On Appeal from the United States District Court for the Eastern District of Pennsylvania.
Gibbons, Sloviter, Circuit Judges, and Bissell, District Judge.*fn*
Jule Finkle, Jack Finkle and Jack H. Felzer (hereinafter referred to as "Finkle") joint venturers, trustees under deeds of trust and lessors of a commercial property, appeal from the judgment entered on a directed verdict denying their claim for a payment that the district court held was an unenforceable penalty. Philmont Steel Products, Inc. (Philmont), assignee of the lease at issue, cross-appeals from the judgment denying its claim for damages it sustained by being forced to vacate the property, which judgment was also entered on a directed verdict. We affirm.
I. FACTS AND PROCEDURAL HISTORY
Through a series of assignments not relevant here, plaintiffs, citizens of Pennsylvania acting as trustees and joint venturers under Pennsylvania deeds of trust and a joint venture agreement, leased a manufacturing facility in Huntingdon Valley, Pennsylvania to Gulf & Western Manufacturing Company (G & WM), a Delaware corporation. G & WM's performance under the lease was guaranteed by its parent, Gulf & Western Industries, Inc. (G & WI), also a Delaware corporation. G & WM assigned its rights under the lease to Philmont, a Pennsylvania corporation, which located operations at the facility in October, 1980.
As modified most recently in 1977, the lease was to expire October 31, 1982 unless a renewal option was exercised 180 days prior to expiration, i.e., by May 4, 1982. No action was taken until May 5, when Philmont claims to have notified Finkle orally of an intention to renew. A letter stating this intention was mailed May 6 and was received May 11. On May 12, Finkle notified Philmont that it refused to recognize the renewal as timely. After the lease then "expired," Philmont moved its operations at an expense it claims exceeded $100,000.
The lease contained a provision added in 1977 stating that if the lessee did not exercise its first option to renew, it would pay the lessor the sum of $76,941. Finkle filed suit in the United States District Court for the Eastern District of Pennsylvania against G & WM and G & WI to compel payment of this sum. Federal jurisdiction was asserted based on diversity of citizenship as neither Delaware corporation had its principal place of business in Pennsylvania, the state of plaintiffs' citizenship.
The Gulf & Western defendants asserted as a defense that Philmont's attempted exercise of the renewal option was timely. Defendants also filed a third-party complaint under Fed. R. Civ. P. 14(a) against their assignee Philmont, claiming that Philmont had agreed to indemnify them for any damages proved by Finkle and for the cost of defending suit. In its answer Philmont denied any obligation to indemnify and asserted as defenses that it had complied with the renewal terms and that the sum sought by Finkle was an unenforceable penalty. As permitted by the express language of Fed. R. Civ. P. 14(a),*fn1 Philmont also asserted a claim against plaintiff Finkle for the costs it had incurred in relocating. Finkle, in turn, asserted a counterclaim against Philmont under Fed. R. Civ. P. 13(a) for payment of the $76,941.
As of trial, Philmont apparently had agreed to indemnify the Gulf & Western defendants, who did not actively participate. Jule Finkle, the only witness called, testified that the $76,941 represented or approximated the amount then owing on a loan of $83,000 Finkle had made to G & WM to pay for improvements to the leased property. At the conclusion of Finkle's presentation, the district court granted Philmont's motion for a directed verdict, concluding that under Pennsylvania law the clause requiring the $76,941 payment was unenforceable as a penalty and that no actual damages had been shown. The court also granted Finkle's motion for directed verdict, concluding that under Pennsylvania law time is of the essence and that any late renewal was insufficient to trigger an obligation by lessor to accept it.
Although the claims presented in this case were authorized by the Federal Rules of Civil Procedure, we must still decide whether there is federal subject matter jurisdiction over them. Of course, Finkle's claim against the Gulf & Western defendants, which are not Pennsylvania corporations and have principal places of business in New York and Michigan, was within the diversity jurisdiction provided by 28 U.S.C. § 1332(a)(1). Therefore, the district court would have had ancillary jurisdiction, even if there had been no diversity, over the Gulf & Western defendants' third-party claim against Pennsylvania corporation Philmont for indemnification. See Field v. Volkswagenwerk AG, 626 F.2d 293, 298-99 (3d Cir. 1980); Sheppard v. Atlantic States Gas Co., 167 F.2d 841, 844-45 (3d Cir. 1948). That claim had a sufficiently close nexus to the plaintiffs' federal claim to be one "case" for purposes of Article III, section 2 of the Constitution.
Persuasive authority also holds that a third-party defendant such as Philmont, which is subject to a plaintiff's claims by way of the third-party impleader, may bring claims authorized by Fed. R. Civ. P. 14(a) against the original plaintiff notwithstanding the lack of an independent basis of jurisdiction for such claims. See Mayer Paving & Asphalt Co. v. General Dynamics Corp., 486 F.2d 763, 772 (7th Cir. 1973), cert. denied, 414 U.S. 1146, 39 L. Ed. 2d 102, 94 S. Ct. 899 (1974); Revere Copper & Brass, Inc. v. Aetna Casualty & Surety Co., 426 F.2d 709, 711-17 (5th Cir. 1970); L & E Co. v United States ex rel. Kaiser Gypsum Co., 351 F.2d 880, 882 (9th Cir. 1965); C. Wright, Federal Courts § 76, at 517 (4th ed. 1983); 3 Moore's Federal Practice para. 14.27, at 14-118 (1984); The Supreme Court, 1977 Term, 92 Harv. L. Rev. 5, 247 (1978). Such claims are unlikely to be collusively manufactured so as to circumvent the rule of complete diversity.
Only by the most remote coincidence could a third party find a friendly defendant to implead him, ostensibly on a claim of recovery over, but in reality for the purpose of allowing the third party to assert a claim against the plaintiff.
3 Moore's Federal Practice at 14-118. It is both efficient and fair to allow Philmont to answer Finkle's suit in one action in federal court with its own claims that arise from the same transaction or occurrence.
We also hold that if, as here, a third-party defendant asserts claims under Rule 14(a) against plaintiff, ancillary jurisdiction extends to support plaintiff's "compulsory counterclaim" under Fed. R. Civ. P. 13(a). Such claims are induced by the third-party's choice to assert its claims against plaintiff. Generally, no independent basis of federal jurisdiction is required for compulsory counterclaims. See 3 Moore's Federal Practice para. 13.13, at 13-880-81; Moore v. New York Cotton Exchange, 270 U.S. 593, 609-10, 70 L. Ed. 750, 46 S. Ct. 367 (1926) (sustaining ancillary jurisdiction over a counterclaim that arose out of same transaction as the plaintiff's federal claim). This principle applies here as well. As the Seventh Circuit recently reasoned in Evra Corp. v. Swiss Bank Corp., 673 F.2d 951, 960 (7th Cir.), cert. denied, 459 U.S. 1017, 74 L. Ed. 2d 511, 103 S. Ct. 377 (1982), the third-party defendant "may not invoke the jurisdiction of the federal courts in order to bring a state-law claim against a nondiverse party and then use the lack of diversity to force that party to bring its identical claim . . . in a state court." See also 3 Moore's Federal Practice para. 14.27, at 14-119; L & E Co. v. United States, 351 F.2d at 882.
This result is consistent with Owen Equipment & Erection Co. v. Kroger, 437 U.S. 365, 57 L. Ed. 2d 274, 98 S. Ct. 2396 (1978). The Court there held that 28 U.S.C. § 1332 impliedly negated the exercise of ancillary jurisdiction over plaintiff's claim under Rule 14(a) against a non-diverse, impleaded third-party that had not asserted any claims against plaintiff. Kroger, a citizen of Iowa, had brought a wrongful death action for negligence against a Nebraska defendant that impleaded what was later revealed to be an Iowa corporation for contribution as a joint tortfeasor. Kroger then amended her complaint to claim negligence against the impleaded Iowa corporation.
In holding that Kroger's Rule 14(a) claim was not within the statutory grant of section 1332, the Court distinguished claims such as impleader, cross-claims, counterclaims, and intervention as of right, over which the lower federal courts had often exercised ancillary jurisdiction, 437 U.S. at 375-77 & n.18. The Court stated that "the context in which the nonfederal claim is asserted is crucial." Id. at 376. First, plaintiff's claim against the nondiverse third-party corporation was "entirely separate from her original claim [against the Nebraska corporation] . . . since the [non-diverse third party's] liability to her depended not at all upon whether or not [the Nebraska corporation] was also liable. Far from being an ancillary and dependent claim, it was a new and independent one." Id. Second, plaintiff had "voluntarily" asserted the "nonfederal" claim against the Iowa corporation by her amended complaint. The claim was not "by a defending party haled into court against his will, or by another person whose rights might have been irretrievably lost unless he could assert them in federal court." Id.
These same considerations of choice and logical dependence counsel a different conclusion as to a plaintiff's compulsory counterclaim against a third-party defendant under Fed. R. Civ. P. 13(a). As illustrated by the facts of this case, such claims are neither so voluntary or independent of the principal claim as to raise the concern that they undermine the meaningful requirements of diversity of citizenship. Finkle appeared satisfied to recover only against the Gulf & Western defendants. Their claim on impleader against Philmont for indemnification was logically dependent on Finkle's primary claim. Philmont, haled into court against its will and likely to be subject to any judgment in favor of Finkel, is entitled to the opportunity in one action to reach back and assert a claim against Finkle that arises ...