Envirotech Corp. v. Bethlehem Steel Corp.

• Decision Date: 17 February 1984
• Docket Number: No. 84,D,84
• Citation: 729 F.2d 70
• Court: U.S. Court of Appeals — Second Circuit
• Parties: ENVIROTECH CORPORATION and Chemico Air Pollution Control Corp., Plaintiffs-Appellees, v. BETHLEHEM STEEL CORPORATION, Defendant-Appellant, and Envirotech Corporation, Defendant on Counterclaim-Appellee. ocket 83-7331.

Page 70

729 F.2d 70

ENVIROTECH CORPORATION and Chemico Air Pollution Control Corp., Plaintiffs-Appellees, v. BETHLEHEM STEEL CORPORATION, Defendant-Appellant and Envirotech Corporation, Defendant on Counterclaim-Appellee.

No. 84, Docket 83-7331.

United States Court of Appeals Second Circuit.

Argued Oct. 27, 1983.

Decided Feb. 17, 1984.

Richard J. McCarthy, New York City (Gaston, Snow, Beekman & Bogue, New York City, Theodore E. Dinsmoor, Stephen Y. Chow, Richard E. Nathan, Gaston, Snow & Ely Bartlett, Boston, Mass., of counsel), for plaintiffs-appellees.

James H. Reidy, New York City (Hynes, Diamond & Reidy, P.C., New York City, Curtis H. Barnette, Howard A. Feldman, Bethlehem, Pa., of counsel), for defendant-appellant.

Before LUMBARD, OAKES and KEARSE, Circuit Judges.

LUMBARD, Circuit Judge:

Plaintiff-appellee Chemico Air Pollution Control Corporation (CAPC Corporation) brought a diversity suit in the Southern District, Robert W. Sweet, Judge, against Bethlehem Steel Corporation, a Delaware corporation, for breach of contract. Bethlehem counterclaimed against CAPC Corporation and its parent company, Envirotech Corporation, also a Delaware Corporation, for breach of contract arising out of the same transaction. When it was subsequently revealed that Envirotech had been the real party in interest in the original claim against Bethlehem, the district court dismissed that claim for lack of diversity. To protect the counterclaim from dismissal as well, Bethlehem offered to drop Envirotech as a counterclaim defendant, and proceed against CAPC Corporation alone. Judge Sweet refused that request, on the ground that Envirotech was an indispensible party to the counterclaim under Fed.R.Civ.P. 19(b), and dismissed the counterclaim as well for lack of subject matter jurisdiction. Bethlehem appeals from the latter determination.

We affirm.

I.

This dispute concerns seven contracts executed from 1977 to 1979 between Bethlehem and various corporate entities, all controlled by Envirotech. Each of the contracts called for Bethlehem to purchase "quench cars," a pollution control device used in the production of metallurgic coke.

As the jurisdictional difficulties in the case arise from the complicated corporate history of Envirotech and its relevant affiliated entities, we start with an outline of that history. In November, 1975, Envirotech purchased Chemico Air Pollution Control Company (Chemico Company) from an outside corporation, to acquire its quench car technology. Chemico Company was made a division of Envirotech. In February and March, 1977, Chemico Company entered into four contracts to sell quench cars to Bethlehem.

In late February, 1977, Envirotech purchased all of the stock of the Fowler Engineering Corporation, apparently to obtain the firm's New York engineering license and changed Fowler's name to Chemico Air Pollution Control Corporation (CAPC Corporation), a wholly owned independent subsidiary of Envirotech. In April, 1977, Envirotech transferred to CAPC Corporation nearly all of the assets and property of Chemico Company, expressly including the four contracts executed earlier that year between Bethlehem and Chemico Company/Envirotech. Bethlehem consented to the assignment of the contracts. ¹

In October, 1978, for tax and accounting reasons, Envirotech and CAPC Corporation entered into a partnership, in which Envirotech held a 99% interest and CAPC Corporation a 1% interest. CAPC Corporation transferred to the Partnership all its assets and liabilities, including the four Bethlehem contracts.

From March to June, 1979, Bethlehem entered into three more contracts for the purchase of quench cars. Despite the April, 1977, transfer of the four earlier Bethlehem contracts from Chemico Company to CAPC Corporation, these three were again executed in the name of Chemico Company.

In November, 1980, CAPC Corporation, a New York corporation, filed a diversity suit in the Southern District against Bethlehem, a Delaware corporation, for $6 million for breach of contract arising from all seven Bethlehem agreements. In December, 1980, for reasons unrelated to this suit, CAPC Corporation transferred its 1% interest in the Partnership to Envirotech as a dividend, and the Partnership was dissolved. In January, 1981, Bethlehem counterclaimed for $7 million in damages for breach of contract against CAPC Corporation and Envirotech, thus joining Envirotech as a third-party defendant. Presumably in contemplation of possible dismissal of its counterclaim against Envirotech, a Delaware corporation, for lack of diversity, Bethlehem simultaneously filed suit in a New York state court against CAPC Corporation and Envirotech, asserting substantially the same claims raised in the counterclaim. The New York action apparently is still pending.

In April, 1981, CAPC Corporation executed an assignment purporting to transfer all its rights and interests in this lawsuit to Envirotech, although the October, 1978, transfer of CAPC's interests to the Partnership, followed by the December, 1980, transfer of all Partnership interests to Envirotech, apparently had already effected that result. ²

In May, 1981, Envirotech filed suit against Bethlehem in California state court, raising the same claim brought by CAPC Corporation in this suit, asserting that it (Envirotech) had become a successor in interest to that suit by virtue of the April, 1981, assignment. The California action was stayed pending disposition of this suit. On September 14, 1981, Envirotech was joined as an additional party plaintiff in this suit by stipulation of the parties, on the strength of CAPC's purported April, 1981, assignment.

The possibility that CAPC Corporation had ceased to be the party in interest long before the April, 1981, purported assignment was not raised until a pretrial conference with Judge Sweet in July, 1982, by which time discovery was substantially complete. Following the submission of memoranda and oral argument on the question of jurisdiction, Judge Sweet issued an opinion on December 16, 1982, dismissing both claim and counterclaim for lack of subject matter jurisdiction, due to the absence of complete diversity.

As to CAPC Corporation's claim against Bethlehem, Judge Sweet concluded that subject matter jurisdiction had never existed, since the real party in interest at the time the complaint was filed in November, 1980, was the Partnership formed in 1978 between CAPC Corporation and Envirotech, which owned the contract rights in question. ³ Since under New York law, a suit on a debt due to a partnership must be brought on behalf of the partnership, D'Ippolito v. Cities Services Co., 374 F.2d 643, 647 (2d Cir.1967); see Fed.R.Civ.P. 17(b) (capacity to sue determined by law of state in which district court sits), and for purposes of diversity jurisdiction a partnership is a citizen of each jurisdiction of which a partner is a citizen, Cunard Line Ltd. v. Abney, 540 F.Supp. 657, 660 (S.D.N.Y.1982), complete diversity was always lacking. The district court therefore dismissed CAPC Corporation's and Envirotech's claim against Bethlehem for lack of subject matter jurisdiction. The parties do not appeal from that dismissal.

Once Judge Sweet dismissed the original claim for lack of subject matter jurisdiction, he had no power to retain the counterclaim under ancillary jurisdiction. See DHL Corp. v. Loomis Courier Service, Inc., 522 F.2d 982, 985 (9th Cir.1975); see generally 6, C. Wright & A. Miller, Fed.Pract. & Proc. Sec. 1414 at 79-80 n. 86 (1971 & 1983 Supp.). To create an independent basis for jurisdiction (i.e., complete diversity), Bethlehem therefore moved to drop Envirotech as a counterclaim defendant, and proceed only against CAPC Corporation.

Judge Sweet rejected that request, on the ground that Envirotech was an indispensible party to the counterclaim, within the meaning of Fed.R.Civ.P. 19(b). In reaching that determination, he weighed the four factors that are listed in Rule 19(b) and routinely applied by the courts, see, e.g., Provident Tradesmens Bank & Trust Co. v. Patterson, 390 U.S. 102, 109-111, 88 S.Ct. 733, 737-738, 19 L.Ed.2d 936 (1968); Prescription Plan Serv. Corp. v. Franco, 552 F.2d 493, 497 (2d Cir.1977) (citing Provident Tradesmens ): (1) the plaintiff's (here, counterclaim plaintiff's) interest in having a federal forum; (2) the defendant's (here counterclaim defendant's) interest in avoiding multiple litigation, inconsistent relief, and sole responsibility for liability jointly shared, if codefendant is dismissed from the suit; (3) the absent codefendant's inability to protect its interests in any judgment rendered; and (4) the public interest in complete, consistent and efficient settlement of controversies.

The first factor, Judge Sweet concluded, lent no weight to Bethlehem's argument in favor of the dispensibility of Envirotech, since the existence of parallel suits commenced in the New York and California state courts provided adequate alternative fora for Bethlehem's counterclaim. The second and third factors, he concluded, lent little if any weight to the argument on the other side (i.e., in favor of indispensibility), since the identity of interests between Envirotech and CAPC Corporation obviated any serious possibility of prejudice to either the absent or the present parties, were Envirotech dropped from the suit. See Prescription Plan Serv. Corp. v. Franco, supra, 552 F.2d at 497.

The fourth factor, usually termed the danger of "rendering hollow or incomplete relief" in the absence of a party not joined, was paramount in the determination that Envirotech was an indispensible party. Judge Sweet concluded that a review of the tortured history of the legal relationship of Envirotech and its subsidiary, CAPC Corporation, concerning the quench car business revealed that, at the very least, the interests of the two companies were "inextricably intertwined" throughout the period in question; and,...