Nishimatsu Const. Co., Ltd. v. Houston Nat. Bank

• Decision Date: 18 July 1975
• Docket Number: No. 74-2053,74-2053
• Citation: 515 F.2d 1200
• Parties: NISHIMATSU CONSTRUCTION CO., LTD., Plaintiff, v. HOUSTON NATIONAL BANK, Defendant-Third Party Plaintiff-Appellee, v. Jack D. BAIZE, Third Party Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1200

515 F.2d 1200

NISHIMATSU CONSTRUCTION CO., LTD., Plaintiff, v. HOUSTON NATIONAL BANK, Defendant-Third Party Plaintiff-Appellee, v. Jack D. BAIZE, Third Party Defendant-Appellant.

No. 74-2053.

United States Court of Appeals Fifth Circuit.

July 18, 1975.

William B. Dazey, Robert E. Newey, Houston, Tex., for defendant-appellant.

Walter E. Workman, William R. Burke, Jr., Houston, Tex., for plaintiff-appellee.

Arno W. Krebs, Jr., Houston, Tex., for Nishimatsu Const. Co.

Appeal from the United States District Court for the Southern District of Texas.

Before WISDOM and DYER, Circuit Judges, and KRAFT, ^* District Judge.

WISDOM, Circuit Judge:

In this diversity case, "the fundamental question," as the appellee frames it, "is whether a party who has wilfully disregarded the rules of the judicial process and ignored the trial setting of the court below, and who suffers a judgment by default as a result of his deliberate and contumacious conduct, may under the guise of challenging the jurisdiction of the district court attempt to defend the case on the merits for the first time in the Court of Appeals." The answer is that he may in the circumstances this case presents.

The default judgment challenged here was entered against South East Construction Company (Secon) and the appellant, Jack D. Baize, in favor of the Houston National Bank (HNB) on two separate instruments: one a promissory note and the other a contract executed in connection with a letter of credit issued by the bank. Only Baize appeals. He contends that the judgment cannot stand because the court lacked jurisdiction over the subject matter of the claim on the promissory note and because the pleadings do not adequately support the judgment in the contract. We agree with these contentions. We vacate the judgments against Baize and remand with directions.

I

Baize, a citizen of the United States and now a resident of Japan, was a representative of Secon. This Hong Kong corporation entrepreneured in the contracting business by obtaining engineering contracts and then subcontracting the entire project. In the transaction that spawned this lawsuit, Secon contracted with the Junta Autonoma del Ferrocarril Quito-San Lorenzo (Junta) of Ecuador to renovate a railroad line in that country. The contract required Secon to prepare or procure drawings, surveys, and specifications for the project and to furnish a list of needed equipment and materials. Secon, by subcontract, engaged the Nishimatsu Construction Company to perform on behalf of Secon the engineering studies for Junta. The subcontract obligated Secon to make periodic payments to Nishimatsu for, among other things, salaries and expenditures paid in connection with the project.

To finance these payments, Secon, through Baize, negotiated with the Houston National Bank to obtain a letter of credit in favor of Nishimatsu for the account of Secon. The bank had known Secon and Baize from previous dealings and was engaged in financing Junta's railroad renovation project. HNB recognized that Secon would be able to cover drafts by Nishimatsu against the letter of credit only if Junta, satisfied with the work, paid Secon. The terms of the letter of credit therefore required that all drafts bear the countersignature of Jack D. Baize or another authorized representative of Secon, to show Secon's approval of the payment and to certify that the listed expenses had the preliminary approval of Junta. Moreover, the bank sought to protect itself by taking an assignment of Secon's rights under the contract with Junta as security for its issuance of credit on behalf of Secon. ¹

Everything went smoothly for six months, and the first seven drafts submitted by Nishimatsu were honored by the bank. They had been countersigned on behalf of Secon by Z. A. Hawes. The bank refused, however, to honor the next nine drafts because, it said, it had received inadequate documentation of the expenses and because it had learned that in spite of Secon's and Nishimatsu's certification to the contrary Junta had refused to give preliminary approval to the invoices. Litigation began with a diversity suit filed on January 7, 1972 by Nishimatsu against HNB to recover under the letter of credit. The bank answered, denying its liability, on January 31.

On February 4 HNB filed the third-party complaint against Secon and Baize that provides the grist for this appeal. The complaint embraced two claims against both Secon and Baize. First, it alleged that Baize and Secon, under the agreement executed in connection with the application for a letter of credit were obligated to reimburse the bank for any sums paid Nishimatsu under that letter of credit. The bank also joined a claim against Secon and Baize on a demand promissory note.

Secon and Baize filed no responsive pleadings. HNB and Nishimatsu meanwhile settled the controversy between them; the bank agreed to pay $17,500. On May 28, 1973, on motion of the parties, the court dismissed the main claim. The bank, on August 16, requested the clerk of the district court to enter the default of Secon and Baize for their failure to plead or otherwise defend the third-party action. A copy of this request was forwarded to Baize at the same address previously furnished the Texas Secretary of State. On September 4, HNB entered a motion for a default judgment, and a copy of the motion was forwarded to Baize and Secon in Tokyo.

Finally, on September 14, 1973, seven months after the third-party complaint had been filed and one month after their default had been taken, Baize and Secon surfaced, filing, by counsel, an answer to the third-party complaint. It was their first and only appearance in the district court. On September 24, the bank noticed Baize's deposition for November 5. Baize, on October 25, telegraphed his refusal to appear, citing his lack of "proper legal representation at this time in Houston." He confirmed the telegram by letter to the district court, but gave no indication that he was seeking other counsel. On December 6, the district court set January 7, 1974 as the trial date, notifying Baize's attorneys in Houston and Tokyo. The bank immediately served requests for admissions and a motion for expedited discovery on Baize and Secon, and the district court ordered a response to the requested admissions by January 1, 1974. Baize and Secon again demurred, Baize informing the court by letter mailed December 27 that he could not reply to the requests for admissions because necessary documents were in storage in Houston. He further requested that the trial, set for January 7, be continued, because, he explained, he needed time to prepare for a court appearance in Japan on February 14.

On January 7, 1974, the case was called for trial. The defendants' attorney of record renewed the motion for a continuance and at the time filed a motion to withdraw as counsel. Her affidavit in support of the first motion stated that, although she had repeatedly and importunately written to Baize and Secon for instructions, she had received no reply. In support of her second motion, she appended a telegram she had received from Baize to the effect that she was "not retained or authorized to represent undersigned at this time." Both motions were taken under advisement, and the court directed counsel to try again to communicate with her recalcitrant clients. On January 10 the case was again called for trial. The court granted the motion to withdraw and denied the motion for a continuance. The bank then renewed its motion for a default judgment. The court granted the motion and held a hearing on damages. On January 15, 1974, the court entered judgment against Baize and Secon, jointly and severally, on both claims for $82,208 plus costs and attorneys' fees. Two weeks later Baize filed notice of appeal. He did not, at any time, file a motion under Rule 60(b), Fed.R.Civ.P., to have the judgment set aside.

II Jurisdiction

Baize's first contention is that the judgment is void because the district court lacked subject matter jurisdiction over the claims asserted in the bank's third-party complaint. This contention is wholly without merit with respect to the bank's impleader action against Secon and Baize on the contract executed in connection with the letter of credit. Such a claim is within the ancillary jurisdiction of the trial court. ² See, e. g. James Talcott, Inc. v. Allahabad Bank, Ltd., 5 Cir. 1971, 444 F.2d 451, cert. den'd 404 U.S. 940, 92 S.Ct. 280, 30 L.Ed.2d 253; Revere Copper & Brass, Inc. v. Aetna Casualty & Surety Co., 5 Cir. 1970, 426 F.2d 709; H. L. Peterson Company v. Applewhite, 5 Cir. 1967, 383 F.2d 430; Southern Milling Company v. United States, 5 Cir. 1959, 270 F.2d 80.

The claim against Baize and Secon on the promissory note, joined with the claim under the contract, stands on a different footing. Although Rule 18(a) of the Federal Rules of Civil Procedure permits a party asserting a third-party claim to "join, either as independent or as alternative claims, as many claims . . . as he has against an opposing party", the joined claims must of course meet federal jurisdictional requirements. There must be either an independent jurisdictional basis for the joined claim or it must fall within the ancillary jurisdiction of the court. United States v. United Pacific Insurance Co., 9 Cir. 1973, 472 F.2d 792, cert. den'd 411 U.S. 982, 93 S.Ct. 2273, 36 L.Ed.2d 958; Schwab v. Erie Lackawanna R. R. Co., 3 Cir. 1971, 438 F.2d 62; 3 Moore, Federal Practice P 14.25 at 14-531 (1974); C. Wright, Federal Courts § 76 at 334 (1970). The appellee implicitly concedes the absence of an independent jurisdictional basis over the claim, ³ but contends that it falls within the ancillary jurisdiction of the court. This position is untenable.

A claim is ancillary "when it bears a logical relationship to the aggregate core of operative facts which constitutes the main claim over which the court has an...