Saadeh v. Farouki

ROGERS, Circuit Judge.

Appellant Fawaz Farouki appeals from a judgment awarding appellee Rafic Saadeh $ 758,470 for breach of contract for failure to repay a commercial loan. Prior to oral argument, the court ordered the parties to be prepared to address whether the district court lacked subject matter jurisdiction over the lawsuit under 28 U.S.C. § 1332(a). Subsequently, the court invited the parties to file supplemental briefs on the jurisdictional issue, which they did. We now hold that the district court lacked subject matter jurisdiction, and therefore vacate the judgment of the district court and remand the case with instructions to dismiss the complaint.

Throughout the 1980s, Fawaz Farouki, the owner of several construction companies doing business in the Middle East and Europe, invested millions of dollars in various enterprises through his investment company, Dinavest, Ltd., a United Kingdom corporation with its principal place of business in Monte Carlo, Principality of Monaco. In 1984, hoping to invest in a California company, Four Point Entertainment, Farouki and Dinavest borrowed $ 550,000 from Rafic Saadeh, a businessman residing in Athens, Greece. Saadeh received a promissory note in exchange for his loan in September 1984. This was the first of three repayment agreements entered into by the parties, all of which resulted in a default by Farouki.

Shortly after the 1984 loan, Farouki and Dinavest began experiencing financial difficulties, and Farouki defaulted on his obligations to numerous creditors. After approximately $ 800,000 in checks he sent to Saadeh were returned for insufficient funds, Farouki made no further payments on his loan from Saadeh. Having defaulted on his loan obligation, Farouki met with Saadeh and they entered into a second agreement in June 1986. Under this agreement Farouki and Dinavest were required to repay Saadeh $ 1,257,800, apparently representing the $ 550,000 principal plus over $ 700,000 in accrued interest and finance charges. The 1986 agreement set October 13, 1986, as the default date; if Farouki failed to repay Saadeh in full by then, Saadeh had the right to take as collateral $ 3.3 million of Four Point stock as well as three notes payable to Dinavest by Four Point that Farouki had used to secure the debt, and to receive annual interest of fifteen percent on any remaining debt.

Farouki again defaulted on his agreement and surrendered the stock and the assigned notes to Saadeh. Because the value of the stock and notes did not fully compensate Saadeh, Saadeh made additional attempts to recover the outstanding amount; Farouki acknowledged his indebtedness and repeatedly promised repayment. In 1987, Saadeh traveled from Greece to New York State to negotiate another repayment agreement with Farouki. Ultimately, they agreed that Farouki and Dinavest would pay Saadeh $ 758,470 plus interest at nine percent per annum in six installments over two years. Farouki again defaulted under the terms of the 1987 agreement.

In 1992, Saadeh filed suit in the United States District Court for the District of Columbia against Farouki, his wife, Dinavest, and L.R. Holdings, a District of Columbia corporation owned and operated by Mrs. Farouki. He sought damages for breach of contract and an accounting. At that time, Farouki was a citizen of Jordan, and Mrs. Farouki was apparently a citizen of Egypt. Beginning in 1989, however, the Faroukis had become permanent residents of Maryland. The sole basis of jurisdiction alleged in Saadeh's complaint was diversity of citizenship.

Farouki and Dinavest filed an answer to the complaint, and all defendants filed a motion to dismiss the claims for an accounting on the ground that they failed to state a claim for which relief could be granted. The district court denied the motion. Discovery proceeded, and shortly before trial, the defendants filed a motion to dismiss on the ground that the court lacked subject matter jurisdiction because the plaintiff, Saadeh, was an alien, and three of the defendants--Farouki, Mrs. Farouki and Dinavest--were also aliens at the time the complaint was filed. Saadeh, in response, claimed that he had evidence that Farouki had become a United States citizen since the complaint had been filed, and that, in any event, as an alien admitted for permanent residence, he would be deemed a United States citizen for the purposes of diversity jurisdiction under a 1988 amendment to § 1332. . . . Farouki maintained that even if Saadeh was correct, a jurisdictional defect still existed as to Dinavest, which he described as an indispensable party. After a brief conference, the parties entered into a joint stipulation, agreeing that Farouki had become a United States citizen in 1993 and to the dismissal of Mrs. Farouki, Dinavest, and L.R. Holdings. The district court dismissed these defendants pursuant to the stipulation, and denied the motion to dismiss. Although Farouki subsequently testified that he resided in Alexandria, Egypt, the court made no finding as to whether he had acquired a new domicile. Following a bench trial, the court found that the 1987 agreement was a valid contract and that Farouki was in breach, and entered judgment for Saadeh in the amount of $ 758,470, plus nine percent annual interest from the date of the agreement.

On appeal, Farouki initially did not pursue the jurisdictional challenge. Rather, he contended that the district court erred in three respects in concluding that the 1987 loan agreement was valid. He maintained that the 1984 loan was usurious and that the 1987 agreement failed to purge the usury; that the district court was barred under the parol evidence rule from considering extrinsic evidence that contradicted certain recitals contained in the 1987 agreement; and that the 1987 agreement was void for lack of consideration because the 1984 agreement was void. Upon reviewing the briefs on appeal and the record of the district court, this court directed the parties' attention to a possible jurisdictional defect because both Saadeh and Farouki were aliens at the time Saadeh filed his complaint. We turn to that question now, assisted by the parties' supplemental briefs.

Under Article III of the Constitution, the judicial power of the United States extends to "Controversies ... between citizens of different States ... and between a State, or the Citizens thereof, and foreign States, Citizens or Subjects."... Article III requires only minimal diversity, that is, diversity of citizenship between any two parties on opposite sides of an action, regardless of whether other parties may be co-citizens. . . Congress has never granted the district courts the full measure of diversity jurisdiction permitted by the Constitution... In Strawbridge v. Curtiss,. . ., the Supreme Court construed the diversity provision of the Judiciary Act of 1789 to require that no two parties on opposite sides of an action could be citizens of the same State. The current diversity statute, 28 U.S.C. § 1332, retains this requirement of "complete diversity." Consequently, "federal diversity jurisdiction is lacking if there are any litigants from the same state on opposing sides.". The Supreme Court has never addressed the scope of the complete diversity rule in cases involving alien parties. Prior to 1988, however, this court held, as have others, that the diversity statute did not confer jurisdiction over a lawsuit involving an alien on one side, and an alien and a citizen on the other side. . . .

As noted, however, Congress amended the diversity statute in 1988 to add what now appears as the last sentence of 28 U.S.C. § 1332(a). This sentence provides in pertinent part that for the purposes of § 1332(a) "an alien admitted to the United States for permanent residence shall be deemed a citizen of the State in which such alien is domiciled." Under this amendment, diversity of citizenship no longer exists in an action between a citizen of State A and an alien admitted to the United States for permanent residence who resides in State A. Read literally, however, the amended statute would create diversity between Saadeh and both Faroukis. As permanent residents of Maryland at the time Saadeh filed his complaint, Mr. and Mrs. Farouki would be "deemed" citizens of Maryland. Thus the amended statute would also appear to abrogate partially the rule of complete diversity by permitting a non-resident alien and a resident alien to be present on opposite sides of this lawsuit. Courts and commentators have differed as to whether this latter result is permissible under the amended statute. . . .Before addressing this complex issue of statutory interpretation, we first examine whether any post-filing events cured the possible jurisdictional defects and thus eliminate the need to address the 1988 amendment.

At the time Saadeh filed his complaint, the constitutional requirement of minimal diversity was satisfied because Saadeh, an alien domiciled in Greece, and L.R. Holdings, a District of Columbia corporation, were opposing parties to the lawsuit. For purposes of Article III, the lawsuit could properly be brought in federal court as a dispute between an alien and a citizen of a State. The statutory requirement of complete diversity was not satisfied, however, because of the presence of Saadeh and Dinavest, both aliens, on opposite sides of the litigation... In addition, there were two other potential defects caused by the presence of Mr. and Mrs. Farouki, both of whom were aliens.

Any jurisdictional defects caused by the presence of Mrs. Farouki and Dinavest as defendants were cured when they were dismissed from the case prior to trial, pursuant to the joint stipulation of the parties. It is well settled that a district court has authority under Rule 21 of the Federal Rules of Civil Procedure to dismiss a dispensable, non-diverse party at any time, even after a judgment has been rendered. . . . The third potential impediment to complete diversity, arising from Farouki's status as an alien when Saadeh filed his complaint, is not so easily resolved.

Saadeh contends that because Farouki became a United States citizen by the time of trial the district court had jurisdiction under § 1332(a)(2). If this were true, then the court need not consider whether he was a "citizen of a State" under the diversity statute, by virtue of his permanent resident status, at the time Saadeh filed his complaint. Farouki points out, however, that even though he became a United States citizen, he was not a citizen of any state for purposes of § 1332(a) because he subsequently established domicile in Egypt. To qualify as a "citizen of a State" for the purposes of § 1332(a), a natural person must be both a citizen of the United States and be domiciled within a particular state. . . . Thus, even were the court to recognize the change in citizenship, it would be essential for Saadeh to demonstrate that Farouki retained his Maryland domicile.

We conclude, however, that Farouki's change in citizenship and possible change in domicile could not cure a defect in complete diversity if one existed at the time Saadeh filed his complaint. It is well established that diversity of citizenship is determined at the time the complaint is filed. . . . Thus, if parties are diverse at the time of filing, a subsequent change in citizenship or domicile will not divest the court of jurisdiction. . . .; Professors Wright, Miller and Cooper suggest that the rationale for this bright-line rule is premised on "providing maximum stability and certainty to the viability of the action and minimizing repeated challenges to the court's subject matter jurisdiction.". . . Were it necessary to track changes of citizenship throughout litigation, courts would face potentially difficult burdens of either holding cases in abeyance for the diversity requirements to be satisfied or, alternatively, repeatedly adjudicating challenges to previous determinations that diversity jurisdiction existed. The bright-line rule also provides "a uniform test that is relatively easy to apply.". . . The corollary to this rule, that if diversity did not exist when the complaint was filed, it cannot be created by a change of domicile by one of the parties or some other event, appears equally sound and equally well settled. . . .

[. . .]

Thus, the remaining question is whether, at the time Saadeh filed his complaint, Farouki qualified as a "citizen of a State" under the 1988 amendment to § 1332. In resolving a question of statutory interpretation, a court's starting point is always the language of the statute. . . .Nevertheless, there are exceptions. For example, the Supreme Court has observed that "in rare cases, the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters, and those intentions must be controlling." Griffin v. Oceanic Contractors, Inc. . . . "Looking beyond the naked text for guidance is perfectly proper when the result it apparently decrees is difficult to fathom or where it seems inconsistent with Congress' intention, since the plain- meaning rule is " "rather an axiom of experience than a rule of law, and does not preclude consideration of persuasive evidence if it exists.' " Public Citizen v. U.S. Dep't of Justice. . . (quoting Boston Sand & Gravel Co. v. United. . . ). Consequently, "where the literal reading of a statutory term would "compel an odd result,' ... we must search for other evidence of congressional intent to lend the term its proper scope." (quoting Green v. Bock Laundry Mach. Co.,. . .); . . . In addition, the Supreme Court has instructed that "where an otherwise acceptable construction of a statute would raise serious constitutional problems," a court should "construe the statute to avoid such problems unless such construction is plainly contrary to the intent of Congress." Edward J. DeBartolo Corp. v. Florida Gulf Coast Building & Construction Trades Council, . . .. While a court "cannot press statutory construction "to the point of disingenuous evasion,' even to avoid a constitutional question," United States v. Locke,. . . (quoting Moore Ice Cream Co. v. Rose,. . . .), where the evidence of congressional intent supports an interpretation that avoids such problems, the court will adopt it. . .

A literal reading of the 1988 amendment to § 1332(a) would produce an odd and potentially unconstitutional result. It would both partially abrogate the longstanding rule of complete diversity, and create federal diversity jurisdiction over a lawsuit brought by one alien against another alien, without a citizen of a state on either side of the litigation. The judicial power of the United States does not extend to such an action under the Diversity Clause of Article III. Hodgson v. Bowerbank. . . . Under the circumstances, it behooves the court to examine the legislative history of the 1988 amendment in order to determine congressional intent.

The 1988 alienage amendment was added to the Judicial Improvements Act during the Senate debate, and the legislative history consists of what is in the Congressional Record. So far as appears, the idea for the addition of an alienage provision originated in a recommendation of the Judicial Conference of the United States. . . . The Judicial Conference supported the addition of the alienage provision in order to restrict diversity jurisdiction:

There is no reason why actions involving persons who are permanent residents of the United States should be heard by federal courts merely because one of them remains a citizen or subject of a foreign state or has not yet become a citizen of the United States. Accordingly, the Conference agreed to recommend that Congress amend 28 U.S.C. § 1332(a) to treat a permanent resident alien as a citizen of the state of his or her domicile.

The intentions of the Judicial Conference are mirrored by the comments of Senator Heflin, the sponsor of the Senate bill, during the debate on the Judicial Improvements Act. Referring to Title II, on diversity jurisdiction, he stated: The provisions of this title make modest amendments to reduce the basis for Federal court jurisdiction based solely on diversity of citizenship....

This title makes three changes in the diversity area: It increases the amount in controversy from $ 10,000 to $ 50,000; it treats permanent resident aliens in the United States as citizens of the State of domicile; and it provides that citizenship in representative party cases ... is determined by reference to the citizenship of the "represented" party.

. . . A section-by-section analysis introduced into the Congressional Record similarly reveals the intent to reduce diversity jurisdiction through the alienage provision. Describing Title II as "making modest adjustments to the scope of diversity jurisdiction to relieve the caseload pressures on the Federal Courts," the analysis paralleled the language of the Judicial Conference report: 28 U.S.C. § 1332(a)(2) currently gives the district courts diversity jurisdiction over actions between citizens of a State and citizens or subjects of a foreign state. Diversity jurisdiction exists under this provision even though the alien may have been admitted to the United States as a permanent resident. As any review of the immigration statistics indicates, large numbers of persons fall within this category.

There is no apparent reason why actions between persons who are permanent residents of the same State should be heard by Federal courts merely because one of them remains a citizen or subject of a foreign state.

In addition to the rationale advanced for the alienage provision, the legislative history of the Judicial Improvements Act makes clear that Congress focused on reducing the caseload of the federal courts by contracting the scope of diversity jurisdiction. The House Judiciary Committee Report indicated that Congress had taken great steps to improve the administration of justice since 1977, when "federal courts were ... overloaded with cases and access to justice suffered from an inadequate number of judges." . . . The Report noted, however, that the federal judiciary was still "beset by problems," including "delay caused by rising caseloads and insufficient support services; spiraling costs caused by litigation expenses and attorneys' fees; and unfair and inconsistent decisions caused by the pressures placed on judges who must cope with the torrent of litigation.". . ..

Against this background, the House Report outlined a plan for diversity reform. . .. It noted that:
Legislative efforts to eliminate or reduce diversity jurisdiction in the Federal courts come to the fore at various intervals. The Judicial Conference of the United States has long supported total abolition of diversity jurisdiction, as well as measures short of total elimination, such as eliminating in-State plaintiff suits and raising the jurisdictional amount. It has always been a controversial endeavor... In the late 1970's through the leadership of Congressman Kastenmeier, the House voted to eliminate diversity jurisdiction--an effort that failed to achieve meaningful diversity reform in conference by the closest of measures.

The activity surrounding this issue in this Congress carries on the tradition. The Subcommittee on Courts, Civil Liberties, and the Administration of Justice adopted an amendment to generally abolish diversity of citizenship. The resolution of this debate by the Committee was to vote to increase the amount in controversy for diversity jurisdiction from $ 10,000 to $ 50,000.

The House Judiciary Committee noted that proponents of this reform anticipated that it would reduce the federal diversity caseload by up to 40 percent. . . .

Given the reasoning underlying the recommendation for the alienage provision and the general expressions of legislative intent for the Judicial Improvements Act, in the absence of contrary evidence, we conclude that Congress intended to contract diversity jurisdiction through the 1988 amendment to § 1332(a), not to expand it by abrogating the longstanding rule that complete diversity is destroyed in lawsuits between aliens. Like the district courts in Lloyds Bank and Arai, we do not view these concerns about the workload of the federal judiciary and the burdens imposed by diversity jurisdiction as consistent with the conclusion that Congress intended what a literal reading of the statute suggests. It would be illogical to conclude that Congress intended to eliminate diversity jurisdiction in cases between a citizen and an alien permanently residing in the same state, but simultaneously intended to expand diversity jurisdiction in cases between an alien permanently residing in one state and an alien permanently residing in another state. Despite the plain language of § 1332(a), the alienage amendment "clearly appears to have been intended only to eliminate subject matter jurisdiction of cases between a citizen and an alien living in the same state." . . . There is no reason to conclude, however, that the amendment was intended to create diversity jurisdiction where it did not previously exist. Like Public Citizen, this appears to be one of those rare cases where the most literal interpretation of a statute is at odds with the evidence of Congressional intent and a contrary construction is necessary to avoid "formidable constitutional difficulties." . ..

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[W]e hold that the district court lacked subject matter jurisdiction because Farouki's acquisition of United States citizenship after Saadeh filed his complaint could not cure the defect, and we vacate the judgment and remand the case to the district court with instructions to dismiss the complaint for lack of subject matter jurisdiction; we do not reach the parties' other contentions.