Eisler v. Stritzler

• Decision Date: 25 May 1976
• Docket Number: No. 75-1331,75-1331
• Citation: 535 F.2d 148
• Parties: Eugene EISLER and Elizabeth Eisler, Plaintiffs, Appellees, v. Nathan STRITZLER, Defendant, Appellant.
• Court: U.S. Court of Appeals — First Circuit

Page 148

535 F.2d 148

Eugene EISLER and Elizabeth Eisler, Plaintiffs, Appellees, v. Nathan STRITZLER, Defendant, Appellant.

No. 75-1331.

United States Court of Appeals First Circuit.

Submitted Feb. 6, 1976.

Decided May 14, 1976.

As Amended May 25, 1976.

Harry A. Ezratty, San Juan, P. R., and Greg Tolson, San Francisco, Cal., on brief for defendant-appellant.

Gilberto Mayo Aguayo and Baker & Woods, Santurce, P. R., on brief for plaintiffs-appellees.

Before COFFIN, Chief Judge, McENTEE and CAMPBELL, Circuit Judges.

COFFIN, Chief Judge.

This appeal presents several questions concerning federal practice and procedure. Plaintiffs, Eugene and Elizabeth Eisler, instituted this action, relying for jurisdiction solely upon diversity of citizenship, to recover damages they allegedly suffered in various business and securities transactions with defendant, Nathan Stritzler. Defendant admitted diversity of citizenship in his pleadings, but subsequently was defaulted for failing to obey the district court's order that he give a deposition. After the district court announced its intention to enter the default judgment, defendant sought to challenge the existence of diversity jurisdiction. The district court refused to consider defendant's challenge and, apparently without holding a hearing on the amount of damages, entered a judgment for plaintiff for $87,000 plus $15,000 costs and attorney fees. Defendant now appeals, contending that the district court erred in (1) refusing to reopen the question of its jurisdiction after the default, and (2) entering and/or refusing to vacate the default judgment.

Plaintiff instituted this action in November, 1967, to recover upon four separate claims, two of which arose from a securities transaction that was consummated on May 26, 1964. On that date, plaintiffs and defendant, who were all officers, directors, and shareholders in Las Torres, Inc., a Puerto Rican corporation, entered into a contract in which plaintiffs agreed to sell their 50 percent interest in that corporation to defendant for $17,000. In Count I of their complaint, plaintiffs alleged that prior to the consummation of that agreement defendant had fraudulently, secretly, and wilfully arranged to resell plaintiffs' stock to two named individuals for $95,000. They sought to recover the $78,000 in damages they suffered by reason of the fraud and breach of defendant's fiduciary obligations. In Count II plaintiffs alleged that defendant had failed to pay $7,000 of the $17,000 purchase price. Count III need not concern us since it was dismissed voluntarily with prejudice. Count IV, which was not related to the securities transaction, alleges that defendant breached his promise to pay certain maintenance charges on property he had leased from plaintiffs and had thereby caused plaintiffs $2,000 damages. To support the existence of diversity jurisdiction, plaintiffs stated that they were California citizens and alleged, on information and belief, that defendant was a citizen of Puerto Rico.

Defendant failed to file a timely answer to plaintiffs' complaint and was promptly defaulted. He was able to have the initial default judgment vacated and thereafter filed an answer in which he admitted the existence of diversity jurisdiction, denied the facts that would have given rise to liability, stated several affirmative defenses, and counterclaimed for over one million dollars in damages. The filing of defendant's answer proved to be the only event of any legal significance that occurred in the case for three years, until June, 1971. After the pleadings were filed, plaintiffs began what proved to be a tortuous and unsuccessful struggle to take defendant's deposition. From October, 1968, to September, 1969, defendant requested and received several continuances of the deposition. During the next eight months, matters remained in stasis, as the court agreed to delay the deposition while defendant looked for a new attorney, his first attorney having withdrawn. Finally, the court ordered defendant to give his deposition in California, in September, 1970, and to pay plaintiffs' expenses. Plaintiffs' attorney then traveled to California, but to no avail. Defendant failed to attend several prearranged meetings, and when he finally did appear at one, he refused to be deposed.

Plaintiffs then directed their energies at obtaining sanctions. These efforts proved more successful, for, after eight months, on June 21, 1971, the court ordered that defendant's answer and counterclaim be stricken and that he be defaulted. At this point, defendant finally retained counsel, who moved to vacate the default judgment. On August 5, 1971, six weeks after the order of default and almost four years after the action was instituted, defendant for the first time challenged the existence of diversity jurisdiction. He made a Rule 12(h)(3) motion to dismiss, which was accompanied by affidavits that alleged that defendant had been a California citizen at the time the action was brought. On November 16, 1972, the district court denied this motion without considering defendant's allegations, relying upon DiFrischia v. New York Central R. Co., 279 F.2d 141 (3d Cir. 1960) for the proposition that, in the absence of a showing of collusion, a defendant who admits diversity jurisdiction in his pleadings, may not dispute it thereafter.

The parties spent 1973 filing memoranda supporting and opposing defendant's motion to vacate the default order of June 21. On January 25, 1974, the court denied the motion to vacate the judgment. After an abortive appeal, which was dismissed for want of appellate jurisdiction, the matter finally dragged to its end in the spring of 1975, when the court, apparently acting on a motion for partial summary judgment, entered a final judgment for plaintiffs for $87,000 and $15,000 in costs and attorney fees. ¹ Although the record is ambiguous, it does not appear that the district court held a hearing on the amount of plaintiffs' damages.

I. Subject Matter Jurisdiction

The first question appellant raises is whether the district court erred in following DiFrischia and refusing to hold a hearing to determine whether there had in fact been diversity of citizenship at the time the action was brought. Although it offends both fairness and judicial economy to allow a defendant, who best knows his own citizenship, to admit diversity jurisdiction in his answer, hamstring the process of litigation for several years by failing to cooperate during discovery, invite the imposition of a default order, and finally raise the absence of diversity jurisdiction after the default order was entered, we conclude that the district court was in error. The well established rule in the federal courts is that subject matter jurisdiction may be litigated at any time before the case is finally decided. See Fed.R.Civ.P. 12(h)(3); Mansfield, Coldwater & Lake Michigan Ry. v. Swan, 111 U.S. 379, 4 S.Ct. 510, 28 L.Ed. 462 (1884). Although Mansfield, the leading case in the area, may not itself have established that a defendant may, in the district court, reopen jurisdictional facts that were admitted in his pleading, see Dobbs, Beyond Bootstrap: Foreclosing the Issue of Subject-Matter Jurisdiction Before Final Judgment, 51 Minn.L.Rev. 491 (1967), subsequent Supreme Court decisions interpreted Mansfield as establishing this broad proposition. See Gilbert v. David, 235 U.S. 561, 35 S.Ct. 164, 59 L.Ed. 360 (1914) (motion to dismiss must be entertained, although seven years after the suit was instituted); Steigleder v. McQuesten, 198 U.S. 141, 25 S.Ct. 616, 49 L.Ed. 983 (1905) (bill in equity averred diversity; answer raised no issue as to citizenship of parties; case was referred to a master; in dictum, the Court stated that the master properly passed on the issue of jurisdiction); Morris v. Gilmer, 129 U.S. 315, 9 S.Ct. 289, 32 L.Ed. 690 (1889) (complaint alleged diversity; defendant's answer raised no jurisdictional objection; subsequently, defendant filed an affidavit challenging the existence of diversity; held, even though record affirmatively showed diversity, court had to consider the affidavit). See also Basso v. Utah Power & Light Co., 495 F.2d 906, 910-11 (10th Cir. 1974); Page v. Wright, 116 F.2d 449, 452-53 (7th Cir. 1940). It is not the province of a court of appeals to challenge such a well established rule, especially since Fed.R.Civ.P. 12(h)(3) appears to have codified it.

DiFrischia v. New York Central R. Co., supra, stands almost alone as a challenger to the traditional federal court practice. There the Third Circuit refused to permit a defendant, who had stipulated to the existence of diversity jurisdiction after having initially denied it, from moving to dismiss for want of jurisdiction two years after the action had been instituted. The court rested its decision principally on the ground that it would not allow a party to "play fast and loose with the judicial machinery and deceive the courts." Id. at 144. Little authority was cited to support the court's decision, and what little there was seems inapposite. ² Although we tend to agree that the DiFrischia rule is preferable to the present practice, we do not regard ourselves as free to adopt it. We note that DiFrischia has not proved to be a particularly generative inroad on the traditional rule, even in the Third Circuit. See Joyce v. United States, 474 F.2d 215 (3d Cir. 1973); Ramsey v. Mellon National Bank & Trust Co., 350 F.2d 874 (3d Cir. 1965).

Although, as we conclude below, there are alternative grounds for upholding the district court's jurisdiction as to at least one count, we must remand this case for a hearing on the existence of diversity jurisdiction at the time the action was brought as to those counts for which there is no other basis for jurisdiction. If any portions of this action are dismissed, however, the district court may, as an incident to its jurisdiction to decide...