Eriline Co. S.A. v. Johnson, 03-1613.

• Decision Date: 17 March 2006
• Docket Number: No. 03-1613.,03-1613.
• Parties: ERILINE COMPANY S.A.; Edgardo Bakchellian, Plaintiffs-Appellants, v. James P. JOHNSON; Universal Marketing Group, Incorporated; Prime Source Trading, LLC; Steven Cloudtree; Michael Koucky, a/k/a Michael Loucky, Defendants-Appellees, and Raymond E. Moore; Lee Alan Moore, Defendants. Justin Antonipillai, Amicus Supporting Appellees.
• Court: U.S. Court of Appeals — Fourth Circuit

440 F.3d 648

ERILINE COMPANY S.A.; Edgardo Bakchellian, Plaintiffs-Appellants, v. James P. JOHNSON; Universal Marketing Group, Incorporated; Prime Source Trading, LLC; Steven Cloudtree; Michael Koucky, a/k/a Michael Loucky, Defendants-Appellees, and Raymond E. Moore; Lee Alan Moore, Defendants.

Justin Antonipillai, Amicus Supporting Appellees.

No. 03-1613.

United States Court of Appeals, Fourth Circuit.

Argued: November 29, 2005.

Decided: March 17, 2006.

COPYRIGHT MATERIAL OMITTED

ARGUED: Don Rodney Kight, Jr., Asheville, North Carolina, for Appellants. Justin Sanjeeve Antonipillai, Arnold & Porter, L.L.P., Washington, D.C., for Amicus Supporting Appellees. ON BRIEF: Elizabeth A. High, Arnold & Porter, L.L.P., Washington, D.C., for Amicus Supporting Appellees.

Before WILLIAMS, KING, and GREGORY, Circuit Judges.

Vacated and remanded by published opinion. Judge King wrote the opinion, in which Judge Williams and Judge Gregory joined.

OPINION

KING, Circuit Judge.

Appellants Eriline Company S.A. and Edgardo Bakchellian seek relief from the dismissal of their state law claims, arising out of an alleged fraud scheme, against various defendants who were in default. They contend on appeal that the district court erred in raising a statute of limitations defense sua sponte and dismissing their state law claims on that basis. See Eriline Co. S.A. v. Johnson, No. CA-01-215 (W.D.N.C. Oct. 16, 2002). As explained below, in the circumstances of this case the district court erred, and we vacate and remand.

I.

On November 20, 1997, Eriline entered into an investment agreement (the "Investment Agreement") with Universal Marketing Group, Inc.¹ The Investment Agreement was signed by Eriline's president, Bakchellian, as well as Universal's president, James P. Johnson. Under the Agreement, Eriline was to provide Universal with the sum of $450,000 that Universal was to combine with other funds in order to lease $100 million from Capital Assets Holding Corporation. The $100 million was then to be used to purchase a "prime bank" guarantee or letter of credit which would generate enormous profits for Eriline and others. Prior to the Agreement's execution, Eriline, on September 21, 1997, deposited the sum of $450,000 into an escrow account controlled by brothers Raymond E. Moore and Lee Allen Moore. Eriline was to direct the release of those funds to Universal upon confirmation by Capital's bank that it held $100 million of Capital's money in Universal's name. Approximately fifteen banking days thereafter, Universal was to facilitate the first payment of profits to Eriline in the sum of $450,000, with additional payments of $450,000 to follow once a month for the next nine months, for a total of $4.5 million. Unfortunately for Eriline, it never saw a dime of its expected profits or its original investment.

On September 14, 2001, Eriline and Bakchellian (together, the "Plaintiffs") filed their complaint (the "Complaint") in the Western District of North Carolina against Universal, Johnson, Prime Source Trading, LLC, Steven Cloudtree, Michael Koucky (a/k/a Michael Loucky), and the Moore brothers.² The Complaint alleged violations of § 10(b) of the Securities Exchange Act of 1934 against each of the seven defendants (the "federal securities claim"). It also alleged various state law claims of breach of contract, negligence, breach of trust, fraud, rescission, and conversion against the defendants in various configurations (the "state claims"). The state claims included a claim against Johnson for breach of an agreement by which he allegedly promised to pay Bakchellian $4.5 million in exchange for a release from any liability to Bakchellian and Eriline ("the `Release Agreement'").³

Of the seven defendants, only the Moores answered the Complaint. On April 1, 2002, the Plaintiffs filed a motion for entry of default against defendants Universal, Johnson, Prime Source, and Cloudtree, and the court clerk entered the default that same day. On June 3, 2002, the Plaintiffs filed two motions for default judgment: one against Johnson in the sum of $4.5 million on the claim that Johnson had breached the Release Agreement, and the other against Johnson, Universal, Prime Source, and Cloudtree in the sum of $450,000 on the federal securities claim as well as several of the state claims. The clerk entered both of the default judgments later that day. Thereafter, in August 2002, the plaintiffs voluntarily dismissed their claims against Koucky and the Moores.⁴

By order of October 16, 2002, the district court vacated both the default judgments entered by the clerk on June 3, 2002, in part because the Plaintiffs had failed to support their requests by filing the Investment Agreement and the Release Agreement with either the Complaint or their motions for default judgment. See Eriline Co. S.A. v. Johnson, No. CA-01-215 (W.D.N.C. Oct. 16, 2002). On March 7, 2003, the Plaintiffs filed a second set of motions for default judgment, seeking the same relief they had sought on June 3, 2002. This time, however, the Plaintiffs supported their motions with several documents, including copies of the Investment Agreement and the Release Agreement.

By order of April 11, 2003, the district court, which then had the Investment Agreement before it for the first time, raised the defense of the statute of limitations sua sponte. It concluded that the federal securities claim was barred by the three-year statute of limitations in 15 U.S.C. § 78i(e), and that the state claims were barred by the three-year statute of limitations in section 1-52 of the North Carolina General Statutes. In so ruling, the court expressed its view that the running of a limitations period is jurisdictional in nature and thus must be raised and considered by the court sua sponte when not affirmatively asserted by one of the parties. The court therefore denied the Plaintiffs' second set of motions for default judgment and dismissed the Complaint in its entirety for lack of subject matter jurisdiction.

The plaintiffs have timely noted their appeal. Because the defendants had defaulted and were not represented by counsel, we proceeded to appoint, on July 26, 2005, an "amicus counsel [to] support[]" them in this appeal (the "amicus").

II.

As explained below, the district court erroneously determined that the expiration of the applicable statutes of limitations deprived it of subject matter jurisdiction. Nevertheless, there is some question whether the district court otherwise possessed such jurisdiction over the state claims. The Plaintiffs invoked the court's diversity jurisdiction under 28 U.S.C. § 1332. At oral argument on November 29, 2005, however, it was observed that the parties might not be completely diverse. Accordingly, by order of even date, we directed the Plaintiffs and the amicus to file supplemental briefs addressing the question of subject matter jurisdiction.

As the Plaintiffs and the amicus now agree, complete diversity is lacking in this case because there are aliens on both sides of the dispute: each of the Plaintiffs is an alien and so is defendant Cloudtree. See Gen. Tech. Applications, Inc. v. Exro Ltda, 388 F.3d 114, 120 (4th Cir.2004) ("[A]lien citizenship on both sides of the controversy destroys diversity.").⁵ In order to remedy this jurisdictional deficiency, the Plaintiffs now urge that we dismiss Cloudtree, the alien defendant without whom complete diversity would exist. See Appellant's Supp. Br. at 3. As the Plaintiffs correctly point out, we have the authority, under the Supreme Court's decision in Newman-Green, Inc. v. Alfonzo-Larrain, to dismiss dispensable defendants who spoil diversity jurisdiction. See 490 U.S. 826, 837, 109 S.Ct. 2218, 104 L.Ed.2d 893 (1989) (ruling that, in interests of judicial economy, a court of appeals has "authority to dismiss a dispensable nondiverse party"). Nevertheless, the Supreme Court has instructed us to exercise such authority "sparingly." Id. Moreover, in order to dismiss Cloudtree from this case, we must first be satisfied that he is not an indispensable party under Rule 19(b) of the Federal Rules of Civil Procedure. See id.; Casas Office Machines, Inc. v. Mita Copystar Am., Inc., 42 F.3d 668, 675 (1st Cir.1994) (observing that appellate courts "may not, of course, dismiss indispensable parties from an action in order to preserve federal jurisdiction"). And the determination of whether a party is indispensable, because of its fact-specific nature, is a matter normally committed to the discretion of the district court. See Coastal Modular Corp. v. Laminators, Inc., 635 F.2d 1102, 1108 (4th Cir.1980) ("The inquiry contemplated by Rule 19 ... is addressed to the sound discretion of the trial court.").

In light of these principles, and because there was little factual development below, if diversity of citizenship were the sole basis of the district court's jurisdiction, we would be tempted to conditionally remand this matter for its determination of whether Cloudtree should be dismissed (on the basis of being a dispensable defendant who spoils jurisdiction). Such a remand, however, is unnecessary because, as the amicus correctly observes, the district court also possessed supplemental jurisdiction over the state claims, which was derived from its federal question jurisdiction over the federal securities claim. See 28 U.S.C. §§ 1331, 1367(a).⁶

Pursuant to § 1367(a), when a plaintiff has alleged both federal and state claims, a district court may exercise supplemental jurisdiction over the state claims if they form "part of the same case or controversy" as the federal claim. In this case, the Plaintiffs' state claims plainly arise from the same "case or controversy" as the federal securities claim, for both the securities claim and the state claims arise from the same set of facts: the fraud scheme allegedly orchestrated by the defendants. See White v. County of Newberry, 985 F.2d 168, 171 (4th Cir.1993) (observing t...