Charles Von Bernuth v. John Herklotz, 2017 U.S. App. LEXIS 2567

Background

Herklotz (California) was a director/shareholder of Plaza (California). WRS (Pennsylvania) sued Plaza and its directors in federal court in Pennsylvania for unpaid video-duplication services; WRS prevailed and obtained a judgment in 2007.
Herklotz had filed crossclaims in the Pennsylvania case against Plaza, Parkinson, von Bernuth (all California residents) asserting state-law indemnity, breach of fiduciary duty, and misrepresentation.
After WRS’s federal claims were resolved by summary judgment, Herklotz moved (unopposed) to sever his crossclaim under Fed. R. Civ. P. 21 and transfer the severed action to the Central District of California; the Pennsylvania court granted the motion.
The California district court dismissed Herklotz’s severed complaint under Rule 12(b)(6); Herklotz appealed the dismissal and contended he was denied leave to amend.
On appeal the Ninth Circuit raised and addressed sua sponte whether the federal courts had subject-matter jurisdiction over the severed, purely state-law dispute between non-diverse parties and concluded jurisdiction was lacking.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether a severed state-law crossclaim can rely on supplemental jurisdiction after the original federal claims are resolved	Herklotz: district court retained supplemental jurisdiction under 28 U.S.C. §1367(c)(3) and could transfer the severed claim	Gehring/others: severance and transfer were permissible; parties’ consent and transfer power preserve jurisdiction	Held: Severance created a new, independent action that could not rely on supplemental jurisdiction; the transferee court lacked subject-matter jurisdiction
Whether Honeywell requires an independent jurisdictional basis for severed claims	Herklotz/Gehring: Honeywell should not bar jurisdiction here	Defendants: Honeywell controls; Louisiana does not undermine Honeywell where severed claims were only supported by supplemental jurisdiction	Held: Honeywell applies—severed claims based solely on supplemental jurisdiction must have an independent basis; Louisiana is inapposite here
Whether the Pennsylvania court’s transfer decision or parties’ consent cures jurisdictional defects	Herklotz/Gehring: transfer under §1404(a) and party consent validate the California court’s jurisdiction	Opponents: a transfer cannot cure lack of subject-matter jurisdiction; transfer requires an antecedent valid exercise of jurisdiction	Held: Transfer and consent do not confer subject-matter jurisdiction; transfer was ineffective because the originating court lost jurisdiction upon severance
Whether the appellate court may decide preclusion against the state-court judgment instead of addressing jurisdiction first	Von Bernuth: appellate court can resolve preclusion and avoid jurisdictional question	Appellate panel/others: preclusion analysis does not overlap with the straightforward diversity/jurisdiction inquiry here	Held: Jurisdiction must be decided first; the court refused to shortcut to res judicata

Key Cases Cited

Matheson v. Progressive Specialty Ins. Co., 319 F.3d 1089 (9th Cir.) (federal courts are courts of limited jurisdiction)
Chapman v. Pier 1 Imports (U.S.) Inc., 631 F.3d 939 (9th Cir.) (appellate court independent obligation to assess jurisdiction)
Gaffney v. Riverboat Servs. of Ind., 451 F.3d 424 (7th Cir.) (Rule 21 severance creates discrete, independent actions)
Honeywell Int’l, Inc. v. Phillips Petroleum Co., 415 F.3d 429 (5th Cir.) (severed claims that relied on supplemental jurisdiction require an independent jurisdictional basis)
Louisiana v. Am. Nat’l Prop. & Cas. Co., 746 F.3d 633 (5th Cir.) (distinguishing Honeywell where severed claims had an independent federal jurisdictional basis)
Acri v. Varian Assocs., Inc., 114 F.3d 999 (9th Cir.) (discussion of supplemental jurisdiction principles)
Detabali v. St. Luke’s Hosp., 482 F.3d 1199 (9th Cir.) (subject-matter jurisdiction may be raised at any time)
E.S. v. Indep. Sch. Dist., 135 F.3d 566 (8th Cir.) (severance produces an independent action)
United States v. O'Neill, 709 F.2d 361 (5th Cir.) (Rule 21 severance creates separate suits)
In re Athens/Alpha Gas Corp., 715 F.3d 230 (8th Cir.) (limited circumstances where preclusion inquiry overlaps jurisdictional analysis)