American Nat. Bank and Trust Co. of Chicago v. Bailey

Decision Date03 January 1967
Citation750 F.2d 577
PartiesAMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, as Trustee under Trust Agreement dated
CourtU.S. Court of Appeals — Seventh Circuit

James A. Romanyak, Schlegel & Trafelet, Ltd., Chicago, Ill., for plaintiff-counterdefendant, counterplaintiff-appellee.

Leonard M. Ring, David C. Roston, Altheimer & Gray, Chicago, Ill., for defendants-counterplaintiffs, counter-cross-defendants-appellees.

Before ESCHBACH, POSNER, and COFFEY, Circuit Judges.

POSNER, Circuit Judge.

This appeal by Chicago Investment Corporation, a party in a multi-party diversity suit, requires us to consider some knotty jurisdictional issues.

To simplify drastically the very complicated facts: A lease granted the tenant an option to buy the leased property, but provided that the option would lapse if the lease was terminated because of the tenant's default and that any transfer by the tenant of his interest without the landlord's prior written consent would be a default. The landlord, alleging that a default had occurred (although for other reasons), sued the tenant, who turned around and gave the Chicago Investment Corporation an irrevocable power of attorney in regard to the lawsuit and also an option (to which the landlord had not agreed) to buy the tenant's interest. Pursuant to the power of attorney, Chicago Investment hired a lawyer to file a counterclaim on the tenant's behalf. The counterclaim alleged that the lease was really a mortgage and that the tenant--the mortgagor under this theory--was the real owner of the property and should be allowed to redeem it. The landlord filed a counterclaim to the counterclaim (see Fed.R.Civ.P. 14(b)), seeking foreclosure in the event that the tenant was right about the lease actually being a mortgage. The landlord's counterclaim named Chicago Investment as a counterdefendant, along with the tenant; apparently the landlord had gotten wind of the option that Chicago Investment had acquired from the tenant, even though the counterclaim filed by Chicago Investment on the tenant's behalf had made no reference to Chicago Investment.

Chicago Investment responded to the landlord's counterclaim by filing a counterclaim in its own name against the landlord, tracking the allegations in the counterclaim it had filed in the tenant's name; and a cross-claim, under Rule 13(g) of the Federal Rules of Civil Procedure, against the tenant, seeking specific performance of the power-of-attorney and option agreements. The landlord and tenant settled their dispute before trial, leaving only the counterclaims by the landlord and Chicago Investment against each other, and Chicago Investment's cross-claim against the tenant, pending in the court. The court granted the landlord's motion to dismiss Chicago Investment's counterclaim on the ground that Chicago Investment was not a real party in interest, see Fed.R.Civ.P. 17(a), and the tenant's motion to dismiss Chicago Investment's cross-claim on the ground that the cross-claim was not within the scope of Rule 13(g). Chicago Investment has appealed these dismissals.

The first question is whether there is a final, appealable judgment. See 28 U.S.C. Sec. 1291. The district judge issued separate orders dismissing Chicago Investment's counterclaim against the landlord and cross-claim against the tenant, as well as orders dismissing the landlord's complaint and counterclaim against the tenant and the counterclaim against the landlord filed in the tenant's name by Chicago Investment, but he issued no order disposing of the landlord's counterclaim against Chicago Investment. But as it is apparent that the landlord has abandoned that claim, we may treat the two orders that the district court did issue as together constituting a final judgment dismissing the entire lawsuit. See Bankers Trust Co. v. Mallis, 435 U.S. 381, 384, 387-88, 98 S.Ct. 1117, 1119-1122 (1978); Ced's Inc. v. EPA, 745 F.2d 1092 at 1095-96 n. 1 (7th Cir.1984); Gracen v. Bradford Exchange, 698 F.2d 300, 302 (7th Cir.1983). The existence of formal orders distinguishes this case from C.I.T. Financial Service v. Yeomans, 710 F.2d 416 (7th Cir.1983) (per curiam), where there was nothing but a docket entry to indicate that the court had made a final disposition of the lawsuit. See id. at 417.

The next question is whether the district court was right to dismiss Chicago Investment's cross-claim against the tenant for lack of subject-matter jurisdiction. A Rule 13(g) cross-claim does not require an independent basis of federal jurisdiction, Cenco Inc. v. Seidman & Seidman, 686 F.2d 449, 452 (7th Cir.1982), but to be within the terms of the rule the cross-claim must either arise "out of the transaction or occurrence that [was] the subject matter ... of the original action" or relate "to any property that [was] the subject matter of the original action." We doubt whether the first criterion was satisfied here. The sense in which the cross-claim arose out of the dispute from which the original suit arose strikes us as too remote, given that the immediate source of the cross-claim was a contract made after the original suit; we should be cautious about using elastic and ill-defined notions of ancillary jurisdiction--a concept not mentioned in Article III--to expand our jurisdiction. Cf. Bernstein v. Lind-Waldock & Co., 738 F.2d 179, 188 (7th Cir.1984); By-Prod Corp. v. Armen-Berry Co., 668 F.2d 956, 960-61 (7th Cir.1982); Jackson v. Consolidated Rail Corp., 717 F.2d 1045, 1057-58 (7th Cir.1983) (separate opinion).

The alternative criterion for a Rule 13(g) cross-claim probably was satisfied, however; the cross-claim related to the property that was the subject-matter of the original suit. But the reasons that led the Supreme Court to state in United Mine Workers v. Gibbs, 383 U.S. 715, 726, 86 S.Ct. 1130, 1139, 16 L.Ed.2d 218 (1966), that a district judge generally should relinquish pendent jurisdiction when the main claim is dismissed before trial also compel the conclusion that he should (subject to a qualification to be noted shortly) relinquish ancillary jurisdiction when the main claim is dismissed before trial--as this and other courts have held. See In re Oil Spill of Amoco Cadiz, 699 F.2d 909, 913 (7th Cir.1983); Waste Systems, Inc. v. Clean Land Air Water Corp., 683 F.2d 927, 930-31 (5th Cir.1982); Joiner v. Diamond M Drilling Co., 677 F.2d 1035, 1043 (5th Cir.1982); Federman v. Empire Fire & Marine Ins. Co., 597 F.2d 798, 811 (2d Cir.1979). The question whether to retain jurisdiction over a claim purely of state law involves a trade-off between convenience to the parties and state autonomy, and the balance favors the latter interest when the main claim falls out of the case before trial. At least this is true most of the time; exceptional circumstances may warrant retention of the ancillary claim even in such a case. In Joiner, for example, the court suggested that the district court would be justified in retaining the ancillary claim, even if the main claim was dismissed before trial, if the statute of limitations would prevent the plaintiff from filing suit in state court based on the claim. 677 F.2d at 1043. But that is not a problem here. Although the statute of limitations has indeed run on the claim in Chicago Investment's cross-claim, an Illinois law tolls the statute of limitations when a claim is dismissed by a federal district court for lack of subject-matter jurisdiction. See Ill.Rev.Stat.1981, ch. 110, p 13-217. It would make no difference if we changed the basis of the dismissal from finding the claim to be outside the scope of Rule 13(g) (a dubious proposition in light of the relating-to-property clause) to requiring that ancillary jurisdiction be relinquished because the main claim was dismissed before trial; the dismissal would still be for lack of subject-matter jurisdiction, and the Illinois statute would apply.

But dismissal on jurisdictional grounds, it turns out, would not be the correct disposition of the cross-claim, even if federal ancillary jurisdiction is not available to support it. The claim has an independent jurisdictional basis--diversity of citizenship between the parties, and an amount in controversy greater than $10,000. See 28 U.S.C. Sec. 1332. This is so even though, before the landlord and tenant settled, there was not complete diversity, the landlord and Chicago Investment both being Illinois corporations.

The rule is that if there are residents of the same state on both sides of a lawsuit, the suit cannot be maintained under the diversity jurisdiction even if there is also a nonresident party. See Strawbridge v. Curtiss, 7 U.S. (3 Cranch) 267, 2 L.Ed. 435 (1806). If this rule is applied here, it would follow that the complaint should have been dismissed before Chicago Investment filed its cross-claim against the tenant. Maybe, however, this should make no difference to the court's jurisdiction over the cross-claim; maybe the cross-claim should be treated as if it had been a complaint that kicked off a brand-new suit pitting Chicago Investment against the tenant. We think this probably is right, but we also think that the requirement of complete diversity was not violated.

Like every interesting legal principle, the rule that there must be complete diversity to sustain diversity jurisdiction is not absolute. A pertinent exception is that if the nondiverse party comes into the case by intervening in it, his presence will not deprive the court of jurisdiction unless the intervenor was an indispensable party when the complaint was filed. Federal jurisdiction is determined by...

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