United States Court of Appeals
For the First Circuit
No. 03-1562
KENNETH MCCULLOCH ET AL.,
Plaintiffs, Appellants,
v.
NORBERTO VÉLEZ, A/K/A NORBERTO VÉLEZ MALAVÉ, ET AL.,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Jay A. García-Gregory, U.S. District Judge]
Before
Torruella, Selya, and Lipez,
Circuit Judges.
Kenneth McCulloch, with whom Ballard, Rosenberg, Golper &
Savitt, Fernando L. Gallardo, and Woods & Woods LLP, were on brief,
for appellants.
Robert Millan for appellees.
April 5, 2004
SELYA, Circuit Judge. This litigation has its genesis in
a purchase and sale agreement (the P&S) executed on May 7, 1997.
Under it, the sellers — plaintiff-appellant Kenneth McCulloch and
two corporations wholly owned by him (Mandorico, Inc. and Tip Top
Donuts, Inc.) — agreed to purvey, inter alia, a baked goods
manufacturing business located in Puerto Rico and certain equipment
associated therewith to Norberto Vélez Malavé, his wife, their
conjugal partnership, and Caribbean Bakers, Inc. (collectively, the
purchasers or the defendants). The sellers also agreed to assign,
and the purchasers agreed to assume, an existing lease for the
business premises between the Puerto Rico Industrial Development
Corporation (as lessor) and Tip Top Donuts (as lessee).1
The P&S required the purchasers to make installment
payments and granted the sellers the right to retrieve the business
and the equipment if the purchasers committed an event of default
and failed to remedy it within a specified cure period. McCulloch
alleges that an uncured default occurred in or around May of 2001.
In all events, he took an assignment from Mandorico of its rights
under the P&S and, together with his wife and their conjugal
partnership, filed suit in the United States District Court for the
District of Puerto Rico. Federal jurisdiction was premised on
1
The P&S assumes that Tip Top Donuts is (or will be) the
lessee. There is some reason to believe, however, that Mandorico
is the actual lessee. This identity question is not germane to the
issues that we must decide, and, accordingly, we do not probe the
point.
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diversity of citizenship (the McCullochs are citizens of New York
and the defendants are citizens of Puerto Rico) and the existence
of a controversy in the requisite amount. 28 U.S.C. § 1332(a)(1).
The complaint charged that the defendants had defaulted on the P&S
and owed $43,750 in unpaid installments, at least $50,000 as the
value of equipment entrusted to them, and at least $50,000 in back
rent.
In due course, the plaintiffs moved for summary judgment.
The defendants opposed the motion. They also moved to dismiss the
complaint pursuant to Fed. R. Civ. P. 12(b)(1) and Fed. R. Civ. P.
19(b). That motion questioned the district court's subject matter
jurisdiction on two grounds, namely, (i) whether the plaintiffs had
made a good-faith claim for an amount sufficient to give the court
jurisdiction, and (ii) whether true diversity existed in view of
the defendants' assertion that Mandorico (a corporation organized
under the laws of Puerto Rico) was an indispensable party and/or
the real party in interest on the plaintiffs' side of the case.
On September 6, 2002, a magistrate judge recommended that
the motion to dismiss be denied. He opined that the amount-in-
controversy requirement had been satisfied and that Mandorico was
not an indispensable party. The defendants objected to the
magistrate judge's report and recommendation. While that objection
was pending, the plaintiffs moved to enjoin the defendants from
continuing to occupy the business premises and from removing any
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equipment. They also filed a second motion for summary judgment
(which apparently superseded their earlier summary judgment
motion).
The district court reviewed the magistrate judge's report
and recommendation de novo, Fed. R. Civ. P. 72(b), and granted the
defendants' motion to dismiss for lack of subject matter
jurisdiction. McCulloch v. Vélez Malavé, 260 F. Supp. 2d 358, 361-
64 (D.P.R. 2003). The court did not, however, place its principal
reliance on the arguments advanced by the defendants, but, rather,
focused on Mandorico's assignment of rights to McCulloch and
concluded that the assignment was an improper attempt to "create
[federal] jurisdiction where none existed." Id. at 362.
Consequently, the assignment had to be disregarded for
jurisdictional purposes. Id. at 363 (citing 28 U.S.C. § 1359).
Only then did the court revert to the original grounds raised in
the motion to dismiss; it concluded that, stripped of the
assignment, Mandorico would become an indispensable party (whose
joinder would destroy diversity) and/or the plaintiffs could not
establish damages in a sum sufficient to satisfy the amount-in-
controversy requirement. Id. at 363-64. Accordingly, the court
dismissed the case for lack of subject matter jurisdiction. Id. at
364. Consistent with that ruling, the court denied as moot the
pending motions for injunctive relief and for summary judgment.
Id.
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This appeal ensued after the district court rejected a
timely motion for reconsideration. Fed. R. Civ. P. 59(e). The
plaintiffs advance no fewer than five separate assignments of
error. They claim that the lower court erred by (i) precluding
McCulloch from serving as co-counsel; (ii) dismissing the complaint
for lack of subject matter jurisdiction; (iii) denying the motion
for reconsideration; (iv) denying the motion for a preliminary
injunction; and (v) denying the motion for summary judgment. We
start with a preliminary point and then address the first two
claims of error. For reasons that will become apparent, we stop
there.
We begin by sorting out wheat from chaff. When several
plaintiffs with separate and distinct demands join together in a
single suit premised on diversity jurisdiction, each plaintiff must
independently satisfy the amount-in-controversy requirement. See
Zahn v. Int'l Paper Co., 414 U.S. 291, 294 (1973); Clark v. Paul
Gray, Inc., 306 U.S. 583, 589 (1939). Here, McCulloch, his wife,
and their conjugal partnership appear as plaintiffs and appellants.
They have gone to great lengths in attempting to establish that
McCulloch has a claim in the requisite amount. There is nothing in
the record, however, to show that any plaintiff other than
McCulloch fulfills the amount-in-controversy requirement: neither
McCulloch's wife nor their conjugal partnership is a party to the
P&S or to the assignment from Mandorico. Nor is there any evidence
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that these two plaintiffs have some sort of common or undivided
interest in the amounts claimed by McCulloch. Accordingly, we are
bound to dismiss the appeal as to both McCulloch's wife and the
conjugal partnership. See Zahn, 414 U.S. at 295; see also United
States v. Zannino, 895 F.2d 1, 17 (1st Cir. 1990) (warning that
claims advanced without developed argumentation are deemed
abandoned). The appeal proceeds only to McCulloch's behoof.
We need not linger long over McCulloch's asserted right
to represent himself. McCulloch is both a lawyer and a member of
the bar of the United States District Court for the District of
Puerto Rico. Thus, he ordinarily would have a right, in that
capacity, to enter his appearance as counsel in a pending case.
But this case is out of the ordinary in that McCulloch is a
principal in the transaction that underlies the litigation. He has
been deposed at length, and there is every reason to expect that he
would be one of the main witnesses should a trial ensue. A lawyer
is under an ethical obligation to refrain from appearing as counsel
in a case in which he reasonably can anticipate that he will be
called as a percipient witness. See ABA Model Rules of Prof'l
Conduct R. 3.7(a); see also D.P.R.R. 83.5(a) (formerly Rule
211.4(b)) (incorporating the ABA Model Rules to govern attorney
conduct in the District of Puerto Rico). Given the salience of
that apothegm, the district court did not abuse its discretion in
refusing to permit McCulloch to act as co-counsel in this matter.
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See Hutchinson v. Spanierman, 190 F.3d 815, 828 (7th Cir. 1999);
see also United States v. Merlino, 349 F.3d 144, 150-52 (3d Cir.
2003).
Nor did McCulloch have a right to appear as co-counsel in
his personal capacity (i.e., pro se). He is — and has been —
represented by other counsel in the district court proceedings. A
party has a right to represent himself or to be represented by an
attorney, but he cannot have it both ways. There is no right to
hybrid representation in the federal courts. United States v.
Campbell, 61 F.3d 976, 981 (1st Cir. 1995); United States v.
Nivica, 887 F.2d 1100, 1121-22 (1st Cir. 1989).
To be sure, hybrid representation occasionally may be
permitted in the trial court's discretion. Nivica, 887 F.2d at
1121. Such largesse is, however, to be dispensed sparingly. Id.
There is nothing in the record that suggests that this case should
come within the exception to this general rule. Thus, the district
court did not abuse its discretion in denying McCulloch's plaint
for what amounts to hybrid representation.
We turn next to the district court's jurisdictional
ruling. The key component of the court's analysis was its
determination that Mandorico's assignment of rights to McCulloch
did not pass muster under 28 U.S.C. § 1359. That statute is an
anti-collusion measure, enacted to prevent parties from
manufacturing diversity jurisdiction in order to channel garden-
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variety litigation from the local courts into a federal forum. See
Kramer v. Caribbean Mills, Inc., 394 U.S. 823, 828-29 (1969). In
terms, the statute strips the district court of jurisdiction over
any "civil action in which any party, by assignment or otherwise,
has been improperly or collusively made or joined to invoke the
jurisdiction of such court." 28 U.S.C. § 1359.
The district court's decision to delve into the bona
fides of the assignment cannot be faulted. It is black-letter law
that a federal court has an obligation to inquire sua sponte into
its own subject matter jurisdiction. In re Recticel Foam Corp.,
859 F.2d 1000, 1002 (1st Cir. 1988); Fed. R. Civ. P. 12(h)(3).
This obligation, coupled with the easily discernible congressional
intent behind the enactment of section 1359, impels a federal
court, when confronted with suspicious circumstances, to make every
effort to determine whether a party has been insinuated into an
action in order to allow the litigants artificially to invoke the
court's jurisdiction. U.S.I. Props. Corp. v. M.D. Constr. Co., 860
F.2d 1, 5 (1st Cir. 1988). The same considerations create a
parallel duty on the part of the court to take steps to determine
whether any party has been omitted from pending litigation in order
to permit the unwarranted invocation of federal jurisdiction. Id.
That the district court had the right — indeed, the duty
— to inquire into the legitimacy of the assignment does not
necessarily validate the way in which it implemented that
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responsibility. McCulloch's best argument against the district
court's action is that the possibility of a collusive assignment
was not broached until the court itself raised the question sua
sponte in the dismissal order,2 so that he was denied a fair
opportunity to be heard. Under this thesis, the court should have
warned him that it had doubts about the propriety of the assignment
and given him a chance to defend the bona fides of the assignment
before determining that the assignment should be disregarded.3 We
explain briefly why we believe that this argument has merit.
Transfers or assignments that have the effect of creating
federal jurisdiction raise a red flag and, thus, need to be
examined with care. Prudential Oil Corp. v. Phillips Petroleum
Co., 546 F.2d 469, 474 (2d Cir. 1976). Assignments between related
parties (e.g., an assignment between a parent company and a
subsidiary or an assignment between a corporation and one of its
officers or directors) are subject to even more exacting scrutiny.
Toste Farm Corp. v. Hadbury, Inc., 70 F.3d 640, 643-44 (1st Cir.
1995). Because such assignments are highly suspect, they are
2
Even though the defendants were challenging subject matter
jurisdiction, their attack focused on the amount in controversy and
the plaintiffs' purported failure to join an indispensable party.
Because they never questioned the propriety of the assignment, that
issue was neither prefigured in the magistrate judge's report nor
addressed in the briefing below.
3
McCulloch adds that he had a legitimate business reason for
the assignment. Because the asserted reason rests on matters
dehors the record, we do not consider it at this juncture.
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presumptively ineffective to create diversity jurisdiction.
Airlines Reporting Corp. v. S & N Travel, Inc., 58 F.3d 857, 862-63
(2d Cir. 1995); Yokeno v. Mafnas, 973 F.2d 803, 809-10 (9th Cir.
1992). An assignment between a corporation and its sole
shareholder is an assignment between related parties (and,
therefore, triggers this presumption).
The assignment between Mandorico and McCulloch is of this
ilk. Two things follow from that fact. First, the district court
had the duty to inquire into its propriety. Second, the court had
a right to regard the assignment as presumptively ineffective under
section 1359.
That is not the end of the matter, however, but only the
beginning. Although this presumption is strong medicine, it is
rebuttable. In order to overcome it, the party who asserts the
validity of the assignment for jurisdictional purposes has the
burden of proving that it was not made collusively. Dweck v. Japan
CBM Corp., 877 F.2d 790, 792 (9th Cir. 1989); Prudential Oil, 546
F.2d at 476. Carrying this burden requires a credible showing of
a legitimate reason for the transfer, that is, a reason unrelated
to the fabrication of federal court jurisdiction. Dweck, 877 F.2d
at 792-93.
In the best of circumstances, rebutting the presumption
that attaches to an assignment between related parties is likely to
be difficult. Here, however, the district court made that task
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virtually impossible: it analyzed the assignment and passed upon
its efficacy without giving McCulloch an opportunity to offer any
evidence as to why the assignment had been executed. In omitting
this intermediate step, the court erred.
The defendants argue that this was not error, but merely
an alternative way of proceeding. In this regard, they emphasize
that a nisi prius court has ample discretion to decide factual
challenges under Rule 12(b)(1) without conducting an evidentiary
hearing. That is certainly true. See, e.g., Valentin v. Hosp.
Bella Vista, 254 F.3d 358, 364 (1st Cir. 2001). But the exercise
of that factfinding authority is subject to certain conditions.
Before a court can engage in differential factfinding and dismiss
an action under Rule 12(b)(1), the party asserting the existence of
subject matter jurisdiction must be given notice that the issue is
in dispute and an adequate opportunity to ascertain and present
relevant facts and arguments supporting his claim of jurisdiction.
See Frey v. EPA, 270 F.3d 1129, 1132 (7th Cir. 2001); Colonial
Pipeline Co. v. Collins, 921 F.2d 1237, 1243-44 (11th Cir. 1991);
Reynolds v. Army & Air Force Exch. Serv., 846 F.2d 746, 748 (Fed.
Cir. 1988); Local 336, Am. Fed'n of Musicians v. Bonatz, 475 F.2d
433, 437-38 (3d Cir. 1973); see also 5A Charles Alan Wright &
Arthur R. Miller, Federal Practice & Procedure § 1350, at 217 (2d
ed. 1990) (noting that "the court should not dismiss the complaint
on a Rule 12(b)(1) motion without giving the nonmoving party the
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opportunity to be heard" unless it finds an irremediable defect on
the face of the complaint); Berrios v. Dep't of Army, 884 F.2d 28,
33 (1st Cir. 1989) (similar). In other words, the party seeking to
remain in federal court must receive a fair chance to put his best
foot forward.
In this instance, the district court acted prematurely in
deciding to disregard the assignment from Mandorico to McCulloch
without asking the parties for either relevant evidence or legal
argument. Although the assignment was presumptively ineffective,
see text supra and cases cited, the court neither afforded
McCulloch advance notice that it intended to evaluate the
assignment's enforceability nor gave him a meaningful opportunity
to rebut the presumption of invalidity. Principles of basic
fairness demand that McCulloch be afforded a chance to present his
side of the story.
We leave the particulars as to how McCulloch should be
afforded a meaningful opportunity to offer facts anent the purpose
for assignment to the lower court. The court may, in its
discretion, convene an evidentiary hearing to determine the
jurisdictional issues, Fed. R. Civ. P. 12(d), or it may elect to
gather the pertinent facts in some other manner. We take no view
of the propriety of the assignment, and none should be implied from
our comments.
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We need go no further. In the present posture of the
case, it would not be prudent for us to reach any of the other
issues raised by the parties (including, but not limited to,
whether McCulloch, without the assignment, can satisfy the amount-
in-controversy requirement; whether Mandorico is — or is not — an
indispensable party to this action; or whether the district court
erred in denying McCulloch's other motions). Further factfinding
is needed, and the shape and texture of those issues will vary
depending on both the facts found and the fate of the assignment.
It therefore suffices, for the nonce, to vacate the order of
dismissal as to McCulloch and remand the case to the district court
for additional proceedings consistent with this opinion. We think
it fitting that all parties bear their own costs incurred in
connection with this appeal.
So Ordered.
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