872 F.2d 1416 (9th Cir. 1989), 86-6670, Kruso v. International Telephone & Telegraph Corp.

Docket Nº:86-6670.
Citation:872 F.2d 1416
Party Name:Lynda KRUSO, Gloria Yokubaitis, Kathy E. Acquistapace, Christine M. Forakis, et al., Plaintiffs-Counterdefendants-Appellants, v. INTERNATIONAL TELEPHONE & TELEGRAPH CORP., ITT Commercial Finance Corp., ITT Industrial Credit Co., a corporation, ITT Business Communications, et al., Defendants- Counterplaintiffs- Appellees.
Case Date:April 19, 1989
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit

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872 F.2d 1416 (9th Cir. 1989)

Lynda KRUSO, Gloria Yokubaitis, Kathy E. Acquistapace,

Christine M. Forakis, et al.,




Finance Corp., ITT Industrial Credit Co., a

corporation, ITT Business

Communications, et al.,




No. 86-6670.

United States Court of Appeals, Ninth Circuit

April 19, 1989

Submitted March 9, 1989[*]

As Amended on Denial of Rehearing June 26, 1989.

Decided .

Page 1417

Bruce A. Friedman, Los Angeles, Cal., for plaintiffs-counterdefendants-appellants.

Robert F. Scoular, Martin J. Foley, and Hillary Arrow Booth, Bryan, Cave, McPheeters & McRoberts, Los Angeles,

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Cal., for defendants-counterplaintiffs-appellees.

Appeal from the United States District Court for the Central District of California.

Before FLETCHER, PREGERSON and LEAVY, Circuit Judges.

PREGERSON, Circuit Judge:


On March 11, 1986 plaintiff-appellants (hereinafter "plaintiffs") filed a complaint in state court alleging that defendant-appellees (hereinafter "defendants"), including ITT Corp., ITT Commercial Finance Corp., and individuals alleged to be their agents, had injured plaintiffs by means of fraud, intentional interference with business relationship, wrongful termination of business relationship, and breach of implied covenant of good faith and fair dealing. The complaint stemmed from a series of transactions in which International American Advertising Corporation d/b/a American Graphics (AG) and U.S. Teletypeset Corporation (TEL) (hereinafter, AG and TEL will be referred to collectively as "AG") had attempted to establish a computerized typesetting business. AG sold "packages" of computer hardware, software, and training to "owner-operator" customers to set up their own typesetting business. Some of the customers individually applied to ITT Commercial Finance Corp. for acquisition financing. ITT Commercial Finance Corp. also provided AG with wholesale financing for acquisition of an inventory of computers for sale to prospective customers.

In their complaint, plaintiffs (owner-operators, shareholders of AG and "employees") alleged that defendants had failed to satisfy their obligation to supply plaintiffs with personal computers and financing. Plaintiffs alleged that defendants had promised to provide financing for the sale of the "package" to members of the public for a period of at least two years, and then broke this promise. Plaintiffs also alleged that defendants had made and broken a promise to provide AG with a continuous supply of ITT personal computers for at least two years. According to plaintiffs, defendants broke these promises when defendants Tom Green and Barbara Bookwalter suddenly, and without any justification, ordered all of AG's inventory removed from its warehouse and refused to provide AG with any further financing. As a result, plaintiffs allege, AG was forced out of business and the owner-operators were left with a useless package of computer products.

Defendants describe the events leading to the lawsuit rather differently. In their version, there was no agreement between defendants and plaintiffs that financing would be available for any set period of time. According to defendants, AG promised the owner-operators to whom it sold the computer package that it would assist them in setting up their own typesetting businesses, and guaranteed to provide them with business. Defendants maintain that AG also promised to provide the owner-operators with phototypesetting services. Defendants contend that AG failed to provide the owner-operators with the business it had guaranteed, and as a result some of the owner-operators stopped paying their equipment leases with ITT Commercial Finance Corp. At the same time, say defendants, AG bounced checks to ITT Commercial Finance Corp. and removed ITT's equipment from a bonded warehouse without paying for it. After learning of this and discovering that AG lacked sufficient funds in the bank to pay for the removed equipment and had not paid the salaries of the bonded warehouseman and its own employees or the fees of the bonded warehouse company, ITT Commercial Finance Corp. exercised its reserved right to provide no further wholesale financing to AG and requested payment for its equipment. AG, according to defendants, refused to pay its indebtedness to ITT Commercial Finance Corp. Defendants contend that plaintiff Broyles, a shareholder in AG, changed the locks on the bonded warehouse, locking out the bonded warehouseman and ITT Commercial Finance Corp. AG, however, subsequently agreed to return

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ITT Commercial Finance Corp's equipment to it voluntarily, and, according to defendants, did so. At this point, defendants say, AG still owed ITT Commercial Finance Corp. over $1 million. When ITT requested payment, plaintiffs, who included a number of owner-operators and shareholders in AG, brought this lawsuit.

AG was not a plaintiff in the lawsuit filed in state court on March 11, 1986. Instead, a group of shareholders in AG, referred to by plaintiffs as the "Teletypeset plaintiffs," together with some of the owner-operators ("Owner-operator plaintiffs") and employees either of the Teletypeset plaintiffs (according to plaintiffs) or AG (according to defendants) ("Employee plaintiffs") brought the action. All of the 156 plaintiffs were California residents. As defendants, plaintiffs named ITT Corporation, ITT Commercial Finance Corp., a number of other ITT entities, nine individual named defendants, and "Does 1 through 50." Among the nine named defendants were Tom Green and Barbara Bookwalter, residents of California. All of the other defendants (aside from the Does) were citizens of states other than California. Plaintiffs have never specified the identity or state of residence of any of the Doe defendants.

On April 10, 1986 defendants filed a Verified Petition for Removal. 1 In their petition they argued, first, that there was complete diversity between the parties notwithstanding the California residence of Green and Bookwalter because those two persons had been joined "fraudulently and improperly" by plaintiffs for the sole purpose of attempting to avoid removal of the case to federal court. According to defendants, plaintiffs had failed to state, and could not state, a claim against Green and Bookwalter upon which relief could be granted. 2 Second, defendants argued that "Does 1 through 50" were "merely formal and phantom parties.... [T]he allegations with respect to them are sham and cannot affect the jurisdiction of [the district] Court or defeat the removal of this action to [the district] Court."

After the case was removed to the district court, plaintiffs moved to remand it back to state court under 28 U.S.C. Sec. 1447(c). 3 In their motion plaintiffs argued that the case had been improvidently removed because "diversity of citizenship does not exist as two of the defendants [Bookwalter and Green] are citizens of the State of California." Plaintiffs did not deny defendants' averment that the Doe defendants were "shams."

After a hearing, the district court denied plaintiffs' motion for remand in an order dated April 23, 1986. The order denied plaintiffs' application for remand, and then

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dismissed plaintiffs' complaint against Bookwalter and Green because "[t]he joinder of defendants Barbara Bookwalter and Tom Green [has] been found to have been not justified on the face of the pleadings." 4 The order went on to invite plaintiffs to file a motion for reconsideration or an amended complaint, or both.

On April 29, 1986 plaintiffs filed a motion for reconsideration of the order denying their motion to remand, to which they attached as an exhibit a "Proposed First Amended Complaint" which, they said, they planned to file in state court if the case was remanded. According to plaintiffs, they did not file this Proposed First Amended Complaint with the district court because they did not want to "concede jurisdiction of the federal court...." Appellants' Opening Brief at 3. The Proposed First Amended Complaint listed Does 1 through 50 among the defendants.

On June 3, 1986 the district court denied the motion for reconsideration. The court stated:

The Court finds no basis for reconsidering its prior ruling that the conclusory allegations in the original complaint were insufficient to sustain the joinder of the individual defendants, and that therefore diversity jurisdiction exists in this case.

The district court refused to certify its ruling on the motion for remand for interlocutory review, and further refused to certify it as a final judgment under Rule 54(b) of the Federal Rules of Civil Procedure.

Plaintiffs nonetheless sought review of the order denying remand in this court. They also sought an emergency stay of proceedings in the district court. This court dismissed the attempted appeal for lack of jurisdiction and denied the emergency motion.

After defendants had filed motions to dismiss and for summary judgment, the district court on August 15, 1986 dismissed plaintiffs' complaint pursuant to Rules 37(b) and (d) and 41(b) of the Federal Rules of Civil Procedure. The court also entered default against plaintiffs on ITT Commercial Finance Corp.'s counterclaims. On October 16, 1986 the district court entered separate orders dismissing the complaint on grounds independent of the August 15 dismissal. The court granted defendants' motions to dismiss and for summary judgment. The court also entered judgment for ITT Commercial Finance Corp. on its counterclaims. Finally, the court entered a finding that plaintiffs had violated Rule 11 of the Federal Rules of Civil Procedure because their complaint "was not well grounded in fact and was not warranted by existing law or a good faith argument...

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