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. e du/thir dc ir c uit_1997/265Filed November 24, 1997

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 96

- 1969

SPECTACOR MANAGEMENT GROUP

v.

MATTHEW G. BROWN,

Appellant.

Appeal from the United States District Court

for the Eastern District of Pennsyl vania

(D.C. Civil No. 93

- 5246)

Argued

June 24, 1997

Before: GREENBERG, McKEE, Circuit Judges, and

WELLFORD,* Senior Circuit Judge

(Filed November 24, 1997)

GARY GREEN, ESQ. (Argued)

Sidkoff, Pincus & Green

1101 Market Street

Suite 2700

Philadelphia, PA 19107

Attorney for Appellant

_________________________________________________________________ *The Honorable Harry W. Wellford of the United States Court of Appeals

of the Sixth Circuit, sitting by designation.

IRA B. SILVERSTEIN, ESQ. (Argued)

Fox, Rothschild, O'Brien &

Frankel

2000 Market Street

Philadelphia, PA 19103

Attorney for Appellee

OPINION OF THE COURT

McKEE, Circuit Judge.

Spectacor Management Group ("Spectacor") initiated this

diversity action as a result of a disagreement with a formersenior level executive over severance pay and benefits. The

defendant counterclaimed, alleging that Spectacor had

breached an oral con tract with him and owed him money

as a result. Following a bench trial, the district court

entered judgment for the defendant but in an amount that

was substantially less than the amount of his counterclaim.

The defendant appeals. We will affirm the ju dgment of the

district court without further comment, as it is based upon

that court's assessment of the evidence, and find no clear

error.1 However, the jurisdictional issues raised by this

appeal require us to discuss the district court's exercise of

subject matter jurisdiction. Accordingly, we will discuss

whether the amount in controversy requirement of 28

U.S.C.A. S 1332(a) has been satisfied.

I.

Spectacor, a Pennsylvania joint venture engaged in the

business of managing public assembly f acilities, such as

stadiums, arenas, and convention centers, brought this

diversity action in an attempt to recoup severance benefits

paid to defendant Matthew Brown, a New Jersey citizen,

following his termination as Executive Vice

- President of

Spect acor. Spectacor's complaint alleged that it paid Brown

$42,500 in benefits and $4,921.04 for medical insurance.

The resulting total ($47,421.04) was, therefore, less than

_________________________________________________________________

1. See Anders on v. Bessemer City, 470 U.S. 564 (1985).

2

the $50,000 minimum required for diversity jurisdiction

when the suit was filed. Spectacor, however, also alleged

that it was entitled to recoup an additional $3,287.21 it

had paid in payroll taxes. This additional sum brought the

amount that Spectacor claimed to $50,708.25 exclusive of

costs and interest.

Brown argues that Spectacor included the amount of the

payroll taxes as a "sham" to manufacture federal

juri sdiction in a preemptive attempt to prevent him from

suing Spectacor in state court. Brown further argues that

Spectacor conceded that even Spectacor's claim to recover

benefits from Brown was a "sham" because Spectacor

stipulated in the district court that it owed him $50,000 in

benefits plus $15,692 in vacation pay. See Appellant's Br.

at 5. Spectacor maintained that it retained the money that

it owed Brown as a set off against payments it had made to

Brown that he was obligated to repay. Thus, Br own's

response to the suit was twofold. He claimed that Spectacor

manipulated the payroll tax claim as a contrivance tomanufacture the amount in controversy needed for diversity

jurisdiction and that Spectacor owed him more than he

owed it. However, rather than filing a motion to dismiss

Spectacor's complaint for lack of jurisdiction in the district

court under Fed. R. Civ. P. 12(b)(1), Brown filed an answer

in which he denied jurisdiction, and counterclaimed against

Spectacor for the amount Spect acor allegedly owed him for

severance pay ($135,000), sales commissions ($837,000),

an earned bonus ($70,720), unused vacation days and

unreimbursed business expenses ($17,550).

Spectacor argues that it included payroll taxes in good

faith and the j urisdictional amount therefore appears on

the face of the complaint. Spectacor maintains that, in any

event, Brown's counterclaim can be considered in

calculating the amount in controversy. That counterclaim

easily surpasses the $50,000 threshold neede d for diversity

jurisdiction. Brown counters by arguing that Spectacor's

allegation of damages in the amount of $50,708.25 fails to

satisfy the jurisdictional amount as the claim was not made

in good faith and that his counterclaim cannot be

considere d in calculating the amount in controversy.

3

We hold that where, as here, a defendant elects not to file

a motion to dismiss for lack of jurisdiction, but answers a

complaint by asserting a compulsory countercla im, 2 the

amount of that counterclaim may be considered by the

court in determining if the amount in controversy exceeds

the statutory requirement for diversity jurisdiction.

Accordingly, since the amount in controversy easily clears

the jurisdictiona l hurdle when Brown's counterclaims are

included, we need not reach the novel and interesting issue

of whether the payroll taxes can be considered in

calculating the amount in controversy.

II.

Federal courts have diversity jurisdiction where there is

complete diversity among the parties, and the amount in

controversy meets the jurisdictional minimum. See 28

U.S.C. S 1332(a). At the time this case wasfiled that

amount was $50,000.3 As a general rule, that amount is

determined from the good fait h allegations appearing on the

face of the complaint. See St. Paul Mercury Indemnity Co. v.

Red Cab Co., 303 U.S. 283, 288 (1938). A complaint will be

deemed to satisfy the required amount in controversy

unless the defendant can show to a legal certain ty that the

plaintiff cannot recover that amount. Id. at 289.

In a cause instituted in the federal court the plaintiffchooses his forum. He knows or should know whether

his claim is within the statutory requirement as to

amount. His good faith in choosing the federal forum is

open to challenge not only by resort to the face of his

complaint, but by the facts disclosed at trial, and if

from either source it is clear that his claim never could

have amounted to the sum necessary to give

jurisdiction there is no injustice in dismissing the suit.

Red Cab, 303 U.S. at 290. As noted above, Brown

challenged the district court's jurisdiction by way of an

_________________________________ ________________________________

2. We note that this case only presents the question of whether

compulsory counterclaims can be considered. Our holding does not

extend to permissive counterclaims.

3. That amount has since been increased to $75,000

.

4

averment in his answer. At P 16 of his answer, under the

section of the answer captioned "DEFENSES", Brown

states: "[t]he Court lacks jurisdiction over the subject

matter in that the amount in controversy do es not exceed

$50,000.00." See app. at 16. Under Rule 12 of the Federal

Rules of Civil Procedure, Brown could have filed a motion

to dismiss for lack of jurisdiction and not filed an answer

unless that motion was denied.

Every defense, in law or fact, to a claim for relief in any

pleading . . . shall be asserted in the responsive

pleading thereto if one is required except that the

following defenses may at the option of the pleader be

made by motion: (1) lack of jurisdiction over the

subject matter . . ."

Fed. R. Civ. P. 12(b) (emphasis added). Brown elected not to

exercise that option. Instead, he asserted a counterclaim

against Spectacor based upon the same transactions that

gave rise to Spectacor 's suit against him.

Federal Rule of Civil Procedure 13 provides in part as

follows:

A pleading shall state as a counterclaim any claim

which at the time of serving the pleading the pleader

has against any opposing party, if i t arises out of the

transaction or occurrence that is the subject matter of

the opposing party's claim and does not require for its

adjudication the presence of third parties of whom the

court cannot acquire jurisdiction . .

. .Fed. R. Civ. P. 13. Brown's claim against Spectacor is a

compulsory counterclaim within the scope of this Rule.

Where the circumstances surrounding a plaintiff 's claim

require a defendant to assert a counterclaim under Rule

13(a), defendant's claim is part of the controversy set forth

in the plaintiff 's complaint. The complaint initiates the

legal action, but it is not the totality of the controversy. It

is merely the portion of the controversy for which plaintiff

seeks relief. However, th e substance of the controversy

extends to any compulsory counterclaim brought under

Rule 13(a).4

_________________________________________________________________

4. The same is not true of counterclaims brought under Rule 13(b) as

"permissive count erclaims" are simply "any claim against an opposing

5

[I]f the jurisdictional amount requirement serves any

salutary function it is to measure the substantiality of

the claim. We believe that the substantiality of the

claim can best be gauged by reference to what is

actually at stake in the litigation rather than by strict

reference to plaintiff's claim for relief.

1A James Wm. Moore et al., Moore's Federal Practice,

P 0.167[8] (2d ed. 1991).

The allegations of the instant suit demonstrate the

wisdom of that approach. Spectacor alleges that it

continued to pay Brown his salary and medical insurance

after he was terminated "as an advance against the overall

set tlement then being negotiated." It maintains that such

payments were a "demonstration of good faith and subject

to reimbursement if agreement was not reached on all

issues" regarding the termination of his employment. (See

app. at 10; Compl. P 10.). It s suit is an attempt to recover

those funds pursuant to the alleged agreement as

settlement of the dispute was apparently never negotiated.

Brown, on the other hand, asserts that Spectacor breached

a contract in which it agreed to pay him certain amoun ts in

the event that his employment was terminated, and that he

was entitled to certain other payments by virtue of his

performance while still employed at Spectacor. He

specifically alleges that "[Spectacor] has breached the

Employment Contract by no t paying Brown sums

[Spectacor] promised to pay upon his termination," (See

app. at 18; Answer P 36), and "[Spectacor] has stopped

Brown's medical insurance coverage, and it therefore owes

him a yet to be liquidated sum for its replacement." (See

____ _____________________________________________________________party not arising out of the . . . occurrence that is the subject matter

of

the opposing party's claim." Fed. R. Civ. P. 13(b). Thus, by definition,

permissive counterclaims are not usually part of the controversy brought

into court by plaintiff 's complaint.

However, we do not today decide whether a permissive counterclaim

could ever bear such a nexus to a plaintiff's claim as to allow a court to

consider it in determining if the amou nt in controversy exceeded the

jurisdictional amount. Resolution of that question must await a more

appropriate case.

6

app. at 19; Answer P 37; see also app. at 19

- 20; Answer

PP 38

- 43).

Other courts have hel d that a compulsory counterclaim

can satisfy the jurisdictional amount even where the

defendant has not objected to jurisdiction. See Fenton v.

Freedman, 748 F.2d 1358 (9th Cir. 1984) (considered

counterclaim where defendant had not objected to

jurisd iction prior to filing compulsory counterclaims);

Roberts Mining & Milling Co. v. Schrader, 95 F.2d 522 (9th

Cir. 1938) (considered counterclaim where defendant did

not object to jurisdiction, but instead filed counterclaim in

an amount adequate to sup port jurisdiction);5 Motorists

Mutual Ins. Co. v. Simpson, 404 F.2d 511 (7th Cir. 1968)

(holding that compulsory counterclaim was not to be

considered where defendant objected to jurisdiction before

filing a counterclaim, but noting that if no objectio n had

been made, consideration of compulsory counterclaim was

permissible).6

_________________________________________________________________

5. We note that the Roberts Mining court did not explicitly hold that the

counterclaim was compulsory. How ever, the initial claim by the plaintiff

was to quiet title to six mines while the counterclaim asserted that the

mines were owned by the defendant. Such a counterclaim would be

considered compulsory under the modern Rule 13(a). The claim was also

comp ulsory under the procedural rules that prevailed at the time. While

the decision was handed down in 1938, the year that the federal courts

of equity and law were unified into the modern system governed by the

Federal Rules of Civil Procedure, the suit w as filed prior to such

unification and thus was one brought "in equity." 95 F.2d at 522. Such

actions were governed by procedural rules that, unlike the rules

governing actions at law, recognized compulsory counterclaims. See

Equity Rule 30 (" `The ans wer must state in short and simple form any

counterclaim arising out of the transaction which is the subject

- matter

of the suit ...."). American Mills Co. v. American Surety Co., 260 U.S.

360,365 (1922) (noting that it is imperative to limit the preclu sive effect of

counterclaims to those which are equitable, as opposed to legal in

nature); Michael D. Conway, Narrowing of the Scope of Rule 13(a), 60 U.

Chi. L. Rev. 141, 154 (1993) ("Prior to 1938, there was no rule requiring

the pleading of compulso ry counterclaims at law.")(citing American Mills,

supra).

6. Spectacor also points to National Union Fire Ins. Co. of Pittsburgh v.

Russell, 972 F.2d 628 (5th Cir. 1992), which held that where an insurer

challenges an award under the Texas Worker's C ompensation Act in

7

Prior to the 1938 unification of the law and equity courts

and the adoption of the Federal Rules of Civil Procedure,

this court held that a counterclaim of sufficient value could

bring a cas e within the jurisdiction of the court regardless

of the amount of plaintiff's claim. See Home Life Ins. Co. v.

Sipp, 11 F.2d 474, 476 (3d Cir. 1926).

In Home Life, Sipp was the beneficiary of a life insurance

policy that the defendant insurance comp any had issued on

her mother's life. Following her mother's death, Sipp sued

to recover the amount of the policy ($3,000) plus interest

and costs. At the time, a claim had to exceed $3,000

exclusive of interest and costs to satisfy the amount

required for diversity jurisdiction. The insurance company

filed a counterclaim for a loan on the policy that remained

outstanding in the amount of $423. Sipp subsequently

attempted to amend her claim to include premiums that

were paid for the period following her mother's death.

However, the court ruled that the amount of "unearned

premiums" could not be included as "the premium is

earned the instant the risk attaches and is not returnable

thereafter." Id. at 475. Moreover, even if the premium could

be re covered, that amount would go to the estate of the

deceased, and not to the plaintiff beneficiary. Thus, the

amount of the premium could not count toward the

jurisdictional minimum. Moreover, the amount of the

counterclaim could not be added to the $3, 000 claim to

satisfy jurisdiction because the counterclaim was in the

nature of a set

- off to be subtracted from, not added to, any

recovery. Accordingly, the counterclaim served only to

reduce the amount in controversy. However, in deciding the

case w e stated:

when the jurisdictional amount is in question, the

tendering of a counterclaim in an amount which in

itself, or added to the amount claimed in the petition,

______________________________________________________________ ___

federal court, the defendant's counterclaim could be considered forpurposes of the jurisdictional amount. However, that case relies

specifically on Horton v. Liberty Mut. Ins. Co., 367 U.S. 348 (1961),

which

dealt with the Texas Worker's Compens ation Act and which, as

discussed below, we do not rely upon here. See n.9 infra.

8

makes up a sum equal to the amount necessary to the

jurisdiction of this court, jurisdiction is established,

whatever may be the state of the plaintiff's complaint.

Id.

Brown suggests that Home Life held that a counterclaim

did not suffice to give a court jurisdiction where the

plaintiff 's initial claim could not. See Appellant's Sup. Br.

at 6. He po ints out that we also stated: "[a] party . . .

cannot by filing a counterclaim give jurisdiction to a court

when a statute denies it jurisdiction. In other words, a

defendant's consent to the court's jurisdiction as to

amount, signified by the filing o f the counterclaim cannot

confer jurisdiction." Home Life, 11 F.2d at 476. However,

that portion of the opinion merely rejects plaintiff 's

argument that defendant should be estopped from

challenging jurisdiction once he or she pleads a

counterclaim. It does not address the issue of whether the

amount of the counterclaim is included in the amount in

controversy for jurisdictional purposes.

We concluded that the jurisdictional prerequisites were

not satisfied in Home Life, because the counterclaim

reduced the amount that the "defendant admits it owes"

and was not an independent claim for recovery.

Accordingly, we stated "[a]t no time and under no

arrangement of the figures [had] the amount in controversy

exceeded $3,000." Id. Although cases of such ancient

vintage do not always guide subsequent inquiries with

precision (especially in view of the evolving nature of federal

jurisdiction), we think that our analysis in Home Life, along

with similar holdings from our sister circuit courts of

a ppeals, counsel us here. Cf. Fenton, 748 F.2d at 1359

(holding that the circuit was bound to follow prior 1938

precedent of Roberts Mining, which was considered a "suit

in equity" and, like Home Life, was decided under

procedural law applicable before the federal system was

unified). Moreover, the discussion in Home Life remains

viable under today's unified federal court system.

Other courts have noted practical reasons for counting

compulsory counterclaims toward the jurisdictional

amount. In Ro berts Mining, the court reasoned that9

consideration of the counterclaim was permissible because

the counterclaim was the equivalent of a second,

independent suit in which the defendant of the initial

action wa s the plaintiff, 95 F.2d at 524 (citing Merchants'

Heat & Light Co. v. James B. Clow & Sons, 204 U.S. 286

(1907)), and that the matter in controversy was the same in

each of these suits. Id. Therefore, because the court would

have jurisdiction over thi s second suit, the court saw no

impediment to asserting jurisdiction over the entirety of the

initial action. Id. This reasoning is echoed in more recent

cases where courts have noted that where there is no

objection to jurisdiction and where the count erclaim

independently meets the required amount, one can assume

that the defendant would have chosen the federal forum

and there is no reason not to exert jurisdiction simply

because the plaintiff won the race to the courthouse. See

Motorists Mutual I ns., 404 F.2d at 514

- 15.7

Of course, we do not mean to suggest that parties can

agree to the jurisdiction of a federal court and thereby

confer jurisdiction that would not otherwise exist. That is

clearly not the case. Federal jurisdiction arises und er the

constitution. It is not created by contract or waiver. In

Fenton, the court stated:

[e]ach of the . . . compulsory counterclaims exceeded

$10,000. In Roberts Mining & Milling Co. v. Schrader,

we stated that a counterclaim that exceeded the

necessary amount in controversy was sufficient to

bring the entire case within the jurisdiction of the

district court, regardless of the lack of jurisdictional

averments in the . . . complaint . . . . The [defendants

here] did not object to the district court's exercise of

_________________________________________________________________

7. We realize that Brown is here arguing that he intended to sue in state

court and that Spectacor raced int o federal court as a preemptive strike

to avail itself of a more favorable forum, see Appellant's Br. at 6, and

therefore this presumption does not apply here. In the situation here, if

Brown had sued in a Pennsylvania state court, Spectacor, as a

Penn sylvania citizen, would not have been able to remove the case to the

district court. See 28 U.S.C. S 1441(b). Nevertheless, these policy

implications are still relevant to our discussion. In noting them, we do

not suggest that there is any merit to the belief of either party here

that

a federal or state forum will benefit either side.

10jurisdiction prior to the filing of their compulsory

counterclaim but, rather, raised the issue for thefirst

time on appeal.

748 F.2d at 1358 (citations and internal quotation marks

omitted). However, the court could not have intended to

suggest that jurisdiction can be waived. Rather, we

conclude that the court was simply noting that the

defendants there had done nothing to prevent the amount

of their counterclaim from becoming part of the controversy

that was initiated by the plaintiff's suit, and that the

counterclaim was therefore properly considered in

determining the amount in controversy. S imilarly, Brown

did object to jurisdiction, but he did not do so in a manner

that kept his counterclaim from being before the court.

When a defendant elects that option afforded under Rule 12

and decides not to move to dismiss for lack of subject

matt er jurisdiction, but asserts a compulsory counterclaim

against the plaintiff instead, the defendant thereby places

the amount of the counterclaim into controversy, and the

court must consider that amount in determining if it has

jurisdiction under 28 U .S.C.A. S 1332(a). This is true

whether or not the defendant also attacks subject matter

jurisdiction in his or her answer or in any other manner

that does not prevent the counterclaim from being before

the court.8

In arguing that we should not cons ider compulsory

counterclaims, Brown also points to Oliver v. Haas, 777 F.

Supp. 1040 (D.P.R. 1991); Michael F. Ronca & Sons, Inc. v.

Monarch Water Systems, 1990 WL 140154 (E.D. Pa. 1990);

P.S. Group v. Aladdin Engineering and Manufacturing, Inc.,

199 0 WL 122938 (E.D. Pa. 1990); and Cabe v. Pennwalt,

372 F. Supp. 780 (W.D.N.C. 1974). See Appellant's Sup. Br.

at 6. Each of these cases was decided in the context of

removal and each holds that counterclaims cannot be

considered when determining whethe r an action has been

_________________________________________________________________

8. Here, in addition to a statement in his answer challenging

jurisdiction,

Brown subsequently moved for sanctions under Fed. R. Civ. P. 11 when,

in response to Br own's summary judgment motion, Spectacor conceded

that it owed Brown more than he owed it. See Appellant's Br. at 6.

However, that does not alter our analysis.

11

properly removed. Although there is authority to the

contrary, see, e.g., Swallow & Assoc. v. Henry MoldedProducts, Inc., 794 F. Supp. 660 (E.D. Mich. 1992) (holding

that in the removal context "substantiality of claim" should

be gauged by considering the compulsory counterclaim),

the cases to whic h Brown points appear to represent the

majority view that inclusion of counterclaims should not be

permitted in the removal context. Wright, supra, at 124

(collecting cases). However, removal is governed by

considerations inapplicable to cases involvin g the exercise

of original jurisdiction. In Shamrock Oil Corp. v. Sheets, 313

U.S. 100, 107

- 109 (1941), the Supreme Court noted that

the legislative history and language of the removal statute

shows that Congress intended to limit removal. The Court

r easoned that removal was statutory and not constitutional,

and that removal jurisdiction must, therefore, be narrowly

construed in favor of the non

- removing party to prevent,

inter alia, encroachment on the right of state courts to

decide cases properl y before them. The contrary

consideration is present when we consider a court's

exercise of original jurisdiction. Thus, in the abstention

context, the Court has stated:

[T]he federal courts have a virtually unflagging

obligation to ex ercise their jurisdiction except in those

extraordinary circumstances where the order to the

parties to repair to the State court would clearly serve

an important countervailing interest.

Deakins v. Monaghan, 484 U.S. 193, 202 (1 988) (internal

quotation marks omitted). Furthermore, "if compulsory

counterclaims were considered for purposes of jurisdiction,

federal subject matter jurisdiction would be reliant on state

law distinctions between compulsory and permissive

countercl aims." Meridian Aviation Service v. Sun Jet Int'l,

886 F.Supp. 613, 615 (S.D.Tex. 1995). Accordingly, Brown's

reliance upon cases addressing issues surrounding removal

jurisdiction does not assist us.

Here, Brown submitted his compulsory counterclaim to

the district court thereby putting the amount of that

counterclaim in controversy. The amount of his

counterclaim must be considered in determining whether

12

the district court had subject matter jurisdicti on. See also

Horton, 367 U.S. 348 (1961).9

_________________________________________________________________

9. In Horton an insurance company filed suit in federal court, alleging

diversity jurisdiction, to challenge a $1,050 award given by the Texa s

Industrial Accident Board pursuant to the Texas Workman's

Compensation Act. In its complaint, the company also asserted that thedefendant would assert a compulsory counterclaim that he was entitled

to an award of $14,035. In response, the defendant filed a motion to

dismiss for failure to satisfy the amount in controversy and filed an

answer, subject to the motion to dismiss, containing the $14,035

conditional compulsory counterclaim just as plaintiff had predicted.

Although the amount of the ins urance company's claim clearly did not

meet the amount in controversy minimum that was then an amount in

excess of $10,000, the Supreme Court held that the jurisdictional

requirement was met because of the $14,035 counterclaim. The Court

stated:

The complaint of the respondent company filed in the District

Court,

while denying any liability at all and asking that the award of

$1,050 against it be set aside, also alleges that petitioner Horton

has claimed, now claims and will claim that he has suffered total

and permanent disability and is entitled to a maximum recovery of

$14,035, which, of course, is in excess of the $10,000 requisite to

give a federal court jurisdiction of this controversy. No d enial of

these allegations in the complaint has been made, no attempted

disclaimer or surrender of any part of the original claim has been

made by petitioner, and there has been no other showing, let alone

a showing `to a le gal certainty,' of any lack of good faith on the

part

of the respondent in alleging that a $14,035 claim is in

controversy.

It would contradict the whole record as well as the allegations of

the

complaint to say that this dispute in volves only $1,050. The claim

before the [Texas Industrial Accident] Board was $14,035; the state

court suit of petitioner asked that much; the conditional

counterclaim in the federal court claims the same amount. Texas

law under which this claim was created and has its being leaves the

entire $14,035 claim open for adjudication in a de novo court

trial,

regardless of the award. Thus the record before us shows beyond a

doubt that the award is challenge d by both parties and is binding

on neither; that petitioner claims more than $10,000 from the

respondent and the respondent denies it should have to pay

petitioner anything at all. No matter which party brings it into

court,

the controversy remains the same; it involves the same amount of

money and is to be adjudicated and determined under the same

rules. Unquestionably, therefore, the amount in controversy is in

excess of $10,000.

13

III.

For the reasons set forth above, we will affirm the

judgment of the district court._________________________________________________________________

367 U.S. at 353

- 54.

As the dissent noted, Horton can be read a s holding that if a plaintiff

asserts in the complaint that a counterclaim will be brought in an

amount above the jurisdictional minimum, then the amount in

controversy has been satisfied. Yet, that is clearly contrary to the well

established rule (de veloped in the context of federal question

jurisdiction)

that a plaintiff cannot create federal jurisdiction by anticipating

federal

defenses that a defendant may assert. See id. at 358

- 59 (citing Skelly Oil

Co. v. Phillips Petroleum Co., 339 U.S. 667 ( 1950); First National Bank of

Canton, Pa. v. Williams, 252 U.S. 504 (1920); Louisville & N.R. Co. v.

Mottley, 211 U.S. 149 (1908); Taylor v. Anderson, 234 U.S. 74 (1914)).

Perhaps because Horton has so troubled commentators and courts, it

has been co nspicuously absent from discussions of the effect of

counterclaims upon the amount in controversy. See, e.g., Fenton, 748

F.2d 1358; Motorists Mutual, 404 F.2d 511. Only two reported cases

outside the Texas Compensation Act context cite Horton in regard to the

counterclaims and the jurisdictional amount. See Emland Builders, Inc.

v. Shea, 359 F.2d 927 (10th Cir. 1966); Russell, 972 F.2d 628. In

Emland Builders, the court found Horton to be of dubious instruction

and held that, in any event, the comp laint sufficed to meet the

jurisdictional requirement.

Although the holding in Horton supports our analysis, we need not rely

upon it for the decision we reach here. (Horton has been described as

"baffling" by respected legal commentators, see Wrigh t, supra at 111,

and we include it only for the sake of the thoroughness of our

discussion).

14

WELLFORD, Senior Circuit Judge, dissenting:

I respectfully dissent from the decision in this case based

on what I believe to be a serious question about lack of

jurisdiction. Spectacor proceeded in the federal court in its

chosen venue, asserting diversity jurisdiction and more

than the required jurisdictional amount, but only barely, on

the face of the complain t. The defendant Brown filed an

answer affirmatively stating "[t]he Court lacks jurisdiction

over the subject matter in that the amount of controversy

does not exceed $50,000." He added, among other things:

Plaintiff has failed to state a val id claim upon which

relief can be granted.. . .

Plaintiff was already obligated to provide the sums

and benefits to Defendant.

. . .

Plaintiff's Complaint was filed in bad faith to harass

Defendant.

Defendant contemporaneously filed a counterclaim, seeking

a substantially greater amount than was requested in the

original complaint.

The district court found that the action was notfiled in

bad faith because "[s]ums owed by a plainti ff to the

defendant are not subtracted from the amount of plaintiff's

claim when calculating the jurisdictional amount. Savarese

v. Edrick Transfer & Storage, Inc., 513 F.2d 140, 142 (9th

Cir. 1975)." In my view, however, the facts of Savarese are

mat erially different from those presented by the

jurisdictional issue in this case. In that case, the plaintiff

sought $11,901 from the defendant who did not contest the

claim. Additionally, the plaintiff acknowledged that he held

some $2,578 that belonge d to the defendant, which he

sought to apply against the debt owed him. The defendant

conceded that the amount sought by Savarese was above

the jurisdictional minimum amount.1 The defendant did not

______________________________________________________ ___________

1. The Savarese court acknowledged that had plaintiff initially demanded

a judgment of $9,323 (the difference after application of an offset), the

district court would have lacked jurisdiction, citing Kansas City

Philharmonic Ass'n v. Gre yhound Lines, 257 F.Supp. 941 (W.D. Mo.

1966); C. Wright, Federal Courts, 116

- 17 and n.52, 134 (2d ed. 1970).

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challenge, in a timely fashion, jurisdiction in its responsive

pleading.

In the instant case, ev en if Brown had not pleaded lack

of jurisdiction, a challenge to subject matter jurisdiction is

not waivable; and when a challenge is made, it must be

fully considered. United States ex rel Coffey v. Austin

Construction, 436 F.Supp. 626 (W.D. Okla. 197 7). Whether

federal jurisdiction exists is determined as of the time the

action is filed, not after the responsive pleading is filed.

Wright, Miller and Cooper, Federal Practice and Procedure,

Vol. 13B S 3608, Vol. 14A S 3702. The party seeking to

inv oke federal jurisdiction, once challenged, "has the

burden of proving its existence." Id., S 3702.In a suit for a sum certain that is less than the

jurisdictional amount, adding a claim for punitive damages

so that the jurisdictional amount may be e xceeded may be

insufficient to establish jurisdiction. Wiggins v. N.A.

Equitable Life Ins. Co., 644 F.2d 1014 (4th Cir. 1981).

Furthermore, "the extent to which a counterclaim can be

considered in determining the amount in controversy never

has been d etermined satisfactorily by the federal courts."

Wright, Miller and Cooper, Federal Practice and Procedure,

Vol. 14, S 3706. "Defendant can object to the court's

jurisdiction over the original claim in the answer and plead

the counterclaim in the alter native." Id., S 3706.

Here, the district court acknowledged that Spectacor

admitted "that it does not `own' the set

- off funds," but,

rather than holding that that fact barred the claim, the

court held that Spectacor took a "strategic action" to

"obt ain what it perceives to be a more amenable forum."

Brown argued (I think plausibly) that Spectacor genuinely

claimed only $47,421 in "salary advances" and "medical

insurance premiums" made for his benefit. Brown

complained, however, about the asserted "payroll tax

liabilities" of $3,287, arguing that this additional claim was

a " `sham' to manufacture federal court jurisdiction." The

district court never decided whether, in fact, the so

- called

"payroll tax liability" portion of the complaint, which was

necessary to exceed the jurisdictional amount of $50,000

was something other than a "sham" or a "contrivance" to

establish federal jurisdiction. The district court merely held,

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without elaboration, that the suit was filed in good faith

and not for the purpose of harassing the defendant.

The majority holds that because defendant did not file a

motion to dismiss for lack of jurisdiction and asserted a

compulsory counterclaim, that it would consider th e

amount of the counterclaim in determining the amount in

controversy, citing Fenton v. Freedman, 748 F.2d 358 (9th

Cir. 1984). But, as the majority acknowledged, Fenton

involved a situation where defendant had not first objected

to jurisdiction. It i s therefore distinguishable from this case,

as is the earlier Ninth Circuit case, Roberts Mining Co. v.

Schrader, 95 F.2d 522 (9th Cir. 1996), for the same reason.

The remaining case cited by the majority for this

jurisdictional holding was Motorists Mutual Ins. Co. v.

Simpson, 404 F.2d 511 (7th Cir. 1969). That court held

contrary to the majority's interpretation:When a claim over which there is otherwise

jurisdiction does not embrace an amount in

controversy in excess o f that required by the statute,

the "plaintiff

- viewpoint" rule, under which jurisdiction

is determined on the basis of what the plaintiff claims,

requires dismissal of the claim. A problem arises,

however, when although the plaintiff 's claim does not

involve the requisite jurisdictional amount, a

compulsory counterclaim is filed which independently

meets the required amount. There are cases which

hold that in such a situation federal jurisdict ion should

be sustained.

But irrespective of the holding in those cases, we

believe that a compulsory counterclaim should not be

held to give rise to federal jurisdiction where the

defendant

- counterclaimant has ob jected from the

beginning to the federal court's assumption of

jurisdiction over the plaintiff's main action on the

ground that the amount in controversy in that action

is insufficient and additionally, after his jurisdictio nal

objection is overruled, files a compulsory counterclaim

even though the amount therein involved exceeds

$10,000 exclusive of interest and costs.

17

Simpson, 404 F.2d at 514 (emphasis add ed) (footnotes

omitted).

The Simpson court, moreover, in the type of situation

existing in this case, observed that "[s]ince, however,

defendant did not originally choose the federal forum, the

option should be his whether or not to keep the action in

federal court," citing 1 J. Moore, Federal Practice P 0.98[1],

at 896 (2d ed. 1964). Simpson held that it was without

jurisdiction to proceed unless the original claim exceeded

the jurisdictional amount. I would agree with this

assessment, and I wo uld question the authority of Home

Life Ins. Co. v. Sipp, 11 F.2d 474 (3d Cir. 1926), to the

extent that it indicates a contrary rule.2

The majority properly concedes that there is a "well

established rule" that a plaintiff cannot create federal

j urisdiction by anticipating federal defenses. Like the

majority, I perceive no persuasive basis for considering

Horton v. Liberty Mutual Ins. Co., 367 U.S. 348 (1961), as

authority in this case. The district court made no reference

to any of these auth orities except Savarese, which is easily

distinguishable.

In my view, the determinative question as to adequacy ofthe jurisdictional amount asserted in the complaint has not

been determined. Spectacor could have filed a declaratory

judgment action to have avoided these problems, but it did

not. It also could have sought removal from state court to

federal court had Brown sued as he indicated he would. I

disagree with the majority view that Brown should lose the

jurisdictional argument because he did not file a motion to

dismiss, when he objected to the court's jurisdiction

affirmatively in his answer. Federal courts are courts of

limited jurisdiction, and I believe we should strictly

construe jurisdictional requirements.

The question of wh ether "payroll tax liability" is a proper

_________________________________________________________________

2. I would agree that Sipp correctly held that neither unearned premiums

nor a policy loan could be added to the then minimum jurisdictional

a mount requirement ($3,000 plus) involving a $3,000 face amount life

insurance policy to establish federal jurisdiction; and (2) filing of the

defendant's counterclaim could not confer jurisdiction.

18

claim again st Brown is a novel one and I see no easy

answer. Was this liability actually paid or incurred, or was

it a mere bookkeeping entry? Did it constitute a part of the

"advance" to Brown? Was Brown liable to repay that

amount to Spectacor, the IRS, or the State, if Spectacor had

later deemed the salary to have been erroneously paid? In

addition, I would call upon the district court to consider the

"good faith" question in view of the circumstances and give

an explanation for its determination in this re gard. I would,

therefore, REMAND to the district court for a thorough

consideration of the jurisdictional issue for the reasons

stated.

A True Copy:

Teste:

Clerk of the United States Court of Appeals

for the Third Circuit

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