Herbert Federman et al., Plaintiffs, v. Empire Fire and Marine Insurance Company et al., Defendants-appellees,andstuart C. Goldberg and Jacob Aschkenasy, Additionaldefendants on Cross-claims,stuart C. Goldberg, Additional Defendant on Cross-claims, Appellant, 597 F.2d 798 (2d Cir. 1979)

On May 31, 1972, Empire Fire and Marine Insurance Company, pursuant to a registration statement and prospectus filed with the Securities and Exchange Commission (SEC), made a public offering of 500,000 shares of common stock. The law firm of Sitomer, Sitomer & Porges (Sitomer) was retained by Empire to prepare the registration statement and prospectus for the offering. Stuart C. Goldberg, an attorney with the Sitomer firm, assisted to a limited extent in the preparation of the issue.

On May 2, 1973, plaintiffs,¹  Deitrich Meyerhofer and Herbert Federman, on behalf of themselves and all similarly situated purchasers, filed the original complaint in this consolidated action. The complaint alleged that the registration statement and prospectus under which Empire stock had been issued was false and misleading in that, among other things, it inflated the amount shown to be received from the offering for it did not disclose that the Sitomer firm was to receive a $200,000 finder's fee from the proceeds.²  An amended complaint, identical in legal theory to the May 2 complaint, was served on June 5, 1973, in which violations of the Securities Act of 1933, the Securities Exchange Act of 1934, SEC Rule 10b-5, and common law negligence, fraud, and deceit were alleged.³ 

The factual basis underlying the alleged violations of the Securities Acts, and rules and regulations thereunder, related specifically to Empire's failure to disclose in the registration statement or prospectus the proposed fee arrangements between Empire and Sitomer.⁴ 

Named as defendants were Empire, and the officers and directors of Empire; the Sitomer firm and its three partners, A. L. Sitomer, S. J. Sitomer, and R. E. Porges; Faulker, Dawkins & Sullivan Securities Corporation (managing underwriter); Stuart C. Goldberg (an attorney with the Sitomer firm); and certain selling Empire shareholders.

The Empire defendants cross-claimed against the Sitomer defendants, and against Stuart C. Goldberg and Jacob Aschkenasy (both of whom worked on the Empire offering) as additional defendants, alleging negligence and malpractice in the preparation of the registration statement. Goldberg, in turn, counterclaimed against Empire and cross-claimed against Sitomer and Aschkenasy, alleging that they had conspired to violate the securities laws by failing to disclose the fee arrangement in the Empire registration, and Goldberg also charged that Sitomer and Aschkenasy, as co-conspirators with Empire, had knowingly and intentionally exposed him to liability under the securities laws by misrepresenting to him the nature of the fee arrangement.

In January 1976 a court-approved settlement disposed of all claims in the present controversy with the exception of the claims asserted by and against Goldberg. In December 1976 Goldberg's claims were dismissed with leave to amend. Goldberg filed an amended complaint and the remaining defendants moved for dismissal. On April 12, 1977, the district court entered an order denying without prejudice the defendants' motions to dismiss. The court retained jurisdiction over the case but suspended all further proceedings in federal court pending the commencement of actions in state court. Meyerhofer v. Empire Fire and Marine Ins. Co., 74 F.R.D. 151 (S.D.N.Y. 1977). Goldberg appeals from this April 12, 1977, order.

This appeal represents but one episode in the unremitting litigation arising out of a 1972 public offering of stock, and as such, requires that we briefly review the events leading up to the district court's order and Goldberg's participation in those events.

Goldberg had been an attorney with the Sitomer firm from November 15, 1971, until he resigned from the firm in January of 1973, and he had developed an expertise in the area of securities law. He had participated to a limited extent in the preparation of the Empire issue, but another Sitomer associate had been primarily responsible for the issue. Work on the Empire S-1 Registration Statement began prior to Goldberg's arrival at the law firm, and his contribution to it had largely consisted of rendering legal opinions concerning the firm's obligation to report its fee. Amendment to Amended Answer, P 49(a), December 22, 1976. Goldberg asserts that in his effort to evaluate properly the firm's disclosure obligations he inquired whether the firm's fee was a fixed or contingent one, and that he was specifically informed by defendants Alvin Sitomer, Stephen Sitomer, and Robert Porges that the fee was not contingent. Id. at P 50(a). Goldberg states that, relying on the correctness of this information, he communicated with the SEC in order to obtain additional information from the Commission concerning the firm's disclosure obligations, and that he prepared a memorandum on January 24, 1972, covering the subject. Id. at P 51(a). During the early months of 1972 Goldberg was instructed to review the preliminary draft of the Empire registration with specific emphasis on Sitomer's purchase of Empire stock and the proper disclosure thereof. Id. at P 52(a). As part of his review Goldberg inquired as to whether the stock was fully paid for and unconditionally owned and was told in response to his inquiry that the stock was indeed fully paid for and unconditionally owned.

In connection with the Empire public offering Goldberg subsequently expressed concern over what he considered omissions in the Empire registration statement, specifically, the nondisclosure or inadequate disclosure of Sitomer's fee arrangement and the extent to which such excessive fees might include a finder's fee. The Empire registration statement and prospectus was filed with the SEC on March 28, 1972, and became effective on May 31, 1972. Goldberg's uneasiness over the excessive fee question in the Empire issue was not extinguished, however, upon the registration becoming effective. In fact, Goldberg's suspicions were rekindled on or about January 20, 1973, when the same question arose in connection with the Sitomer firm's fee arrangements with Glacier General Assurance Company (Glacier). Goldberg confronted the Sitomer defendants with the fruits of his personal investigation into the fee arrangement practice of the firm, whereupon said defendants admitted they had lied about the nature of the Empire fee and informed him that it was indeed a contingent arrangement, yet, they refused to make an immediate disclosure thereof. Id. at P 57(a). Goldberg's continued advocacy that full and complete disclosure of the fee arrangement in the Empire offering be forthwith made culminated in his resignation from the firm on January 22, 1973.⁵  On the following day Goldberg met with SEC officials for the purpose of making a full disclosure of the methods of operation utilized in Sitomer's securities practice.⁶  The information related to the SEC at this meeting was subsequently embodied in an affidavit prepared by Goldberg dated January 26, 1973.

Goldberg met with the attorneys for the plaintiffs, the firm of Bernson, Hoeniger, Freitag & Abbey, on at least two occasions, the first meeting taking place on May 3, 1973, one day after service of the original complaint. It was through these meetings that the Bernson firm was supplied with a copy of Goldberg's January 26 affidavit which tended to verify his lack of knowledge of the fee arrangement and of his concomitant nonparticipation in the omission of the information about the finder's fee in the prospectus. As a consequence of this, Goldberg was dropped as a party defendant.

After their receipt of the January 26 affidavit the plaintiffs amended their complaint so as to include more specific factual allegations, but the underlying legal theories were consistent with those contained in the original complaint.

As a result of the association between Goldberg and the Bernson firm the remaining defendants filed a motion pursuant to Canons 4 and 9 of the Code of Professional Responsibility,⁷  the Disciplinary Rules and Ethical Considerations thereto, and the supervisory powers of the district court, seeking an order disqualifying Goldberg and the Bernson firm from acting as attorneys in the premises and from disclosing confidential information relative thereto. The district court (MacMahon, J.) by memorandum and order dated August 23, 1973, held that the Bernson firm and Goldberg were barred from acting as counsel or participating with counsel for plaintiffs in the originally filed Meyerhofer action or in any future action against Empire involving the underlying transactions in issue, and also from disclosing to others any relevant confidential information. The complaint was dismissed without prejudice.

On appeal, our court found that the association between Goldberg and the Bernson firm was not "tainted by violations of the Code of Professional Responsibility," Meyerhofer v. Empire Fire and Marine Ins. Co., 497 F.2d 1190, 1196 (2d Cir.), Cert. denied, 419 U.S. 998, 95 S. Ct. 314, 42 L. Ed. 2d 272 (1974), and that there was no proof "that Goldberg had revealed any information, confidential or otherwise, that might have caused the instigation of the suit," at 1194, and that in view of the serious charges surrounding the Empire issue Goldberg "had the right to make an appropriate disclosure with respect to his role in the public offering," at 1195. The portion of the district court's order dismissing the complaint and enjoining the Bernson firm from acting as counsel for plaintiffs was reversed. The portion of the lower court's order prohibiting Goldberg from acting as a "party or as an attorney for a party in any action arising out of the facts herein alleged" was affirmed, at 1196.

During the pendency of the Meyerhofer appeal the plaintiffs instituted a second action styled Federman v. Empire Fire and Marine Ins. Co., asserting essentially the same claims that were contained in the Meyerhofer action. Stuart C. Goldberg, however, was not named as a defendant in the Federman action. The two cases were later consolidated by order dated December 30, 1974.

On March 24, 1974, the Empire defendants served their answer, which in addition to various denials and affirmative defenses set forth five cross-claims.⁸  The first four cross-claims were asserted jointly and severally against the Sitomer firm, its general partners, Stuart C. Goldberg, and Jacob Aschkenasy. As Goldberg and Aschkenasy were not previously parties to the litigation, they were brought into the action under Rule 13(h) of the Federal Rules of Civil Procedure as additional defendants on defendant Empire's cross-claims.⁹  Summarized, the first and second cross-claims alleged that Empire relied on the Sitomer firm, its partners, Goldberg, and Aschkenasy as lawyers to prepare the public offering to ensure the legal sufficiency and completeness of the Empire registration statement, and Empire sought indemnification and contribution from them in the event that Empire incurred any liability. Empire based these claims on the theory that any Empire liability would have been caused by the negligence and malpractice of the cross-defendants in failing to ensure that the registration statement complied with applicable legal requirements. The third and fourth cross-claims sought reimbursement for all liabilities and expenses, including attorneys' fees, incurred as a result of the alleged negligence and malpractice of the cross-defendants.

The fifth cross-claim was asserted solely against the Sitomer firm. By it Empire sought the refund of all legal fees paid to the firm with reference to any services found to have been negligent or occasioned by malpractice.

Goldberg served his initial answer to Empire's cross-claims on May 27, 1974. In addition to denials and affirmative defenses to Empire's claims, he filed three cross-claims; one against Sitomer and its partners, jointly and severally, for indemnification, and two separate claims against Sitomer, its partners, and Aschkenasy for indemnification and contribution. Shortly thereafter, on June 16, 1974, he served an amended answer and added one claim, denominated as a counterclaim, for damages sought to be recovered against the Empire defendants, and added a cross-claim against Sitomer, its partners, and Aschkenasy, each for alleged damage to his reputation, for the loss of his employment, and for his attorney's fees.

The Empire defendants' response to Goldberg's counterclaim was served on June 25, 1974. It consisted of various denials and a single defense of legal insufficiency.

On August 22, 1975, all parties, with the exception of Goldberg, entered into a stipulation of settlement by which the Sitomer firm agreed to pay $650,000 and Empire agreed to pay $160,000 to a class settlement fund administered by plaintiffs' counsel. The settlement was approved by the district court. The settlement provided that all claims between and among the plaintiffs, defendants, and the additional defendant, Aschkenasy, would be dismissed on the merits with prejudice. The claims asserted by and against Goldberg were not included in the stipulation of settlement. The claims remaining unsettled were Empire's cross-claims against Goldberg and Goldberg's counterclaim against Empire and cross-claims against Sitomer and Aschkenasy.

Subsequent to the district court's approval of the settlement, the Empire defendants moved pursuant to Rules 12(c) and 12(h) (2) of the Federal Rules of Civil Procedure for judgment on the pleadings seeking the dismissal of Goldberg's counterclaim on the ground that the claim failed to state a claim upon which relief could be granted. In support of their motion, the Empire defendants asserted that, as a matter of law, Goldberg's claims were insufficient under New York law for the imposition of liability. At the same time that Empire interposed its Rule 12 motions Goldberg moved for an order of recusal and for transfer to another judge. The motion was denied after oral argument. Empire's Rule 12 motions were granted and Goldberg's counterclaim was dismissed with leave to amend on December 3, 1976.

Goldberg served an amendment to his amended answer on December 22, 1976. It contained two distinct causes of action in lieu of the four-paragraph counterclaim against Empire and cross-claim against Sitomer, its partners, and Aschkenasy. These were asserted as counterclaims against Empire and cross-claims against Sitomer, its partners, and Aschkenasy. They were claims for "injurious involvement"¹⁰  which included a claim for medical expenses and claims for damages based upon fraud.¹¹  Also included in this amendment were two new cross-claims against the Sitomer firm for breach of warranty and fraud.¹² 

Empire moved pursuant to Rule 12(b) (6) of the FRCP for an order dismissing each counterclaim on the ground that each claim failed to state a claim upon which relief could be granted because as a matter of law they were legally insufficient.

The district court (MacMahon, J.) determined the cross-claims and counterclaims asserted in Goldberg's most recent answer to raise questions of state law and held that as such they fell within the court's pendent jurisdiction because Goldberg's claims and the original plaintiffs' claims were derived from a common nucleus of operative fact and the federal claims were substantial. Relying on the general policy considerations underlying the exercise of pendent jurisdiction outlined by the Supreme Court in United Mine Workers v. Gibbs, 383 U.S. 715, 86 S. Ct. 1130, 16 L. Ed. 2d 218 (1966), the district court declined to exercise its discretionary power to adjudicate the state law claims inasmuch as they presented primarily unprecedented, novel, and complex issues of state law. As stated by the district court: "The interest of judicial economy and convenience would not be served in this case by the retention of jurisdiction over the state claims because the federal claims have been eliminated from the case."¹³  The district court's purported reliance on the Gibbs considerations was diminished, however, when contrary to the teachings of Gibbs¹⁴  it denied Empire's motions to dismiss and retained jurisdiction suspending all further proceedings pending the commencement and final determination of an action in state court encompassing all state law claims, cross-claims, and counterclaims. This appeal followed.

* For the purposes of review we will treat Judge MacMahon's April 12 order denying Empire's motions to dismiss and the concomitant retaining of federal district court jurisdiction as an order of abstention which is a " final" order and therefore within this court's appellate jurisdiction. 28 U.S.C. § 1291 (1970); Indiana State Employees Association, Inc. v. Richard A. Boehning, 511 F.2d 834, 835 (7th Cir.), Rev'd on other grounds, 423 U.S. 6, 96 S. Ct. 168, 46 L. Ed. 2d 148 (1975); Druker v. Sullivan, 458 F.2d 1272, 1273 (1st Cir. 1972). Although the district court's order was couched in terms of pendent jurisdiction and the discretionary exercise thereof, the practical effect of such an order, irrespective of technical nomenclature, was the postponement of any exercise of federal jurisdiction awaiting state court adjudication of questions of state law.¹⁵  In arriving at its decision to exercise its power of abstention the district court erroneously predicated federal jurisdiction on its finding that the state law claims were within its pendent jurisdiction.

II

Pendent jurisdiction developed largely as a result of problems facing federal courts due to the existence of parallel state and federal claims. It became increasingly evident that, in order for federal courts to exercise even limited jurisdiction, they must hear certain state claims.¹⁶  The concept of pendent jurisdiction as outlined by the Supreme Court in United Mine Workers v. Gibbs, supra, permitted the adjudication of state claims in conjunction with federal claims between the same parties if the state and federal claims derive from a common nucleus of operative fact or are of such a nature that the parties would normally be expected to try them in one judicial proceeding. United Mine Workers v. Gibbs, supra. Therefore, when the relationship between the state and federal claims permitted the conclusion that the whole action was really one claim under the Constitution, laws, or treaties of the United States, adjudication of a nonfederal claim by a federal court was justified under article III, section 2 of the United States Constitution.¹⁷ 

Application of the doctrine of pendent jurisdiction is discretionary; it requires a balancing of the considerations of comity, fairness to the litigants, judicial economy, and the avoidance of needless decisions of state law. United Mine Workers v. Gibbs, supra. Dismissal of the state claim is the recommended procedure if state issues predominate or jury confusion is likely due to divergent legal theories, and in cases where the federal claim is disposed of prior to trial. United Mine Workers v. Gibbs, supra; Nolan v. Meyer, 520 F.2d 1276 (2d Cir.), Cert. denied,423 U.S. 1034, 96 S. Ct. 567, 46 L. Ed. 2d 408 (1975); Kavit v. A. L. Stamm & Co., 491 F.2d 1176 (2d Cir. 1974); Yanity v. Benware, 376 F.2d 197 (2d Cir.), Cert. denied, 389 U.S. 874, 88 S. Ct. 167, 19 L. Ed. 2d 158 (1967); T. B. Harms Co. v. Eliscu, 339 F.2d 823 (2d Cir. 1964), Cert. denied, 381 U.S. 915, 85 S. Ct. 1534, 14 L. Ed. 2d 435 (1965). Here the district court weighed these factors and found that the likelihood of prejudice to Goldberg due to the possible running of the state statute of limitations necessitated retention of jurisdiction under the doctrine of pendent jurisdiction.¹⁸ 

The district court was correct in considering this factor, and its retention of jurisdiction instead of dismissing the state claims cannot be considered an abuse of discretion. The district court did, however, err in finding A fortiori that because the state and federal claims arose out of a common nucleus of operative fact they were necessarily within the court's pendent jurisdiction.

Pendent jurisdiction as defined in Gibbs applies to state law claims which are joined in the complaint with federally cognizable claims and which are asserted by the original plaintiff against the original defendant. United Mine Workers v. Gibbs, supra; Blake v. Pallan, 554 F.2d 947, 956 n. 11 (9th Cir. 1977). It is the combination of state and federal claims in a complaint that gives rise to the doctrine of pendent jurisdiction. On the other hand, when, subsequent to the filing of the complaint, a party other than the original plaintiff injects state claims into a controversy as counterclaims, cross-claims, or third-party claims, such claims fall within the court's ancillary jurisdiction rather than its pendent jurisdiction.

III

The concept of ancillary jurisdiction allows a district court once it has acquired jurisdiction over a case or controversy to decide matters incident to the main claim which otherwise could not be asserted independently. It is invoked to avoid piecemeal litigation which might occur due to the irreconcilability between article III limits on jurisdiction and the permissive rules of joinder adopted by the Federal Rules of Civil Procedure. United States v. United Pacific Ins. Co., 472 F.2d 792 (9th Cir.), Cert. denied, 411 U.S. 982, 93 S. Ct. 2273, 36 L. Ed. 2d 958 (1973). The scope of ancillary jurisdiction is not well defined and its application requires a consideration of factors similar to those consulted when exercising pendent jurisdiction.

The concept of ancillary jurisdiction has supported non-federal claims having relation to property under a federal court's control as in bankruptcy proceedings. Steelman v. All Continent Corp., 301 U.S. 278, 57 S. Ct. 705, 81 L. Ed. 1085 (1937); Samuel C. Ennis & Co., Inc. v. Woodmar Realty Co., 542 F.2d 45 (7th Cir. 1976), Cert. denied, 429 U.S. 1096, 97 S. Ct. 1112, 51 L. Ed. 2d 543 (1977). State claims incidental to a receivership established by a federal court come within the scope of a federal court's ancillary jurisdiction. Tcherepnin v. Franz, 485 F.2d 1251 (7th Cir. 1973), Cert. denied, 415 U.S. 918, 94 S. Ct. 1416, 39 L. Ed. 2d 472 (1974); Esbitt v. Dutch-American Mercantile Corp., 335 F.2d 141 (2d Cir. 1964); Riehle v. Margolies, 279 U.S. 218, 49 S. Ct. 310, 73 L. Ed. 669 (1929), as well as acts undertaken by a federal court to protect and/or effectuate its judgments. Dugas v. American Surety Co., 300 U.S. 414, 57 S. Ct. 515, 81 L. Ed. 720, Rehearing denied, 301 U.S. 712, 57 S. Ct. 787, 81 L. Ed. 1365 (1937) (protect); Martina Theatre Corp. v. Schine Chain Theatres, Inc., 278 F.2d 798 (2d Cir. 1960) (effectuate).

The required nexus between the underlying federal jurisdiction-conferring claim and a non-federal counterclaim or cross-claim is not altogether clear. The leading case for the determination of ancillary jurisdiction over counterclaims (under Equity Rule 12) is Moore v. New York Cotton Exchange, 270 U.S. 593, 46 S. Ct. 367, 70 L. Ed. 750 (1926). The Supreme Court in Moore sanctioned the retention of jurisdiction over the defendant's non-federal counterclaim notwithstanding the dismissal on the merits of the plaintiff's jurisdiction-conferring claim. The Court held that:

So close is the connection between the case sought to be stated in the bill and that set up in the counterclaim, that it only needs the failure of the former to establish the latter; but the relief afforded by the dismissal of the bill is not complete without an injunction restraining appellant from continuing to obtain by stealthy appropriation what the court held he could not have by judicial compulsion.¹⁹ 

Therefore, when parties to an action have conflicting state and federal claims arising out of the same transaction a federal court has ancillary jurisdiction to decide All claims, thereby avoiding the potential for piecemeal litigation. The general rule as applied to counterclaims is that a federal court has ancillary jurisdiction over compulsory counterclaims since by their definition they arise out of the same transaction or occurrence that is the subject matter of the opposing party's claim. Baker v. Gold Seal Liquors, Inc., 417 U.S. 467, 468 n. 1, 94 S. Ct. 2504, 2506, 41 L. Ed. 2d 243 (1974); Mayer Paving & Asphalt Co. v. General Dynamics Corp., 486 F.2d 763 (7th Cir. 1973), Cert. denied, 414 U.S. 1146, 94 S. Ct. 899, 39 L. Ed. 2d 102 (1974); United States v. Heyward-Robinson Co., 430 F.2d 1077 (2d Cir. 1970), Cert. denied, 400 U.S. 1021, 91 S. Ct. 582, 27 L. Ed. 2d 632 (1971); Dery v. Wyer, 265 F.2d 804 (2d Cir. 1959); Lesnik v. Public Industrials Corp., 144 F.2d 968, 976 n. 10 (2d Cir. 1944); Kaumagraph Co. v. General Trade Mark Corp., 12 F. Supp. 230 (S.D.N.Y. 1935), Aff'd per curiam, 102 F.2d 992 (2d Cir. 1939). The same rule for determining ancillary jurisdiction over compulsory counterclaims holds true for cross-claims pursuant to Rule 13(g) of the Federal Rules of Civil Procedure.²⁰ 

Evaluating the cross-claims and counterclaims asserted in the present controversy in the light of these general principles, we find that Empire's cross-claims seeking contribution, indemnity, and damages were properly within the district court's ancillary jurisdiction inasmuch as they arose out of the same transaction that was the subject matter of the original complaint. Rule 13(g) specifically sanctions claims between coparties for contribution and indemnity such as those asserted by Empire. The entry of the stipulation of settlement resulted in prejudicial dismissal on the merits of Empire's cross-claims against codefendant Sitomer and additional defendant Aschkenasy. Empire's cross-claims against Goldberg for contribution and indemnity merit the same disposition in view of the fact that the settlement eliminated the underlying jurisdictional bases for such claims. The stipulation of settlement also necessitates dismissal of Empire's remaining cross-claims against Goldberg for damages and reimbursement, this being the recommended procedure when the jurisdiction-conferring claim is dismissed prior to trial. United Mine Workers v. Gibbs, supra; Nolan v. Meyer, supra; Kavit v. A. L. Stamm & Co., supra; Yanity v. Benware, supra; T. B. Harms Co. v. Eliscu, supra. The fact that the federal claim was dismissed pursuant to a settlement rather than by judicial determination does not justify the application of a different rule. The district court therefore erred in retaining jurisdiction over Empire's cross-claims in the absence of a federal jurisdiction-conferring claim.

Having disposed of the state claims asserted Against Goldberg, we now address the state law claims asserted By him. Goldberg's most recent amended answer contained four state law claims. The claims for injurious involvement and fraud were denominated as counterclaims against Empire and cross-claims against the Sitomer defendants. The two remaining claims for breach of warranty and fraud took the form of cross-claims against only the Sitomer defendants.

Inasmuch as the test for determining the scope of ancillary jurisdiction over counterclaims and cross-claims is synonymous with the Rule 13(a) test for defining compulsory counterclaims, the application of this standard to Goldberg's claims will be determinative of the issue of ancillary jurisdiction. The absence of any accepted test for the determination of whether a claim is compulsory as opposed to permissive has resulted in reliance on numerous tests, all of which tend to support the conclusion that the counterclaim arises out of the same transaction or occurrence that is the subject matter of the opposing party's claim.²¹  The factors most generally considered by these tests as indicators of the compulsory nature of a claim are: (1) identity of facts between original claim and counterclaim; (2) mutuality of proof; (3) logical relationship between original claim and counterclaim. Although these factors or tests may be indicative in one sense or another of the compulsory character of a counterclaim, no one of them is conclusive, and should not be relied on exclusively.

While it is true that Goldberg's counterclaims for injurious involvement and fraud (also cross-claims) bear some factual relationship to the original claim for securities fraud, it cannot be said that they arise out of the same transaction or occurrence for the purpose of invoking ancillary jurisdiction. First, Goldberg's claims, which raise unprecedented questions of tort law, contract law, and warranties, go far beyond the purview of the plaintiff's claims seeking relief because of defendants' violations of the securities and exchange acts. Secondly, a mere Sine qua non relationship between Goldberg's alleged injury and the underlying securities violations is insufficient to satisfy the required nexus which gives rise to a compulsory counterclaim. Additionally, the quantum of proof required to establish the allegations of the original complaint would fall far short of the proof required to support Goldberg's claims.²²  For example, Goldberg concedes that proof of his damages as a result of his alleged injurious involvement will include events which occurred more than one year after the public offering. Lastly, the factual basis of Goldberg's claims for damages concerns primarily events subsequent and unrelated to the alleged omissions in the registration statement and prospectus, and cannot be found to arise out of the same transaction or occurrence.

In view of the dissimilarities between Goldberg's counterclaims and the original claim, we find that the counterclaims are not compulsory as defined by Rule 13(a) and, therefore, were not automatically within the scope of the district court's ancillary jurisdiction. Baker v. Gold Seal Liquors, Inc., supra; Lesnik v. Public Industrials Corp., supra; Mayer Paving & Asphalt Co. v. General Dynamics Corp., supra; cf. United States v. Heyward-Robinson Co., 430 F.2d 1077, 1088 (2d Cir. 1970), Cert. denied, 400 U.S. 1021, 91 S. Ct. 582, 27 L. Ed. 2d 632 (1971) (concurring opinion, Friendly, C. J.). Goldberg's counterclaims are therefore permissive counterclaims only, and the district court may not exercise its ancillary power of jurisdiction over them unless there exists some independent jurisdictional base such as the existence of a federal question upon which federal jurisdiction may be founded. Aldens, Inc. v. Packel, 524 F.2d 38 (3d Cir. 1975), Cert. denied, 425 U.S. 943, 96 S. Ct. 1684, 48 L. Ed. 2d 187 (1976); Polorn Products, Inc. v. Lybrand, Ross Bros. & Montgomery, 66 F.R.D. 610 (S.D.N.Y.), Rev'd on other grounds, 534 F.2d 1012 (2d Cir. 1975).

Federal question jurisdiction under 28 U.S.C. § 1331 is unavailable because Goldberg's claims raise issues of state law and are only peripherally related to the federal securities statutes.²³  Absent any jurisdictional base the district court was without jurisdiction, ancillary or otherwise, and Goldberg's counterclaims should have been dismissed for lack of jurisdiction.

The foregoing analysis of Goldberg's counterclaims applies with equal force to his cross-claims against Sitomer, inasmuch as the Rule 13(a) test for determining a compulsory counterclaim is identical to the Rule 13(g) test for cross-claims. Therefore, our finding that Goldberg's counterclaims for injurious involvement and fraud were permissive rather than compulsory precludes consideration of them as cross-claims against Sitomer. As to the remaining cross-claims against Sitomer for breach of warranty and fraudulent inducement in continuation of employment, we find that these claims clearly do not arise out of the same transaction or occurrence which was the subject matter of the original complaint; and, that being the case, they do not come within the definition of cross-claims contained in Rule 13(g). The independent quality of Goldberg's remaining claims not only renders them inappropriate as cross-claims, but also destroys their ancillary character which in turn prohibits the exercise of federal jurisdiction. Goldberg's cross-claims as well as his counterclaims must be dismissed for lack of jurisdiction.

Inasmuch as the district court was without jurisdiction to hear Goldberg's claims, its decision to abstain pending state court adjudication was in error. The exercise of abstention power by a federal court assumes a case properly within the jurisdiction of the federal court, because abstention necessarily involves discretion to postpone or decline to exercise federal jurisdiction. Harman v. Forssenius, 380 U.S. 528, 85 S. Ct. 1177, 14 L. Ed. 2d 50 (1965); England v. Louisiana State Bd. of Med. Exam., 375 U.S. 411, 84 S. Ct. 461, 11 L. Ed. 2d 440 (1964); Williams v. Murdock, 350 F.2d 840 (3d Cir. 1965).²⁴ 

Reversed and remanded with instructions to dismiss all cross-claims and counterclaims.

LUMBARD, Circuit Judge, concurs in the result.