United States v. Heyward-Robinson Company

United States Court of Appeals, Second Circuit
430 F.2d 1077 (1970)

ELI5:

Rule of Law:

A counterclaim is compulsory under Federal Rule of Civil Procedure 13(a), thus conferring ancillary jurisdiction upon a federal court, if it bears a 'logical relationship' to the opposing party's claim, even if it arises from a separate contract. This logical relationship can be established when the parties' course of dealing treats multiple contracts as a single, intertwined transaction.

Facts:

D'Agostino Excavators, Inc. (D'Agostino) entered into two separate subcontracts with the prime contractor, The Heyward-Robinson Company, Inc. (Heyward).
One subcontract was for excavation work on a federal government project at a Naval Submarine Base (the 'Navy job').
The other subcontract was for similar work on a private construction project for Stelma, Inc. (the 'Stelma job').
Both subcontracts were for the same type of work, between the same parties, and performed during substantially the same period.
Heyward made progress payments to D'Agostino in lump sums that were not allocated between the two separate jobs.
A single insurance policy obtained by D'Agostino covered both the Navy and Stelma jobs.
A dispute arose over payments and insurance, leading Heyward to send termination letters that addressed and terminated both subcontracts simultaneously.
The contracts gave Heyward the right to terminate both subcontracts for a breach of either one and to withhold money due on one to cover damages on the other.

Procedural Posture:

D'Agostino sued Heyward and its surety, Maryland Casualty Company, in the U.S. District Court for the District of Connecticut, invoking federal jurisdiction under the Miller Act for claims on the Navy job.
Heyward filed a counterclaim for alleged overpayments and completion costs related to both the Navy job and the private Stelma job.
D'Agostino filed a reply containing a counterclaim against Heyward to recover funds allegedly due on the Stelma job.
The jury returned a special verdict finding that Heyward had breached the subcontracts.
Following a trial on damages, the jury found Heyward owed D'Agostino a net amount of $63,988.36 for both projects.
The district court entered judgment for D'Agostino, from which Heyward and Maryland appealed to the U.S. Court of Appeals for the Second Circuit.
On appeal, Heyward and Maryland argued for the first time that the district court lacked subject-matter jurisdiction over the claims related to the non-federal Stelma job.

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Issue:

Does a federal court have ancillary jurisdiction over a counterclaim arising from a non-federal private construction contract when the original claim is based on a separate, federal construction contract under the Miller Act, if the parties treated both contracts as a single transaction?

Opinions:

Majority - Judge Bryan

Yes. A federal court has ancillary jurisdiction over the counterclaim because it is compulsory under FRCP 13(a). A counterclaim is compulsory if it arises out of the same 'transaction or occurrence' as the main claim, a phrase which courts should interpret broadly and realistically. The court applied the 'logical relationship' test, finding that while the Navy and Stelma jobs were based on separate contracts, the parties' actions created a sufficient connection to treat them as a single transaction for litigation purposes. The key factors establishing this logical relationship were the unallocated lump-sum payments, the single insurance policy covering both jobs, the simultaneous termination of both contracts for the same alleged breach, and the contractual right to offset debts across projects. This approach avoids a multiplicity of suits and achieves a comprehensive resolution in a single lawsuit, consistent with the purpose of Rule 13(a).

Concurring - Judge Friendly

Yes. While agreeing with the majority's conclusion that jurisdiction exists, the counterclaim was permissive, not compulsory. The 'logical relationship' test is stretched too far when applied to legally distinct contracts, as the claims on the Stelma job do not arise from the 'transaction or occurrence' of the Navy subcontract. However, the court should exercise jurisdiction anyway by rejecting the conventional rule that permissive counterclaims require an independent jurisdictional basis. For reasons of judicial economy and fairness, once a federal court has jurisdiction over the parties, it should have the power to hear all claims between them, a principle consistent with the modern understanding of ancillary and pendent jurisdiction.

Analysis:

This case is a leading example of the flexible 'logical relationship' test used to define 'transaction or occurrence' for compulsory counterclaims under FRCP 13(a). The decision establishes that the focus is on the factual and practical connections between claims, not just their legal or contractual separateness. By allowing the non-federal counterclaim, the court prioritized judicial economy and the avoidance of piecemeal litigation. Judge Friendly's concurrence is also significant for its critique of traditional jurisdictional rules for permissive counterclaims, foreshadowing later developments in the doctrine of supplemental jurisdiction codified in 28 U.S.C. § 1367.

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