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Federal Court Supplemental Jurisdiction Over Claims By Third-Party Plaintiffs

The First Circuit has held the federal district court in Rhode Island did not abuse its jurisdiction when it exercised supplemental jurisdiction over claims between non-diverse parties after the claims between diverse parties had been dismissed. 

The issue arose in a dispute over a construction project involving a hotel in Providence.  After the project experienced cost overruns one of the subcontractors sued the general contractor in federal court alleging it had not been paid.  The basis of federal court jurisdiction was diversity.  The general contractor counterclaimed alleging the subcontractor had not completed its work.  It also brought a third-party claim against the hotel owner alleging that the owner's failure to pay the general contractor caused it to breach its contract with the subcontractor. 

There was parallel state court litigation involving mechanics' liens filed by the general contractor and the subcontractor against the owner.  The subcontractor and the owner resolved their dispute which effectively resolved most of the subcontractor's claims against the general contractor in federal court.  However, the general contractor's counterclaim was still pending. 

The owner filed a motion to dismiss the general contractor's claims against it arguing there no longer was federal jurisdiction because the main part of the remaining case involved claims between two non-diverse parties and the district court could not properly exercised jurisdiction over those claims.  The district court denied the motion and eventually entered judgment for the general contractor on its claims against the owner.

On appeal, the First Circuit noted (and the parties agreed) that the district court initially had supplemental jurisdiction over the non-diverse claims pursuant to 28 U.S.C. 1367(a).  Instead, the owner argued that once the diverse claims were dismissed, the district court should have dismissed the non-diverse claims pursuant to 28 U.S.C. 1367(b):

"(b) In any civil action of which the district courts have original jurisdiction founded solely on section 1332 of this title, the district courts shall not have supplemental jurisdiction under subsection (a) over claims by plaintiffs against persons made parties under Rule 14, 19, 20, or 24 of the Federal Rules of Civil Procedure, or over claims by persons proposed to be joined as plaintiffs under Rule 19 of such rules, or seeking to intervene as plaintiffs under Rule 24 of such rules, when exercising supplemental jurisdiction over such claims would be inconsistent with the jurisdictional requirements of section 1332." (emphasis added).

The critical issue is whether the word "plaintiffs" in the statute includes third-party plaintiffs.  The First Circuit held it refers only to the original plaintiff, not third-party plaintiffs.  The Court said that while this was an issue of first impression in the First Circuit, it's opinion joined those of several other circuits that had reached the same conclusion.  The Circuit Court said this conclusion was also consistent with Congress' intent that Section 1367(b) was intended to prevent original plaintiffs, but not third-party plaintiffs, from circumventing the requirements of diversity. 

The First Circuit also rejected the owner's argument that the district court should have dismissed the non-diverse claims pursuant to Section 1367(c) because they "substantially predominated" over the diverse claims.  The Circuit Court said that while such a circumstance would ordinarily lead to dismissal of the state claims, dismissal was not required and the failure to dismiss was not an abuse of discretion in these circumstances.  

Allstate Interiors & Exteriors, Inc. v. Stonestreet Construction, LLC, 2013 WL 5290028 (1st Cir. Sept. 20, 2013). 

For information about out business and commercial litigation practice, please see:  http://www.sfandllaw.com/Practice-Areas/Business-Commercial-Litigation.shtml

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