Saturday, March 30, 2013

FYI: 7th Cir Rules No Diversity Jurisdiction as to Borrower's Frivolous "Sovereign Citizens" Complaint, Dismissal Still Appropriate as Sanction

The U.S. Court of Appeals for the Seventh Circuit recently ruled that: (1) federal diversity jurisdiction was lacking over a consumer's claim against a finance company because the amount in controversy was below the statutory amount; (2) the finance company's counterclaim did not fall within the court's "supplemental" jurisdiction because the original claim was not within the district court's jurisdiction; and (3) the lower court's determination that the consumer's complaint was frivolous was a determination on the merits warranting dismissal with prejudice.  


In so ruling, the Seventh Circuit concluded that dismissal of the consumer's complaint with prejudice was appropriate as a sanction for filing a frivolous claim, but that the finance company's counterclaim should be dismissed without prejudice.


A copy of the opinion is attached.


Plaintiff bought a used truck, financing the purchase with an installment contract through a dealer that assigned the contract to defendant finance company ("Finance Company").  The contract specified an interest rate of 23.9 percent.  After making the first payment on the loan, the plaintiff sent Finance Company a copy of the contract on which he had stamped "accepted for value and returned for value for settlement and closure," advising Finance Company to collect the balance of the loan from the U.S. Treasury.  Following default, Finance Company repossessed and sold the truck for less than what was owing on the loan, and billed the plaintiff around $11,000 for the difference. 


Plaintiff filed suit against Finance Company in federal court for $34 million in compensatory damages and $2.2 billion in punitive damages, basing federal jurisdiction on federal courts' admiralty and diversity jurisdictions.   Finding the complaint frivolous and remarking that the "inordinately high interest rate" in the contract might violate Illinois's usury law, the lower court dismissed the entire complaint without prejudice. 


Plaintiff filed an amended complaint, which the lower court dismissed with prejudice, ruling that the Plaintiff had successfully invoked diversity jurisdiction.   Finance Company filed a counterclaim, seeking the roughly $11,000 still owing on the unpaid debt plus prejudgment interest and attorneys' fees.


The plaintiff never answered the counterclaim, and the lower court entered a default judgment in favor of Finance Company.  Plaintiff appealed.  The Seventh Circuit vacated and remanded.


As you may recall, federal diversity jurisdiction requires diversity of citizenship and an amount in controversy that exceeds $75,000, exclusive of interest and costs.  28 U.S.C. § 1332.  In addition, federal district courts have "supplemental jurisdiction over all other claims that are so related to claims in the action within such original jurisdiction that they form part of the same case or controversy . . . ."  28 U.S.C. § 1367.


Noting that the complaint bore the characteristics of the so-called "Sovereign Citizens" movement, the Seventh Circuit pointed out that Plaintiff based federal jurisdiction on both diversity and, mistakenly, on admiralty jurisdiction.  In so doing, the Seventh Circuit observed that dismissals for lack of federal jurisdiction are ordinarily without prejudice, and that a determination of a lack of jurisdiction precludes a court from making any determinations as to the merits of the underlying claim.   Nevertheless, the Seventh Circuit also noted that when a case over which the court has federal jurisdiction is dismissed for failure to state a claim, the dismissal is actually a merits-based determination and is thus appropriately with prejudice.  The Seventh Circuit also pointed out, moreover, that dismissal with prejudice may also be appropriate in rare circumstances as a sanction for misconduct, such as filing a frivolous lawsuit intended only to harass. 


Having initially stricken Finance Company's brief because it lacked an adequate jurisdictional statement, the Seventh Circuit examined the jurisdictional statement in Finance Company's amended brief, observing that it contained numerous errors.  Specifically, quoting from Finance Company's brief, the Court pointed out Finance Company's jurisdictional assertion that the suit met diversity jurisdiction requirements because the suit alleged that the matter in controversy exceeded the sum or value of $75,000" and, moreover, that the district court had "supplemental jurisdiction" over the counterclaim.  See 28 U.S.C. §§ 1332(a), 1367.  Noting that the plaintiff sought an exorbitant sum in damages and that based on the face of the pleadings, it was apparent that plaintiff was entitled to recover nothing, the Seventh Circuit stressed that a mere allegation of an amount in controversy does not establish that it is in fact the amount in controversy. 


Therefore, in pointing out that the plaintiff was entitled to recover nothing, the Seventh Circuit also observed that the counterclaim could not fall within the district court's "supplemental" jurisdiction, as the counterclaim was not "intimately related to claims" already within federal jurisdiction on some other basis. 


In noting, moreover, that because Finance Company's counterclaim was based solely on state law and failed to meet the statutory minimum for federal diversity jurisdiction, the counterclaim could not stand as an independent federal suit, the Seventh Circuit went on to state that the lower court should have dismissed the counterclaim for lack of federal jurisdiction.  This dismissal, the Court explained, however, should have been without prejudice so as to allow Finance Company to file a new suit in state court. 


Recognizing that the amount of Finance Company's claim might be too small to make a lawsuit worthwhile, the Court suggested that Finance Company could have sought Rule 11 sanctions against the plaintiff for filing a frivolous suit.  Another sanction available to Finance Company, was, according to the Court, dismissal of Plaintiff's complaint with prejudice in order that plaintiff would be precluded from harassing Finance Company by re-filing his suit in state court.  As the Seventh Circuit observed, although the lower court dismissed the complaint with prejudice, it was on the erroneous ground that there was federal diversity jurisdiction, as well as on the merits.  Instead, the Court opined, such dismissal should have been imposed as a sanction.


Accordingly, the Appellate Court vacated the lower court's judgment and remanded with specific instructions to:  (1) either dismiss the suit without prejudice, or dismiss with prejudice as a sanction for filing a frivolous suit; (2) vacate the default judgment in favor of Finance Company on its counterclaim due to lack of jurisdiction; and (3) dismiss the counterclaim without prejudice to allow Finance Company to re-file in state court.




Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
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