Olympia Hotels Corp. v. Johnson Wax Development Corp.

908 F.2d 1363 (7th Cir. 1990)


In 1988, Olympia (P) filed suit against Racine Hotel Partners Limited Partnership (D) charging breach of contract and, eventually conspiracy as well. D wanted to create a first-class hotel in the city of that name and had hired P, a hotel-management firm, to build and operate the hotel. The contract had a term of twenty-five years and provided that P would have complete control of the hotel (D's principals had no experience in the hotel business) and would use its best efforts to make the hotel a success. The hotel was built and went into operation, but it was not a success, and after several years of operation D gave P written notice of default. P questioned the existence of diversity, claiming that P's principal place of business was in Wisconsin, the state of which D's partners were citizens, and not in Texas as Olympia claimed. D filed compulsory counterclaims that charged P with a breach of contract and with fraud in the inducement of the contract -- both claims under Wisconsin law -- but also with violations of the federal RICO statute. The jurisdictional issue became moot because of the counterclaims. The RICO claims were not frivolous, and therefore they gave the district court federal-question jurisdiction over the counterclaims, and (because these were compulsory counterclaims) ancillary jurisdiction, equivalent to pendent jurisdiction, over the complaint. Ancillary, like pendant, jurisdiction is discretionary, whereas diversity jurisdiction is mandatory. The district judge had jurisdiction and exercised it, and the exercise was valid even if she misconceived the basis of that jurisdiction. The judge decided to sever the counterclaims (except for Racine's claim for breach of contract) from P's claims and try them later. The voir dire of the jury was conducted by a federal magistrate over D's objection. At the close of all the evidence, the judge directed a verdict for P on D's counterclaim for breach of contract and D on P's claim of civil conspiracy. The jury then returned a verdict for P on its breach of contract claim, awarding $1.2 million in damages. The judge entered judgment for that amount under Rule 54(b) of the Federal Rules of Civil Procedure, and D has appealed, with P cross-appealing from the dismissal of its claim of civil conspiracy.