IFC Interconsult AG v. Safeguard Intl , 438 F.3d 298 ( 2006 )

Opinions of the United
2006 Decisions States Court of Appeals
for the Third Circuit
2-13-2006
IFC Interconsult AG v. Safeguard Intl
Precedential or Non-Precedential: Precedential
Docket No. 05-1817
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PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
Nos. 05-1817 and 04-3933
IFC INTERCONSULT, AG,
Appellant in 05-1817
v.
SAFEGUARD INTERNATIONAL PARTNERS, LLC;
SAFEGUARD INTERNATIONAL FUND, L.P.
and
IFC INTERCONSULT, AG
v.
SAFEGUARD INTERNATIONAL PARTNERS, LLC,
Appellant in 04-3933
Appeal from the United States District Court
for the Eastern District of Pennsylvania
(D.C. No. 04-mc-00107)
District Judge: Hon. Marvin Katz
Argued on November 14, 2005
Before: ROTH, FUENTES and BECKER, Circuit Judges
(Opinion Filed: February 13, 2006)
Dennis R. Suplee, Esquire (ARGUED)
Nancy Winkelman, Esquire
Stephen A. Fogdall, Esquire
Schnader, Harrison, Segal & Lewis LLP
Suite 3600
1600 Market Street
Philadelphia, PA 19103
James D. Zirin, Esquire (ARGUED)
Sidley Austin Brown & Wood LLP
787 Seventh Avenue
New York, NY 10019
Counsel for IFC Interconsult, AG
Kenneth I. Levin, Esquire (ARGUED)
Matthew J. Hank, Esquire
Pepper Hamilton LLP
Two Logan Square
18th & Arch Streets
Philadelphia, PA 19103
Counsel for Safeguard International Fund, L.P.
Paul R. Rosen, Esquire (ARGUED)
Bruce Bellingham, Esquire
Spector Gadon & Rosen, PC
1635 Market Street
Seven Penn Center, 7th Floor
Philadelphia, PA 19103
Counsel for Safeguard International Partners, LLC
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OPINION
ROTH, Circuit Judge:
These consolidated appeals involve the propriety of the
District Court’s confirmation of an arbitration award and, in
connection with that award, also involve the questions whether
the District Court had ancillary jurisdiction over a garnishment
action to collect on the award and whether the District Court
properly denied summary judgment on the garnishment action.
For the reasons stated below, we will affirm the District Court’s
confirmation of the arbitration award, reverse the District
Court’s ruling that it lacked ancillary jurisdiction over the
garnishment action, reverse the District Court’s alternative
ruling denying the garnishor summary judgment, and direct that
summary judgment be entered in favor of the garnishor.
I. Factual and Jurisdictional Background
The parties to the arbitration are Safeguard International
Partners, LLC (SIP) and IFC Interconsult, AG (IFC). SIP is the
general partner of SIF Management, L.P., which manages a
hedge fund, Safeguard International Fund, L.P. (the Fund).1 In
July 1996, SIP hired IFC to recruit investors for the Fund under
an agreement (the Agreement) that stated that the parties would
submit disputes under the contract to binding arbitration in
Philadelphia, Pennsylvania, conducted by the American
Arbitration Association. The Agreement did not specify what
1
The partnership agreements are all governed by Delaware
law.
-3-
court would have jurisdiction over the arbitration.
SIP claims that IFC and related parties began to defraud
it and, as a result, SIP refused to pay IFC all of the finder’s fees.
In August 2002, IFC responded by initiating arbitration against
SIP under the Agreement. IFC wanted George H. Carter and
Carter’s company, CFC, related parties who were also owed
fees, to be involved in the arbitration; SIP did not. In September
2002, SIP filed a complaint for declaratory judgment in the
United States District Court for the Eastern District of
Pennsylvania to determine who was eligible for arbitration
under the Agreement. The District Court dismissed the
complaint for lack of subject matter jurisdiction because there
was not complete diversity of citizenship between the multiple
parties. See Strawbridge v. Curtiss, 7 U.S. (3 Cranch) 267
(1806); 28 U.S.C. § 1332.
In October 2002, SIP filed a similar declaratory judgment
action in the Philadelphia Court of Common Pleas. In
November, the Court of Common Pleas ruled that the arbitration
could proceed but only between IFC and SIP and with certain
restrictions. Various motions and appeals followed, but
eventually the parties reached a settlement. The Court of
Common Pleas on February 26, 2003, reflected this settlement
in the following order:
The Court, having been advised that the within case has
been settled, the case shall be marked “discontinued” on
the prothonotary’s docket and removed from the
applicable list and inventory of pending cases. If the
instant proceedings involve an appeal from a compulsory
arbitration award, any lien from the arbitration award is
released. This case may be restored to the trial list only
upon written order of the team/program leader. This
relief shall be requested by formal motion.
-4-
Safeguard Int’l Partners, LLC v. IFC Interconsult, AG, No. 02-
0904980, Order of Feb. 26, 2003.
The case then proceeded to arbitration. In June 2004, the
arbitration panel entered an award in favor of IFC in the amount
of nearly four million dollars. IFC filed a application in the
District Court for the Eastern District of Pennsylvania to
confirm the award. SIP moved for a one month extension to
respond, which the District Court granted.
Rather than responding on the merits, however, SIP filed
an application in the Court of Common Pleas to modify, correct
and/or vacate the arbitration award under the Pennsylvania
Uniform Arbitration Act, 42 PA.C.S.A. §§ 7314-15 and for
sanctions against IFC.2 SIP also filed a motion in the District
Court to dismiss or stay IFC’s confirmation petition under FED.
R. CIV. P. 12(b)(6).3
Before the Court of Common Pleas addressed SIP’s
application to amend or vacate the arbitration award, the District
Court ruled on IFC’s application and SIP’s motion in
opposition. In the same order, the District Court granted IFC’s
application to confirm the arbitration award and denied SIP’s
2
In the application to the Court of Common Pleas, SIP
alleged that IFC violated the restrictions contained in the pre-
arbitration order issued by that court. SIP additionally claimed
that the arbitration panel lacked jurisdiction for some of its
findings and erred as a matter of law because IFC had conceded
SIP’s defense that IFC took an unlawful secret profit, thereby
voiding their Agreement.
3
We note that this motion might have been brought more
properly under FED. R. CIV. P. 12(b)(1) as it challenged the
District Court’s subject matter jurisdiction, not the IFC’s failure
to state a claim on which relief could be granted.
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motion. SIP then filed a motion to strike the judgment for lack
of subject matter jurisdiction under FED. R. CIV. P. 60(b). The
motion remonstrated that IFC had improperly alleged diversity
jurisdiction when filing its petition to confirm the arbitration
award in the District Court. The District Court denied the
motion to strike the judgment because, although there is not
complete diversity between the parties, there is federal subject
matter jurisdiction based on the Federal Arbitration Act, 9
U.S.C. § 203. SIP then filed a motion for reconsideration. The
District Court denied it and SIP appealed.
SIP presents two grounds to support its position that the
arbitration award should not have been confirmed. First, SIP
argues that the District Court abused its discretion in declining
to abstain from the exercise of jurisdiction over IFC’s
application to confirm the arbitration award. Second, SIP
contends that the District Court denied it an opportunity to be
heard on the merits of IFC’s application to confirm the award.
While the appeal has been pending, SIP has refused to
satisfy the judgment. For that reason, IFC initiated a
garnishment action against the Fund under FED. R. CIV. P. 69.
The Fund is scheduled to liquidate on March 31, 2006, after
which IFC will not be able to look to its assets to satisfy the
judgment. IFC’s garnishment action is based on the Fund’s
contractual duty to indemnify SIP. The Agreement of Limited
Partnership of the Fund provides that:
The Fund shall indemnify and hold harmless each
Indemnified Person [including SIP] from any and all
reasonable costs and expenses and all damages and
claims which may be incurred or asserted against him or
it by reason of . . . [its] connection to or relationship with
the [Fund ] . . ..
Based on this language and on the Fund’s interrogatory
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responses, IFC moved for summary judgment on the
garnishment action against the Fund. The Fund argued that it
was not liable to SIP because the indemnification clause of the
Agreement did not cover placement fee arrangements and
because the indemnification was only for actual loss, so that
SIP’s mere liability did not trigger the indemnification
obligation. The District Court denied IFC summary judgment
because it found that a genuine issue of material fact still
remained regarding whether the Agreement provided for loss or
liability indemnification.
In the same order that denied summary judgment, the
District Court dismissed the action for lack of subject matter
jurisdiction. The District Court found that it did not have
original federal question jurisdiction over the garnishment and
that ancillary jurisdiction was not possible because the
garnishment action relied “not only on different facts than the
award-confirmation suit, but also upon a new theory of
liability–essentially, breach of contract between the Fund and
SIP.” IFC Interconsult, AG v. Safeguard Int’l Partners, LLC,
No. 04-00107 (E.D.Pa.), Memorandum and Order of February
10, 2005. IFC then appealed both the denial of summary
judgment and the dismissal for lack of subject matter
jurisdiction.
We have jurisdiction over SIP’s appeal under 9 U.S.C. §
16 and 28 U.S.C. § 1291 and over IFC’s appeal under 28 U.S.C.
§ 1291.
II. Discussion
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This consolidated appeal presents four separate issues,
each presented in turn below.
A. Did the District Court Abuse Its Discretion by not
Abstaining under Colorado River from Hearing IFC’s
Motion to Confirm the Arbitration?
Federal district courts have a “virtually unflagging
obligation . . . to exercise the jurisdiction given them.” Colo.
River Water Conservation Dist. v. United States, 424 U.S. 800,
817 (1976). Federal district courts may abstain from hearing
cases and controversies only under “exceptional circumstances
where the order to the parties to repair to the state court would
clearly serve an important countervailing interest.” Id. at 813
(internal quotations omitted). “Generally, as between state and
federal courts, the rule is that the pendency of an action in the
state court is no bar to proceedings concerning the same matter
in the Federal court having jurisdiction,” id. at 817 (internal
quotations omitted), although there are certain categories of
cases in which abstention is proper.
Colorado River categorized three situations in which the
Supreme Court had previously found federal abstention proper:
(1) cases that present federal constitutional issues that “might be
mooted or presented in a different posture by a state court
determination of pertinent state law,” id. at 814; see R.R.
Comm’r v. Pullman Co., 312 U.S. 496 (1941); (2) cases that
present “difficult questions of state law bearing on policy
problems of substantial import whose importance transcends the
result in the case then at bar,” Colorado River, 424 U.S. at 814;
see Burford v. Sun Oil Co., 319 U.S. 315 (1943); La. Power &
Light Co. v. Thibodaux, 360 U.S. 25 (1959); and (3) cases in
which federal jurisdiction has been invoked for the purpose of
restraining valid, good faith state criminal proceedings,
Colorado River, 424 U.S. at 816; see Younger v. Harris, 401
U.S. 37 (1971); Huffman v. Pursue, 420 U.S. 592 (1975)
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(extending Younger to quasi-criminal civil proceedings).
None of these situations is implicated in this case.
Colorado River also recognized a fourth category of cases in
which abstention might be proper out of respect for
“considerations of [wise] judicial administration, giving regard
to conservation of judicial resources and comprehensive
disposition of litigation.” 424 U.S. at 817 (internal quotations
omitted). SIP argues that the District Court should have
abstained based on these principles underlying this fourth
category of abstention.
We review the District Court’s decision not to abstain for
abuse of discretion, although the underlying legal questions that
determine whether the case falls within the range in which the
District Court may exercise discretion are subject to plenary
review. Riley v. Simmons, 45 F.3d 764, 770 (3d Cir. 1995);
Grode v. Mut. Fire, Marine & Inland Ins. Co., 8 F.3d 953, 958
(3d Cir. 1993). As we stated in United Services Automobile
Ass’n v. Muir:
A district court has little or no discretion to abstain in a
case that does not meet traditional abstention
requirements. Within these constraints, determination
whether the exceptional circumstances required for
abstention exist is left to the district court, and will be set
aside on review only if the district court has abused its
discretion.
792 F.2d 356, 361 (3d Cir. 1986) (citation omitted).
The threshold requirement for a district court to even
entertain abstention is a contemporaneous parallel judicial
proceeding. For judicial proceedings to be parallel, there must
be identities of parties, claims, and time. As we noted in Yang
v. Tsui, “[P]arallel cases involve the same parties and
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‘substantially identical’ claims, raising ‘nearly identical
allegations and issues.’” 416 F.3d 199, 205 (3d Cir. 2005)
(quoting Timoney v. Upper Merion Twp., 66 Fed. Appx. 403,
405 (3d Cir. 2003)).
We have never required complete identity of parties for
abstention. See Trent v. Dial Med. of Fla. Inc., 33 F.3d 217, 224
(3d Cir. 1994). However, even when there is a substantial
identity of parties and claims, abstention is still appropriate only
when there are “ongoing, not completed parallel state
proceedings,” or else we would be considering issues of res
judicata. Bass v. Butler, 258 F.3d 176, 179 (3d Cir. 2001). In
this case, the proceedings in the Court of Common Pleas
involved the parties in this appeal, as well as additional parties,
but there is no identity of time.
Even if we were to view all issues concerning the
arbitration as necessarily related, there was no action pending in
the Court of Common Pleas when IFC moved the District Court
to confirm the arbitration award. The Court of Common Pleas
effectively discontinued jurisdiction over its case in February
2003, more than a year before our case came before the District
Court for confirmation of the arbitration award. After a
settlement was reached regarding the appeals from the Court of
Common Pleas’ declaratory judgment on eligibility for
arbitration, the Court of Common Pleas discontinued the case
and expressly noted that it could be reopened only by written
order upon request by a formal motion. SIP never made such a
motion, and the Court of Common Pleas issued no such written
order. Even if we were to view SIP’s Application to Modify or
Vacate the Arbitration Award as constituting such a formal
motion, we are unaware of any written order from the Court of
Common Pleas that reopened the case. In any event, SIP filed
the Application in the Court of Common Pleas only after IFC
moved for confirmation of the arbitration award in the District
Court. Therefore, we hold that the District Court was correct in
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declining to abstain from exercising its jurisdiction. This lack
of identity in timing would capsize SIP’s Colorado River raft,
even if it were to succeed in getting launched.
SIP, however, remonstrates that the Court of Common
Pleas “retained jurisdiction both to enforce its Order and to
adjudicate any other issue relating to the arbitration because that
Court was seized of jurisdiction to supervise the arbitration from
October, 2002.” As an initial matter, we note that the record
contains no such indication from the Court of Common Pleas.
SIP has failed to cite any language but its own that purports to
show such on-going jurisdiction. Even if the language were
from the Court of Common Pleas and not from SIP, there is a
difference between a court’s retaining active jurisdiction and
merely possessing the contempt jurisdiction that inheres in
courts to enforce past orders. We do not believe that a passive
reservation of enforcement jurisdiction is adequate to trigger
abstention, and we are wary about extending jurisdiction from
an adjudication of eligibility for arbitration into jurisdiction over
the arbitration itself.
For us to conclude that this case presents the prerequisite
situation of parallel proceedings, much less determine that a
Colorado River analysis counsels in favor of abstention so
strongly that the District Court abused its discretion by refusing
to yield jurisdiction, requires heroic assumptions in favor of SIP.
We are not inclined to make these assumptions given the
disfavor in which we hold abstention, and see no need to
proceed to our traditional abstention analysis.4 Therefore, we
4
The factors we consider in an abstention analysis are:
[1] which court first assumed jurisdiction over a relevant
res, if any; [2] whether the federal court is inconvenient;
[3] whether abstention would aid in avoiding piecemeal
litigation; [4] which court first obtained jurisdiction; [5]
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judge SIP’s claim unseaworthy for a navigation of Colorado
River’s rapids, and affirm the District Court’s denial of SIP’s
Rule 12(b)(6) motion.
B. Did the District Court Deny SIP an Opportunity
to be Heard?
The District Court’s Order of September 7, 2004, which
confirmed the arbitration award, ably addressed SIP’s argument
about abstention but did not discuss the merits of confirmation
beyond noting that “the arbitration was conducted within the
rules established by the AAA and with no apparent objection by
either party during the proceedings.” Order of Sept. 7, 2004.
The Order did, however, acknowledge SIP’s arguments that the
related parties “indirectly participated in the arbitration
proceedings in violation of the Court of Common Pleas’
November 1, 2002 Order” and that this involvement should void
the arbitration award. Id.
SIP argues on appeal that by confirming the arbitration
award before affording SIP an opportunity to challenge the
award on the merits, the District Court violated FED. R. CIV. P.
12(a)(4)(A), thereby denying SIP its Fifth Amendment Due
Process right to be heard.
The Federal Rules of Civil Procedure apply to
proceedings under the Federal Arbitration Act (FAA) to the
extent that the FAA does not provide its own procedure. FED.
R. CIV. P. 81(a)(3). SIP claims that the FAA does not provide
whether federal or state law applies; and [6] whether the
state action is sufficient to protect the federal plaintiff's
rights.
Rycoline Products, inc. v. C & W Unlimited, 109 F.3d 883, 890
(3d Cir. 1997).
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its own procedure for challenging a court’s exercise of
jurisdiction, so that FED. R. CIV. P. 12 applies. FED. R. CIV. P.
12(a)(4)(A) provides that:
(4) Unless a different time is fixed by court order, the
service of a motion under this rule alters these periods of
time as follows:
(A) if the court denies the motion or postpones its
disposition until the trial on the merits, the
responsive pleading shall be served within 10
days after notice of the court’s action;...
FED. R. CIV. P. 12(a)(4)(A). SIP contends that FED. R. CIV. P.
12(a)(4)(A) was triggered because there was a pleading and a
responsive motion that was denied.
SIP argues that IFC’s application to the District Court for
confirmation of the arbitration award was in the form of a
pleading because the application featured numbered paragraphs
like a pleading,5 was entitled “petition,” and allegedly lacked a
supporting memorandum of law, a form of order, and a
supporting affidavit, as required by LOCAL R. Civ. P. 7.1 of the
United States District Court of the Eastern District of
Pennsylvania. Thus, SIP believes that Rule 12(a)(4)(A) is
triggered because IFC filed a pleading and SIP’s jurisdictional
Rule 12(b)(6) motion in response was denied. Therefore,
according to SIP, it should have received 10 days after the
denial of its Rule 12(b)(6) jurisdictional motion to file a
responsive pleading arguing against confirmation on the merits.
SIP contends that, because it believed that it would have a later
5
FED. R. CIV. P. 10(b) provides “All averments of claim or
defense shall be made in numbered paragraphs, the contents of
which shall be limited as far as practicable to a statement of a
single set of circumstances....” FED. R. CIV. P. 10(b).
-13-
opportunity to challenge the arbitration award on the merits, it
did not make its merits arguments in its Rule 12(b)(6) motion
and that the District Court’s flouting of the Federal Rules of
Civil Procedure denied SIP its procedural due process rights.
We disagree. As an initial matter, IFC’s application to
the District Court for confirmation of the arbitration award was
a motion, not a pleading. The FAA requires that “[a]ny
application to the court hereunder shall be made and heard in the
manner provided by law for the making and hearing of
motions...” 9 U.S.C. § 6. For SIP to believe that IFC had filed
a pleading, it had also to believe that IFC was not following the
procedural requirements of the FAA to proceed by motion; SIP
made no such objection.
Circumstances indicate that SIP was well aware that IFC
was required to proceed by motion under the FAA and in fact
did so, as demonstrated by SIP’s own request for an extension
of the 14-day period for filing an opposition to a motion under
Local Rule 7.1(c), which expressly applies to “any party
opposing the motion.”
We regard SIP’s arguments about the application’s form
as pure pettifoggery. Numbered paragraphs do not a pleading
make. Indeed, SIP’s own motion papers were in a numbered
format. The title of “petition” certainly does not vitiate the
substance of the application, and we are satisfied from our
consultation of the record that the application was in fact
accompanied by a brief, a proposed order, and an appropriate
affidavit. The opening words of the application, “Petitioner IFC
Interconsult, AG moves the court for an order,” make clear that
it was a motion, not a pleading. Thus, SIP cannot claim to be
justifiably confused by the form of IFC’s application. Had SIP
in fact interpreted the application as a pleading, it should have
preserved its rights by seeking additional time to move, answer,
or otherwise respond pursuant to FED. R. CIV. P. 12(a). It did
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not.
Because IFC proceeded by motion and not by pleading,
SIP’s argument fails on two points. First, because motion
practice under the FAA was initiated, the relevant procedures
are provided by FAA section 6, which requires that “[a]ny
application to the court hereunder shall be made and heard in the
manner provided by law for the making and hearing of motions
. . ..” 9 U.S.C. § 6. Since IFC made its application by motion,
the Federal Rules of Civil Procedure do not apply to the
responsive motion practice, Productos Mercantiles e
Industriales, S.A. v. Faberge USA, Inc., 23 F.3d 41, 46 (2d Cir.
1994) (FED. R. CIV. P. 12(b) does not apply to motions to vacate
arbitration awards) ; O.R. Sec., Inc. v. Prof. Planning Assocs.,
Inc., 857 F.2d 742, 748 (11th Cir. 1988) (the rules of notice
pleading of FED. R. CIV. P. 8 are inapplicable to proceedings to
vacate an arbitration award because relief must be sought in the
form of a motion), and SIP proceeded at its peril when it failed
to raise its arguments on the merits in its responsive motion.
Second, even if the FAA did not provide the relevant
procedures, FED. R. CIV. P. 12(a)(4)(A) could not have been
triggered because a pleading is a prerequisite for the application
of Rule 12(a)(4)(A), and there was no pleading, only IFC’s
motion, followed by SIP’s motion.
We also note that SIP had several opportunities to present
its arguments on the merits to the District Court but failed to
invoke any of the statutory grounds for setting aside an
arbitration award. SIP first filed a motion for extension for time
to respond. However, when that motion was granted, SIP
dashed into state court with a motion to vacate or modify the
arbitration award, rather than argue on the merits in federal
court. SIP then submitted its Rule 12(b)(6) motion for
abstention, rather than argue on the merits. SIP declined to
submit a cross-motion to vacate and made no attempt to argue
the merits in its motion to strike the judgment and its motion for
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reconsideration, much less argue that it failed to raise arguments
on the merits because it thought that it would have an
opportunity to do so after its motion to dismiss. If SIP really
expected that it would have an opportunity to respond on the
merits, it is inexplicable why SIP failed to argue so after the
District Court entered judgment. SIP proceeded at its own peril
with its strategy of attempting to reverse-remove the case to
state court rather than arguing the merits. SIP had ample
opportunities to be heard and the District Court properly decided
the merits of the confirmation action. Therefore, we will affirm
the District Court’s confirmation of the arbitration award.
C. Did the District Court Have Ancillary Jurisdiction
Over the Garnishment Action?
IFC’s appeal from the District Court’s order dismissing
the garnishment action against the Fund for lack of subject
matter jurisdiction raises two theories of jurisdiction. First, IFC
claims that the District Court had ancillary jurisdiction. Second,
IFC claims that the District Court had supplemental jurisdiction
under 28 U.S.C. § 1367(a). We undertake a plenary review of
dismissals for lack of subject matter jurisdiction. Sikirica v.
Nationwide Ins. Co., 416 F.3d 214, 219 (3d Cir. 2005).
IFC argues that the District Court had subject matter
jurisdiction both as a matter of ancillary jurisdiction and as a
matter of supplemental jurisdiction. Ancillary jurisdiction is a
common law doctrine that has largely been codified as
“supplemental jurisdiction” in 28 U.S.C. § 1367.6 Peacock v.
6
Section 1367 authorizes supplemental jurisdiction:
over all claims that are so related to claims in the action
within such original jurisdiction that they form part of the
same case or controversy under Article III of the United
States Constitution. Such supplemental jurisdiction shall
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Thomas, 516 U.S. 349, 354, n.5 (1996). We do not see the
relevant inquiries for ancillary and supplemental jurisdiction as
separate; if the District Court had ancillary jurisdiction, it also
had supplemental jurisdiction under 28 U.S.C. § 1367.
The Supreme Court has explained that “a federal court
may exercise ancillary jurisdiction ‘(1) to permit disposition by
a single court of claims that are, in varying respects and degrees,
factually interdependent; and (2) to enable a court to function
successfully, that is, to manage its proceedings, vindicate its
authority, and effectuate its decrees.’” Id. at 354 (quoting
Kokkonen v. Guardian Life Ins. Co, 511 U.S. 375, 379-80
(1994). Previously, we have held that a federal district court
“has ancillary jurisdiction to adjudicate a garnishment action by
a judgment creditor against a nonparty to the original lawsuit
which may owe the judgment debtor an obligation to indemnify
against the judgment.” Skevofilax v. Quigley, 810 F.2d 378,
385 (3d Cir. 1987) (en banc). Skevofilax involved a
garnishment action brought by judgment creditors who had won
a federal judgment for malicious prosecution against three
police officers. The officers were indemnified by the township
that employed them, and the judgment creditors sought to satisfy
the judgment by garnishing the township under FED. R. CIV. P.
69. The township objected that the federal district court lacked
subject matter jurisdiction over the garnishment action because
the parties were not diverse and the garnishment proceeding was
based solely on contract and raised no federal issues. Sitting en
banc, we held that under Rule 69, “the same relief is available
in federal court for the satisfaction of a federal court judgment
as would be available in state court,” as “Rule 69 does not
contemplate that the holders of federal judgments must resort to
include claims that involve the joinder or intervention of
additional parties.
28 U.S.C. § 1367(a).
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state tribunals for their enforcement.” Id. at 384. The
applicable state procedure in Skevofilax permitted a
garnishment action based on an indemnification agreement. For
that reason, we ruled that the District Court had jurisdiction.
There is no contention that, if Skevofilax is still “good”
law, it governs this case and the District Court had ancillary
jurisdiction over the garnishment action. The District Court
held that it did not have subject matter jurisdiction because it
believed that the Supreme Court’s decision in Peacock, 516 U.S.
349, abrogated Skevofilax. The question before us, then, is
whether Peacock overruled Skevofilax. The question before us,
then, is whether Peacock overruled Skevofilax. We hold that it
did not, and we are obligated to follow our precedent in
Skevofilax insofar as Peacock does not apply.
1. Did Peacock Abrogate Skevofilax?
In Peacock, the Supreme Court addressed the question
“whether federal courts possess ancillary jurisdiction over new
actions in which a federal judgment creditor seeks to impose
liability for a money judgment on a person not otherwise liable
for the judgment.” 516 U.S. at 351. The plaintiff in Peacock had
obtained a federal judgment against the defendant corporation
for an ERISA violation. While the case was on appeal, the
corporation’s primary shareholder transferred most of the
corporate assets to himself, which defeated the plaintiff’s
attempts to collect on the judgment from the corporation. The
plaintiff then brought an action in federal court against the
shareholder under a veil-piercing theory. Id. At 352. The
plaintiff alleged subject matter jurisdiction, inter alia, as a matter
of ancillary jurisdiction to the original ERISA suit. Id. at 354.
The Supreme Court rejected the plaintiff’s claim of ancillary
jurisdiction because of the lack of a factual nexus with the
-18-
original ERISA suit and because it involved “entirely new
theories of liability.” Id. at 358.
The Fund argues that Peacock overruled Skevofilax and,
as evidence of that, points to Peacock’s reference to Skevofilax
as being on the wrong side of a circuit split. Id. at 352 n.2.
Peacock noted that the Supreme Court had granted certiorari in
the case to resolve a circuit split on the exercise of ancillary
jurisdiction, id. at 352, and illustrated this split in footnote two,
in which Skevofilax was listed along with three other cases as
being on the wrong side of the split:
Compare 39 F.3d 493 (CA4 1994) (case below), Argento
v. Melrose Park, 838 F.2d 1483 (CA7 1988), Skevofilax
v. Quigley, 810 F.2d 378 (CA3) (en banc), cert. denied,
481 U.S. 1029, 107 S. Ct. 1956, 95 L. Ed. 2d 528 (1987),
and Blackburn Truck Lines, Inc. v. Francis, 723 F.2d 730
(CA9 1984), with Sandlin v. Corporate Interiors Inc., 972
F.2d 1212 (CA10 1992), and Berry v. McLemore, 795
F.2d 452 (CA5 1986).
Id. at 352 n.2. The implication drawn by the Fund is that
Peacock intended to abrogate Skevofilax. We are more
sanguine about the continued viability of Skevofilax.
Footnote two is dictum. As the Supreme Court noted in
the course of its discussion of ancillary jurisdiction in Kokkonen
v. Guardian Life Insurance Co. of America, “[i]t is to the
holdings of...cases, rather than their dicta, that we must attend.”
511 U.S. 375, 379 (1994). Nonetheless, we pay due homage to
the Supreme Court’s well-considered dicta as pharoi that guide
our rulings. Cf. Tate v. Showboat Marina Casino P’ship, No.
05-1681 (7th Cir., Dec. 13, 2005) (Posner, J.) (arguing that “the
holding of a case includes, besides the facts and the outcome,
the reasoning essential to that outcome”). Footnote two,
however, is hardly a well-considered dictum; it merely
-19-
illustrates a circuit split about general questions of ancillary
jurisdiction and is in no way dispositive of whether Peacock
extends to garnishment actions.
Peacock itself made clear that it does not apply to Rule
69 actions. In the penultimate paragraph of the Peacock’s
majority opinion, the Supreme Court noted that:
When a party has obtained a valid federal judgment, only
extraordinary circumstances, if any, can justify ancillary
jurisdiction over a subsequent suit like this. To protect
and aid the collection of a federal judgment, the Federal
Rules of Civil Procedure provide fast and effective
mechanisms for execution.
Id. at 359. The Supreme Court then observed in a footnote that
“Rule 69(a), for instance, permits judgment creditors to use any
execution method consistent with the practice and procedure of
the State in which the district court sits.” Id. at 359 n.7
(emphasis added). Thus, the Supreme Court did not see a Rule
69 action as falling into the same category as the veil-piercing
suit in Peacock. Peacock excepted Rule 69 actions from its
reach.
Rule 69 provides that “The procedure on execution, in
proceedings supplementary to and in aid of a judgment, and in
proceedings on and in aid of execution shall be in accordance
with the practice and procedure of the state in which the distrit
court is held . . ..” FED. R. CIV. P. 69. The Supreme Court
referred to the full range of execution methods authorized under
Rule 69, and for the Federal District Court for the Eastern
District of Pennsylvania this includes garnishment. PA. R. CIV.
P. 3101-3149. Thus, under Peacock itself, ancillary jurisdiction
was proper over the Rule 69 garnishment action in this case.
Moreover, the Fund’s reading of footnote two is contrary
-20-
to the substance of the Peacock opinion. Factually, Peacock is
a bird of a different feather than Skevofilax, and we do not
believe that the Supreme Court intended Peacock to extend to
the Skevofilax situation because garnishment is different from
other types of liability. The key difference between
Peacock and Skevofilax is that Peacock addressed whether
ancillary jurisdiction was available to find primary liability,
whereas Skevofilax dealt with ancillary jurisdiction to seek
satisfaction of a judgment from a party that is alleged to be
secondarily liable based on an indemnification agreement.
Peacock emphasized the need for independent subject matter
jurisdiction over new actions, id. at 359, which distinguishes it
from a garnishment action. The Supreme Court itself
recognized this distinction in Mackey v. Lanier Collection
Agency & Service, where it noted that garnishment is usually
understood as a procedural mechanism for the enforcement of
judgments, rather than a “substantive law...[that] creates rights
and liabilities where none existed before.” 486 U.S. 825, 834
n.10 (1988).
Peacock was not a collection or enforcement action. The
plaintiff did not seek a Rule 69 garnishment and there was no
indemnity obligation available for garnishment. The plaintiff
in Peacock did not seek to stand in the judgment debtor’s shoes
or to enforce an indemnification agreement. Instead, Peacock
was an entirely new and unrelated action. There was no nexus
of factual allegations between the veil-piercing claim in Peacock
and the underlying ERISA claim, id. at 356; the plaintiff in
Peacock was attempting to jurisdictionally bootstrap a new veil-
piercing action onto his earlier ERISA suit. Veil-piercing does
not make a party secondarily liable. Rather, it collapses
corporate distinctions to make for joint primary liability. This
contrasts with garnishment, in which there is a new party and a
new theory of liability, but not a new direct claim. Moreover,
garnishment actions are distinguishable from veil-piercing
because they require a pre-existing contractual or statutory basis
-21-
for garnishment, whereas veil-piercing is an equitable
procedure, In re: Owens Corning, 419 F.3d 195, 205 (3d Cir.
2005), that involves the creation of liability in spite of the
contractual and statutory separateness of corporate entities.
The Supreme Court in Peacock observed that a court’s
ancillary jurisdiction is greater in judgment-enforcement actions
than in independent suits based on a judgment, and was careful
to note that it had “reserved the use of ancillary jurisdiction in
subsequent proceedings for the exercise of a federal court’s
inherent power to enforce its judgments.” 516 U.S. at 356. The
Supreme Court explicitly refrained from addressing collection
actions in Peacock, see id. at 357, n.6, and noted that it had
“never authorized the exercise of ancillary jurisdiction in a
subsequent lawsuit to impose an obligation to pay an existing
federal judgment on a person not already liable for that
judgment.” Id. at 357 (emphasis added). Thus, Peacock only
addressed jurisdiction over actions that seek to impose liability
“on a person not otherwise liable for the judgment.” Id. at 351
(emphasis added). Indeed, Peacock itself largely recognized
that jurisdiction is proper for Rule 69 actions to enforce a
judgment like the instant one. See id. at 359, n.7. In light of the
crucial factual distinction regarding primary and secondary
liability, we believe that Peacock does nothing to disturb our
holding in Skevofilax.
Indeed, were it otherwise, there could never be
jurisdiction over any garnishment action, as it would always be
based on a new, contractual theory of liability. Thus, “in almost
all cases federal courts would be unable to enforce their
judgments by resort to garnishment process.” Skevofilax, 810
F.2d at 384. As we noted in Skevofilax:
The untoward consequences of insistence upon a federal
district court possessing an independent basis of subject
matter jurisdiction over a garnishee would not be
-22-
confined to the efforts at post-judgment enforcement.
Under Rule 64 of the Federal Rules of Civil Procedure,
prejudgment in rem and quasi in rem remedies are
available “under the circumstances and in the manner
provided by the law of the state in which the district
court is held[.]”
Id. at 384 (citing FED. R. CIV. P. 64) (alternations original).
“Ancillary enforcement jurisdiction is, at its core, a
creature of necessity.” Peacock, 516 U.S. at 359. If federal
courts were deprived of ancillary jurisdiction to enforce their
judgments, it would make federal courts dependent on state
courts to enforce federal judgments, thereby jeopardizing the
effectiveness of federal decrees. Skevofilax, 810 F.2d at 385.
Moreover, “[i]t would impose on the state courts the role of
serving as an auxiliary or adjunct to the district court by
cleaning up the loose ends of a district court lawsuit,” thereby
impairing the interests of the state. Id. “Prudential factors, such
as “convenience, judicial economy . . . fairness to litigants and
. . . interests of federalism” counsel strongly against the Fund’s
reading of Skevofilax. Id. at 389 (Becker, J., concurring)
(quoting Ambromovage v. United Mine Workers of Am., 726
F.2d 972, 990 & n.53 (3d Cir. 1984). We are not inclined to
render federal courts toothless. Doing so would be contrary to
all prudential factors.
Our reading of Peacock comports with the jurisprudence
of the Seventh Circuit, which has considered the issue on no less
than three occasions. Footnote two of Peacock directs the reader
to compare six circuit court decisions. 516 U.S. at 352 n.2.
Three of the six cases, including Peacock itself, dealt with
whether there was ancillary jurisdiction over veil piercing
actions subsequent to an initial finding of corporate liability.
See Thomas v. Peacock, 39 F.3d 493 (4th Cir. 1994); Sandlin v.
Corp. Interiors, Inc., 972 F.2d 1212 (10th Cir. 1992); Blackburn
-23-
Truck Lines, Inc. v. Francis, 723 F.2d 730 (9th Cir. 1984). Of
the remaining three cases, one is Skevofilax and one is Argento
v. Melrose Park, 838 F.2d 1483 (7th Cir. 1988).7 Argento
involved a garnishment action on an indemnification contract to
collect the damages awarded in a civil rights action under 42
U.S.C. §§ 1983 and 1985. The legal issue in Argento was
indistinguishable from Skevofilax. Since the Supreme Court’s
decision in Peacock, the Seventh Circuit has stated in no less
than three cases that Peacock did not overrule Argento. See
Yang v. City of Chi., 137 F.3d 522 (7th Cir. 1998) (district court
had jurisdiction over garnishment proceeding based on
indemnification clause); Wilson v. City of Chi., 120 F.3d 681
(7th Cir. 1997) (holding Peacock does not apply where “the
plaintiff is proceeding in his original action [under Rule 69]
7
The final case is Berry v. McLemore, 795 F.2d 452 (5th
Cir. 1986), which involved two separate garnishment actions
against different defendants, who were both alleged to be liable
to the judgment debtor. The Fifth Circuit concluded that there
was no ancillary jurisdiction because Fifth Circuit precedent has
always treated garnishments as independent actions,
unconnected to the underlying suit establishing liability. Id. at
455. Nonetheless, the Fifth Circuit held that there was federal
jurisdiction over one of the garnishment actions based on
diversity jurisdiction.
We find the results of the Fifth Circuit’s decision
troubling, as it would largely restrict the ability of federal courts
to enforce their judgments to the diversity of citizenship of
garnishee and garnishor (although we can conceive of the rare
situation in which garnishment could lead to federal question
jurisdiction). The possibility that some garnishees will be haled
before a federal court while other garnishees on the same
judgment will end up before a state court strikes is a poor use of
judicial resources and creates too many opportunities for
jurisdictional mischief.
-24-
rather than by means of a new suit.”); Matos v. Nellis, Inc., 101
F.3d 1193 (7th Cir. 1996). Accord Condaire, Inc. v. Allied
Piping, Inc., 286 F.3d 353 (6th Cir. 2002) (holding that federal
court may exercise jurisdiction over a garnishment action that
raises different issues than were litigated in the original suit).
Cf. U.S.I. Prop. Corp. v. M.D. Constr. Co., 230 F.3d 489, 497
n.6 (1st Cir. 2000) (noting Skevofilax and stating “[w]e do not
decide whether such indemnification proceedings fall within
enforcement jurisdiction.”); Dulce v. Dulce, 233 F.3d 143 (2d
Cir. 2000) (district court had jurisdiction to order judgment
debtor’s executor to probate judgment debtor’s will); Thomas,
Head & Greisen Employees Trust v. Buster, 95 F.3d 1449 (9th
Cir. 1996) (district court had jurisdiction to void fraudulent
transfer). We concur with the Seventh Circuit that Peacock
applies to the non-collection scenarios, like veil-piercing, but
not to the garnishment scenarios of Argento and Skevofilax.
The Fund also claims that Peacock governs this case
because a new basis for liability is alleged. We disagree.
Although garnishment actions are new actions in the sense that
there is a new party and a new theory for that party’s liability,
they are not new actions in the sense of a new direct claim. In
the instant case, the District Court characterized the appeal as
having a different theory of liability based on breach of contract.
More aptly phrased, the garnishment is based not on a breach of
contract theory, but on the existence of a contract. Although
garnishment involves a new theory of liability, there is an
essential difference between an action to enforce a judgment via
garnishment and an action to establish liability in the first place.
A typical action requires that the plaintiff establish that the
defendant is liable to him. A garnishment action, in contrast, is
predicated on a pre-existing judgment finding that the judgment
debtor is liable to the garnishor and then requires a showing that
the garnishee is liable to the judgment debtor, not to the
garnishor.
-25-
The Fund objects that Peacock should govern because the
garnishment was a separate action rather than part of the original
suit. While the Fund is correct that the Seventh Circuit appeared
to find this distinction important in Wilson, 120 F.3d at 684, we
find that the better reading of Wilson is the one the Seventh
Circuit has adopted in later cases, namely that Rule 69 actions
are to be treated as part of the original suit. Thus, in Yang, the
Seventh Circuit noted that:
there is no question here that [plaintiff]’s Rule 69 petition
is not a new suit. As in Wilson and Argento, the only
new issue raised in [plaintiff]’s second suit is whether
[defendant was acting within the scope of his
employment so as to trigger the indemnification clause].
137 F.3d at 526. Thus, the Seventh Circuit line of cases does
not support the treatment of garnishment actions differently,
based on whether they are brought separately or as a part of the
original suit that established primary liability.
To the extent that the Fund urges us to find the fact that
a Rule 69 action was filed separately from the original suit as
divesting jurisdiction, we reject the proposition as unduly
formalistic. A Rule 69 action can be filed as part of the original
suit or as a separate suit. A Rule 69 action, by its very nature,
piggybacks on an action establishing liability and has a
derivative status. Moreover, the Rule 69 action can be initiated
under the original suit years after the original complaint was
filed. We fail to see a meaningful distinction between Rule 69
actions brought under an original suit and those brought
separately, and we are loathe to burden judgment creditors with
an atavism that smacks of the archaic distinctions of pleadings
at common law.
The Fund’s final argument is that ancillary jurisdiction
over a garnishment action is not appropriate where the garnishee
-26-
disputes its liability. We do not believe that disputed liability is
sufficient to divest federal jurisdiction from an action when it
would otherwise be appropriate, even if the dispute involved
questions of fact. Under Skevofilax, the dispute over the scope
of the indemnification agreement is irrelevant to jurisdiction;
contesting garnishment cannot itself defeat federal enforcement
jurisdiction. See 810 F.2d at 385. Cf. Matos, 101 F.3d at
1196. (“Whether a debt existed, and if so whether [the
garnishee] repaid, are in the end factual questions that the
district court must resolve.”)
The Fund argues that Peacock’s observation that the
Supreme Court had previously “approved the exercise of
ancillary jurisdiction over a broad range of supplementary
proceedings involving third parties to assist in the protection and
enforcement of federal judgments—including . . . garnishment”
cannot be read as an indication that there is ancillary jurisdiction
over all garnishment actions. Instead, the Fund asserts that
ancillary jurisdiction over garnishment actions is only
appropriate when there are no contested issues of fact regarding
the garnishment. Thus, in the Fund’s reading, there might be
ancillary jurisdiction over a run of the mill garnishment of a
bank account to pay a child support order but not for a contested
indemnification like in the present case.
As support for this reading, the Fund points to Hudson
v. Coleman, 347 F.3d 138, 146 (6th Cir. 2003), in which the
Sixth Circuit held that there was no ancillary federal jurisdiction
over a garnishment action based on an indemnification
agreement because “legitimate, unresolved disputes concerning
whether conduct occurs without scope of [the agreement]
deprives a federal court of ancillary jurisdiction in a garnishment
action pursuant to Peacock.” In Hudson, the Sixth Circuit
opined:
The Supreme Court’s acknowledgment of the fact that
-27-
garnishment sometimes falls within ancillary jurisdiction
is obviously not imprimatur for all garnishment actions
arising from previous factually similar underlying federal
claims to proceed in federal court. The type of
garnishment proceeding referred to in Peacock does not
contemplate making the garnishee personally liable on
the judgment based on some independent legal theory as
Hudson seeks to do in this case. Instead, the typical
garnishment proceeding referenced in Peacock
contemplates the garnishee’s paying the judgment
creditor/garnishing party directly for funds, such as a
salary, owed by the garnishee to the defendant in the
underlying action.
Id. at 144.
We are unpersuaded by our brethren’s analysis.8 The
8
We would think that any consideration of the scope of the
Supreme Court’s blessing of ancillary enforcement jurisdiction
over garnishment in Peacock would begin with an analysis of
the case cited by the Supreme Court as an example of when
ancillary jurisdiction was proper over a garnishment action,
Mackey, 486 U.S. 825. The Sixth Circuit did not even mention
Mackey in Hudson, perhaps because the issue was “obvious.”
Unfortunately, Mackey does not support the proposition for
which the Supreme Court cited it in Peacock. The Supreme
Court cited it as an example of its past approval of “the exercise
of ancillary jurisdiction over a broad range of supplementary
proceedings involving third parties to assist in the protection and
enforcement of federal judgments—including...garnishment.”
516 U.S. at 356.
Ancillary federal enforcement jurisdiction was never
involved in Mackey, however. Mackey came up on a grant of
certiorari to the Georgia Supreme Court; federal courts were
never involved until the Supreme Court heard the case and the
-28-
Sixth Circuit’s jurisprudence on ancillary jurisdiction appears
unsettled, Condaire, Inc. v. Allied Piping, Inc., 286 F.3d 353
(6th Cir. 2002) (holding that federal court may exercise
jurisdiction over a garnishment action that raises different issues
than were litigated in the original suit), and the example given
by the Sixth Circuit is a distinction without a difference. The
difference between “to owe” and “to be liable” is purely
semantic. Garnishment always involves a separate theory of
liability from the original action. The garnishment of a salary
still involves a theory of contract liability based on an
employment contract and is thus indistinguishable from
garnishment based on an indemnification contract (which could
itself be part of an employment contract). In any event, our
disagreement with Hudson is immaterial because, as discussed
below regarding the District Court’s denial of IFC’s summary
judgment motion, the remaining questions concerning the
Fund’s liability are questions of law. The fact that the Fund’s
liability is disputed does not defeat federal jurisdiction.
Although we believe it clear that ancillary enforcement
jurisdiction is proper in this case under its actual facts, we note
issue it granted certiorari on was whether ERISA, a federal
statute, preempted Georgia’s garnishment statute. Had the Sixth
Circuit referred to Mackey, however, they would have noted a
well-considered dictum (easily counter-balancing the rather
cursory dictum in footnote two of Peacock) that garnishment is
usually understood as a procedural mechanism for the
enforcement of judgments, rather than a “substantive law...[that]
creates rights and liabilities where none existed before.” 486
U.S. 834, n.10. To this extent, the fact that garnishment always
involves a new theory of liability is irrelevant to the question of
ancillary jurisdiction. The liability in garnishment is always a
derivative, secondary liability to the garnishor, never direct,
primary liability. This distinction removes garnishment actions
from the analysis set forth in Peacock.
-29-
that there would undoubtedly have been subject matter
jurisdiction over the garnishment in this case had SIP made a
cross-claim against the Fund under FED. R. CIV. P. 13(g).
“[M]any of the same factors that would justify jurisdiction of the
indemnification claim if it had been . . . asserted as a cross-claim
under Rule 13(g) continue to justify jurisdiction over the Rule
69 claim.” Skevofilax, 810 F.2d at 389 (Becker, J., concurring).
In neither the instant case nor Skevofilax was a timely cross-
claim filed under Rule 13(g). A plurality section of Skevofilax
treated the judgment debtors’ support of the judgment creditors’
garnishment motion as a cross-claim, but we do not think it
takes away from the essential point. Namely, if there would
have been jurisdiction over a cross-claim, there must also be
jurisdiction over a derivative claim made by a party standing in
the shoes of the party that could have made the cross-claim.
There are numerous strategic reasons why a cross-claim might
not be asserted in any particular action,9 but we do not believe
that federal jurisdiction can ever depend on a particular
defendant’s strategic maneuvers. Either there is a sufficient
“common nucleus of operative fact” for jurisdiction to hear
related claims or there is not. United Mine Workers v. Gibbs,
383 U.S. 715, 725 (1966). If a sufficient “common nucleus of
operative facts” for jurisdiction could exist over a cross-claim,
so too could it exist over a garnishment action. There was a
“common nucleus of operative facts” between the arbitration
confirmation and the garnishment in this case because the
original arbitration matter which the District Court confirmed
dealt with IFC’s contract with SIP to recruit investors for the
9
SIP and the Fund are juridically separate entities and are
represented by separate counsel, but there is an inference of
complicity between the Fund and SIP, which is the general
partner in SIF Management, L.P., which is the general partner
of the Fund, in order to escape the judgment, for the Fund is set
to liquidate on March 31, 2006.
-30-
Fund, which SIP managed via SIF Management, L.P. When
SIP refused to pay the placement fees to IFC, it did so on the
grounds that it was protecting the Fund from the alleged fraud.
SIP’s calculated decision not to implead the Fund should
not be adequate to defeat IFC’s garnishment action. The
possibility of ancillary jurisdiction via a cross-claim indicates
that there should also be ancillary jurisdiction for a garnishment
action that lets the garnishor stand in the shoes of the potential
cross-claimant.
To summarize, we do not believe that Peacock extends to
cases involving garnishment actions based on indemnification
agreements. Therefore, we hold that Skevofilax is still “good
law” and are bound by this precedent to find that there is
ancillary jurisdiction to impose an obligation to pay an existing
judgment on a party that is alleged in good faith to be
secondarily liable for that judgment. We conclude that our
holding here does not ruffle Peacock’s feathers.
D. Did the District Court Err in Refusing to Grant
Summary Judgment for the Garnishment?
In the same order, the District Court both denied IFC’s
motion for summary judgment on the garnishment and
dismissed the garnishment action for lack of subject matter
jurisdiction. If the District Court lacked subject matter
jurisdiction, it should not have ruled on summary judgment, as
there would not be a proper “case or controversy” that it could
adjudicate.
While we remain chary of hypothetical jurisdiction, see
Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83, 101-102
(1998), in light of our ruling that the District Court erred in
finding that it did not have subject matter jurisdiction, we are
willing to look upon the District Court’s ruling as being a ruling
-31-
in the alternative. We recognize that the District Court was
faced with a difficult question regarding the relationship of
Peacock and Skevilofax, and that, viewed in light of our ruling,
the District Court’s combined ruling served the interests of
judicial economy. Therefore, we will deem the District Court’s
consideration of summary judgment to have been proper in spite
of its finding that it did not have subject matter jurisdiction over
the case.
We undertake a plenary review of grants of summary
judgment. Gottshall v. Consol. Rail Corp., 56 F.3d 530, 533 (3d
Cir. 1995). Summary judgment is only appropriate if there are
no genuine issues of material fact and the movant is entitled to
judgment as a matter of law. FED. R. CIV. P. 56(c). In reviewing
the District Court’s grant of summary judgment, we view the
facts in a light most favorable to the non-moving party.
Gottshall, 56 F.3d at 533.
The genuine issue of material fact found by the District
Court was the scope of the indemnification agreement, namely
whether it was loss or liability indemnification and whether it
covered the placement fee agreement. Indemnity agreements
are interpreted in accordance with general principles of contract
law and, under Delaware law, “the interpretation and
construction of insurance contracts presents a clear question of
law subject to de novo review.” E. I. du Pont de Nemours &
Co. v. Allstate Ins. Co., 686 A.2d 152, 156 (Del. 1996);
Rhone-Poulenc Basic Chems. Co. v. Am. Motorists Ins. Co.,
616 A.2d 1192, 1195 (Del. 1992) (“The proper construction of
any contract, including an insurance contract, is purely a
question of law.”). Therefore, the District Court erred in
denying IFC’s summary judgment motion on the grounds that
genuine issues of material fact remained. Accordingly, we will
reverse the District Court’s denial of IFC’s motion for summary
judgment.
-32-
Typically, we would now remand this case to the District
Court to allow it the first crack at determining questions of law
related to summary judgment, which could then be appealed to
us. This is not a typical case, however, for two reasons. First,
the Fund is set to liquidate on March 31, 2006. If we were to
remand and the District Court granted summary judgment, IFC’s
ability to collect on its judgment from the Fund would be
severely prejudiced. IFC has been diligent in protecting its
rights and had the District Court properly found jurisdiction over
the garnishment action, the March 31, 2006, deadline might not
loom so large.
Second, although there is a corporate separateness
between SIP and the Fund, we note that SIP exercises significant
control over the Fund in its capacity as general partner of SIP
Management, L.P., which is the general partner of the Fund.
The main legal defense posed by the Fund is that it is not yet
liable. Were SIP to pay, the Fund could not claim that its
indemnification obligation has not yet vested. In the context of
the pending liquidation of the Fund, the party capable of
satisfying the judgment, there is a strong overtone of strategic
behavior by related parties. We are loathe to let a federal
judgment be evaded by strategic behavior. See City News &
Novelty, Inc. v. City of Waukesha, 531 U.S. 278, 284 (2001) (“a
party should not be able to evade judicial review, or to defeat a
judgment, by temporarily altering questionable behavior.”)
Therefore, rather than remand, we are exercising the full
measure of our jurisdiction under 28 U.S.C. § 1291 and
undertaking our own plenary review of the questions of law.
There are still four questions of law that must be
resolved. First, whether the indemnification agreement was for
loss or liability indemnification; second, whether the
indemnification agreement applied to the placement fee
arrangement; third, whether SIP was acting within the ambit of
the “on behalf of” clause regarding the placement fees; and
-33-
fourth, whether there is merit to the Fund’s claim of set-off.
1. Was the Indemnification for Loss or Liability?
The agreement between SIP and the Fund is governed by
Delaware law. It is readily apparent that it is an agreement for
liability, not just loss indemnification. The indemnification
agreement states that:
The Fund shall indemnify and hold harmless each
Indemnified Person [including SIP] from any and all
reasonable costs and expenses and all damages and
claims which may be incurred or asserted against him or
it by reason of any action taken or omitted to be taken on
behalf of the [Fund] or in furtherance of its interest, or by
reason of such Indemnified Person’s connection to or
relationship with the [Fund], unless such cost, expense,
damage or claim results from the failure of such
Indemnified Person to [act in good faith in the best
interests of the Fund and not commit gross negligence or
wilful misconduct].
(emphasis added). The agreement provides indemnification not
merely for “damages incurred,” but also for “claims asserted.”
Under Delaware law, this assuredly includes judgments
awarded. Seitz v. A-Del. Constr. Co., 1987 Del. Super. LEXIS
1279, *7 (Del. Super. Ct., Aug. 13, 1987) (“When the contract
of indemnity binds the indemnitor to save harmless the
indemnitee, it is a contract indemnity against liability.”);
Tidewater Coal Exch., Inc. v. Am. Surety Co., 143 A. 34 (Del.
Super. Ct. 1928); see also, Valhal Corp. v. Sullivan Assocs.,
Inc., 44 F.3d 195, 202 n.6 (3d Cir. 1995) (“hold harmless”
defined as an agreement in which one party relieves another of
“liability”); Sorenson v. Overland Corp., 142 F. Supp. 354 (D.
Del. 1956).
-34-
2. Did the Indemnification Agreement Exclude
Placement Fees?
Under Delaware law,
if a writing is plain and clear on its face, i.e., its language
conveys an unmistakable meaning, the writing itself is
the sole source for gaining an understanding of intent.
However, if the words of the agreement can only be
known through an appreciation of the context and
circumstances in which they were used a court is not free
to disregard extrinsic evidence of what the parties
intended. In that situation the language used by the
parties is subject to different meanings and is, thus,
ambiguous, or more precisely, not reflective of the
parties shared intent. But the language of an agreement,
like that of a statute, is not rendered ambiguous simply
because the parties in litigation differ concerning its
meaning.
City Investing Co. Liquidating Trust v. Cont’l Cas. Co., 624
A.2d 1191, 1198 (Del. 1993) (internal citations and quotations
omitted).
In this case the agreement is plain on its face. There is no
ambiguity regarding the words “any action take or omitted to be
taken on behalf of the [Fund]”. This is broad, unambiguous
language that evinces no intention to carve out a particular
transaction. Therefore, we do not consider the affidavit of an
SIP member, submitted by SIP in opposition to the garnishment,
which purports that the indemnity provision was not intended to
apply to placement fee obligations. As the indemnification
agreement is clear on its face, we hold that it does cover the
placement fee arrangement, if it was undertaken on behalf of the
Fund.
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3. Was SIP Acting on Behalf of the Fund When
It Refused to Pay IFC?
The Fund argues that although the placement fee
arrangement was made on its behalf, the failure to pay IFC for
its services was not done on its behalf. We believe that this
draws too fine of a line and that, as a matter of law, SIP was
acting on the Fund’s behalf in contracting with IFC and in its
actions that constituted a breach of that contract. It is
unquestioned that SIP had the authority to enter into the
placement fee arrangement and to monitor the contract. SIP’s
refusal to pay IFC was because SIP claimed that IFC was
defrauding it. SIP has vigorously maintained this position
throughout this litigation. When SIP refused to pay, it was
acting in accordance with its management duties to protect the
Fund from fraud and believed in good faith, as far as we can tell,
that withholding payment was excused by IFC’s prior breach.
Only now, when it appears that the Fund might be on the hook,
does the Fund disown SIP’s actions. We are unimpressed. The
failure to pay IFC its placement fees was done on behalf of the
Fund and is covered by the indemnification agreement.
4. May the Fund Raise SIP’s Set-Off Claim as
a Defense to the Garnishment?
Finally, the Fund argues that IFC breached its agency
agreement with SIP by diverting the Fund’s assets and that the
Fund’s ability to raise SIP’s claim of a set-off precludes
summary judgment on the garnishment action. We disagree.
First, this was SIP’s defense in arbitration, which was rejected
by the arbitrators. This is not a direct appeal of the arbitrators’
ruling, so if the Fund were in privity with SIP, the arbitrators’
ruling, confirmed by the District Court in its Order of September
7, 2004, would preclude litigation of this issue under res
judicata. Transamerica Occidenal Life Ins. Co. v. Aviation
Office of America, Inc., 292 F.3d 384, 393 (3d Cir. 2002).
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Second, the Fund, as garnishee, may not raise the judgment
debtor’s defenses as against the judgment creditor. Fed. R. Civ.
P. 69 states that “[t]he procedure on execution, in proceedings
supplementary to and in aid of a judgment, and in proceedings
on and in aid of execution shall be in accordance with the
practice and procedure of the state in which the district court is
held . . ..” Although the interpretation of the indemnification
Agreement is governed by Delaware law, the case was before
the United States District Court for the Eastern District of
Pennsylvania. We look therefore to Pennsylvania law regarding
enforcement of the judgment. Under Pennsylvania law, a
garnishee “may not assert any defense on behalf of the
defendant against the plaintiff or otherwise attack the validity of
the attachment.” PA. R. CIV. P. 3145(d)(2). Therefore, the Fund
may not raise SIP’s set-off claim as a defense.
Because no genuine issues of material fact remain and
all issues of law have been decided in favor of IFC, we hereby
order summary judgment in favor of IFC in its garnishment
action.
Conclusion
For the reasons given above, we will affirm the District
Court’s confirmation of the arbitration award in favor of IFC as
against SIP, reverse the District Court’s denial of summary
judgment on IFC’s Rule 69 garnishment action, and direct that
summary judgment be entered in favor of IFC as against the
Fund on the garnishment action.
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