United States v. United Pacific Insurance Company

• Decision Date: 20 February 1973
• Docket Number: No. 71-2711.,71-2711.
• Citation: 472 F.2d 792
• Parties: UNITED STATES of America for the Use of Stanton W. Payne, Plaintiff, v. UNITED PACIFIC INSURANCE COMPANY, a Washington corporation, Defendant and Third Party Plaintiff-Appellee, v. DISCOUNT COMPANY, INC., a corporation, et al., Third Party Defendants-Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

472 F.2d 792 (1973)

UNITED STATES of America for the Use of Stanton W. Payne, Plaintiff, v. UNITED PACIFIC INSURANCE COMPANY, a Washington corporation, Defendant and Third Party Plaintiff-Appellee, v. DISCOUNT COMPANY, INC., a corporation, et al., Third Party Defendants-Appellants.

No. 71-2711.

United States Court of Appeals, Ninth Circuit.

January 5, 1973.

Rehearing Denied February 20, 1973.

Ralf H. Erlandson (argued), of Erlandson & Morgan, Milwaukie, Ore., for appellants.

Paul R. Meyer (argued), Daniel J. Seifer, of Kobin & Meyer, Theodore S. Bloom, Portland, Ore., for appellee.

Before WRIGHT and CHOY, Circuit Judges, and TAYLOR,^* District Judge.

CHOY, Circuit Judge:

Stanton W. Payne furnished equipment and labor to appellant Discount Co., Inc. (Discount), a Washington corporation, for work in Oregon by Discount under a contract dated May 20, 1968 with the United States Department of Agriculture Forest Service at the Mona Campground and Lookout Boating Site (Mona Project). Pursuant to the Miller Act, 40 U.S.C. § 270b, Payne sued United Pacific Insurance Co. (United), a Washington corporation, surety for Discount on performance and payment bonds for the project.

On August 8, 1967 Discount, its President Richard R. Norelius, and his wife Phyllis L. Norelius had entered into a general indemnity agreement with United covering all liabilities and attorney's fees incurred by United under the bonds posted for Discount. United had also posted similar bonds for another project in Oregon, the North Waldo Campground (Waldo Project).

In the summer of 1969, Discount having completed neither project, disputes arose between Discount and the Forest Service on the scope and progress of the work. In July and August 1969, the Forest Service terminated the contracts on both projects for default by Discount. As required by its performance bonds, United completed the work on the projects. United established reserves in excess of $110,000 expecting losses in completing the projects and in paying other claims besides Payne's. United demanded that Discount and the Noreliuses post collateral security pursuant to the 1967 indemnity agreement. Upon learning that Discount and the Noreliuses were transferring and concealing assets to avoid the demand for collateral, United impleaded Discount and the Noreliuses as third-party defendants.¹

United prayed for specific performance of the indemnity agreement including the posting of additional security, an injunction against any transfer or concealing of assets, and for judgment against Discount and the Noreliuses for any liability to Payne.

In October, 1969, pursuant to stipulation by all parties, the injunction sought by United was issued. Discount and the Noreliuses did not comply with the injunction, so in December, 1969 Elim and Agnes Norelius (Richard's parents) were added as third-party defendants solely to the issue of fraudulent concealment of assets by the original third-party defendants.

In April, 1970, ten months prior to the trial, United settled Payne's claim for $2,162.40. Also prior to trial, United completed both projects at a total cost of $145,777.67.² Thus, at the time of trial all of United's claims were liquidated and its suit for specific performance of the indemnity agreement was in effect a suit for damages.

The district court, sitting without a jury, held that the indemnity agreement was valid and awarded United $145,777.67 damages and $25,000 attorney's fees, granted United an accounting, transferred to United identified assets, and imposed a constructive trust on the house found to have been built with funds diverted from Discount.³ We reverse.

Payne's original claim was within federal jurisdiction because it arose under a federal statute. But the third-party claim was neither based on a federal statute nor asserted between citizens of different states. Independently considered, it was not within federal jurisdiction. However, the district court ruled that the third-party claim was "ancillary" to the original action and so no further jurisdictional basis was required to support it. The correctness of that ruling is the main issue on this appeal.

"It is well settled that a grant of jurisdiction over particular subject matter includes the power to adjudicate all matters ancillary to the particular subject matter." Glens Falls Indemnity Co. v. United States ex rel. Westinghouse Electric Supply Co., 229 F.2d 370, 373 (9th Cir. 1955). This is true regardless of the absence of diversity of citizenship or of a federal question in the ancillary suit.⁴Glens Falls, supra.

"Ancillary claims may be entertained `to prevent the relitigation in other courts of the issues heard and adjudged in the original suit'", Glens Falls, supra at 374; and to promote the economical and expeditious administration of justice by avoiding a multiplicity of suits through permitting issues and claims arising out of the same operative facts to be embraced in a single action. West's Federal Practice Manual, M.L. Volz, Ed. Vol. 6, Sec. 7367, pg. 412 (1970).⁵

But, we cannot lose sight of the fact that federal courts are courts of limited jurisdiction. We must weigh the "desire to preserve the integrity of constitutionally based jurisdictional limitations against the desire to dispose of all disputes arising from one set of facts in one action." 6 Wright & Miller, Federal Practice and Procedure, Sec. 1444, 221 (1971); accord, Dery v. Wyer, 265 F.2d 804, 811 (2nd Cir. 1959) (Lumbard, J. dissenting).

Decisions discussing the concept of ancillary jurisdiction have applied a number of tests in delineating the concept.⁶ This court has stated that ancillary means auxiliary, accessorial or subordinate, and that third-party claims are ancillary if the claims arise out of the subject matter of the original action and involve the same persons and issues, Glens Falls, supra, 229 F.2d at 374 or if they arose out of the same "transaction or occurrence." L & E Co. v. United States ex rel. Kaiser Gypsum Co., 351 F. 2d 880, 882 (9th Cir. 1965).⁷

Under these tests the district court properly asserted jurisdiction over United's claim for indemnification as to Payne's claim.⁸ Both claims involved the same core of facts and both arose out of the same transaction. United's claim only sought a transference of its liability to Payne. "In effect, the supplemental proceeding serves to accomplish full justice with reference to any award made on the principal claim." Pennsylvania R. R. Co. v. Erie Avenue Warehouse Co., 302 F.2d 843, 844 (3rd Cir. 1962).

May United's other claims also be considered ancillary to Payne's original suit? We think not. We know of no other decision that has extended the concept of ancillary jurisdiction to cover the instant situation. We do not think it advisable to so expand the concept. Two decisions have discussed this problem and both cases are distinguishable from ours.

In Noland Co. v. Graver Tank & Manufacturing Co., 301 F.2d 43 (4th Cir. 1962), a general contractor sued a subcontractor for breach of contract to provide a water tank. The subcontractor filed a third-party complaint against his supplier for indemnification and in addition asserted a further claim for $4,000 loss of anticipated profits. The court held that the latter claim was ancillary to the original suit. It noted that the facts involved in the disputed claim were substantially the same as those in the primary suit, that the profit issue was not complicated or unduly burdensome, and that considering the issue would not appreciably prolong the litigation. Unlike the case at bar, the disputed claim in Noland arose out of the same transaction as the principal claim and there was a close nexus between it and the principal claim.

More in point is Schwab v. Erie Lackawanna R. R. Co., 438 F.2d 62 (3rd Cir. 1971), where a railroad employee brought an FELA suit against the railroad for injuries resulting from a train-truck collision. The railroad impleaded the owner of the truck seeking contribution or indemnification, and also asserted a claim as permitted by F.R.C. P. 18(a) against the truck owner for damage to the train. The court held that there was no need for an independent jurisdictional basis for the latter claim because the claim was ancillary to the principal claim since it arose out of the same transaction or occurrence; i. e. the accident. On the facts of that case, the decision is undoubtedly correct.⁹ All the claims involved were factually and logically related. There was a strong nexus between...