# Appendix — Brown v. Spectacor Management Group > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386013_2404%3A2 ## Record - **Collection:** Supreme Court brief - **Document type:** Appendix - **Published:** January 1, 1998 - **Citation:** 523 U.S. 1120 ## Text APPENDIX A UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT No. 96-1969 SPECTACOR MANAGEMENT GROUP, V. MATHEW G. BROWN, Appellant. SUR PETITION FOR REHEARING Present: SLOVITER, CHIEF JUDGE, STAPLETON, MANSMANN, GREENBERG, SCIRICA, COWEN, NYGAARD, ALITO, ROTH, LEWIS, McKEE, and RENDELL Circuit Judges. The petition for rehearing filed by appellant in the above entitled case having been submitted to the judges who participated in the decision of this court and to all other available circuit judges of the circuit in regular active service, and no judge who concurred in the decision having asked for rehearing, and a majority of the circuit judges of the circuit in regular active service not having voted for rehearing by the court in banc, the petition for rehearing is denied. Al BY THE COURT, /s/ Circuit Judge Hon. Theodore A. McKee DATED: December 16, 1997 A2 APPENDIX B UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT No. 96-1969 SPECTACOR MANAGEMENT GROUP, V. MATTHEW G. BROWN, Appellant. Appeal from the United States District Court for the Eastern District of Pennsylvania (D.C. Civil No. 93-5246) Present: Greenberg, McKee, Circuit Judges, and Wellford, Senior Circuit Judge’ JUDGMENT This cause came on to be heard on the record from the United States District Court for the Eastern District of Pennsylvania and was argued by counsel on June 24, 1997. On consideration whereof, it is now here ordered and adjudged by this Court that the judgment of the said District Honorable Harry W. Wellford of the United States Court of Appeals for the Sixth Circuit, sitting by designation. A3 Court entered October 15, 1996, be, and the same is hereby affirmed. Costs taxed against appellant. All of the above in accordance with the opinion of this Court. Page 2 96-1969 ATTEST: Clerk Dated: November 24, 1997 Costs Taxed in Favor of Spectacor Management Group as follows: TRE vi ccthiivccvcsncens cassesseons $124.00 Certified as a true copy and issued in lieu of a formal mandate on December 24 1997 /S/ Chief Deputy Clerk, U.S. Court of Appeals for the Third Circuit. A4 APPENDIX C Filed November 24, 1997 UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT No. 96-1969 SPECTACOR MANAGEMENT GROUP Vv. MATTHEW G. BROWN, Appellant. Appeal from the United States District Court for the Eastern District of Pennsylvania (D.C. Civil No. 93-5246) Argued June 24, 1997 Before: GREENBERG, McKEE, Circuit Judges, and WELLFORD, “Senior Circuit Judge (Filed November 24, 1997) ** The Honorable Harry W. Wellford of the United States Court of Appeals of the Sixth Circuit. Sitting by Designation. AS5 ae . Spectacor Management Group v. Matthew G. Brown No. 96-1969 GARY GREEN, ESQ. (Argued) Sidkoff, Pincus & Green 1101 Market Street Suite 2700 Philadelphia, PA 19107 Attorney for Appellant IRA B. SILVERSTEIN, ESQ. (Argued) Fox, Rothschild, O'Brien & Frankel 2000 Market Street Philadelphia, PA 19103 Attorney for Appellee OPINION OF THE COURT McKEE. Circuit Judge. Spectacor Management Group {"Spectacor"} initiated this diversity action as a result of a disagreement with a former senior level executive over severance pay and benefits. The defendant counterclaimed, alleging that Spectacor had breached an oral contract with him and owed him money as a result. Following a bench trial, the district court entered Judgment for the defendant but in an amount that was substantially less than the amount of his counterclaim. The defendant appeals. We will affirm the Judgment of the district court without further comment, as it is based upon that court's A6 Spectacor Management Group v. Matthew G. Brown No. 96-1969 assessment of the evidence, and find no clear error.’ However, the jurisdictional issues raised by this appeal require us to discuss the district court's exercise of subject matter jurisdiction. Accordingly, we will discuss whether the amount in controversy requirement of 28 U.S.C.A. § 1332(a) has been satisfied. I, Spectacor, a Pennsylvania joint venture engaged In the business of managing public assembly facilities, such as Stadiums, arenas, and convention centers, brought this diversity action in an attempt to recoup severance benefits paid to defendant Matthew Brown, a New Jersey citizen, following his termination as Executive Vice-President of Spectacor. Spectacor's complaint alleged that it paid Brown $42.500 in benefits and $4,921.04 for medical insurance. The resulting total ($47.421.04) was, therefore, less than the $50,000 minimum required for diversity jurisdiction when the suit was filed. Spectacor, however, also alleged that it was entitled to recoup an additional $3,287.21 it had paid in payroll taxes. This additional sum brought the amount that Spectacor claimed to $50,708.25 exclusive of costs and interest. Brown argues that Spectacor included the amount of the payroll taxes as a "sham" to manufacture federal jurisdiction in a preemptive attempt to prevent him from suing Spectacor in state court. Brown further argues that Spectacor ! See Anderson v. Bessemer City, 470 U.S. 564 (1985). A7 Spectacor Management Group v. Matthew G. Brown No. 96-1969 conceded that even Spectacor's claim to recover benefits from Brown was a sham because Spectacor stipulated in the district court that it owed him $50,000 in benefits plus $15,692 in vacation pay. See Appellant's Br. at 5. Spectacor maintained that it retained the money that it owed Brown as a set off against payments it had made to Brown that he was obligated to repay. Thus, Brown's response to the suit was twofold. He claimed that Spectacor manipulated the payroll tax claim as a contrivance to manufacture the amount in controversy needed for diversity jurisdiction and that Spectacor owed him more than he owed it. However, rather than filing a motion to dismiss Spectacor's complaint for lack of jurisdiction in the district court under Fed. R. Civ. P. 12(b)(1). Brown filed an answer in which he denied jurisdiction, and counterclaimed against Spectacor for the amount Spectacor allegedly owed him for severance pay ($135.000), sales commissions ($837,000), an earned bonus ($70,720), unused vacation days and unreimbursed business expenses ($17,550). Spectacor argues that it included payroll taxes in good faith and the jurisdictional amount therefore appears on the face of the complaint. Spectacor maintains that, in any event, Brown's counterclaim can be considered in calculating the amount in controversy. That counterclaim easily surpasses the $50.000 threshold needed for diversity jurisdiction. Brown counters by arguing that Spectacor's allegation of damages in the amount of $50.708.25 fails to satisfy the jurisdictional amount as the claim was not made in good faith and that his counterclaim cannot be considered in calculating the amount in controversy. We hold that where, as here, a defendant elects not to A8 Spectacor Management Group v. Matthew G. Brown No. 96-1969 | file a motion to dismiss for lack of jurisdiction, but answers a complaint by asserting a compulsory counterclaim,’ the amount of that counterclaim may be considered by the court in determining if the amount in controversy exceeds the statutory requirement for diversity jurisdiction. Accordingly, since the amount in controversy easily clears the jurisdictional hurdle when Brown's counterclaims are included, we need not reach the novel and interesting issue of whether the payroll taxes can be considered in calculating the amount in controversy. Il. Federal courts have diversity jurisdiction where there is complete diversity among the parties, and the amount In controversy meets the jurisdictional minimum. See 28 U.S.C. § 1332(a). At the time this case was filed that amount was $50,000.’ As a general rule, that amount is determined from the good faith allegations appearing on the face of the complaint. See St. Paul Mercury Indemnity Co. v. Red Cab Co., 303 U.S. 283, 288 (1938). A complaint will be deemed to satisfy the required amount in controversy unless the defendant can show to a legal certainty that the plaintiff cannot recover that amount, Jd. at 289. In a cause instituted in the federal court the . We note that this case only presents the question of whether compulsory counterclaims can be considered. Our holding does not extend to permissive counterclaims. 3 That amount has since been increased to $75.000. A9 Spectacor Management Group v. Matthew G. Brown No. 96-1969 plaintiff chooses his forum. He knows or should know whether his claim is within the statutory requirement as to amount. His good faith in choosing the federal forum is open to challenge not only by resort to the face of his complaint, but by the facts disclosed at trial, and if from either source it is clear that his claim never could have amounted to the sum necessary to give jurisdiction there is no injustice in dismissing the suit. Red Cab, 303 U.S. at 290. As noted above, Brown challenged the district court's jurisdiction by way of an averment in his answer. At 4 16 of his answer, under the section of the answer captioned "DEFENSES", Brown states: "[t}he Court lacks jurisdiction over the subject matter in that the amount in controversy does not exceed $50,000.00." See app. at 16. Under Rule 12 of the Federal Rules of Civil Procedure, Brown could have filed a motion to dismiss for lack of Jurisdiction and not filed an answer unless that motion was denied. Every defense, in law or fact, to a claim for relief In any pleading . . . shall be asserted In the responsive pleading thereto if one is required except that the following defenses may at the option of the pleader be made by motion: (1) lack of jurisdiction over the subject matter..." Fed. R. Civ. P. 12(b) (emphasis added). Brown elected not to exercise that option. Instead, he asserted a counterclaim Al10 Spectacor Management Group v. Matthew G. Brown No. 96-1969 against Spectacor based upon the same transactions that gave rise to Spectacor's suit against him. Federal Rule of Civil Procedure 13 provides in part as follows: A pleading shall state as a counterclaim any claim which at the time of serving the pleading the pleader has against any opposing party, if it arises out of the transaction or occurrence that is the subject matter of the opposing party's claim and does not require for its adjudication the presence of third parties of whom the court cannot acquire jurisdiction .... Fed. R. Civ. P. 13. Brown's claim against Spectacor is a compulsory counterclaim within the scope of this Rule. Where the circumstances surrounding a plaintiff's claim require a defendant to assert a counterclaim under Rule 13(a), defendant's claim is part of the controversy set forth in the plaintiff's complaint. The complaint initiates the legal action, but it is not the totality of the controversy, it is merely the portion of the controversy for which plaintiff seeks relief. However, the substance of the controversy extends to any compulsory counterclaim brought under Rule 13(a).* * The same is not true of counterclaims brought under Rule 13(b) as ‘permissive counterclaims’ are simply ‘any claim against an Opposing party not arising out of the . . . occurrence that Is the subject matter of the opposing party's claim," Fed. R. Civ. P. 13(b). Thus, by definition, permissive counterclaims are not usually part of the controversy brought into court by plaintiff's All Spectacor Management Group v. Matthew G. Brown No. 96-1969 [i]f the jurisdictional amount requirement serves any salutary function it is to measure the substantiality of the claim. We believe that the substantiality of the claim can best be gauged by reference to what is actually at stake In the litigation rather than by strict reference to plaintiff's claim for relief. IA James Wm. Moore ef al. Moore's Federal Practice. 40.167[8] 2d ed. 1091). The allegations of the instant suit demonstrate the wisdom of that approach. Spectacor alleges that it continued to pay Brown his salary and medical insurance after he was terminated "as an advance against the overall settlement then being negotiated." It maintains that such payments were a ‘demonstration of good faith and subject to reimbursement If agreement was not reached on all Issues' regarding the termination of his employment. (See app. at 10: Compl. q 10.). Its suit is an attempt to recover those funds pursuant to the alleged agreement as settlement of the dispute was apparently never negotiated. Brown, on the other hand, asserts that Spectacor breached a contract in which it agreed to pay him certain amounts In the event that his employment complaint. However, we do not today decide whether a permissive counterclaim could ever bear such a nexus to a plaintiff's claim as to allow a court to consider it in determining if the amount in controversy exceeded the jurisdictional amount. Resolution of that question must await a more appropriate case. Al2 Spectacor Management Group v. Matthew G. Brown No. 96-1969 was terminated, and that he was entitled to certain other payments by virtue of his performance while still employed at Spectacor. He specifically alleges that ‘[Spectacor] has breached the Employment Contract by not paying Brown sums [Spectacor] promised to pay upon his termination, " ‘See app. at 18; Answer 436), and "[Spectacor] has stopped Brown's medical insurance coverage, and it therefore owes him a yet to be liquidated sum for its replacement." (See app. at 19: Answer ¢ 37: see also app. at 19-20; Answer 4438-43). Other courts have held that a compulsory counterclaim can satisfy the jurisdictional amount even where the defendant has not objected to jurisdiction. See Fenton v. Freedmart, 748 F.2d 1358 {9th Cir. 1984} {considered counterclaim where defendant had not objected to jurisdiction prior to filing compulsory counterclaims}; Roberts Mining & Milling Co. v. Schrader, 95 F. 2d 522 {9th Cir. 1938} (considered counterclaim where defendant did not object to jurisdiction, but instead filed counterclaim in an amount adequate to support jurisdiction);° Motorist Mutual Ins. Co. v. Simpson, e We note that the Roberts Mining court did not explicitly hold that the counterclaim was compulsory. However. the initial claim by the plaintiff was to quiet title to six mines while the counterclaim asserted that the mines were owned by the defendant. Such a counterclaim would be considered compulsory under the modern Rule 13{a). The claim was also compulsory under the procedural rides that prevailed at the time. While the decision was handed down in 1938, the year that the federal courts of equity and law were unified into the modern system governed by the Federal Rules of Civil Procedure, the suit was filed prior to such unification and thus was one brought "in equity." 95 F.2d at 522. Such actions Al3 % 3 e Ei 2 a4 4 me 2g Spectacor Management Group v. Matthew G. Brown No. 96-1969 404 F.2d 511 (7th Cir. 1968) (holding that compulsory counterclaim was not to be considered where defendant objected to jurisdiction before filing a counterclaim, but noting that if no objection had been made, consideration of compulsory counterclaim was permissible).° Prior to the 1938 unification of the law and equity courts and the adoption of the Federal Rules of Civil Procedure, this court held that a counterclaim of sufficient value could bring a case within the jurisdiction of the court regardless of the amount of plaintiff's claim. See Home Life were governed by procedural rules that, unlike the rules governing actions at law, recognized compulsory counterclaims. See Equity Rule 30 ("The answer must state in short and simple form any counterclaim arising out of the transaction which is the subject- matter of the suit ....") American Mills Co. v. American Surety Co., 260 U.S. 360, 365 (1922) (noting that, it is imperative to limit the preclusive effect of counterclaims to those which are equitable, as opposed to legal in nature): Michael D. Conway. Narrowing of the Scope of Rule 13(a). 60 U. Chi. L. Rev. 141. 154 (1993) ("Prior to 1938, there was no rule requiring the pleading of compulsory counterclaims at law.") (citing American Mills, supra). ® — Spectacor also points to National Union Fire Ins. Co. of Pitisburgh v. Russell 972 F.2d 628 (5th Cir. 1992), which held that where an insurer challenges an award under the Texas Worker's Compensation Act in federal court, the defendant's counterclaim could be considered for purposes of the jurisdictional amount. However, that case relies specifically on Horton v. Liberty Mutual. Ins. Co., 367 U.S. 348 (1961). which dealt with the Texas Worker's Compensation Act and which, as discussed below, we do not, rely upon here. See n.9 infra. Al4 Spectacor Management Group v. Matthew G. Brown No. 96-1969 Ins. Co. v. Sipp, 11 F.2d 474, 476 (3rd Cir. 1926). In Home Life, Sipp was the beneficiary of a life Insurance policy that the defendant insurance company had Issued on her mother's life. Following her mother's death, Sipp sued to recover the amount of the policy ($3,000) plus interest and costs. At the time, a claim had to exceed $3,000 exclusive of interest and costs to satisfy the amount required for diversity jurisdiction. The insurance company filed a counterclaim for a loan on the policy that remained outstanding in the amount of $423. Sipp subsequently attempted to amend her claim to include premiums that were paid for the period following her mother's death. However, the court ruled that the amount of "unearned premiums" could not be included as "the premium is earned the instant the risk attaches and is not returnable thereafter." Jd. at 475. Moreover, even if the premium could be recovered, that amount would go to the estate of the deceased, and not to the plaintiff beneficiary. Thus, the amount of the premium could not count toward the jurisdictional minimum. Moreover, .the amount of the counterclaim could not be added to the $3,000 claim to satisfy jurisdiction because the counterclaim was in the nature of a set-off to be subtracted from, not added to, any recovery. Accordingly, the counterclaim served only to reduce the amount in controversy. However, in deciding the case we stated: when the jurisdictional amount is in question, the tendering of a counterclaim in an amount which in itself, or added to the amount claimed in the petition, makes up a sum equal to the amount necessary to the jurisdiction of this Al5 Spectacor Management Group v. Matthew G. Brown No. 96-1969 court, jurisdiction is established, whatever may be the state of the plaintiff's complaint. Brown suggests that Home Life held that a counterclaim did not suffice to give a court jurisdiction where the plaintiff's initial claim could not. See Appellant's Sup. Br. at 6. He points out that we also stated: "[a] party . . . cannot by filing a counterclaim give jurisdiction to a court when a statute denies it jurisdiction. In other words, a defendant's consent to the court's jurisdiction as to amount, signified by the filing of the counterclaim cannot confer jurisdiction." Home Life, 11 F.2d at 476. However, that portion of the opinion merely rejects plaintiff's argument that defendant should be estopped from challenging jurisdiction once he or she pleads a counterclaim. It does not address the issue of whether the amount of the counterclaim is included in the amount in controversy for jurisdictional purposes. We concluded that the jurisdictional prerequisites were not satisfied in Home Life, because the counterclaim reduced the amount that the "defendant admits it owes " and was not an independent claim for recovery. Accordingly, we stated [a]t no time and under no arrangement of the figures [had] the amount in controversy exceeded $3,000." Id. Although cases of such ancient vintage do not always guide subsequent Inquiries with precision {especially in view of the evolving nature of federal jurisdiction}, we think that our analysis in Home Life, along with similar holdings from our sister circuit courts of appeals, counsel us here. Cf. Fenton, 748 F.2d at 1359 {holding that the circuit was bound to follow prior 1938 precedent of Roberts Mining, which was considered a “suit in equity" and, like Home Life, was decided under procedural Al6 Spectacor Management Group v. Matthew G. Brown No. 96-1969 law applicable before the federal system was unified}. Moreover, the discussion in Home Life remains viable under today's unified federal court system. Other courts have noted practical reasons for counting compulsory counterclaims toward the jurisdictional amount. In Roberts Mining, the court reasoned that consideration of the counterclaim was permissible because the counterclaim was the equivalent of a second, independent suit in which the defendant of the initial action was the plaintiff, 95 F.2d at 59.4 {citing Merchants’ Heat & Light Co. v. James B. Clow & Sons, 204 U.S. 286 (1907)}, and that the matter in controversy was the same in each of these suits, /d. Therefore, because the court would have jurisdiction over this second suit, the court saw no impediment to asserting jurisdiction over the entirety of the initial action, /d. This reasoning is echoed in more recent cases where courts have noted that where there is no objection to jurisdiction and where the counterclaim independently meets the required amount, one can assume that the defendant would have chosen the federal forum and there is no reason not to exert jurisdiction simply because the plaintiff won the race to the courthouse. See Motorists Mutual Ins., 404 F.2d at 514-15.’ ” We realize that Brown is here arguing that he intended to sue in state court and that Spectacor raced into federal court as a preemptive strike to avail itself of a more favorable forum, see Appellant's Br. at 6. and therefore this presumption does not apply here. In the situation here, if Brown had sued in a Pennsylvania state court Spectacor, as a Pennsylvania citizen, would not have been able to remove the case to the district court. See 28 U.S.C. § 1441(b). Nevertheless, these policy implications are still relevant Al7 7 af 3 : ¥ * Spectacor Management Group v. Matthew G. Brown No. 96-1969 Of course, we do not mean to suggest that parties can agree to the jurisdiction of a federal court and thereby confer jurisdiction that would not otherwise exist. That is clearly not the case. Federal jurisdiction arises under the constitution. It is not created by contract or waiver. In Fenton, the court stated: feJach of the... compulsory counterclaims exceeded $10,000. In Roberts Mining & Milling Co. v. Schrader, we stated that a counterclaim that exceeded the necessary amount in controversy was sufficient to bring the entire case within the jurisdiction of the district court, regardless of the lack of jurisdictional averments in the . . . complaint _... The [defendants here] did not object to the district court's exercise of jurisdiction prior to the filing of their compulsory counterclaim but, rather, raised the issue for the first time on appeal. : 148 F.2d at 1358 (citations and internal quotation marks omitted). However, the court could not have intended to suggest that Jurisdiction can be waived. Rather, we conclude that the court was simply noting that the defendants there had done nothing to prevent the amount of their counterclaim from to our discussion. In noting them, we do not suggest that there is any merit to the belief of either party here that a federal or state forum will benefit either side. Al18 Spectacor Manageiment Group v. Matthew G. Brown No. 96-1969 becoming part of the controversy that was initiated by the plaintiff's suit, and that the counterclaim was therefore properly considered in determining the amount in controversy. Similarly, Brown did object to jurisdiction, but he did not do so in a manner that kept his counterclaim from being before the court. When a defendant elects that option afforded under Rule 12 and decides not to move to dismiss for lack of subject matter jurisdiction, but asserts a compulsory counterclaim against the plaintiff instead, the defendant thereby places the amount of the counterclaim into controversy, and the court must consider that amount in determining if it has jurisdiction under 28 U.S.C.A. §1332(a). This is true whether or not the defendant also attacks subject matter jurisdiction in his or her answer or in any other manner that does not prevent the counterclaim from being before the court.* In arguing that we should not consider compulsory counterclaims, Brown also points to Oliver v. Haas, 777 F. Supp. 1040 {D.P.R. 1991}; Michael F. Ronca & Sons, Inc. v. Monarch Water Systems, 1990 WL 140154 (E.D. Pa. 1990): P.S. Group v. Aladdin Engineering and Manufacturing, Inc., 1990 WL 122938 {E.D. Pa. 19901; and Cabe v. Pennwalt, 372 F. Supp. 780 (W.D.N.C. 1974). See Appellant's Sup. Br. at 6. Each of these cases was decided in . Here in addition to a statement in his answer challenging Jurisdiction, Brown subsequently moved for sanctions under Fed. R. Civ. P. 11 when, in response to Brown's summary judgment motion. Spectacor conceded that it owed Brown more than he owed it. See Appellant's Br. at 6. However, that does not alter our analysis. Al9 sw BD aera Spectacor Management Group v. Matthew G. Brown No. 96-1969 the context of removal and each holds that counterclaims cannot be considered when determining whether an action has been properly removed. Although there is authority to the contrary, see. e.g., Swallow & Assoc. V. Henry Molded Products, Inc., 794 F. Supp. 660 {E.D. Mich. 1992) {holding that in the removal context 'substantiality of claim" should be gauged by considering the compulsory counterclaim the cases to which Brown points appear to represent the majority view that inclusion of counterclaims should not be permitted in the removal context. Wright. supra, at 124 (collecting cases}. However. removal is governed by considerations inapplicable to cases involving the exercise of original jurisdiction. In Shamrock Oil Corp. v. Sheets. 313 U.S. 100. 107-109 {1941), the Supreme Court noted that the legislative history and language of the removal statute shows that Congress intended to limit removal. The Court reasoned that removal was statutory and not constitutional. and that removal jurisdiction must therefore, be narrowly construed In favor of the non-removing party to prevent, inter alia, encroachment on the right of state courts to decide cases properly before them. The contrary consideration is present when we consider a court's exercise of original jurisdiction. Thus, in the abstention context, the Court has stated: [T]he federal courts have a virtually unflagging obligation to exercise their Jurisdiction except In those extraordinary circumstances where the order to the parties to repair to the State court would clearly serve an important countervailing interest. Deakins v. Monaghan, 484 U.S. 193. 202 {1988) {internal A20 vals Spectacor Management Group v. Matthew G. Brown No. 96-1969 quotation marks omitted). Furthermore. "If compulsory counterclaims were considered for purposes of jurisdiction. | federal subject matter jurisdiction would be reliant on state law distinctions between compulsory and permissive counterclaims." Meridian Aviation Service v. Sun Jet Int'l 886 F. Supp. 613, 615 (S.D.Tex. 1995). Accordingly, Brown's reliance upon cases addressing issues surrounding removal jurisdiction does not assist us. Here, Brown submitted his compulsory counterclaim to the district court thereby putting the amount of that counterclaim in controversy. The amount of his counterclaim must be considered in determining whether the district court had subject matter jurisdiction. See also Horton, 367 U.S. 348 (1961).? * In Horton an insurance company filed suit in federal court, alleging diversity jurisdiction, to challenge a $1,050 award given by the Texas Industrial Accident Board pursuant to the Texas Workman's Compensation Act in its complaint the company also asserted that the defendant would assert a compulsory counterclaim that he was entitled to an award of $14,035. In response, the defendant filed a motion to dismiss for failure to satisfy the amount in controversy and filed an answer, subject to the motion to dismiss, containing the $14.035 conditional compulsory counterclaim just as plaintiff had predicted. Although the amount of the insurance company's claim clearly did not meet the amount in controversy minimum that was then an amount in excess of $10,000 the Supreme Court held that the jurisdictional requirement was met because of the $14,035 counterclaim.. The Court stated: The complaint of the respondent company filed in the District Court, while denying any liability at all A21 Spectacor Management Group v. Matthew G. Brown No. 96-1969 and asking that the award of $1,050 against it be set aside, also alleges that petitioner Horton has claimed, now claims and will claim that he has suffered total and permanent disability and is entitled to a maximum recovery of $14,035, which, of course, is in excess of the $10,000 requisite to give a federal court jurisdiction or this controversy. No denial of these allegations in the complaint has been made, no attempted disclaimer or surrender of any part of the original claim has been made by petitioner, and there has been no other showing, let alone a showing ‘to a legal certainty’ of any lack of good faith on the part of the respondent in alleging that a $14.035 claim is in controversy. It would contradict the whole record as well as the allegations of the complaint to say that this dispute involves only $1,050. The claim before the [Texas Industrial Accident] Board was $14,035: the state court suit of petitioner asked that much: the conditional counterclaim in the federal court claims the same amount. Texas law under which this claim was created and has its being leaves the entire $14,035 claim open for adjudication in a de novo court trial regardless of the award. Thus the record before us shows beyond a doubt that the award is challenged by both parties and is binding on neither; that petitioner claims more than $10,000 from the respondent and the respondent denies it should have to pay petitioner anything at all no matter which party brings it into court, the controversy remains the same; it involves the same amount of money and is to be adjudicated and determined A22 Spectacor Management Group v. Matthew G. Brown No. 96-1969 under the same rules. Unquestionably, therefore, the amount in controversy is in excess of $10,000.367 U.S. at 353-54. As the dissent noted. Horton can be read as holding that if a plaintiff asserts in the complaint that a counterclaim will be brought in an amount above the jurisdictional minimum, then the ainount in controversy has been satisfied. Yet, that is clearly contrary to the well-established rule (developed in the context of federal question Jurisdiction that a plaintiff cannot create federal jurisdiction by anticipating federal defenses that a defendant may assert. See id. at 358-59 (citing Skelly Oil Co. v. Phillips Petroleum Co., 339 U.S. 667 11950}: First National Bank of Canton Pa. v. Williams, 252 U.S. 504 11920): Louisville & N.R. Co. v. Mottley. 211 U.S. 149 11908): Taylor v. Anderson, 234 U.S. 74 11914)). Perhaps because Horton has so troubled commentators and courts, it has been conspicuously absent from discussions of the effect of counterclaims upon the amount In controversy. See. e.g.. Fenton, 748 F. 2d 1358: Motorists Mutual. 404 F.2d 51 I. Only two reported cases outside The Texas Compensation Act context cite Horton In regard to the counterclaims and the jurisdictional amount. See Emland Builders. Inc. v. Shes, 359 F.2d 927 {lOth Cir. 1966): Russell 972 F.2d 628. In Eraland Builders. the court found Horton to be of dubious Instruction and held that. in any event, the complaint sufficed Io meet the Jurisdictional requirement. Although the holding In Horton supports our analysis, we need not rely upon it for the decision we reach here. (Horton has been described as ‘baffling" by respected legal commentators, see Wright. supra at 111. and we include It only for the sake of the thoroughness of our discussion). A23 ‘ Spectacor Management Group v. Matthew G. Brown No. 96-1969 Il. For the reasons set forth above, we will affirm the judgment of the district court. WELLFORD, Senior Circuit Judge, dissenting: I respectfully dissent from the decision in this case based on what I believe to be a serious question about lack of jurisdiction. Spectacor proceeded in the federal court in its chosen venue, asserting diversity jurisdiction and more than the required jurisdictional amount, but only barely, on the face of the complaint. The defendant Brown filed an answer affirmatively stating "[t}he Court lacks jurisdiction over the subject matter in that the amount of controversy does not exceed $50,000." He added, among other things: Plaintiff has failed to state a valid claim upon which relief can be granted. 7 Plaintiff was already obligated to provide the sums and benefits to Defendant. Plaintiff's Complaint was filed in bad faith to harass Defendant. Defendant contemporaneously filed a counterclaim, seeking a substantially greater amount than was requested in the original complaint. The district court found that the action was not filed in A24 Spectacor Management Group v. Matthew G. Brown No. 96-1969 bad faith because "[s]ums owed by a plaintiff to the defendant are not subtracted from the amount of plaintiff's claim when calculating the jurisdictional amount. Savarese v. Edrick Transfer & Storage. Inc., 513 F. 2d 140, 142 {9th Cir. 1975).". 'n my view, however, the facts of Savarese are materially different from those presented by the jurisdictional issue in this case. In that case, the plaintiff sought $11,901 from the defendant who did not contest the claim. Additionally, the plaintiff acknowledged that he held some $2,578 that belonged to the defendant, which he sought to apply against the debt owed him. The defendant conceded that the amount sought by Savarese was above the jurisdictional minimum amount.’ The defendant did not challenge, in a timely fashion, jurisdiction in its responsive pleading. In the instant case, even if Brown had not pleaded lack of jurisdiction, a challenge to subject matter jurisdiction is not waivable: and when a challenge is made, It must be fully considered. United States ex rel Coffey v. Austin Construction. 436 F. Supp. 626 {W.D. Okla. 1977}. Whether federal jurisdiction exists is determined as of the time the action is filed, not after the responsive pleading is filed. Wright, Miller and Cooper. Federal Practice and Procedure. Vol. 13B §3608. Vol. 14A §3702. The party seeking to invoke federal jurisdiction, once challenged, "has the burden , The Savorese court acknowledged that had plaintiff initially demanded a judgment of $9,323 (the difference after application of an offset, the district court would have lacked jurisdiction, citing Kansas City Philharmonic Ass'n v. Greyhound Lines, 257 F. Supp. 941 (W.D. Mo. 1966): C. Wright Federal Courts, 116-17 and n.52, 134 2d ed. 1970). A25 LE ee ee re ee z mr # a r | % Pe 4 ; Spectacor Management Group v. Matthew G. Brown No. 96-1969 of proving its existence." /d., § 3702. In a suit for a sum certain that is less than the jurisdictional amount, adding a claim for punitive damages so that the jurisdictional amount may be exceeded may be insufficient to establish jurisdiction. Wiggins v. N.A. Equitable Life Ins. Co., 644 F.2d 1014 {4th Cir. 1981}. Furthermore, "the extent to which a counterclaim can be considered In determining the amount In controversy never has been determined satisfactorily by the federal courts." Wright, Miller and Cooper, Federal Practice and Procedure, Vol. 14, §3706. "Defendant can object to the court's jurisdiction over the original claim In the answer and plead the counterclaim in the alternative." Jd., §3706. | Here, the district court acknowledged that Spectacor admitted "that it does not ‘own’ the set-off funds." but, rather than holding that that fact barred the claim, the court held that Spectacor took a "strategic action" to obtain what it perceives lo be a more amenable forum.” Brown argued (I think plausibly) that Spectacor genuinely claimed only $47,421 in "salary advances and "medical insurance premiums" made for his benefit. Brown complained, however, about the asserted "payroll tax liabilities" of $3,287, arguing that this additional claim was a 'sham' to manufacture federal court jurisdiction. ' The district court never decided whether, in fact. the so-called -payroll tax liability’ portion of the complaint, which was necessary to exceed the jurisdictional amount of $50,000 was something other than a "sham" or a "contrivance" to establish federal jurisdiction. The district court merely held, without elaboration, that the suit was filed in good faith and not for the purpose of harassing the defendant. A26 Spectacor Management Group v. Matthew G. Brown No. 96-1969 The majority holds that because defendant did not file a motion to dismiss for lack of jurisdiction and asserted a compulsory counterclaim, that it would consider the amount of the counterclaim in determining the amount in controversy, citing Fenton v. Freedman, 748 F.2d 358 19th Cir. 1984). But. as the majority acknowledged, Fenton involved a situation where defendant had not first objected to jurisdiction. It is therefore distinguishable from this case, as is the earlier Ninth Circuit case, Roberts Mining Co. v. Schrader, 95 F.2d 529. (9th Cir. 1966), for the same reason. The remaining case cited by the majority for this jurisdictional holding was Motorists Mutual Ins. Co. v. Simpson, 404 F. 2d 511 (7th Cir. 1969). That court held contrary to the majority's interpretation: When a claim over which there is otherwise jurisdiction does not embrace an amount In controversy in excess of that required by the statute, the ‘"plaintiff- viewpoint" rule, under which jurisdiction is determined on the basis of what the plaintiff claims, requires dismissal of the claim. A problem arises, however, when although the plaintiff's claim does not involve the requisite jurisdictional amount, a compulsory counterclaim is filed which independently meets the required amount. There are cases which hold that In such a situation federal jurisdiction should be sustained. But irrespective of the holding in those A27 OO eee Spectacor Management Group v. Matthew G. Brown No. 96-1969 cases, we believe that a compulsory counterclaim should not be held to give rise to federal jurisdiction where the defendant- counterclaimant has objected from the beginning to the federal court's assumption of jurisdiction over the plaintiff's main action on the ground that the amount In controversy in that action is insufficient and additionally, after his jurisdictional objection is overruled, files a compulsory counterclaim even though the amount therein involved exceeds $10,000 exclusive of interest and costs. Simpson, 404 F.2d at 514 emphasis added) (footnotes omitted). The Simpson court, moreover, in the type of situation existing in this case, observed that "[sJince, however, defendant did not originally choose the federal forum, the option should be his whether or not to keep the action in federal court," citing 1 J. Moore, Federal Practice § 0.98[1), at 896 (2d ed. 1964). Simpson held that It was without jurisdiction to proceed unless the original claim exceeded the jurisdictional amount. I would agree with this assessment, and I would question the authority of Home Life Ins. Co. v. Sipp. 11 F.2d 474 (3d Cir. 1926), to the extent that it indicates a contrary rule.’ ' I would agree that Sipp correctly held that neither unearned premiums nor a policy loan could be added to the then minimum jurisdictional amount requirement ($3.000 plus) involving A28 Spectacor Management Group v. Matthew G. Brown No. 96-1969 The majority properly concedes that there is a "well- established rule" that a plaintiff cannot create federal jurisdiction by anticipating federal defenses. Like the majority, I perceive no persuasive basis for considering Horton v. Liberty Mutual Ins. Co., 367 U.S. 348 (1961), as authority in this case. The district court made no reference to any of these authorities except Savarese, which is easily distinguishable. In my view, the determinative question as to adequacy of the jurisdictional amount asserted in the complaint has not been determined. Spectacor could have filed a declaratory judgment action to have avoided these problems, but it did not. It also could have sought removal from state court to federal court had Brown sued as he indicated he would. I disagree with the majority view that Brown should lose the jurisdictional argument because he did not file a motion to dismiss, when he objected to the court's jurisdiction affirmatively in his answer. Federal courts are courts of limited jurisdiction, and I believe we should strictly construe jurisdictional requirements. The question of whether "payroll tax liability is a proper claim against Brown is a novel one and I see no easy answer. Was this liability actually paid or incurred, or was it © a mere bookkeeping entry? Did it constitute a part of the "advance" to Brown? Was Brown liable to repay that amount a $3,000 face amount life Insurance policy to establish federal jurisdiction: and (2) filing of the defendant’s counterclaim could not confer jurisdiction. A29 ee nn Spectacor Management Group v. Matthew G. Brown No. 96-1969 to Spectacor, the IRS, or the State, if Spectacor had later deemed the salary to have been erroneously paid? In addition. I would call upon the district court to consider the "good faith" question in view of the circumstances and give an explanation for its the district court for a thorough consideration of the jurisdictional issue for the reasons stated. A True Copy: Teste: Clerk of the United States Court of Appeals for the Third Circuit A30 APPENDIX D IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA SPECTACOR MANAGEMENT GROUP v. MATTHEW G. BROWN CIVIL ACTION NO.93-5246 CIVIL JUDGMENT Before the Honorable Robert S. Gawthrop, III AND NOW, this 9th day of October, in accordance with this Court's Opinion and Order* of September 27, 1996, IT IS ORDERED that Judgment be and the same is hereby entered in favor of the defendant, Matthew G. Brown and against the plaintiff, Spectacor Management Group in the amount of $15,535.05. *Copy of Opinion attached BY THE COURT /S/ A31 prairies ees as A Si Ula a i i ee tes B 7 ; g | @ Mm Spectacor Management Group v. Matthew Brown No. 93-5246 Deputy Clerk Civ 1 (8/80), Dated: 10/15/96 IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA SPECTACOR MANAGEMENT GROUP, Plaintiff, V. MATTHEW G. BROWN, Defendant/Counterclaimant. CIVIL ACTION NO. 93-5246 OPINION Gawthrop, J. September 27, 1996 Spectacor Management Group ("SMG") commenced this action to recover funds advanced to and on behalf of its former employee, Matthew G. Brown ("Brown"). Mr. Brown has counterclaimed for his 1992 bonus, his accrued vacation, business expenses, a severance package, and a sales commission. After a bench trial, and upon the following reasoning, I shall grant SMG's claim for the recoupment of funds. I shall grant Mr. Brown's counterclaims for his undisputed bonus, accrued vacation and business expenses, but deny his counterclaims for severance, a sales commission, and greater discretionary bonus. A32 Spectacor Management Group v. Matthew Brown No. 93-5246 FINDINGS OF FACT 1. The plaintiff, SMG, is a Pennsylvania Joint Venture with its principal place of business in Philadelphia, Pennsylvania. 2. The defendant/counterclaimant, Mr. Brown, is an individual who, at the time this action was filed, was a resident of the State of New Jersey. 3. The amount in controversy exceeds $50,000, exclusive of interest and costs. 4. The cause of action arose in Philadelphia, Pennsylvania, within this judicial district. 5. SMG is in the business of managing public assembly facilities, such as stadiums, arenas, and convention centers, throughout the world. 6. At all times material to this case, SMG or its predecessor entities have been either partnerships or a joint venture, the ownership of which has evolved through the following sequence. From its inception until 1988, the entity which is now known as SMG existed as a partnership called Spectacor Management and was owned and controlled by several individuals and entities affiliated with Spectacor, Inc. and/or the Edward Snider family (the "Spectacor Group"). In 1988, Spectacor Management merged with a firm then known as FMG Associates (the "FMG merger"), owned and controlled by Pritzker & Pritzker (the "Pritzkers"), the Chicago-based family partnership that controls Hyatt Hotels, A33 ee eS Spectacor Management Group v. Matthew Brown No. 93-5246 to form SMG. In 1991, ARA Leisure Services, Inc., a subsidiary of The ARA Group, Inc., now known as Aramark ("ARA"), purchased a one-third interest in SMG, which was reorganized as a joint venture owned equally by the Spectacor Group, the Pritzkers and ARA. 7. At all times material to this case, SMG has been managed on a day-to-day basis by a chief executive officer and various subordinate officers appointed by and responsible to the board. The chief executive officers relevant to this case are: Antonio G. Tavares, who held the position of president from the inception of SMG through early 1992; Richard H. Vent, a member of the board who held the position of managing director from the time of Mr. Tavares’ departure until the Fall of 1992; and Thomas R. Gibson, who held the position of president from the Fall of 1992 throughout the remainder of the events at issue. 8. Matthew G. Brown was hired by Spectacor Management in 1985 as General Manager of the Philadelphia Civic Center and, thereafter, held a series of increasingly responsible positions, including Senior Vice President for Operations, beginning in May, 1989, and Executive Vice President, beginning in early 1992. Mr. Brown's employment was terminated in January 1993. 9. At least from the time of his promotion to senior vice president in May 1989 through the time of his termination, Brown reported directly to the chief execut. " sanction] should also attach to a party who permits ine assertion of a claim that such party reasonably should have known to be groundless". Kenna, supra, at 177-78. A132 Spectacor Management Group v. Matthew Brown No. 93-5246 Furthermore, since SMG is an entity which can only act through its agents or employees, Rule 11 sanctions can be imposed on it as a result of Mr. Whiteside's signing of the Complaint, or failure to make the appropriate pre-filing investigation. Business Guides v, Chromatic Communications Enter.. supra, 498 U.S. at 547-48. In the instant case, the monetary sanction Brown is requesting should be allocated between SMG and its counsel since both are responsible for the filing of an action which they believed was without factual foundation.” Brown's counsel gave SMG and its counsel every reasonable opportunity to avoid having to respond to a formal Rule 11 Motion. On August 2, 1994, Brown's counsel wrote to Mr. Silverstein to alert him and SMG to the Rule 11 violation that had become apparent to Brown from the brief and affidavits SMG filed with the Court on July 22, 1994. A copy of this letter is attached hereto as Exhibit M. In this letter, Brown°s counsel described the Rule 11 violation, and offered the following proposal to remedy it: “To remedy this violation of Rule 11, Mr. Brown demands that SMG withdraw its action and that SMG pay Mr. Brown's expenses . To the extent the Court determines that subdivision (b)(2) of Rule 11 has been violated, any monetary sanction for that violation should be imposed upon SMG's counsel, and not SMG. See, Rule 11 (2)(A). If however the Court ‘finds that any other part of subdivision (b) of the rule was violated, any monetary sanction should be allocated between SMG and its counsel. A133 Spectacor Management Group v. Matthew Brown No. 93-5246 including attorney's fees incurred in connection with defending this action. If the Complaint is not withdrawn within 15 days, we will follow the procedure set forth in Rule 11. Alternatively, we demand that SMG withdraw its Opposition to Mr. Brown's Motion for Summary Judgment on his claims for the $50,000. bonus SMG admits he earned for 1992 and the $15,692.30 in vacation pay, and that it pay to Mr. Brown, within 15 days, these amounts together with interest." Mr. Silverstein wrote back to Brown's counsel on August 4, 1994, stating that "1 see no Rule 11 violation and we will neither withdraw our Complaint, pay your legal fees and costs or consent to the entry of judgment on any aspect of your claims..." A copy of this letter is attached hereto as Exhibit N. As a result of Mr. Silverstein's letter, Brown's counsel decided to follow the formal procedure outlined in Rule 11. This motion will be filed with the Court if, within 21 days after service of the motion, SMG still refuses to withdraw its Complaint against Brown, or alternatively, to pay Brown the $50,000.00 bonus and $15,692.30 in vacation pay. If SMG refuses to correct the Rule 11 violation within the "safe harbor"' period provided by the amended Rule 11, and thereby forces Brown to file this motion, Brown will seek aS appropriate sanctions under Rule 11, an order: (a) striking the Complaint; and (b) directing SMG and/or its counsel to A134 Spectacor Management Group v. Matthew Brown No. 93-5246 pay Brown "some or all of the reasonable attorneys’ fees and other expenses incurred as a direct result of the violation". As the Advisory Committee Notes to the 1993 amendments to Rule 11 state, "[t}he court has available a variety of possible sanctions to impose for violations", one of which is “stalking the offending paper"' and another of which is an award of counsel fees. Since SMG and its counsel must have believed at the time the Complaint was filed, and any reasonable pre-filing investigation would have revealed that the Complaint, at least as far as SMG was concerned, was without foundation in fact or law, an order striking the Complaint from the record is certainly appropriate. Regarding monetary sanctions, the Advisory Committee Notes provide that in determining the propriety of such a sanction, the court should consider, inter alia, whether the violation “infected the entire pleading", “whether it was intended to injure; [and] what effect it had on the litigation process in time or expense;..." The amended Rule 11 expressly states that the court may award the movant reasonable attorneys’ fees and expenses to remedy the violation. See, Rule 11 (2). In the instant case, an award of attorneys’ fees and costs to Brown is necessary and appropriate to redress the proven violation of Rule 11. Here, the violation "infected the entire in pleading” in that under SMG's and its counsel's theory of the case, SMG had no claim against Brown, or at most, a claim that did not come close to meeting the $50,000.00 amount in controversy requirement. Furthermore, and more significantly, Brown was prejudiced by the Ruie 11 violation because he would not have sued SMG in Federal Court but for the filing of SMG's Complaint against him, A135 ——e Spectacor Management Group v. Matthew Brown No. 93-5246 which put him in a position of having to defend this frivolous action and at the same time having to assert his Counterclaim in this forum. Brown has already incurred substantial legal fees and costs in connection with defending this action, and therefore, SMG and its attorneys should be ordered to pay some or all of these fees and expenses. If the Court grants this motion, Brown will request permission to submit an affidavit setting forth the fees and costs he has incurred and paid as a result of having to defend this lawsuit, so that the Court will have an adequate record upon which to base an order fixing the amount of fees and costs to remedy the Rule 11 violation. © V. CONCLUSION For all of the foregoing reasons, Brown respectfully requests that this Honorable Court grant his motion and, to remedy the Rule 11 violation, impose sanctions against SMG and its counsel pursuant to Rule 11. 10 To review, the record reveals compellingly that SMG filed its action against Brown as a preemptive suit in response to Brown's counsel's letter to SMG dated September 20, 1993. That letter invited SMG to further explore settlement with Brown, but SMG and its counsel declined the invitation and decided to sue Brown for money it believed it had already been paid. If SMG had not filed its “strike-suit" against Brown, the parties could have continued exploring the possibility of an overall settlement agreement, and if those negotiations had not been fruitful, Brown may not yet have sued SMG. Even if Brown had decided to sue, however, his choice of forum would have been the state court. A136 Spectacor Management Group v. Matthew Brown No. 93-5246 Respectfully submitted, /s/ GARY GREEN ROBERT A. DAVITCH OF COUNSEL SIDKOFF, PINCUS & GREEN, P.C. 12th Floor, 530 Walnut Street Philadelphia, Pennsylvania 19106 (215) 574-0600 DATED: August 26, 1994 Al37 Spectacor Management Group v. Matthew Brown No. 93-5246 COPY OF PAYCHECK TO BROWN FROM SMG, DATED 3/31/93 SPECTACOR MANAGEMENT GROUP Philadelphia, PA NAME PAY PAY DATE PERIOD Brown, Matthew G. | Ending 3/31/93 3/31/93 SPECTACOR MANAGEMENT GROUP 701 Market Street Philadelphia, PA 19106 To The Account Of: MATTHEW G. BROWN 7 WETHERSFIELD DR MEDFORD NJ Account Number Amount 3113018 vicina EF Spectacor Management Group v. Matthew Brown No. 93-5246 INTER-OFFICE MEMORANDUM TO: RICHARD SCHULZE FRED SHABEL DICK VENT FROM: TOM GIBSON DATE: MARCH 4, 1993 RE: 1992 OFFICER BONUSES This is a follow-up to my January 14, 1993 memo regarding 1992 bonuses recommendations for my direct reports. As we discussed at that time, I would wait until we had the audited results to finalize officer bonuses. Coopers has now completed the audit for 1992 showing a profit of $8,248 million or 102% of the $8,078 budget. This is a slight increase from the year end flash report of $8.173 million or 101.2% of budget shown in the January 14th memo. Based on the audit results, the following is my recommendation for 1992 bonuses. 1/14/93 Final Memo Recommendation Matt Brown $48 900 $50,000 Wes Westley 41,962 44,000 Mich Sauers 39,838 41,000 Maureen Ginty 20,981 22,000 With your concurrence, I would like to announce bonuses late next week. A139 Pee ee ce nce SS Spectacor Management Group v. Matthew Brown No. 93-5246 Thank you. /S/ Tom Gibson ————— eS ee Oe eee A140 Spectacor Management Group v. Matthew Brown No. 93-5246 EXHIBIT "A" COMMONWEALTH OF PENNSYLVANIA ‘$s COUNTY OF PHILADELPHIA AFFIDAVIT THOMAS R. GIBSON, being duly sworn according to law, deposes and says: 1. From July 24, 1992 until February 28, 1994, I was employed by Spectacor Management Group ("SMG" or the "Company") as its President and Chief Executive Officer. I have personal knowledge of the facts set forth in this affidavit 2. In its present form, SMG is a privately-held Pennsylvania Joint Venture owned equally by Spectacor, Inc. (a Philadelphia company controlled by the Edward M. Snider family), Pritzker & Pritzker (a Chicago company controlled by the Pritzker family and majority owner of Hyatt Hotels) and ARA Services, Inc. (a Philadelphia-based company well- known in the leisure services industry). SMG is in the business of managing public assembly facilities -- such as Stadiums, arenas, and convention centers throughout the world. 3. At the time I was hired by the Company, Matthew G. Brown was serving as Executive Vice President and Chief Operating Officer. Richard H. Vent, a member of the Board of Directors, was serving as Managing Director and acting Al4l Spectacor Management Group v. Matthew Brown No. 93-5246 Chief Executive officer. After I was hired, Mr. Brown continued in his position as Executive Vice President for Operations, reporting to me. xe * * 9. During the course of the severance negotiations, I also became aware that Mr. Brown claimed to be owed $550 in unreimbursed business expenses (beyond expenses for which he had been reimbursed) and $15,692.20 as payment for unused vacation time. (a) With respect to the business expenses, I reviewed the documentation submitted by Mr. Brown in support of those expenses, concluded that a substantial portion of the expenses were "dated" in that they had been incurred more than 120 days (and, indeed, in some cases more than one year) prior to their being submitted for reimbursement and, therefore, were not eligible for reimbursement. | declined to authorize their payment on that basis. I did, however, approve a substantial amount of properly documented expenses. (b) I also concluded that Mr. Brown had accrued a gross amount of $15,692.20 in unused vacation pay, which amount was subject to payroll withholding, but directed my subordinates to withhold payment of that amount to Mr. Brown until the matter of the salary and medical coverage advances to him in anticipation of settlement was resolved. 10. During the first quarter of 1993, I was responsible Al42 Spectacor Management Group v. Matthew Brown No. 93-5246 for calculating and transmitting to the Compensation Committee of the Board of Directors my recommendations for 1992 year-end bonuses to the Company's senior officers under the SMG Executive Annual Incentive Plan. As explained in the Plan document, those bonus payments are calculated based upon a “target” percentage of the individual's annual salary. In Mr. Brown's case for 1992, that percentage was 35% of his annual salary of $170,000, for a "guideline" bonus of $59,500. This "guideline" applied to the extent that the Company met its operating income budget target for the year. In 1992, SMG's net operating income budget target was $8.087 million and its result was $8.248 million, or 102% of budget. Under the terms of the Plan, this 2% increase resulted in an increase to Mr. Brown's “overall” bonus guideline of another 6% of salary to a total of $69,700. I also note in this regard that these budget figures are the same which were used for the calculation of the 1992 year-end bonuses for all other executives of the Company and, further, are the net operating income figures used by the Cornpany for all other financial reporting tax and business purposes. I understand that Mr. Brown has alleged that there were additional $250,000 in income allegedly improperly deferred from December, 1992 to January, 1993. I disagree. Those funds were properly recorded in 1993. In further applying the terms of the Executive Annual Incentive Plan, 70% of the overall bonus “guideline” is denominated the "Financial Component" and is deemed earned by the employee in its entirety. In Mr. Brown's case, this amounted to $48,790. The remaining 30% of the overall bonus "guideline" is denominated the ',Discretionary Component" and varies depending upon my recommendation to the Board Compensation Committee and own judgment of the individual's performance. Further, and Al43 Spectacor Management Group v. Matthew Brown No. 93-5246 again in keeping with the terms of the Plan, in the case of an employee such as Mr. Brown, whose employee terminates after the close of the year but before bonus payments are made, I have the discretion to award or not award the "Discretionary Component" of the bonus. Based both upon my evaluation of Mr. Brown's performance and given the fact that I had additional discretion to deny the "Discretionary Component" because Mr. Brown's employment had terminated, I recommended to the Compensation Committee of the Board of Directors a total bonus payment to Mr. Brown of $50,000, a figure which represented his full "Financial Component" plus a few extra dollars to "round off" the figure. Before making this recommendation, I reviewed Mr. Brown's prior compensation history and noted that this proposed bonus was significantly in excess of any bonus he had ever received before and, further, was in excess of the total bonus -- that is, financial and discretionary -- which I was recommending for any of the other senior officers of the Company. I made these recommendations to the Board in a memorandum dated March 4, 1993. The document contained in the Appendix to SMG's Memorandum of Law in this matter as Exhibit "R" is a true and correct copy of that memorandum. Thereafter, this recommendation was approved by the Board, the $50,000 bonus was credited to Mr. Brown, appropriate payroll deductions were made and, again, the net proceeds were retained by SMG, at my direction, pending resolution of SMG's claims for reimbursement of salary advances made to Mr. Brown. Spectacor Management Group v. Matthew Brown No. 93-5246 May 6, 1993 William Whiteside, Esq. Fox, Rothschild, O' Brien & Frankel 2000 Market Street 9th Floor Philadelphia, PA 19103 RE: Matthew Brown Dear Bill: As discussed, the following is a breakdown of Matt Brown's vacation entitlement in terms of dollars: $170,000.00 - Yearly Salary $ 3,269.23 - Weekly Salary $ 653.84 - Daily Salary x24 - — #of Vacation Days $ 15,692.20 - Dollar Value of vacation Days Sincerely, /s/ Maureen Ginty Sr. Vice President Human Resources MG/bac A145 APPENDIX K IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA SPECTACOR MANAGEMENT GROUP, Plaintiff, Vv. MATTHEW G. BROWN, Defendant/Counterclaimant. CIVIL ACTION NO. 93-5246 PLAINTIFF'S REPLY MEMORANDUM IN OPPOSITION TO DEFENDANT/COUNTERCLAIMANT'S MOTION FOR SUMMARY JUDGMENT, IN SUPPORT OF PLAINTIFF'S CROSS-MOTION FOR SUMMARY JUDGMENT AND IN OPPOSITION TO DEFENDANT/COUNTERCLAIMANT'S MOTION FOR SANCTIONS INTRODUCTION The Defendant/Counterclaimant Matthew G. Brown has filed a Memorandum or Law in opposition to the Plaintiff, Spectacor Management Group's ("SMG" or the "Company") Cross-Motion for Summary Judgment on the Counterclaim which is little more than a re-hash of the arguments raised in A146 Spectacor Management Group v. Matthew Brown No. 93-5246 his initial Motion for Summary Judgment. Because SMG believes that each of Mr. Brown's arguments has been addressed fully in its principal Memorandum, it will not repeat those arguments here, but will offer several brief observations upon the points raised by Mr. Brown. Mr. Brown has also filed a Motion for Sanctions under Rule 11, alleging, in sum, that SMG "fabricated" its claim against him and filed a "strike suit" in retaliation for his having threatened to sue SMG (a suit which, he contends, exposed D. Mr. Brown's Demand for Judgment on His claim for Vacation Pay and the "Financial Component" Bonus, as well as His Motion to Dismiss the Complaint as a Rule 11 Sanction, are Without Merit. Lest there be any misunderstanding, SMG agrees that, under its policies as applicable to Mr. Brown, he has been credited with a gross sum of $15,692.00 in unused vacation and $50,000 in 1991 bonus under the Executive Annual Incentive Plan. These monies are, simply put, assets of Mr. Brown in the possession of SMG; SMG has not asserted that it'"owns" them or has acquired title to them in satisfaction of its claim against Mr. Brown. On the other hand, Mr. Brown is holding in excess of $50,000 in severance and other advances made to him by SMG and to which SMG makes a claim of right to reimbursement. How these claims (together with the various other raised by Mr. Brown) will "net out" at Al47 Spectacor Management Group v. Matthew Brown No. 93-5246 the conclusion of this litigation is, obviously, a question which must abide the conclusion of the litigation.‘ Thus, this entire controversy strikes SMG as much ado about nothing. The same is true of Mr. Brown's extraordinary Rule 11 Motion. There is no question but that, by September 1993, several months of negotiations between the parties had failed to produce an agreement and, based upon the salary continuation and other advances made on his behalf against an anticipated settlement, SMG had a claim against Mr. Brown, a person of diverse citizenship, in an amount in excess of $50,000 (while, of course, Mr. Brown denies that such payments were advances subject to recoupment, that denial is simply that and does not deprive SMG of a good faith basis for its claim). Assuming no other disputes between the parties, SMG could properly have brought that claim in this Court under its diversity jurisdiction. 29 U.S.C. § 1332(a). Against this background, Mr. Brown's new counsel, Gary Green, Esquire, wrote directly to SMG's President, in a letter which began: "Please be advised that this law firm * Indeed, even if Mr. Brown is, in theory, entitled to a , judgment” against SMG over these undisputed amounts, it is clear that, being inextricably bound up with all of the other claims and defenses of the parties, such a judgment would not be "final" under Rule 54 and Mr. Brown would not be entitled to payment of or to execute upon it unless this Court were to grant him certification under Rule 54(b) (something for which he has not even asked, much less demonstrated his entitlement). A148 Spectacor Management Group v. Matthew Brown No. 93-5246 has been retained to institute proceedings against Spectacor Management Group ("SMG") on behalf of our client, Matthew G. Brown." (Letter dated 9/20/93 from Green to Gibson, { 1) (emphasis added).* The letter goes on to demand the sum of $1,153,145 and to opine that: "We harbor no illusion that this matter is like] ' led ide 1) Indeed, the correspondence between Mr. Roscetti [Brown's previous counsel] and Fox, Rothschild leads me to believe that you have misinterpreted what is at risk here for SMG, and that you have not assessed properly the evidence that is extant concerning Mr. Brown's entitlement to the sales commission relative to the Long Beach transaction." (Letter dated 9/20/93 from Green to Gibson, { 3)(emphasis added).° Agreeing with Mr. Green that it was unlikely that : A true and correct copy of Mr. Green's letter is contained in the Appendix to SMG's principal Memorandum as Exhibit "D". ® While SMG would normally have let such conduct pass as unworthy of comment, since Mr. Brown has raised the issue of professional propriety, one is led to wonder what Mr. Green was doing writing directly to the client and suggesting that the client and its counsel -- who, as reflected in the letter itself, Mr. Green knows Al49 Spectacor Management Group v. Matthew Brown No. 93-5246 the matter would be settled “outside the courtroom" if his client was adhering to the position outlined in his letter and taking Mr. Green at his word that he was prepared to institute litigation himself if SMG did not capitulate in two weeks' time, SMG filed this action seeking the return of its advances to Mr. Brown. Apparently, it is Mr. Brown's view that the existence of diversity jurisdiction is clearly negated and SMG's invocation of it is in such bad faith as to warrant the sanction of dismissal because independent of this claim, SMG also had in its possession monies belonging to Mr. Brown arguably sufficient to satisfy its claim if upheld. Mr. Brown then goes on to complain that this bad faith invocation of the Court's diversity jurisdiction had the pernicious effect of requiring him to bring his own claims as Rule 13(a) compulsory counterclaims. Not surprisingly, despite his citation of a volume of cases dealing with Rule 11 sanctions generally, Mr. Brown offers not a single authority which even suggests this to be the case. Rather, both the law and simple common sense compel the conclusion that Mr. Brown's contentions fail for several reasons. First, the existence of a claim is not affected by the presence or absence of a source of funds for its satisfaction. SMG does not contend that it has "paid itself" what Mr. to be involved -- “have misinterpreted what is at risk here for SMG", if not attempting to "go behind counsel's back" and argue the merits of the case with the lay client. Not only does such conduct reflect extremely bad manners, it constitutes a flagrant violation of Rule 4.2 of the Rules of Professional Conduct. A150 Spectacor Management Group v. Matthew Brown No. 93-5246 Brown owes it by keeping his vacation pay and bonus monies; rather, it acknowledges that he disputes SMG's claim, continues to hold his funds in his name and intends to "execute" upon them only to satisfy a judgment when its claim is upheld. Put another way, SMG acted responsibly by promptly seeking judicial resolution of its claim (and, therefore, of Mr. Brown's entitlement to the money) rather than simply keeping it and "daring" Mr. Brown to file suit for its return. As reflected, among other places, in the Pennsylvania Wage Payment & Collection Law, 43 P.S. 260.9a(c),’ an employer's retention of sums owing a departed employee in the amount of a "good faith setoff" or claims against the employee by the employer is well-established in both law and practice and cannot be said then to deprive the employer of otherwise available jurisdiction to have the underlying dispute judicially resolved. Second, even to the extent that the theoretical "set-off" somehow affects the amount in controversy for a direct claim by SMG against Mr. Brown under Section 1332(a), there clearly was a dispute between parties of diverse citizenship in ’ — This section of the law reads in relevant part: "A good faith dispute or contest as to the amount of wages due or the good faith assertion of a right of set-off or counter-claim shall be deemed a satisfactory explanation for nonpayment of such amount in dispute or claimed as a set-off or counter-claim.” 43 P.S. § 260.9a(c). Al51 Spectacor Management Group v. Matthew Brown No. 93-5246 which more than $50,000 was at issue sufficient to have permitted SMG to bring a Declaratory Judgment Action under Section 2201(a) of the Judicial Code, seeking a determination of the rights of the parties to (a) the advances and (b) the vacation pay and bonus monies being held. 28 U.S.C. § 2201(a). Indeed, the entire point of the Declaratory Judgment Act is to permit a party faced with acclaim to obtain an adjudication of its rights without being required to act at its peril and "wait to get sued". 6A Moore's Federal Practice § 57.23 & n.ll (2d ed. 1994) (citing Weyerhaeuser Corp. v. { of Pulp. Sulphite & Paper Worl 190 F. Supp. 196 (D. Me. 1960). Regardless of the posture, Mr. Brown would still have been required by Rule 13(a) to assert his counterclaims, 6A Moore's Federal Practice § 57.27, and we would still be here. Third, and perhaps most directly to the point, in Mr. Green's September 20, 1993 letter, he asserted on Mr. Brown's behalf all of what are now his counterclaims, in an amount in excess of $1,000,000, and threatened to sue upon them within two weeks. Manifestly, SMG could then have filed a Declaratory Judgment Action on alJ of these claims and obviated even the claim/counterclaim process. Once again, we would still be here. Fourth, although he tries to do so in two different ways, Mr. Brown has demonstrated absolutely no prejudice resulting from SMG having sued first. Initially, Mr. Brown contends that he has been prejudiced because, but for the filing of the action, settlement negotiations would have continued without the pressure of litigation (Brown Motion at 26, n.9). The problem of course, is that this claim is belied by A152 Spectacor Management Group v. Matthew Brown No. 93-5246 Mr. Green's own letter to Mr. Gibson, which prompted SMG to file this action in the first place, in which he specifically says that he has been hired to litigate and that he “harbor{s] no illusion" that the matter can be settled without litigation. Beyond that, what really appears to have Mr. Brown so exercised is the fact that, SMG having "beaten him to the punch" with its claim, Rule 13(a) required him to bring his own claims against SMG as compulsory counterclaims in this action, rather than in a separate action in state court (Brown Motion at 26, n.9). In an attempt at a degree of candor — apparently foreign to Mr. Brown, SMG acknowledges that (a) the “conventional wisdom" -- as reliable as we all know it to be -- would normally suggest that the Philadelphia Court of Common Pleas is a more favorable forum for an employee in a financial dispute with his employer; (b) it would prefer to be in this Court (c) it was aware, when it filed its Complaint, of the operation of Rule 13(a) and (d) it was aware at the same time that, had Mr. Brown sued first in state court, SMG, as a resident defendant, would not have been able to remove the case despite diversity of citizenship and adequate amount in controversy. 28 U.S.C. § 1441(b). Meaning thereby no impertinence, SMG's only observation on these facts is "So What"? It was Mr. Brown who threatened imminent litigation, SMG perceived an advantage offered by the Rules and took advantage of it. This action reflected neither harassment nor bad faith, but rather simply good lawyering. In sum, if Mr. Brown would like SMG to amend its Complaint to bring a Declaratory Judgment Action as to all of his claims, SMG fails to see the point but is prepared to do so. Beyond that, the Motion for Sanctions is without merit. A153 APPENDIX L IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA SPECTACOR MANAGEMENT GROUP, Plaintiff, ¥ MATTHEW G. BROWN, Defendant CIVIL ACTION NO. 93-5246 ORDER AND NOW, this 13th day of February, 1995, the pending motions are disposed of as follows: 1. Plaintiff's and Defendant's Motions for Summary Judgment are DENIED.* 2. Defendant's Motion for Sanctions is DENIED.** BY THE COURT: /s/ Robert S. Gawthrop, III, J A154 aac ag *The deposition testimony offered by defendant does not establish that Mr. Tavares made an oral contract with plaintiff to provide him with the severance pay, commission and benefits to which he claims to be entitled. On the other hand, the testimony does not establish conclusively that no oral contract was made. **The record before me does not establish that plaintiff filed this diversity action in bad faith. Sums owed by a plaintiff to the defendant are not subtracted from the amount of plaintiff's claim when calculating the jurisdictional amount. See, ¢.g., Savarese v. Edrick Transfer & Storage. Inc., 513 F.2d 140, 142 (9th Cir. 1975). Thus, the fact that plaintiff held a certain amount of wages it owed to defendant as a "setoff" does not bar plaintiff from filing a claim against defendant, in particular when defendant has threatened to file a lawsuit of his own against plaintiff. Plaintiff admits that it does not "own" the setoff funds, and it plans to claim those funds only to satisfy a judgment in its favor. Further, plaintiff did not file this action solely to harass defendant. When defendant threatened to file a lawsuit against plaintiff, plaintiff filed the instant lawsuit in order to obtain what it perceives to be the more amenable forum. So long as plaintiff has a factual and legal basis for filing suit in this court, its strategic action is not sanctionable. A155 Nl Sie a aie abe ail echt Ae ny Se APPENDIX M J. Burns - Direct [75] give us the components? A. The total is approximately $50,700, and it is comprised of compensation in the amount of $42,500, employer payroll taxes associated with that in the amount of $3300, and medical benefits, of approximately 4900. MR. SILVERSTEIN: Thank you. No other questions. CROSS-EXAMINATION BY MR. GREEN: Q. The calculation of how much money SMG paid itself from the bonus, that it paid to Mr. Brown-- MR. SILVERSTEIN: Your Honor, if I may, this is beyond the scope of the direct. The issue of the bonus is part of counterclaimant's case. Mr. Burns will be available. I purposely narrowed it so if we were going to get into this on cross examination, I would have dealt with these issues on my direct. That was the purpose of my separating these things out, so we could very simply and narrowly limit Mr. Burns’ testimony here. He will be available. If Mr. Green wishes to A156 Pa ites ressneetrerermncrter mat noun nen TMH Ce eT ene Senn UT EO call him on his case-in-chief, I will make a representation that we will make Mr. Burns available without need for subpoena. But this is exactly the reason, to avoid this now, that I didn't go into this J. Burns - Cross [76] direct with Mr. Burns. THE COURT: Does that not sate your concerns, sir? MR. GREEN: Your Honor, if Mr. Burns is here to testify that there was an amount paid, to establish what the claim is, if Mr. Burns should also say, what amount they took at the time they are making the payment, because there's already an acknowledgment-- THE COURT: Can't you explore that later in the case, figuratively speaking? MR. SILVERSTEIN: I do not believe there is any dispute as to the setoff amount. THE COURT: I don't think so either. MR. GREEN: May I mention this one point, why I want to bring it in now? I will obviously abide by the Court's ruling. THE COURT: It can come in, if you want to get into that, at the end of plaintiff's case. MR. GREEN: We would like to make a motion under A157 Rule 52(c), at which time I would like to be able to argue to the Court that based on all of the hearing evidence on the plaintiff's side, they have not established any damages were due, and since this witness, with only being half of the bagel, s0-to-speak, testifying what the amount was that they J. Burns - Cross [77] spent for Mr. Brown, we should also know what the other side was, what was the amount they credited to themselves, so the net may work out to be either zero, not making plaintiff's claim for that reason alone. MR. SILVERSTEIN: We are willing to stipulate to that amount. I believe the Court can take judicial notice as admission in the prior filings that we filed with respect to the various motions. Mr. Green wants to present me with a figure. THE COURT: Upon that warranty, let's do it that way. MR. GREEN: Okay. MR. SILVERSTEIN: I believe I can stipulate that the amount, the total amount of the bonus and the vacation pay exceeds the amount that we paid off, paid out. MR. GREEN: I will accept that. I have just one or two other questions. BY MR. GREEN: Q. Mr. Burns, did they reserve -- let me preface that, that was a terrible question. Did SMG reserve a sum for Mr. Brown's payment? A. What do you mean by reserve? Q. Put $200,000 in reserve to pay Mr. Brown? ** * A159 --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386013_2404%3A2. Public record. Not legal advice.