Tuesday, November 14, 2006

Second Circuit Finds that Supplemental Jurisdiction Exists over Subsequent Attorney Malpractice Claims Based on Separate Underlying Securities Action

Per Achtman v. Kirby, McInerney & Squire, LLP, 464 F.3d 328 (2d Cir. Sept. 25, 2006):

Plaintiffs brought a putative class action against their former attorneys . . . . Both firms had served as class counsel in a separate earlier securities class action and it is the firms' conduct in litigating the securities action that is now alleged by the plaintiffs to have constituted malpractice. The district court dismissed the malpractice complaint for failure to state a claim. . . . We remanded to the district court for the limited purpose of having it explain its basis for exercising subject matter jurisdiction over the action. The district court subsequently identified three possible bases for subject matter jurisdiction: (1) the terms of an injunction it entered in the underlying securities class action pursuant to its authority under 28 U.S.C. § 1651; (2) diversity jurisdiction if non-diverse plaintiffs are dismissed as unnecessary parties; and (3) supplemental jurisdiction under 28 U.S.C. § 1367(a). While we are querulous as to the first two contentions, we agree that supplemental jurisdiction exists.

"The power of the inferior federal courts is 'limited to those subjects encompassed within a statutory grant of jurisdiction.' " Bechtel v. Competitive Tech., Inc., 448 F.3d 469, 471(2d Cir.2006) (quoting Ins. Corp. of Ir., Ltd. v. Compagnie des Bauxites de Guinee, 456 U.S. 694, 701, 102 S.Ct. 2099, 72 L.Ed.2d 492 (1982)). Although an exercise of "judicial power [may be] desirable or expedient," a suit may not proceed absent statutory authorization. United States v. Town of N. Hempstead, 610 F.2d 1025, 1029 (2d Cir.1979). In short, jurisdiction cannot simply be "expanded by judicial decree." Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377, 114 S.Ct. 1673, 128 L.Ed.2d 391 (1994).

The All Writs Act empowers federal courts to issue "all writs necessary or appropriate in aid of their respective jurisdictions and agreeable to the usages and principles of law." 28 U.S.C. § 1651(a). . . . However, the All Writs Act "does not, by its specific terms, provide federal courts with an independent grant of jurisdiction." Syngenta Crop Prot., Inc. v. Henson, 537 U.S. 28, 33, 123 S.Ct. 366, 154 L.Ed.2d 368 (2002). Therefore, even assuming arguendo that the Injunction properly prohibited the commencement of malpractice actions in other fora, the Injunction cannot itself furnish jurisdiction over claims that do not fall within one of the traditional statutory grants. See, e.g., 28 U.S.C. §§ 1331 (federal question), 1332 (diversity of citizenship). To hold otherwise would make mincemeat of the limited grants of jurisdiction bestowed upon us. See Owen Equip. & Erection Co. v. Kroger, 437 U.S. 365, 374, 98 S.Ct. 2396, 57 L.Ed.2d 274 (1978) ("The limits upon federal jurisdiction, whether imposed by the Constitution or by Congress, must be neither disregarded nor evaded.").

It is true that in a class action only the named plaintiffs need be diverse with the defendants to establish diversity jurisdiction. See Snyder v. Harris, 394 U.S. 332, 340, 89 S.Ct. 1053, 22 L.Ed.2d 319 (1969). A federal court may "salvage jurisdiction by removing, pursuant to Fed.R.Civ.P. 21, a dispensable non-diverse party from a suit." Herrick Co. v. SCS Commc'ns, Inc., 251 F.3d 315, 330 (2d Cir.2001). This may be done on appeal as well. See Newman-Green, Inc. v. Alfonzo-Larrain, 490 U.S. 826, 837-38, 109 S.Ct. 2218, 104 L.Ed.2d 893 (1989). Nevertheless, at least one remaining named plaintiff must meet the $75,000 amount-in-controversy requirement for the exercise of diversity jurisdiction. See Exxon Mobil Corp. v. Allapattah Servs., Inc., 545 U.S. 546, 125 S.Ct. 2611, 2615, 162 L.Ed.2d 502 (2005). . . . Unhappily, the stipulation does not state which plaintiffs have asserted claims in excess of $75,000 . . . [t] herefore, it is not clear from the record that diversity jurisdiction can be salvaged.

Finally, the district court found that it had supplemental jurisdiction over the malpractice claims because it "has original jurisdiction over the underlying [securities] action." Achtman, 404 F.Supp.2d at 546. We agree. As a threshold matter, we recognize that some district courts have refused to rely on the existence of subject matter jurisdiction in one action to provide supplemental jurisdiction over claims in a related action. See, e.g., Keene v. Auto Owners Ins. Co., 78 F.Supp.2d 1270, 1274 (S.D.Ala.1999) ("[S]ection 1367 applies only to claims within a single action and not to claims within related actions."); Sebring Homes Corp. v. T.R. Arnold & Assocs., Inc., 927 F.Supp. 1098, 1101-02 (N.D.Ind.1995) ("Section 1367 provides no original jurisdiction over a separate ... but related suit."). This distinction, however, has never troubled us. See, e.g., Alderman v. Pan Am World Airways, 169 F.3d 99, 101-02 (2d Cir.1999) (supplemental jurisdiction over contract dispute based on jurisdiction over settled wrongful death action). Turning to the terms of the statute, we have held that disputes are part of the "same case or controversy" within § 1367 when they "derive from a common nucleus of operative fact." Promisel v. First Am. Artificial Flowers Inc., 943 F.2d 251, 254 (2d Cir.1991) (internal citation omitted). . . . In determining whether two disputes arise from a "common nucleus of operative fact," we have traditionally asked whether "the facts underlying the federal and state claims substantially overlapped ... [or] the federal claim necessarily brought the facts underlying the state claim before the court." Lyndonville Sav. Bank & Trust Co. v. Lussier, 211 F.3d 697, 704 (2d Cir.2000) (internal citations omitted). . . . We are compelled by this unbroken line of cases to find that the facts underlying the present malpractice claims and the underlying securities claims "substantially overlap[ ]," creating a common nucleus of operative fact. Lyndonville Sav. Bank & Trust, 211 F.3d at 704.


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