Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-07-56657/USCOURTS-ca9-07-56657-0/pdf.json

Parties Involved:
Thomas G. Gehring
Appellee
John Herklotz
Appellant
Eric Parkinson
Appellee
Plaza Entertainment, Inc.
Appellee
Charles Von Bernuth
Appellee
WRS, Inc.

Document Text:

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

JOHN HERKLOTZ,

Cross-Claimant-Appellant,

v.

ERIC PARKINSON, CHARLES VON

BERNUTH, and PLAZA

ENTERTAINMENT, INC.,

Cross-Defendants-Appellees,

and

THOMAS G. GEHRING,

Third-Party-Defendant-Appellee.

Nos. 07-56657

07-56662

D.C. No.

CV-07-01823-R

OPINION

Appeal from the United States District Court

for the Central District of California

Manuel L. Real, District Judge, Presiding

Argued and Submitted November 10, 2016

Pasadena, California

Filed February 14, 2017

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2 HERKLOTZ V. PARKINSON

Before: Marsha S. Berzon and Jacqueline H. Nguyen,

Circuit Judges, and Jack Zouhary,

*

 District Judge.

Opinion by Judge Zouhary

SUMMARY**

Subject Matter Jurisdiction

The panel vacated the district court’s Fed. R. Civ. P.

12(b)(6) dismissal of a state law crossclaim arising out of a

diversity action, and remanded with instructions to dismiss

for lack of jurisdiction.

When the District Court in the Western District of

Pennsylvania granted summary judgment in a diversity suit

in favor of WRS, Inc., appellant John Herklotz moved to

sever his state law crossclaim and transfer it to the Central

District of California.

The panel held that once Herklotz’s crossclaim was

severed, it became an entirely new and independent case that

must have an independent jurisdictional basis. The panel held

that Herklotz could no longer rely on the supplemental

jurisdiction afforded by 28 U.S.C. § 1367(a). The panel

concluded that there was no subject matter jurisdiction

* The Honorable Jack Zouhary, United States District Judge for the

Northern District of Ohio, sitting by designation.

** This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

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HERKLOTZ V. PARKINSON 3

because Herklotz’s severed crossclaim included only state

law claims against non-diverse parties.

COUNSEL

Charles E. Ruben (argued), Law Offices of Charles E. Ruben,

Los Angeles, California, for Cross-Claimant-Appellant John

Herklotz.

David S. Fisher (argued), Fisher Law Corporation, Woodland

Hills, California, for Cross-Defendant-Appellee Charles von

Bernuth.

David T. Stowell (argued), Stowell Zeilenga Ruth Vaughn &

Treiger LLP, Westlake Village, California, for Third-PartyDefendant-Appellee Thomas G. Gehring.

OPINION

ZOUHARY, District Judge:

This case serves as a reminder of the foundational rule

that federal courts are courts of limited jurisdiction. An

initial overview of this procedurally tortured, sixteen-year

saga may be useful.

In a nutshell: this action began in 2000 as a diversity suit

in the Western District of Pennsylvania by Plaintiff WRS,

Inc. against Defendants Plaza Entertainment and its directors

John Herklotz, Eric Parkinson, and Charles von Bernuth. 

Herklotz crossclaimed against Plaza, Parkinson, and von

Bernuth. When the district court granted summary judgment

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4 HERKLOTZ V. PARKINSON

in favor of WRS, Herklotz moved to sever his state law

Crossclaim and transfer it to the Central District of

California. The Pennsylvania district court granted the

unopposed motion, severed the Crossclaim, and transferred

the newly independent case. The California district court

then dismissed Herklotz’s claims under Federal Civil Rule

12(b)(6), from which Herklotz appeals.

In advance of oral argument, we signaled our concern that

the district court lacked subject matter jurisdiction over the

state law Crossclaim between non-diverse parties. We then

invited supplemental briefing on that question following oral

argument.

BACKGROUND

In the mid 1990s, Herklotz negotiated an agreement with

Eric Parkinson and Parkinson’s company, Plaza

Entertainment, to distribute a family film called “The Giant

of Thunder Mountain.” As part of this arrangement, Herklotz

invested in Plaza and also became a director and shareholder

of the company. Plaza in turn hired WRS to perform video

duplication services. Plaza asked WRS to work on a credit

basis, but WRS refused unless Plaza paid its past due balance

from previous projects and executed a surety agreement. 

Herklotz provided his personal guaranty for Plaza’s debt, and

WRS moved forward with the duplication services.

Plaza intended to distribute the movie to Walmart, but

took a significant financial hit when Walmart cancelled its

order. When Plaza fell even further behind in its payments to

WRS, the two companies negotiated a service agreement

through which WRS took over Plaza’s distribution, sales, and

collections. Parkinson and Charles von Bernuth, Plaza’s

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HERKLOTZ V. PARKINSON 5

Chief Operating Officer, provided additional personal

guaranties for Plaza’s debt. However, Plaza never came

current on its account and ultimately owed WRS nearly $1.5

million, plus interest.

In 2000, WRS (a Pennsylvania company) sued Plaza (a

California company), and Parkinson, von Bernuth, and

Herklotz (all California residents) in federal court in

Pennsylvania. Herklotz crossclaimed against Plaza,

Parkinson, and von Bernuth for indemnity, and against

Parkinson and von Bernuth for breach of fiduciary duty and

misrepresentation—all state law claims.

The Pennsylvania litigation stalled in 2002, when WRS

filed for bankruptcy, and eventually resumed in 2005. 

Default judgments were entered against Plaza, Parkinson, and

von Bernuth, and WRS prevailed against Herklotz on

summary judgment. In February 2007, the district court

entered judgment for $2.5 million in favor of WRS, for

which Parkinson, von Bernuth, and Herklotz were jointly and

severally liable.

Herklotz then moved to sever his Crossclaim against

Plaza, Parkinson, and von Bernuth and to transfer the severed

claims to federal court in California. The Pennsylvania court

granted the unopposed motion. Several months later,

Herklotz filed a First Amended Crossclaim, which added

state law claims against Thomas Gehring—Herklotz’s former

attorney, Plaza shareholder, and fellow Californian—for

indemnity and breach of fiduciary duty.

Neither Plaza nor Parkinson responded to the First

Amended Crossclaim. Von Bernuth and Gehring both moved

to dismiss for failure to state a claim, and the district court

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6 HERKLOTZ V. PARKINSON

granted both motions. Herklotz timely appealed in October

2007. He argues the district court erred in dismissing his

claims without allowing leave to amend.

Meanwhile, Herklotz also filed a parallel action in

California state court in December 2007. He raised claims

for indemnity, contribution, and declaratory relief against

Plaza, Parkinson, von Bernuth, and Gehring. As in the

federal action, Plaza and Parkinson did not appear, answer, or

otherwise plead. Von Bernuth and Gehring both demurred,

arguing the state court action was barred by res judicata in

light of the resolution of the federal proceeding. In March

2008, the California trial court dismissed the complaint with

prejudice, and the state appellate court affirmed in November

2009.

DISCUSSION

Federal courts are courts of limited jurisdiction, and

parties may not expand that jurisdiction by waiver or consent. 

Matheson v. Progressive Specialty Ins. Co., 319 F.3d 1089,

1090 (9th Cir. 2003) (per curiam). Thus, challenges to

subject matter jurisdiction may be raised at any point,

including for the first time on appeal. Detabali v. St. Luke’s

Hosp., 482 F.3d 1199, 1202 (9th Cir. 2007). Moreover, even

if the parties do not dispute jurisdiction, this Court has an

independent obligation to assess both its own and the district

court’s jurisdiction. Chapman v. Pier 1 Imports (U.S.) Inc.,

631 F.3d 939, 954 (9th Cir. 2011) (en banc); California ex

rel. Sacramento Metro. Air Qual. Mgmt. Dist. v. United

States, 215 F.3d 1005, 1009 (9th Cir. 2000) (“An appellate

court is under a ‘special obligation to satisfy itself not only of

its own jurisdiction, but also that of the lower courts in a

cause under review, even though the parties are prepared to

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HERKLOTZ V. PARKINSON 7

concede it . . . [or] make no contention concerning it.’”)

(quoting Axell Int’l, Ltd. v. Intercargo Ins. Co., 183 F.3d 935,

943 (9th Cir. 1999)).

Effect of Severance on Federal Jurisdiction

Herklotz’s severed Crossclaim included only state law

claims against non-diverse parties. Both Herklotz and

Gehring contend the Pennsylvania district court retained

supplemental jurisdiction over the Crossclaim following

summary judgment on the underlying Complaint. They cite

28 U.S.C. § 1367(c)(3), which provides a federal court with

discretion to retain or decline jurisdiction over pendent state

law claims once those claims within the court’s original

jurisdiction have been dismissed or otherwise resolved. See

also Acri v. Varian Assocs., Inc., 114 F.3d 999, 1000–01 (9th

Cir. 1997) (en banc); Baker v. Farmers Elec. Coop., Inc.,

34 F.3d 274, 283 (5th Cir. 1994). But this principle presumes

the pendent claims remain part of the original action, even if

the federal claims to which they once related have been

dismissed.

That did not happen here. Instead, once the Pennsylvania

district court granted summary judgment on the claims within

its original jurisdiction, Herklotz opted to sever the

Crossclaim. When a claim is severed, it becomes an entirely

new and independent case. See, e.g., Gaffney v. Riverboat

Servs. of Ind., 451 F.3d 424, 441 (7th Cir. 2006) (“As a

general matter, Rule 21 severance creates two discrete,

independent actions, which then proceed as separate suits for

the purpose of finality and appealability.”); E.S. v. Indep. Sch.

Dist., 135 F.3d 566, 568 (8th Cir. 1998) (“When a single

claim is severed from a lawsuit, it proceeds as a discrete,

independent action . . . .”); United States v. O'Neill, 709 F.2d

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8 HERKLOTZ V. PARKINSON

361, 368 (5th Cir. 1983) (“Severance under Rule 21 creates

two separate actions or suits where previously there was but

one.”). Thus, the Crossclaim became the operative complaint

of a new lawsuit.

A severed action must have an independent jurisdictional

basis. Honeywell Int’l, Inc. v. Phillips Petroleum Co.,

415 F.3d 429, 431–32 (5th Cir. 2005). It can no longer rely

on the supplemental jurisdiction afforded by 28 U.S.C.

§ 1367(a), for there is nothing left to supplement. That is,

“the once-upon-a-time related claim is no longer a related

claim because there is no federal claim to which it can

relate.” Louisiana v. Am. Nat’l Prop. & Cas. Co., 746 F.3d

633, 638 (5th Cir. 2014). This is apparent from the plain

language of Section 1367(a), which provides that “district

courts shall have supplemental jurisdiction over all other

claims that are so related to claims in the action within such

original jurisdiction that they form part of the same case or

controversy.” 28 U.S.C. § 1367(a) (emphasis added). 

Where, as here, the claims were stripped of their

jurisdictional predicate through severance, they lose their

federal hook and must stand on their own.

Gehring contends the Fifth Circuit’s decision in

Louisiana, 746 F.3d 633, limits its earlier holding in

Honeywell, 415 F.3d 429, such that the latter can no longer be

read to require an independent jurisdictional basis for severed

actions. However, Louisiana itself is inapposite, for the

district court in that case had original jurisdiction over the

severed claims under the Class Action Fairness Act. 746 F.3d

at 639. Thus, the Fifth Circuit repeatedly remarked that

Honeywell “applies only to severed claims that are based on

supplemental jurisdiction.” Id. at 640 (emphasis added). 

That is precisely the situation here.

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HERKLOTZ V. PARKINSON 9

Herklotz and Gehring also protest that applying the

Honeywell rule here would interfere with the authority of the

district court to transfer venue and the ability of the parties to

consent to such a transfer under 28 U.S.C. § 1404(a). In other

words, they suggest the district court must retain jurisdiction

to preserve its ability to transfer venue. They have it

backwards. Certainly a district court may transfer a case that

is properly within its jurisdiction. But the Pennsylvania

district court lost jurisdiction over the Crossclaim when it was

severed from the original action. Once that fact is

established, it becomes irrelevant whether the parties

consented to the transfer to California. The Pennsylvania

court lacked jurisdiction to enter the transfer order, and the

California court lacked jurisdiction to take the case.

One can easily imagine how the parties found themselves

in this predicament. Presumably, once the WRS claims were

resolved, Herklotz was not enthused by the prospect of

continuing to travel cross country to litigate his Crossclaim. 

WRS apparently did not oppose the motion to sever and

transfer—likely because WRS had no skin in that game, as it

had already prevailed on its claims and was not a party to the

Crossclaim. From the perspective of the Pennsylvania court,

it was presented with an opportunity to close a case that had

been pending on its docket for seven years. It is not

surprising that it did not scrutinize the unopposed motion

more closely. Nevertheless, the appropriate course of action

would have been either to deny the motion to sever and retain

jurisdiction over the supplemental state law claims, or to

decline to exercise supplemental jurisdiction under 28 U.S.C.

§ 1367(c)(3) and dismiss the Crossclaim, thus permitting

Herklotz to seek relief in state court.

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10 HERKLOTZ V. PARKINSON

Effect of State Court Proceeding

Alternatively, von Bernuth suggests we may avoid this

jurisdictional quagmire by shifting our focus. He contends

that whether or not the California court had subject matter

jurisdiction at the time the case was transferred, this Court

has jurisdiction now because there is a federal question

arising from the parallel state court proceeding: namely, the

preclusive effect of that judgment. The sole authority cited

for this theory, Cawley v. Celeste (In re Athens/Alpha Gas

Corp.), 715 F.3d 230 (8th Cir. 2013), is inapposite. In that

case, the Eighth Circuit recognized that courts may resolve

cases on preclusion grounds without first addressing

jurisdiction in the limited circumstances where the preclusion

inquiry “overlaps significantly with the analysis required” to

assess jurisdiction, such as under the Rooker-Feldman

doctrine. Id. at 235.

The jurisdictional question in this case is not a “murky

problem under Rooker-Feldman,” id., but a straightforward

analysis of diversity jurisdiction—one which overlaps not at

all with the preclusion arguments raised on appeal. Von

Bernuth’s proposal that we fast-forward to the issue of res

judicata is absolutely contrary to the fundamental legal

principle that jurisdiction must be established in the first

instance. It cannot be waived by agreement or delayed like

a bouncing ball.

CONCLUSION

It is unfortunate this lengthy odyssey must conclude in

this way, but jurisdiction is one rule this Court cannot bend. 

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HERKLOTZ V. PARKINSON 11

Accordingly, we vacate the district court judgment and

remand with instructions to dismiss for lack of jurisdiction.

VACATED AND REMANDED.

Each side to bear its own costs.

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