Saadeh v. Farouki

• Decision Date: 04 March 1997
• Docket Number: No. 95-7164,95-7164
• Citation: 107 F.3d 52
• Parties: Rafic SAADEH, Appellee, v. Fawaz FAROUKI, Appellant.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 52

107 F.3d 52

323 U.S.App.D.C. 239

Rafic SAADEH, Appellee, v. Fawaz FAROUKI, Appellant.

No. 95-7164.

United States Court of Appeals District of Columbia Circuit.

Argued Sept. 26, 1996.

Decided March 4, 1997.

Appeal from the United States District Court for the District of Columbia (No. 92cv00060).

David N. Braus, New York City, argued the cause and filed the briefs for appellant.

Lenore C. Garon, Washington, DC, argued the cause and filed the brief for appellee.

Before HENDERSON, ROGERS and TATEL, Circuit Judges.

Opinion for the Court filed by Circuit Judge ROGERS.

ROGERS, Circuit Judge:

Appellant Fawaz Farouki appeals from a judgment awarding appellee Rafic Saadeh $758,470 for breach of contract for failure to repay a commercial loan. Prior to oral argument, the court ordered the parties to be prepared to address whether the district court lacked subject matter jurisdiction over the lawsuit under 28 U.S.C. § 1332(a). Subsequently, the court invited the parties to file supplemental briefs on the jurisdictional issue, which they did. We now hold that the district court lacked subject matter jurisdiction, and therefore vacate the judgment of the district court and remand the case with instructions to dismiss the complaint.

I.

Throughout the 1980s, Fawaz Farouki, the owner of several construction companies doing business in the Middle East and Europe, invested millions of dollars in various enterprises through his investment company, Dinavest, Ltd., a United Kingdom corporation with its principal place of business in Monte Carlo, Principality of Monaco. In 1984, hoping to invest in a California company, Four Point Entertainment, Farouki and Dinavest borrowed $550,000 from Rafic Saadeh, a businessman residing in Athens, Greece. Saadeh received a promissory note in exchange for his loan in September 1984. This was the first of three repayment agreements entered into by the parties, all of which resulted in a default by Farouki.

Shortly after the 1984 loan, Farouki and Dinavest began experiencing financial difficulties, and Farouki defaulted on his obligations to numerous creditors. After approximately $800,000 in checks he sent to Saadeh were returned for insufficient funds, Farouki made no further payments on his loan from Saadeh. Having defaulted on his loan obligation, Farouki met with Saadeh and they entered into a second agreement in June 1986. Under this agreement Farouki and Dinavest were required to repay Saadeh $1,257,800, apparently representing the $550,000 principal plus over $700,000 in accrued interest and finance charges. The 1986 agreement set October 13, 1986, as the default date; if Farouki failed to repay Saadeh in full by then, Saadeh had the right to take as collateral $3.3 million of Four Point stock as well as three notes payable to Dinavest by Four Point that Farouki had used to secure the debt, and to receive annual interest of fifteen percent on any remaining debt.

Farouki again defaulted on his agreement and surrendered the stock and the assigned notes to Saadeh. Because the value of the stock and notes did not fully compensate Saadeh, Saadeh made additional attempts to recover the outstanding amount; Farouki acknowledged his indebtedness and repeatedly promised repayment. In 1987, Saadeh traveled from Greece to New York State to negotiate another repayment agreement with Farouki. Ultimately, they agreed that Farouki and Dinavest would pay Saadeh $758,470 plus interest at nine percent per annum in six installments over two years. Farouki again defaulted under the terms of the 1987 agreement.

In 1992, Saadeh filed suit in the United States District Court for the District of Columbia against Farouki, his wife, Dinavest, and L.R. Holdings, a District of Columbia corporation owned and operated by Mrs. Farouki. He sought damages for breach of contract and an accounting. At that time, Farouki was a citizen of Jordan, and Mrs. Farouki was apparently a citizen of Egypt. Beginning in 1989, however, the Faroukis had become permanent residents of Maryland. ^{1 1} The sole basis of jurisdiction alleged in Saadeh's complaint was diversity of citizenship, 28 U.S.C. § 1332.

Farouki and Dinavest filed an answer to the complaint, and all defendants filed a motion to dismiss the claims for an accounting on the ground that they failed to state a claim for which relief could be granted. The district court denied the motion. Discovery proceeded, and shortly before trial, the defendants filed a motion to dismiss on the ground that the court lacked subject matter jurisdiction because the plaintiff, Saadeh, was an alien, and three of the defendants--Farouki, Mrs. Farouki and Dinavest--were also aliens at the time the complaint was filed. Saadeh, in response, claimed that he had evidence that Farouki had become a United States citizen since the complaint had been filed, and that, in any event, as an alien admitted for permanent residence, he would be deemed a United States citizen for the purposes of diversity jurisdiction under a 1988 amendment to § 1332. See Judicial Improvements and Access to Justice Act, Pub.L. No.100-702, § 203, 102 Stat. 4646 (1988). Farouki maintained that even if Saadeh was correct, a jurisdictional defect still existed as to Dinavest, which he described as an indispensable party. After a brief conference, the parties entered into a joint stipulation, agreeing that Farouki had become a United States citizen in 1993 and to the dismissal of Mrs. Farouki, Dinavest, and L.R. Holdings. The district court dismissed these defendants pursuant to the stipulation, and denied the motion to dismiss. Although Farouki subsequently testified that he resided in Alexandria, Egypt, the court made no finding as to whether he had acquired a new domicile. Following a bench trial, the court found that the 1987 agreement was a valid contract and that Farouki was in breach, and entered judgment for Saadeh in the amount of $758,470, plus nine percent annual interest from the date of the agreement.

On appeal, Farouki initially did not pursue the jurisdictional challenge. Rather, he contended that the district court erred in three respects in concluding that the 1987 loan agreement was valid. He maintained that the 1984 loan was usurious and that the 1987 agreement failed to purge the usury; that the district court was barred under the parol evidence rule from considering extrinsic evidence that contradicted certain recitals contained in the 1987 agreement; and that the 1987 agreement was void for lack of consideration because the 1984 agreement was void. Upon reviewing the briefs on appeal and the record of the district court, this court directed the parties' attention to a possible jurisdictional defect because both Saadeh and Farouki were aliens at the time Saadeh filed his complaint. We turn to that question now, assisted by the parties' supplemental briefs.

II.

Under Article III of the Constitution, the judicial power of the United States extends to "Controversies ... between citizens of different States ... and between a State, or the Citizens thereof, and foreign States, Citizens or Subjects." U.S. CONST. art. III, § 2. Article III requires only minimal diversity, that is, diversity of citizenship between any two parties on opposite sides of an action, regardless of whether other parties may be co-citizens. State Farm Fire & Casualty Co. v. Tashire, 386 U.S. 523, 530-31, 87 S.Ct. 1199, 1203-04, 18 L.Ed.2d 270 (1967). Congress has never granted the district courts the full measure of diversity jurisdiction permitted by the Constitution, however. In Strawbridge v. Curtiss, 7 U.S. (3 Cranch) 267, 267, 2 L.Ed. 435 (1806), the Supreme Court construed the diversity provision of the Judiciary Act of 1789 to require that no two parties on opposite sides of an action could be citizens of the same State. The current diversity statute, 28 U.S.C. § 1332, ² retains this requirement of "complete diversity." Consequently, "[f]ederal diversity jurisdiction is lacking if there are any litigants from the same state on opposing sides." Prakash v. American Univ., 727 F.2d 1174, 1178 n. 25 (D.C.Cir.1984). The Supreme Court has never addressed the scope of the complete diversity rule in cases involving alien parties. Prior to 1988, however, this court held, as have others, that the diversity statute did not confer jurisdiction over a lawsuit involving an alien on one side, and an alien and a citizen on the other side. Eze v. Yellow Cab Co., 782 F.2d 1064, 1065 (D.C.Cir.1986); see also Cabalceta v. Standard Fruit Co., 883 F.2d 1553, 1557 (11th Cir.1989); Faysound Ltd. v. United Coconut Chemicals, Inc., 878 F.2d 290, 294-95 (9th Cir.1989); Corporacion Venezolana de Fomento v. Vintero Sales Corp., 629 F.2d 786, 790 (2d Cir.1980), cert. denied, 449 U.S. 1080, 101 S.Ct. 863, 66 L.Ed.2d 804 (1981); Field v. Volkswagenwerk AG, 626 F.2d 293, 296 (3d Cir.1980); Ed & Fred, Inc. v. Puritan Marine Ins. Underwriters Corp., 506 F.2d 757, 758 (5th Cir.1975). ³

As noted, however, Congress amended the diversity statute in 1988 to add what now appears as the last sentence of 28 U.S.C. § 1332(a). This sentence provides in pertinent part that for the purposes of § 1332(a) "an alien admitted to the United States for permanent residence shall be deemed a citizen of the State in which such alien is domiciled." Under this amendment, diversity of citizenship no longer exists in an action between a citizen of State A and an alien admitted to the United States for permanent residence who resides in State A. Read literally, however, the amended statute would create diversity between Saadeh and both Faroukis. As permanent residents of Maryland at the time Saadeh filed his complaint, Mr. and Mrs. Farouki would be "deemed" citizens of Maryland. Thus the amended statute would also appear to abrogate partially the rule of complete diversity by permitting a non-resident alien and a resident alien to be present on opposite sides of...