Acton Co., Inc. of Massachusetts v. Bachman Foods, Inc.

• Decision Date: 11 January 1982
• Docket Number: No. 81-1441,81-1441
• Citation: 668 F.2d 76
• Parties: ACTON CO., INC. OF MASSACHUSETTS, Plaintiff-Appellant, v. BACHMAN FOODS, INC., et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — First Circuit

Page 76

668 F.2d 76

ACTON CO., INC. OF MASSACHUSETTS, Plaintiff-Appellant, v. BACHMAN FOODS, INC., et al., Defendants-Appellees.

No. 81-1441.

United States Court of Appeals, First Circuit.

Argued Nov. 6, 1981.

Decided Jan. 11, 1982.

Gerald A. Rosenthal, Boston, Mass., with whom William A. Zucker, and Gadsby & Hannah, Boston, Mass., were on brief, for plaintiff-appellant.

Daniel A. Pollack, New York City, with whom Martin I. Kaminsky, Edward T. McDermott, and Pollack & Kaminsky, New York City, were on brief, for defendants-appellees.

Before COFFIN, Chief Judge, DAVIS, Judge, ^* BREYER, Circuit Judge.

COFFIN, Chief Judge.

This appeal involves an aborted business transaction in which the Acton Corp. (Acton) and its wholly owned subsidiary, Acton Co., Inc. of Massachusetts (ACIM), sought to purchase substantially all the assets of Bachman Foods, Inc. Negotiations between Acton and Culbro Corp., Bachman's parent corporation, culminated in the signing of a letter of intent on April 26, 1979 which provides for Acton "or a designated subsidiary" to purchase Bachman Foods. The letter stated that Acton was to assume most of Bachman's liabilities to take over Bachman's employee and pension obligations, and to lease space at a Culbro facility. Acton also furnished Culbro a $250,000 "forfeitable deposit" to be retained by Culbro if the transaction was not timely completed, "except by reason of the failure of Culbro to perform any term or condition" of the preliminary agreement. An additional deposit of $750,000 was to be paid by Acton on June 29, 1979; Acton was then to pay $11 million on the closing date, and to secure its subsidiary's note for the balance due, to be determined according to a formula set forth in the letter.

Acton subsequently created a new corporation, the appellant ACIM, and designated it as the subsidiary referred to in the letter of intent. Further discussions led to the signing of an Asset Purchase Agreement on June 12, 1979, to which Acton, ACIM, Culbro and Bachman were signatories. This agreement, whose enforceability along with that of the letter of intent is the underlying substantive issue in this case, designated ACIM as the purchaser and stated that ACIM was to undertake most of the obligations accepted by Acton in the prior letter of intent. But the agreement stated that Acton, not ACIM, was entitled to a refund of the $250,000 deposit in case of Culbro or Bachman's default. Moreover, as ACIM concedes, Acton was to guarantee unconditionally ACIM's performance under the purchase agreement, including all ACIM's obligations and liabilities. Finally, the agreement included terms which indicate that it was to be binding and enforceable against both Acton and ACIM, and that both corporations would be entitled to relief in case Bachman or Culbro should fail to perform.

By letter dated June 29, however, Acton notified Culbro and Bachman that it had decided not to purchase Bachman because Culbro and Bachman had breached the agreement and had made material misrepresentations to Acton which had induced it to enter into the agreement. Shortly thereafter, Culbro and Bachman instituted a breach of contract action against Acton and ACIM in New York state court. Several weeks later, ACIM, without joining Acton as a co-plaintiff, filed this federal diversity action against Culbro and Bachman, seeking a declaration that no enforceable agreement exists between the parties and damages for fraud and misrepresentation. ACIM is a Massachusetts corporation; Acton, a Delaware corporation with its principal place of business in Massachusetts; Bachman, a Delaware corporation with its principal place of business in New Jersey; and Culbro is a New York corporation.

The district court granted defendants' motion to dismiss the action for failure to join Acton, which the court determined to be an indispensable party that could not be joined without destroying diversity jurisdiction. On appeal, ACIM argues that the court erred in concluding that Acton was an indispensable party and in failing to recognize that Acton could be joined under the court's ancillary jurisdiction. For the reasons that follow, we affirm.

I.

Rule 19 of the Federal Rules of Civil Procedure provides for the joinder to a suit of parties needed for its just adjudication. The Rule furthers several related policies, including the public interest in preventing multiple and repetitive litigation, the interest of the present parties in obtaining complete and effective relief in a single action, and the interest of absentees in avoiding the possible prejudicial effect of deciding the case without them. Rule 19(a) sets forth three types of parties to be joined if feasible; but if joinder will divest the court of subject matter jurisdiction, Rule 19(b) directs the court to "determine whether in equity and good conscience the action should proceed among the parties before it, or should be dismissed."

There is little doubt that Acton, as a party to the letter of intent and to the purchase agreement, should be joined to this action if feasible. Each of the policies noted above would be served by joinder of Acton. To begin, Acton played a substantial role in negotiating both agreements; indeed, ACIM did not even exist in April 1979 when the letter of intent was signed. Thus Acton may have rights under this preliminary agreement not shared by ACIM. Moreover, according to the express terms of the purchase agreement, Acton and not ACIM would be entitled to refund of the $250,000 deposit. Unless Acton were bound by the results of ACIM's suit, it would remain free to commence a new action on its claims. Acton's presence is therefore desirable not only to avoid piecemeal and duplicative litigation, but also to provide complete relief to the appellees. See Rule 19(a)(1).

In addition, Acton, as ACIM's parent corporation and as ACIM's guarantor, might be bound by ACIM's suit under the doctrine that res judicata applies not only to the actual parties but also to those in privity with the parties. See, e.g., General Foods Corp. v. Massachusetts Dep't of Public Health, 648 F.2d 784, 787-90 (1st Cir. 1981); Pan American Match, Inc. v. Sears, Roebuck & Co., 454 F.2d 871, 874 (1st Cir.), cert. denied, 409 U.S. 892, 93 S.Ct. 113, 34 L.Ed.2d 149 (1972). If so, to proceed in Acton's absence might impair Acton's interest in the controversy very significantly. Even if Acton would not be legally bound, an adverse ruling would be a persuasive precedent in a subsequent proceeding, and would weaken Acton's bargaining position for settlement purposes. In either case, to proceed without Acton might "as a practical matter impair or impede" Acton's ability to protect its interest in this matter. Rule 19(a)(2)(i). Acton is therefore a party to be joined to this action unless doing so will deprive the court of subject matter jurisdiction.

II.

The sole basis for federal court jurisdiction over this case is diversity of citizenship, 28 U.S.C. § 1332. The statute conferring diversity jurisdiction has long been interpreted to require complete diversity-opposing parties may not be citizens of the same state. Strawbridge v. Curtiss, 3 Cranch (7 U.S.) 267, 2 L.Ed. 435 (1806). It is undisputed that both Acton and Bachman are citizens of Delaware under 28 U.S.C. § 1332(c); and Acton, if joined, would be aligned with ACIM as party plaintiff. Acton's joinder as co-plaintiff would thus appear to destroy diversity jurisdiction. Appellant argues, however, that Acton can be joined to the suit under the doctrine of ancillary jurisdiction.

Ancillary jurisdiction is designed to enable a federal court having subject matter jurisdiction over a dispute to resolve closely related claims lacking an independent jurisdictional basis. Although Article III restricts federal courts to adjudicating certain enumerated "cases or controversies", once a court acquires jurisdiction over such a case, fairness to the litigants or judicial economy may dictate that related claims arising out of the same core controversy be considered at the same time. The Supreme Court has thus interpreted Article III to empower federal courts to adjudicate state law claims when they derive from the same "nucleus of operative fact" involved in a substantial claim arising under federal law, and when the claims are such that a plaintiff "would ordinarily be expected to try them all in one judicial proceeding." Owen Equipment & Erection Co. v. Kroger, 437 U.S. 365, 371, 98 S.Ct. 2396, 2401, 57 L.Ed.2d 274 (1978), quoting UMW v. Gibbs, 383 U.S. 715, 725, 86 S.Ct. 1130, 1138, 16 L.Ed.2d 218 (1966).

The scope of ancillary jurisdiction is limited not only by Article III, but also by the applicable statutory grant of jurisdiction to the federal courts. Kroger, supra, 437 U.S. at 372, 98 S.Ct. at 2401-02; FDIC v. Otero, 598 F.2d 627, 631 (1st Cir. 1979). The relevant statute here, 28 U.S.C. § 1332, was recently interpreted by the Supreme Court in Kroger, supra. In Kroger, the Court held that even though plaintiff's claim against a third party defendant arose out of the same factual context as plaintiff's diversity claim against the original defendant, the Court lacked jurisdiction over the additional claim because plaintiff and the third party defendant were citizens of the same state.

The Court's holding that "neither the convenience of litigants nor considerations of judicial economy can suffice to justify extension of the doctrine of ancillary jurisdiction to a plaintiff's cause of action against a citizen of the same State in a diversity case", id. 437 U.S. at 377, 98 S.Ct. at 2404, was based on several factors. First, the statutory requirement of complete diversity, which should be strictly construed, could be readily circumvented by artful pleading if ancillary jurisdiction were to apply: a plaintiff could leave non-diverse defendants out of the original lawsuit and then wait for them to be impleaded or otherwise joined. Id. at...