction itself) and thereby create jurisdiction after the fact. The Supreme Court's holding in Newman-Green, Inc., v. Alfonzo-Larrain, 490 U.S. 826 (1989), suggests that the courts of appeals may indeed create jurisdiction nunc pro tunc in this way, but it adds that this power "should be exercised sparingly," and only when doing so will not prejudice any of the parties to the litigation. Id. at 837-38. And in the specific context of a default judgment, serious questions of prejudice would inevitably arise, because it might seem unreasonable to require a defendant to appear to defend a case over which the court had no subject matter jurisdiction whatsoever.

We decline, however, to adopt this approach. Instead, we hold that while a complaint must present certain quite particular allegations of diversity jurisdiction in order to be adequate, the actual existence of diversity jurisdiction, ab initio, does not depend on the complaint's compliance with these procedural requirements. This is the only conclusion consistent with the established practice that when a defendant moves, under Fed. R. Civ. P. 12(b)(1), to dismiss a complaint that inadequately pleads diversity jurisdiction (under circumstances in which extrinsic or subsequently adduced evidence shows that diversity exists), then the court "may [either] deny the motion and direct the pleader to amend, or it may dismiss with leave to amend." 5A Charles A. Wright & Arthur R. Miller, Federal Practice and Procedure §1350 at 223 (2d ed. 1990) (footnote omitted).

It is also the only conclusion consistent with the actual practice of our court, which has on two recent occasions allowed parties to cure inadequate pleadings of diversity without reference to the prejudice analysis required by Newman-Green. See Universal Reinsurance Co. Ltd. v. St. Paul Fire and Marine Ins. Co., 224 F.3d 139, 140-42, No. 99-9191, (2nd Cir. Aug. 8, 2000); Canedy v. Liberty Mut. Ins. Co., 126 F.3d 100, 103 (2d Cir. 1997).³ If adequate pleadings of diversity were themselves an essential element of diversity jurisdiction, then the first of these alternatives could not be available to the courts, for they would have no jurisdiction on which to base...