908 F.2d 1363 (7th Cir. 1990), 89-2350, Olympia Hotels Corp. v. Johnson Wax Development Corp.

Docket Nº:89-2350, 89-2557.
Citation:908 F.2d 1363
Party Name:OLYMPIA HOTELS CORPORATION, James M. Grisebaum, and Martin Brody, Plaintiffs-Appellees, Cross-Appellants, v. JOHNSON WAX DEVELOPMENT CORPORATION, formerly known as Johnson Real Estate Corporation, and Racine Hotel Partners Limited Partnership, Defendants-Appellants, Cross-Appellees.
Case Date:July 20, 1990
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit

Page 1363

908 F.2d 1363 (7th Cir. 1990)

OLYMPIA HOTELS CORPORATION, James M. Grisebaum, and Martin

Brody, Plaintiffs-Appellees, Cross-Appellants,



Johnson Real Estate Corporation, and Racine Hotel

Partners Limited Partnership,

Defendants-Appellants, Cross-Appellees.

Nos. 89-2350, 89-2557.

United States Court of Appeals, Seventh Circuit

July 20, 1990

Argued May 15, 1990.

Rehearing Denied Aug. 21, 1990.

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[Copyrighted Material Omitted]

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Joanne S. Mack, Edwin J. Hughes, Brian E. Butler, Daniel W. Stolper, Stafford, Rosenbaum, Rieser & Hansen, Madison, Wisc., for plaintiffs-appellees, cross-appellants.

Anne W. Reed, William R. Steinmetz, Reinhart, Boerner, Vandeuren, Norris & Rieselbach, Milwaukee, Wisc., James M. Shellow, Dean A. Strang, Shellow, Shellow & Glynn, Milwaukee, Wis., for defendants-appellants, cross-appellees.

Before POSNER and KANNE, Circuit Judges, and SNEED, Senior Circuit Judge. [*]

POSNER, Circuit Judge.

Before us are cross-appeals in a suit arising out of a contract dispute. The appeals are rich with issues, and to discuss them intelligibly we shall have to simplify matters brutally.

In 1988, Olympia Hotels Corporation filed suit against Racine Hotel Partners Limited Partnership charging breach of contract and, by a subsequent amendment to the complaint, conspiracy as well, all in violation of Wisconsin law. The basis of federal jurisdiction was diversity of citizenship. Racine questioned the existence of diversity, claiming that Olympia's principal place of business was in Wisconsin, the state of which Racine's partners were citizens, Carden v. Arkoma Associates, --- U.S. ----, 110 S.Ct. 1015, 108 L.Ed.2d 157 (1990), and not in Texas as Olympia claimed. The jurisdictional issue became moot when Racine filed compulsory counterclaims that charged Olympia not only with breach of contract and with fraud in the inducement of the contract--both claims under Wisconsin law--but also with violations of the federal RICO statute. The RICO claims were not frivolous, and therefore they gave the district court federal-question jurisdiction over the counterclaims, and (because these were compulsory counterclaims) ancillary jurisdiction, equivalent to pendent jurisdiction, over the complaint. Baker v. Gold Seal Liquors, Inc., 417 U.S. 467, 469 n. 1, 94 S.Ct. 2504, 2506 n. 1, 41 L.Ed.2d 243 (1974); Robbins v. Lynch, 836 F.2d 330, 334 (7th Cir.1988); 6 Wright, Miller & Kane, Federal Practice and Procedure Sec. 1414, at p. 99 (2d ed. 1990). Any defects in the invocation of diversity jurisdiction became academic. Well, not completely academic, because ancillary, like pendent, jurisdiction is discretionary, Giardono v. Jones, 867 F.2d 409, 414 (7th Cir.1989), whereas diversity jurisdiction is mandatory. If the district judge had realized that the basis for her exercising jurisdiction over the case might be discretionary rather than mandatory, she might have decided to resolve the issue of Olympia's citizenship, and if she found that Olympia was a citizen of Wisconsin after all--so that there was no diversity jurisdiction; the only basis for federal jurisdiction was the doctrine of ancillary jurisdiction--have declined to exercise ancillary jurisdiction over the state law claims. But it is too late for all that. The district judge had

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jurisdiction and exercised it, and the exercise was valid even if she misconceived the basis of that jurisdiction.

The principal counterclaims were not filed until March 23, 1989; and with trial scheduled for May 15, the judge decided to sever the counterclaims (except for Racine's claim for breach of contract) from the plaintiff's claims and try them later. (Again, if the only basis of jurisdiction over those claims was ancillary jurisdiction and she knew this, the sequence would have been curious--taking the ancillary claims before the main one.) They remain pending in the district court, and there is no trial date. The trial on the plaintiff's claims began as scheduled and lasted two weeks. The voir dire of the jury was conducted by a federal magistrate over Racine's objection. At the close of all the evidence the judge directed a verdict for Olympia on Racine's counterclaim for breach of contract and for Racine on Olympia's claim of civil conspiracy. The jury then returned a verdict for Olympia on its breach of contract claim, awarding $1.2 million in damages. The judge entered judgment for that amount under Rule 54(b) of the Federal Rules of Civil Procedure, and Racine has appealed, with Olympia cross-appealing from the dismissal of its claim of civil conspiracy.

The facts bearing on the legal issues are simple enough. Racine, established to create a first-class hotel in the city of that name, hired Olympia, a hotel-management firm, to build and operate the hotel. The contract had a term of twenty-five years and provided that Olympia would have complete control of the hotel (Racine's principals had no experience in the hotel business) and would use its best efforts to make the hotel a success. The hotel was built and went into operation, but it was not a success and after several years of operation Racine gave Olympia written notice of default. Racine complained that Olympia had not used its best efforts to make a success of the hotel and that it had reimbursed itself out of the hotel's revenues for expenses not actually incurred in the hotel's operation. This suit followed shortly.

The first issue is our appellate jurisdiction. Rule 54(b) authorizes the district court to make immediately appealable a judgment that disposes, with finality, of one or more claims, even though other claims remain pending in the district court so that the suit as a whole has not been finally disposed of by that court. It has seemed to us implicit in the rule that the retained and the appealed claims must be factually distinct, for otherwise the court of appeals may be forced to analyze the same facts in successive appeals, a form of piecemeal appealing not authorized by the rule. Horn v. Transcon Lines, Inc., 898 F.2d 589, 592 (7th Cir.1990); Indiana Harbor Belt R.R. v. American Cyanamid Co., 860 F.2d 1441 (7th Cir.1988); ODC Communications Corp. v. Wenruth Investments, 826 F.2d 509, 512 (7th Cir.1987) (per curiam); FDIC v. Elefant, 790 F.2d 661, 664 (7th Cir.1986); A/S Apothekernes Laboratorium for Specialpraeparater v. I.M.C. Chemical Group, Inc., 725 F.2d 1140 (7th Cir.1984).

This is a borderline case. The claims for breach of contract and for civil conspiracy that were tried and that the parties are trying to bring before us in their appeals concern the parties' conduct after the contract was signed and the hotel built and in operation, while the counterclaims that await trial in the district court concern promises that Olympia is alleged to have made when the contract was first being negotiated. Yet the claims and counterclaims are of course closely related; if they were not, the counterclaims would not be compulsory; and we shall see that Racine's principal ground of appeal is that the district judge should have let it prove fraud as a defense to Olympia's claim for breach of contract. The fact that one claim appears in the complaint and another in a counterclaim, moreover, does not make them different claims for purposes of Rule 54(b). Curtiss-Wright Corp. v. General Electric Co., 446 U.S. 1, 9, 100 S.Ct. 1460, 1465, 64 L.Ed.2d 1 (1980); Automatic Liquid Packaging, Inc. v. Dominik, 852 F.2d 1036, 1037 (7th Cir.1988).

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This is not, however, a case in which a party "merely gave different legal characterizations to the same facts." A/S Apothekernes Laboratorium for Specialpraeparater v. I.M.C. Chemical Group, Inc., supra, 725 F.2d at 1143. It is a case in which although the claims arise from a single dispute or factual setting, there are many factual differences between them, as in Automatic Liquid Packaging, supra; Jack Walters & Sons Corp. v. Morton Building, Inc., 737 F.2d 698, 701-03 (7th Cir.1984), and Minority Police Officers Ass'n v. City of South Bend, 721 F.2d 197 (7th Cir.1983). Indeed, it appears that virtually the only facts that overlap are those that are not in dispute.

The only rub is the statement in a number of opinions illustrated by Automatic Liquid Packaging, Inc. v. Dominik, supra, 852 F.2d at 1038; Local P-171, Amalgamated Meat Cutters v. Thompson Farms, 642 F.2d 1065, 1071 (7th Cir.1981), and Cinerama, Inc. v. Sweet Music, S.A., 482 F.2d 66, 69 (2d Cir.1973) (Friendly, J.), that a Rule 54(b) judgment may not be entered if two claims are the same for purposes of res judicata; that is, if failing to join them in the same suit would constitute the "splitting" of a single claim. If this were the law, then such a judgment could never be entered in a case in which a compulsory counterclaim remained pending in the district court, and yet we know it can be. Cold Metal Process Co. v. United Engineering & Foundry Co., 351 U.S. 445, 452, 76 S.Ct. 904, 908, 100 L.Ed. 1311 (1956); Automatic Liquid Packaging, Inc. v. Dominik, supra, 852 F.2d at 1037-38. A compulsory counterclaim is by definition a counterclaim that must be filed to preserve the defendant's rights, Baker v. Gold Seal Liquors, Inc., supra, 417 U.S. at 469 n. 1, 94 S.Ct. at 2506 n. 1; if made the basis of a separate suit it would be barred either by the force of Rule 13(a) itself, or by the prohibition in the doctrine of res judicata against splitting one's cause of action. Asset Allocation & Management Co. v. Western Employers Ins. Co., 892 F.2d 566, 572 (7th Cir.1989); cf. Southern Construction Co. v. Pickard, 371 U.S. 57, 60, 83 S.Ct. 108, 110, 9 L.Ed.2d 31 (1962) (per curiam).

In the present case, even though the two sets of claims arise out...

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