Spectacor Management Group v. Matthew G. Brown
1997 U.S. App. LEXIS 33309, 131 F.3d 120, 1997 WL 739116 (1997)
Rule of Law:
In a federal diversity action, the amount of a defendant's compulsory counterclaim constitutes part of the amount in controversy if the defendant elects to file an answer containing the counterclaim rather than moving to dismiss the complaint for lack of jurisdiction.
Facts:
- Spectacor, a facility management company, terminated Matthew Brown, a senior executive.
- Following the termination, Spectacor paid Brown approximately $42,500 in benefits and $4,921 in medical insurance premiums.
- Spectacor also paid approximately $3,287 in payroll taxes related to Brown's compensation.
- The parties failed to reach a final settlement agreement regarding the termination.
- Spectacor claimed the payments were advances that Brown was obligated to repay.
- Brown contended that Spectacor breached an oral contract and owed him substantial sums for severance, commissions, and bonuses totaling over $1 million.
Procedural Posture:
- Spectacor sued Brown in the United States District Court for the Eastern District of Pennsylvania.
- Brown filed an Answer denying subject matter jurisdiction and asserting a compulsory counterclaim.
- The District Court held a bench trial.
- The District Court entered judgment in favor of Brown (appellee) on the counterclaim.
- Brown (appellant) appealed to the United States Court of Appeals for the Third Circuit, challenging the District Court's subject matter jurisdiction.
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Issue:
Does a defendant's compulsory counterclaim count toward the statutory amount in controversy requirement for federal diversity jurisdiction when the defendant asserts the counterclaim in a responsive pleading rather than filing a motion to dismiss?
Opinions:
Majority - McKee
Yes, a compulsory counterclaim contributes to the amount in controversy when the defendant chooses to litigate it rather than seeking dismissal. The court reasoned that while the plaintiff's complaint initiates the action, it does not define the totality of the controversy. Under the Federal Rules of Civil Procedure, the defendant had the option to file a motion to dismiss for lack of subject matter jurisdiction before filing an answer. By electing not to file a motion to dismiss and instead asserting a compulsory counterclaim under Rule 13(a), the defendant placed the amount of that counterclaim into the controversy. Consequently, the court looks at the total substantiality of the claim, including what is at stake in the counterclaim, to determine if the jurisdictional threshold is met.
Dissenting - Wellford
No, a compulsory counterclaim should not establish jurisdiction where the defendant has objected to jurisdiction in their answer. The dissent argued that federal jurisdiction is determined at the time of filing and must be strictly construed. Since Brown affirmatively stated in his answer that the court lacked jurisdiction because the amount was insufficient, he did not waive the objection. The dissent emphasized that a plaintiff should not be able to rely on a defendant's subsequent counterclaim to cure a jurisdictional defect in the original complaint, particularly when the plaintiff's claim barely exceeded the limit and may have included 'sham' amounts like payroll taxes.
Analysis:
This decision clarifies the 'amount in controversy' calculation in diversity cases, specifically regarding the interplay between insufficient plaintiff claims and large compulsory counterclaims. The ruling prevents a defendant from 'having it both ways'—simultaneously arguing the court is too small for the plaintiff's claim while using the same court to pursue a much larger claim against the plaintiff. It establishes that the method of objection matters: a Motion to Dismiss halts the inclusion of the counterclaim, whereas an Answer with a counterclaim expands the controversy. This encourages defendants to dispose of jurisdictionally insufficient cases immediately via motion rather than engaging in the litigation process.
