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SOAM CORP. v. TRANE CO.

December 23, 1980

SOAM CORPORATION, Plaintiff,
v.
The TRANE COMPANY, Thomas E. Kelly, Inc., Thomas E. Kelly and Bruce E. Hampson,Defendants



The opinion of the court was delivered by: TENNEY

This litigation was commenced in state court and was removed to this court pursuant to 28 U.S.C. § 1441. Removal was predicated on the diversity of citizenship between plaintiff Soam Corporation ("Soam"), a New York corporation, and defendant The Trane Company ("Trane"), a Wisconsin corporation. 28 U.S.C. § 1332.

After removal, and as a result of information allegedly uncovered during discovery, plaintiff was granted leave to amend its complaint to add three additional defendants and to add a claim that Trane and the new defendants had committed a fraud on the plaintiff. Because the addition of the new nondiverse parties destroys complete diversity, Trane has moved to drop the three new defendants or, in the alternative, to vacate the order which granted plaintiff's motion to join the new defendants. Plaintiff has moved for a remand of the entire action to state court. *fn1" Both motions were referred to Magistrate Nina Gershon for report and recommendation. She recommended that defendant's motion be denied and that plaintiff's motion be granted. The Court adopts these recommendations for the reasons hereinafter discussed.

BACKGROUND

 Soam's claims arise from a written contract entered into by the parties and from an alleged oral contract between Soam and Bruce E. Hampson, who represented himself as manager of Trane's New York Sales District Office. The written contract provided that Trane would compensate Soam for its services if Trane's air conditioning equipment was accepted for use in the Moscow World Trade Center. The alleged oral contract consisted of an agreement made by Hampson agreeing to compensate Soam for its services on behalf of Trane.

 Following the removal of this action to federal court, Soam discovered that Hampson was not employed by Trane but by Thomas E. Kelly, Inc. ("Kelly, Inc."). Furthermore, Trane's purported New York District Office was revealed to be the office of Kelly, Inc., a franchise of Trane. It was also alleged that Hampson, acting for Kelly, Inc., was in direct competition with Soam for Trane's commissions from the Moscow World Trade Center contract. Soam therefore moved for leave to amend its complaint to add Hampson, Kelly, Inc., and Thomas E. Kelly personally, as defendants. Soam also sought to add a cause of action charging that Trane and the new defendants fraudulently represented that Hampson was an employee of Trane, and that in reliance on this representation, Soam performed services at the behest of Hampson while Hampson and the Kelly defendants were competing with Soam for Trane's commissions. Over the defendant's objections that the amended complaint raised independent issues that should be raised by plaintiff in a separate action, the Magistrate found that the issues involved were so intertwined that they should be tried in a single action. Accordingly, the motion to amend was granted.

 Because of the resulting loss of diversity, Trane moved under Federal Rule of Civil Procedure ("Rule") 21 to drop the new defendants from the action or, in the alternative, to vacate the order permitting the filing of an amended complaint joining them. As noted above, Magistrate Gershon recommended denial of this motion, and recommended the granting of plaintiff's motion to remand the entire case to state court.

 ARGUMENTS

 While the defendant objects to the Magistrate's Report and Recommendation, the plaintiff, not surprisingly, urges the Court to adopt the Magistrate's rulings. Both parties rely in part on 28 U.S.C. § 1447(c) which sets out the exclusive grounds upon which an action removed to federal court can be remanded. Section 1447(c) provides, in relevant part:

 
If at any time before final judgment it appears that the case was removed improvidently and without jurisdiction, the district court shall remand the case ....

 The defendant contends that this provision prohibits the remand to state court of any case removed to federal court if such removal was proper at the time it was made. Relying on Thermtron Products, Inc. v. Hermansdorfer, 423 U.S. 336, 96 S. Ct. 584, 46 L. Ed. 2d 542 (1976), discussed infra, Trane asserts that only the circumstances at the time of removal may be considered in determining whether the case "was removed improvidently and without jurisdiction." According to the defendant, the Second Circuit has "a long standing rule" that joinder of non-diverse parties should not result in a remand unless such parties are deemed indispensible. Trane thus argues that the district court may require the retention of all parties to the amended complaint and determine all claims, pursuant to 28 U.S.C. § 1441(c). *fn2" Finally, defendant argues that the plaintiff's motion to amend the original complaint should have been denied. In Trane's view, "it is clear that courts in this Circuit, as well as the Federal Rules of Civil Procedure, place greater weight on the preservation of the federal forum than on consideration of judicial economy." Defendant's Objections to Magistrate's Report and Recommendation ("Defendant's Memorandum") at 9. Trane thus contends that Soam should be required to bring its new cause of action in state court.

 The plaintiff argues that under 28 U.S.C. § 1447(c), a case removed to federal court may be remanded if an impropriety or jurisdictional flaw appears at any time before a final judgment is rendered. In plaintiff's view, the additional defendants and cause of action are not at all "separate and independent" and should be included in the main case. Because the amendment was proper and diversity jurisdiction is now destroyed, Soam contends that the entire action must be remanded to state court.

 DISCUSSION

 This case raises two closely connected issues. First, does a district court have discretion to remand a case to state court once it has been properly removed pursuant to 28 U.S.C. § 1441? Second, may a district court allow an amendment that joins parties whose presence destroys the complete diversity upon which jurisdiction in the federal court was based? It should be kept in mind that the statutes conferring both diversity and removal jurisdiction are to be strictly construed. See Owen Equip. & Erection Co. v. Kroger, 437 U.S. 365, 377, 98 S. Ct. 2396, 2404, 57 L. Ed. 2d 274 (1978) (diversity jurisdiction); Irving Trust Co. v. Century Export & Import, S. A., 464 F. Supp. 1232, 1236 (S.D.N.Y.1979) (removal jurisdiction).

 Defendant has invoked Thermtron Products, Inc. v. Hermansdorfer, 423 U.S. 336, 96 S. Ct. 584, 46 L. Ed. 2d 542 (1976), which involved the scope of appellate review, pursuant to 28 U.S.C. § 1447(d), *fn3" over a district court's decision to remand a case that had been removed to federal court. There, a district court judge had remanded the case to state court because his overcrowded docket would not allow the parties to have a speedy decision on the merits of their claims. Section 1447(d) precludes appellate review of a remand order, with one narrowly defined exception not applicable in this case. However, the Supreme Court held that because section 1447(c) established ...


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