Newman-Green, Inc. v. Alfonzo-Larrain

PETITIONER:Newman-Green, Inc.
RESPONDENT:Alfonzo-Larrain
LOCATION:Kino Community Hospital

DOCKET NO.: 88-774
DECIDED BY: Rehnquist Court (1988-1990)
LOWER COURT: United States Court of Appeals for the Seventh Circuit

CITATION: 490 US 826 (1989)
ARGUED: Apr 24, 1989
DECIDED: Jun 12, 1989

ADVOCATES:
Frank K. Heap – on behalf of the Respondents
Phil Caldwell Neal – on behalf of the Petitioner

Facts of the case

Question

Audio Transcription for Oral Argument – April 24, 1989 in Newman-Green, Inc. v. Alfonzo-Larrain

William H. Rehnquist:

We’ll hear argument next in Number 88-774, Newman-Green, Inc., versus Alejandro Alfonzo-Larrain.

Mr. Neal.

Phil Caldwell Neal:

Mr. Chief Justice, and may it please the Court:

The narrow issue presented by this case is whether a court of appeals may permit amendment of the complaint to drop a nondiverse defendant and thereby perfect diversity jurisdiction so that the court may go on to decide the merits of the appeal.

The court below held that it had no such power.

The courts of appeals for the Second, Third, Fifth, Ninth and District of Columbia Circuits have held to the contrary and, in fact, no court since 1942, which was the Seventh Circuit again, has held that it did not have such power.

It is a narrow issue, but perhaps the broader significance of it is that it raises a question whether the powers of the courts of appeals, so far as possible, should be conducted in a way… should be construed in a way that permits the just, speedy and inexpensive termination of controversies as the Federal Rules of Civil Procedure admonish.

The case arises from a suit brought by the Plaintiff, Petitioner here, the Newman-Green Company, to enforce certain individual guarantee agreements of individuals in Venezuela which guaranteed royalty payments due from a Venezuelan corporation under a license agreement with the Plaintiff corporation.

The Plaintiff… the complaint alleged that the five individual Defendants, that four of them were residents and citizens of Venezuela, and that the fifth-named Defendant, one Bettison, was a citizen of the United States, resident in Caracas, Venezuela, and the complaint alleged jurisdiction based on Section 1332 of Title 28.

The… no objection to the jurisdiction of the court, of the district court, was made by the Defendants at any time, although they did, oddly enough, move to quash service of process.

That was overruled.

The case was litigated in the district court for about four-and-a-half years, and you can get some idea of the extensiveness of the… of the litigation and how controverted it was by scanning the docket entries which are reproduced in the… in the joint appendix.

At length after four-and-a-half years, during which time the district court had rendered several opinions, the district court rendered summary judgment which disposed of all of the claims against the five individual Defendants.

The Venezuelan Corporation itself had intervened in the meantime and had certain counterclaims pending.

The district court gave judgment in part for the Plaintiff, and that judgment was eventually satisfied.

No appeal was taken from it, but in important aspects gave judgment, summary judgment for the Defendants and entered a Rule 54(b) certification, upon which appeal was taken to the Seventh Circuit.

When counsel for the Appellant rose to make his argument, a judge of the Seventh Circuit said,

“Do we have jurisdiction of the case? “

And it was then and only at that time that anyone realized that in fact, under Section 1332, there was no diversity jurisdiction.

Harry A. Blackmun:

Which judge was that, Mr. Neal?

Phil Caldwell Neal:

That was Judge Easterbrook, Justice Radmun… Blackmun.

Harry A. Blackmun:

I’m not surprised.

[Laughter]

Who wrote the dissent?

Phil Caldwell Neal:

Judge Easterbrook wrote the dissent, yes.

Judge Easterbrook raised the issue and then suggested to counsel that the problem could be solved if the Plaintiffs cared to file a motion to dismiss Bettison, the nondiverse Defendant.

The argument continued.

The case was taken under submission.

The Plaintiff did indeed file such a motion.

The Defendants, the Appellees, filed a motion to dismiss the case rather than to dismiss the Defendant, and when the opinion came out, Judge Easterbrook dealt first with the jurisdictional point and then said we grant the motion to dismiss the nondiverse Defendant and proceeded to decide the merits.

Phil Caldwell Neal:

A motion for rehearing and rehearing en banc was filed.

Seventh Circuit granted rehearing en banc, and the result of the en banc hearing was that the majority of the court, in an opinion by Judge Posner, held that Judge Easterbrook’s opinion was erroneous, vacated the… vacated the decision of the panel, and held that the court of appeals had no power to amend, to permit the dismissal of a nondiverse Defendant, that that could be done only in the district court and remanded the case to the district court for further proceedings to consider whether such a motion should be granted.

And indeed, it perhaps bears noting, that the opinion of Judge Posner suggested that the district court might choose to exercise its discretion by saying six years is long enough, and out you go, rather than merely addressing whether they… whether the other side had been somehow prejudiced by the inclusion of Bettison as a Defendant during that period.

Anthony M. Kennedy:

I take it you don’t argue that the circuit didn’t have the power to do that if it had chosen to do it.

Phil Caldwell Neal:

To remand?

Anthony M. Kennedy:

Yes.

Phil Caldwell Neal:

No,… no Your Honor.

We only argue that the court had power which… which it disclaimed to do the opposite and to decide the case then and there by permitting the dismissal.

Anthony M. Kennedy:

But really a remand of the district court could have been a limited remand for the requesting the court to act within 14 or 21 days, could it not?

Phil Caldwell Neal:

And… and indeed, according to a fairly substantial body of authority, it could have been a remand that directed the district court to permit a dismissal of the nondiverse Defendant on the ground that any contrary action would be an abuse of the district court’s discretion.

The result of the court of appeals’ decision, of course, is that the case would, at a minimum, have to go back to the district, where at best, perhaps, the District Judge would do what Judge Easterbrook had said ought to be done, permit the dismissal of the nondiverse Defendant, and then reconsider and perhaps enter again the same judgment on the same grounds that the district court had done before, and then a new appeal would be started and a year later–

Anthony M. Kennedy:

Well, it wouldn’t necessarily be a new appeal.

The circuit court could retain jurisdiction after… and remand for the limited purposes of determining this motion within 21 days, and the argument’s been made before the panel, and the case is then correctly before it.

Phil Caldwell Neal:

–Perhaps… perhaps it could.

Needless to say, the… the majority of the Seventh Circuit didn’t consider any such thing and indeed, one of the necessary consequences, which the majority of the court saw, was that the decision on the merits had to be… had to be vacated, and… and… and the whole case really had to go back for an exercise of judgment which the court of appeals saw it could not… it could not make.

Byron R. White:

And you think that… I take it from your brief, you think that both Judge Easterbrook and Judge Posner were… were not on the right track, neither one of them?

Phil Caldwell Neal:

Oh, no, Your Honor.

We… we certainly think that Judge Easterbrook’s panel did–

Byron R. White:

But I thought you present a different rationale for it.

Phil Caldwell Neal:

–Well, we presented… yes, we presented supporting rationale, I think, and maybe if I… if I go… if I go directly… directly to that, there is an… there is an issue in the case raised by… by Judge Posner’s opinion and relied on very heavily by… by the respondents here that the whole business is of permitting the dismissal of a nondiverse defendant is offensive to fundamental issues… principles of federal jurisdiction.

The other issue, which we think is the only real issue, and I will come back to that one, was whether there is any authority for the court of appeals to permit amendment of the… of the complaint, and there is a specific statute, Section 1653 of Title 28, which says defective allegations of jurisdiction may be amended in either the trial or the appellate court.

And… and the majority of the court below held that that didn’t reach this case.

Judge Easterbrook disagreed on that.

What we… and Judge Posner’s opinion said there isn’t any other source of authority.

Courts of appeals don’t permit amendments.

I suppose what… what we have contributed, if anything, to the solution of this problem is that if you go back to Section 32 of the Judiciary Act of 1789, it expressly confers authority on the courts of appeals, as well as the district courts, to permit… to permit amendment, and… and that… that statute has been relied on more than once by this court to permit–

William H. Rehnquist:

Amendments of the sort that you would have had to make, Mr. Neal?

Judge Posner took the position when, I guess, the defective allegations of jurisdiction were… where the allegations didn’t conform to fact and… does the Section 32 authorizer broader amendments than that?

Phil Caldwell Neal:

–It’s… it’s very general and… it’s very general in… in its language, Mr. Chief Justice.

It’s… it’s… it’s not directed expressly to amendments to preserve or correct jurisdictional defect.

Phil Caldwell Neal:

It’s… it’s… it’s a general provision permitting the appellate courts to… to permit amendments, and Justice Story way back in… in 1812 wrote an opinion that circuit reported in… in 1 Gallison’s Report called Anonymous decision, in which he said there’s nothing at common law to prevent courts of appeal as well as trial courts from permitting amendments of the… of the pleadings.

William H. Rehnquist:

The only appellate court in existence, I guess, at the time of the judiciary of 1789 or about to become in existence would be our Court.

Phil Caldwell Neal:

Well, that is correct, except that in some… in some aspects the old circuit courts had an appellate jurisdiction from–

William H. Rehnquist:

You could appeal from the district court to the circuit courts?

Phil Caldwell Neal:

–Yes.

But I… but I… and I… and… and… and Justice Story’s opinion was rendered on circuit… I mean, in a circuit court as a Circuit Justice, so… so, there it is.

There is… there’s authority from the very beginning to do… to do exactly what the court below, the majority of the court below said there wasn’t any–

William H. Rehnquist:

And where is Section 32 to be found in the present?

Phil Caldwell Neal:

–It’s not, Your Honor.

It… it… it continued as Section 954 of the revised statutes.

It was relied on as late as 1925.

I think, in an opinion of Mr. Justice Sutherland permitting in this Court the amendment of pleadings to show the raising of a federal question.

But it evaporated with the revision of the judicial code in… in 1948, and–

Anthony M. Kennedy:

Doesn’t… doesn’t part of it survive in 28 U.S.C. 777?

Phil Caldwell Neal:

–Well, 777 was… was omitted from… from the judicial code of 1948, and the revisors said that… that these provisions had been picked up in the Federal Rules.

Now–

Antonin Scalia:

Mr. Neal, 777… and that was sort of your argument that… that the old Section 32 survives until it’s finally picked up somehow in Rule 15, but by the time it gets picked up in Rule 15 with the 48 revision, it… it no longer is the broad jurisdictional provision that you… that you referred to.

It has… when it… when it becomes revised statute Section 954… and I don’t know when that came about, but certainly later when it’s Section 777, it reads,

“No summons, writ, declaration, return, process, judgment, or other proceedings shall be abated, arrested, quashed or reversed for any defect or want of form. “

“It… it becomes… and it goes on to say. “

Such court shall proceed and give judgment, “blah, blah, blah”.

Such court shall amend every such defect and want of form other than those which the party demurring so expresses and may at any time permit either of the parties to amend any defect in the process or pleadings upon such conditions as it shall in its discretion by its rules prescribed.

“Doesn’t all that”–

Phil Caldwell Neal:

–That is a part of–

Antonin Scalia:

–just go to defects of form by… by then?

Don’t you think the last clause of that, of 777, fairly read only applies to defects of form?

In other words, I don’t read 777 as being really the same as 32.

Phil Caldwell Neal:

–Well, I think there were changes.

I think there were changes in language, Your Honor, and I will not be… I will not be categorical about it.

But, as I say, Section 954 was relied on as late as… as 1925 as permitting this kind of amendment there having to do with federal question jurisdiction rather than diversity jurisdiction, and 954, I think, became 777 in the codification of 1926 immediately thereafter.

Phil Caldwell Neal:

And I’m… and I’m not aware of anything that suggests that there was a purpose at that point to… to… to narrow the… the power.

In any event, I do not… it seems to me that the significance of this background is simply that there was recognized from the very beginning a power… power to permit amending the complaint, even on appeal, in order to avoid unnecessary further proceedings at the district court level.

This court relied on… on that in… in a number of decisions along the way; Kennedy against the Bank of Georgia in 1850.

And even without reliance on that statute, I believe that Justice Marshall… Chief Justice Marshall’s decision in Carneal v. Banks back in 1825 is an express… an explicit authorization.

It doesn’t talk about… about trial or appellate courts.

It’s pretty clear if that opinion is read carefully, which I don’t think anybody else involved in this case has really done, that that opinion is exactly what Judge Easterbrook did in the… in the court below.

I think I’d like to reserve the remainder of my time for rebuttal, if I may.

William H. Rehnquist:

Thank you, Mr. Neal.

Mr. Heap.

Frank K. Heap:

Mr. Chief Judge, and may it please the Court:

There is a serious of inescapable facts in this case, and those facts very simply are that at the time this complaint was filed, there was no federal subject matter jurisdiction.

At the time the case was tried in the district court, there was no federal subject matter jurisdiction.

At the time the panel heard the case, there was no subject matter jurisdiction.

At the time the full en banc court heard the case, there was no federal jurisdiction, and there is no federal jurisdiction as I stand here today.

Mr. Bettison is an offending party.

The question is what does one do about it.

There was great discussion by both the dissenting opinion and the en banc opinion on the applications of Rules 15 and Rules 21.

There was no discussion of Rule 1.

Rule 1 very clearly says,

“These rules govern the procedure in the United States district courts. “

–does not govern the procedures in the circuit court.

Whether the circuit court wishes to adopt those rules, it may, but it hasn’t in the Seventh.

More importantly, all of the opinions have ignored Rule 12(h)(3), and that rule very clearly say whenever it appears by suggestion of the parties or otherwise that the court lacks jurisdiction of the subject matter, the court shall dismiss the action.

William H. Rehnquist:

Mr. Heap, supposing that it had come to the court of appeals’ attention that this fifth Defendant was, in fact, diverse, so that you’re not talking about an… an amendment to change facts or… or a dismissal of a defendant who couldn’t be sustained with complete diversity, but just an… an erroneous factual allegation.

Could the court of appeals have done nothing about that?

Frank K. Heap:

I believe that Rules 15… 1653 very clearly covers that situation, and that may be done in either the trial court or the appellate court if it is a defective matter of pleading; i.e., in your particular case, Chief Judge… Justice, the case where you had mispleaded, where you had diversity.

The problem with 1653, however, is that you cannot drop people in order to create that jurisdiction.

There’s a long list and long series of cases on that very subject.

Byron R. White:

Do you think the district court has the power to dismiss a nondiverse–

Frank K. Heap:

I do not, Your Honor.

Frank K. Heap:

I… I believe this matter should… should have been direct back to the district court for a ruling under rule 12.

Byron R. White:

–Well, do you… do you think the… do you think… you don’t think Judge Posner was right that the district court could have done this?

Frank K. Heap:

Judge Posner’s opinion is… is very brief.

It covers the first two paragraphs.

From that point on, Judge Posner seems to get into a long dissertation–

Byron R. White:

Well, I thought… I thought most of the… I thought the two opinions said all that could possibly be said about the case, but–

Frank K. Heap:

–I would agree, Your Honor.

Byron R. White:

–but Mr. Neal has certainly introduced a new element.

Frank K. Heap:

Well, I don’t think that there has been one case, in deference to Mr. Neal’s position, that has taken the position that federal subject matter jurisdiction can be created in a manner that it was attempted.

Byron R. White:

So that all the district court could do was just dismiss the case?

Frank K. Heap:

That is our position, Your Honor.

Anthony M. Kennedy:

Mr. Heap–

–Suppose both parties had stipulated that the non… that the nondiverse party could be dismissed.

Frank K. Heap:

I don’t believe that parties have the right to stipulate to federal jurisdiction, Your Honor.

John Paul Stevens:

Mr. Heap, is there is a difference between dropping parties to create federal jurisdiction and adding parties?

Take the Mullaney case, Justice Frankfurter’s opinion.

How do you distinguish between the two?

Frank K. Heap:

In the Mullaney case, Your… Justice, the… the federal court had jurisdiction.

It was a federal question that was involved.

It had federal jurisdiction.

The problem involved the… whether or not the principal of an undisclosed… or of a disclosed or the issue–

John Paul Stevens:

Well, it didn’t have jurisdiction if none of the plaintiffs had standing.

Frank K. Heap:

–The plaintiff ultimately… actually, by the time the case was decided had standing under the federal–

John Paul Stevens:

Well, because they’d added two parties who clearly had standing.

Frank K. Heap:

–That is correct.

But the controversy that existed between the parties was between diverse citizens.

It was… it was a suit that was originally styled in the name of the case.

John Paul Stevens:

Well, would you say that if it were clear that there had been no jurisdiction before the additional parties were added, that the court could not have allowed that to take place?

Frank K. Heap:

That would be our position, yes.

John Paul Stevens:

I see.

John Paul Stevens:

Well, under the en banc opinion, you’re going to be in the district court.

It’s remanded for further proceedings in this case.

Frank K. Heap:

That is correct, Your Honor.

Byron R. White:

And you say it shouldn’t have been remanded for that purpose at all.

It should have been dismissed.

Frank K. Heap:

No, no.

My… my argument was that it should be remanded to the district court with directions that a ruling under Rule 12 be entered.

There was no federal jurisdiction, and the case should have been dismissed.

Byron R. White:

So, you say it should have been dismissed.

Frank K. Heap:

That is correct, by the district court.

Byron R. White:

Yeah.

Well… but the en banc opinion would permit the district court to consider whether just to drop the nondiverse party.

Frank K. Heap:

I think if you read judge–

Byron R. White:

I’m not sure you’re entitled to argue–

Frank K. Heap:

–Your Honor–

Byron R. White:

–dismissal theory here without cross-appeal.

Frank K. Heap:

–Well, I think… I think, Your Honor, that very recent cases including the Tahoe… Lake Tahoe case very clearly indicate that subject matter jurisdiction can be raised without a cross-appeal.

The fact of the matter is Judge Posner, if you read his opinion, was constrained because of a rather lengthy series of discussions, as Mr. Neal has pointed out, and a conflict between the various circuit courts from taking an action other than follow either Rule 21 or Rule 15.

I think the time and the reason this case has importance, I believe, today is that this court ought to give direction to the circuit courts as to what you do when you clearly have no federal subject matter jurisdiction.

This is an extension–

Sandra Day O’Connor:

Well, it’s not an Article III jurisdictional problem, in any event, is it, do you think?

Frank K. Heap:

–I believe so.

There’s no basis other than diversity.

Diversity is the only basis upon which this case is brought.

This is… is basically a state jurisdiction.

Sandra Day O’Connor:

Why shouldn’t a party plaintiff have some control over the plaintiff’s own case after it’s filed, to the extent of being able to seek dismissal in these circumstances?

Frank K. Heap:

The Plaintiff chose to bring and style his suit in the federal district court and alleged jurisdiction which didn’t exist.

Sandra Day O’Connor:

I don’t see why the plaintiff’s control should automatically terminate with the filing of a complaint.

Frank K. Heap:

I don’t think we’re arguing their control should… should terminate.

If, in fact, there is federal subject matter jurisdiction, the case proceeds.

Frank K. Heap:

If there is not, I think the case must be dismissed.

Anthony M. Kennedy:

What about Rule 15(c), the relation-back rule?

Do the cases hold that the relation-back rule, the cases in the circuit courts hold that the relation-back rule doesn’t apply if there’s a jurisdictional defect?

Frank K. Heap:

There are cases that have applied, and particularly on the West Coast, have applied Rule 15 to allow this relation back.

There are an equal number of cases in the circuit that the test of federal jurisdiction is determined at the time the case is filed and subsequent events don’t change that fact.

It’s a very difficult situation.

It has never reached this Court before.

The Court has come very close in a couple of cases to address this question, but it’s… my research has revealed this is the first time the issue has been directly before this Court.

Antonin Scalia:

To come back to Justice O’Connor’s question, it’s not really an Article III problem unless you think that Article III requires complete diversity.

We’ve never held that, have we?

Frank K. Heap:

I think–

Antonin Scalia:

I mean, Congress might provide, might it not, as far as our opinions show that even if there was not complete diversity, so long as you had some diverse parties in the suit, the suit could proceed in federal court?

And if that’s true, then what was involved here was simply a failure to comply with the statute and not with Article III.

And Congress could, by statute provide that, well, complete diversity is the ordinary rule, but we will allow a suit that had incomplete diversity to be valid from the beginning so long as it is later amended to create complete diversity.

That would comply with Article III, wouldn’t it?

Frank K. Heap:

–I don’t believe so.

Antonin Scalia:

You think complete diversity is required by Article III?

Frank K. Heap:

I think that the federal court is a court of very limited jurisdiction.

That jurisdiction is set forth from the sovereign… it happens to be the people of the United States, as embodied in the Constitution, and I don’t believe the Congress has the authority to expand that.

It requires diversity of citizenship.

Diversity is what’s required.

Antonin Scalia:

Well, I think there is diversity when some people on both sides of the suit are from different states.

Why isn’t that diversity?

Frank K. Heap:

It requires diversity in suits by citizens of one state against residents or citizens of another.

Mr. Bettison is a stateless citizen.

You cannot obtain diversity citizenship over Mr. Bettison pursuant to the United States Constitution.

It is not–

Antonin Scalia:

I’m glad you think it is so clear.

I–

Frank K. Heap:

–I am trying to find a simple solution to what has now been 30 years of confusion in the circuit courts.

Frank K. Heap:

If there are no further questions… thank you, Your–

William H. Rehnquist:

–Thank you, Mr. Heap.

Mr. Neal, do you have rebuttal?

Phil Caldwell Neal:

I think I would only… only like to comment on what seems to me to be a misconception, not only in Mr. Heap’s argument, but also in Judge Posner’s opinion.

And that is that what is involved in this case involves somehow changing the facts as they existed when the complaint was filed.

We have… we do not… we do not question the general position that jurisdiction in a federal court is determined by the facts as of the date the case was filed.

No facts are being changed here.

It’s not as though you were trying to show that Mr. Bettison had become a citizen of a state, even though he was not at the time the action was filed.

All that’s being changed here is a… is a pleading.

It is dropping an allegation which defeats federal jurisdiction, and Section 1653, on its face, is designed to permit the changing of pleadings, not the changing of facts.

This is not the changing of facts.

I think the other thing that I would… and, of course, to… to call that into question is to call into question the massive body of precedent that goes all the way back to 1825 and has been continuous.

We’ve set forth on… on I think two or three pages of our reply brief the cases, and they’re only part of the cases.

And even though Judge Posner in his opinion toward the end of it, seemed to express some discomfort with that thought, the cases are there, and I submit that you really can’t reconcile those cases with what’s really the fundamental premise of Judge Posner’s opinion.

John Paul Stevens:

Mr. Neal, there’s one thing about this case that puzzles me that I notice Professor Easterbrook and Professor Posner and yourself and your opponent, Judge Shader, all have a connection with the University of Chicago Law School.

I just wonder why that faculty can’t straighten the matter out like this a little more consistently.

[Laughter]

Phil Caldwell Neal:

I’ve been baffled by the same thing, Your Honor.

[Laughter]

And it’s really what makes me think that the kind of admonitory purpose of Judge Posner’s opinion, which seems to me to be a kind of dunce cap theory of jurisprudence.

Go back to the district court, and that’s wearing the dunce cap, and everybody will see and be wiser from there on.

If they were not successful in imparting this wisdom when it was part of their function to do so, I’m a little skeptical that this opinion will have all that… all that effect.

And I suppose the only thing I… I should throw in here in view of the string of University of Chicago people you’ve mentioned who were associated with this is… the only explanation I was able to get why my younger and brighter colleagues who were participants in this error was one of them said yes, he took federal jurisdiction at the University of Chicago, but it was taught that year by a visiting professor from Harvard, and they didn’t deal with diversity jurisdiction.

If there are no other questions, I will–

William H. Rehnquist:

Thank you, Mr. Neal.

The case is submitted.