364 F.3d 1 (1st Cir. 2004), 03-1562, McCulloch v. Velez

Docket Nº:03-1562.
Citation:364 F.3d 1
Party Name:Kenneth McCULLOCH et al., Plaintiffs, Appellants, v. Norberto V
Case Date:April 05, 2004
Court:United States Courts of Appeals, Court of Appeals for the First Circuit

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364 F.3d 1 (1st Cir. 2004)

Kenneth McCULLOCH et al., Plaintiffs, Appellants,


Norberto VÉLEZ, a/k/a Norberto Vélez Malavé, et al., Defendants, Appellees.

No. 03-1562.

United States Court of Appeals, First Circuit

April 5, 2004

Heard March 4, 2004.

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Kenneth McCulloch, with whom Ballard, Rosenberg, Golper & Savitt, Fernando L. Gallardo, and Woods & Woods LLP, were on brief, for appellants.

Robert Millan, for appellees.

Before TORRUELLA, SELYA, and LIPEZ, Circuit Judges.

SELYA, Circuit Judge.

This litigation has its genesis in a purchase and sale agreement (the P & S) executed on May 7, 1997. Under it, the

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sellers--plaintiff-appellant Kenneth McCulloch and two corporations wholly owned by him (Mandorico, Inc. and Tip Top Donuts, Inc.)--agreed to purvey, inter alia, a baked goods manufacturing business located in Puerto Rico and certain equipment associated therewith to Norberto Vélez Malavé, his wife, their conjugal partnership, and Caribbean Bakers, Inc. (collectively, the purchasers or the defendants). The sellers also agreed to assign, and the purchasers agreed to assume, an existing lease for the business premises between the Puerto Rico Industrial Development Corporation (as lessor) and Tip Top Donuts (as lessee).1

The P & S required the purchasers to make installment payments and granted the sellers the right to retrieve the business and the equipment if the purchasers committed an event of default and failed to remedy it within a specified cure period. McCulloch alleges that an uncured default occurred in or around May of 2001. In all events, he took an assignment from Mandorico of its rights under the P & S and, together with his wife and their conjugal partnership, filed suit in the United States District Court for the District of Puerto Rico. Federal jurisdiction was premised on diversity of citizenship (the McCullochs are citizens of New York and the defendants are citizens of Puerto Rico) and the existence of a controversy in the requisite amount. 28 U.S.C. § 1332(a)(1). The complaint charged that the defendants had defaulted on the P & S and owed $43,750 in unpaid installments, at least $50,000 as the value of equipment entrusted to them, and at least $50,000 in back rent.

In due course, the plaintiffs moved for summary judgment. The defendants opposed the motion. They also moved to dismiss the complaint pursuant to Fed.R.Civ.P. 12(b)(1) and Fed.R.Civ.P. 19(b). That motion questioned the district court's subject matter jurisdiction on two grounds, namely, (i) whether the plaintiffs had made a good-faith claim for an amount sufficient to give the court jurisdiction, and (ii) whether true diversity existed in view of the defendants' assertion that Mandorico (a corporation organized under the laws of Puerto Rico) was an indispensable party and/or the real party in interest on the plaintiffs' side of the case.

On September 6, 2002, a magistrate judge recommended that the motion to dismiss be denied. He opined that the amount-in-controversy requirement had been satisfied and that Mandorico was not an indispensable party. The defendants objected to the magistrate judge's report and recommendation. While that objection was pending, the plaintiffs moved to enjoin the defendants from continuing to occupy the business premises and from removing any equipment. They also filed a second motion for summary judgment (which apparently superseded their earlier summary judgment motion).

The district court reviewed the magistrate judge's report and recommendation de novo, Fed.R.Civ.P. 72(b), and granted the defendants' motion to dismiss for lack of subject matter jurisdiction. McCulloch v. Vélez Malavé, 260 F.Supp.2d 358, 361-64 (D.P.R.2003). The court did not, however, place its principal reliance on the arguments advanced by the defendants, but, rather, focused on Mandorico's assignment of rights to McCulloch and concluded that the assignment was an improper attempt to "create [federal] jurisdiction where none existed." Id. at 362. Consequently, the assignment had to be disregarded

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for jurisdictional purposes. Id. at 363 (citing 28 U.S.C. § 1359). Only then did the court revert to the original grounds raised in the motion to dismiss; it concluded that, stripped of the assignment, Mandorico would become an indispensable party (whose joinder would destroy diversity) and/or the plaintiffs could not establish damages in a sum sufficient to satisfy the amount-in-controversy requirement. Id. at 363-64. Accordingly, the court dismissed the...

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