Court Opinion

ID: 4125890
Source: CourtListenerOpinion
Date Created: 2017-02-14 18:01:09.427429+00
Date Added: 2024-06-11T07:45:56.431397
License: Public Domain

FOR PUBLICATION

  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT

JOHN HERKLOTZ,                           Nos. 07-56657
        Cross-Claimant-Appellant,             07-56662

                v.                         D.C. No.
                                         CV-07-01823-R
ERIC PARKINSON, CHARLES VON
BERNUTH, and PLAZA                         OPINION
ENTERTAINMENT, INC.,
       Cross-Defendants-Appellees,

               and

THOMAS G. GEHRING,
   Third-Party-Defendant-Appellee.

     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
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.
                  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-Party-
Defendant-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
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
                  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
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
                  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
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.
                  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.
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.
                 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.