                                      PRECEDENTIAL

      UNITED STATES COURT OF APPEALS
           FOR THE THIRD CIRCUIT
               ______________

                 No. 17-3012
               ______________
IN RE: COMMUNITY BANK OF NORTHERN VIRGINIA
   MORTGAGE LENDING PRACTICES LITIGATION

         *Specter Specter Evans & Manogue,
                                   Appellant

          *(Pursuant to Fed. R. App. P. 12(a)
                  ______________

    On Appeal from the United States District Court
       for the Western District of Pennsylvania
               (D.C. No. 2-03-cv-00425)
     District Judge: Honorable Arthur J. Schwab
                   ______________

               Argued October 2, 2018
                  ______________

Before: SHWARTZ, ROTH, and FISHER, Circuit Judges.

              (Filed: December 20, 2018)
                   ______________

             OPINION OF THE COURT
                 ______________
Stanley M. Stein [ARGUED]
445 Fort Pitt Boulevard
Suite 150
Pittsburgh, PA 15219

              Counsel for Appellant

Gary F. Lynch        [ARGUED]
Jamisen A. Etzel
Carlson Lynch Sweet & Kilpela
1133 Penn Avenue
5th Floor, Suite 210
Pittsburgh, PA 15222

              Counsel for Appellee

SHWARTZ, Circuit Judge.

        R. Bruce Carlson was co-lead counsel representing the
plaintiffs in In re Community Bank of Northern Virginia
Mortgage Lending Practices Litigation, MDL No. 1674 (“In re
Community Bank” or “CBNV”). He began his work on the
case while an associate with Specter Specter Evans &
Manogue (“SSEM” or “the firm”), and continued to work on
the case after he left the firm. He entered into agreements with
SSEM regarding how fees recovered in CBNV, and other
cases, would be allocated between himself and SSEM.

       After the final order approving the class settlement and
fee award was entered in CBNV, SSEM filed a state court
breach of contract action against Carlson, alleging that he owed
the firm a portion of the fees he received in CBNV. Carlson




                                  2
moved the District Court to stay the state case and confirm his
fee award. The Court exercised ancillary jurisdiction over the
state contract dispute, stayed the state case, and granted
Carlson’s motion, concluding that SSEM was not entitled to
any portion of the fee Carlson had received because a condition
precedent for triggering any payment to SSEM had not
occurred.

        The District Court erred in exercising ancillary
jurisdiction over the state contract dispute because it did not
retain jurisdiction over disputes arising from the allocation of
fees among counsel, the state law breach of contract claim is
factually distinct from the federal claims the CBNV plaintiffs
made against the bank, exercising ancillary jurisdiction was not
needed for the Court to resolve matters properly before it, and
the Court had no control over the funds SSEM seeks. Because
the Court improperly exercised ancillary jurisdiction over this
dispute, we will reverse the order exercising ancillary
jurisdiction, lift the stay of the state court action, vacate the
order confirming Carlson’s fees, and leave to the state court the
resolution of this state law contract dispute.

                                I

        SSEM hired Carlson as an associate in 2000 for a salary
and various benefits, as well as a percentage of fees earned by
the firm for class actions he originated. Within weeks of his
hiring, Carlson identified individuals who had incurred losses
allegedly arising from their dealings with lenders who paid
illegal kick-backs to undisclosed third parties. Based upon his
investigation, Carlson filed several lawsuits that eventually
became part of the CBNV multidistrict litigation, alleging
violations of the Real Estate Settlement Procedures Act




                                    3
(“RESPA”), 12 U.S.C. § 2601 et seq.; the Truth in Lending Act
(“TILA”), 15 U.S.C. § 1601 et seq., as amended by the Home
Ownership and Equity Protection Act (“HOEPA”), id. at §
1639 et seq.; and the Racketeer Influenced and Corrupt
Organizations Act (“RICO”), 18 U.S.C. § 1961 et seq. In 2003,
the District Court granted a joint motion for class certification
and approval of a class settlement, which would have paid $33
million to the class and $8.1 million to class counsel. Objectors
and proposed intervenors appealed the order.

        In February 2004, while the appeal of the class
certification and class settlement order was pending, Carlson
and SSEM entered into an agreement concerning how they
would split fees for CBNV. The agreement noted that the
District Court had approved a class counsel fee award of $8.1
million that was on appeal, and that, “assuming that the district
court’s Order is affirmed . . . , Carlson shall be entitled to 20%
of the first $2,000,000 and 35% of all amounts in excess of
$2,000,000.” App. 289. Two months later, Carlson decided to
leave the firm, and in June 2004, he and SSEM entered into a
Separation Agreement. That agreement states:

       All defense counsel, all plaintiff’s counsel and
       all courts shall be advised that SSEM and
       CARLSON have a joint interest in a portion of
       the fee in the cases set forth herein [including
       CBNV], and that, with respect to that interest,
       CARLSON and SSEM (as soon as practicable
       but in no event later than June 1, 2004) shall
       prepare and dispatch a joint letter to defense
       counsel directing that their respective fee
       interests be wired to separate escrow accounts,
       consistent with the fee sharing arrangements set




                                    4
      forth in this Agreement. CARLSON expressly
      represents that he has consulted with defense
      counsel in each of these cases and they are
      agreeable to this arrangement. CARLSON and
      SSEM will also file a notice under seal with each
      court wherein a case is pending that is subject to
      this Agreement that confirms the fee
      arrangement between SSEM and CARLSON for
      that case.

App. 258-59 ¶ 13. The Separation Agreement acknowledges
previously negotiated fee-splitting agreements and, with
respect to CBNV states, in relevant part:

      SSEM and/or CARLSON are entitled to fifty-
      percent (50%) of the $8.1 million fee approved
      in this case (after payment to objectors). The
      parties previously agreed that CARLSON is
      entitled to twenty percent (20%) of the first $2
      million payable to SSEM and/or CARLSON and
      thirty-five percent (35%) of all amounts in
      excess of $2 million. This agreement shall
      continue intact, irrespective of CARLSON’S
      ongoing responsibilities in the matter and any
      time that CARLSON may devote to the appeal of
      the settlement’s approval and thereafter.

App. 259-60 ¶ 16. After Carlson left SSEM, we vacated the
2003 class certification and class settlement order and
remanded the case. In re Cmty. Bank, 418 F.3d 277, 301-02
(3d Cir. 2005). Carlson notified SSEM of this ruling and
sought to change the Separation Agreement. The record is
silent as to whether SSEM responded to this notification.




                                 5
        In 2008, the District Court granted a second joint
motion for class certification and approval of a class
settlement. In re Cmty. Bank, No. 03-0425, 2008 WL 239650,
at *10-11 (W.D. Pa. Jan. 25, 2008). While the second order
was on appeal, Carlson suggested that he and SSEM enter
mediation to renegotiate their fee-splitting agreement. There
is no evidence that SSEM responded to this suggestion. In the
meantime, we vacated the second class certification and class
settlement order and again remanded. In re Cmty. Bank, 622
F.3d 275, 279 (3d Cir. 2010), as amended (Oct. 20, 2010).
Carlson’s partner Gary Lynch informed SSEM that the second
order had been vacated and again sought to revise the fee-
splitting agreement. Nothing in the record indicates the
agreement was revised.

       After the second remand, plaintiffs filed an amended
complaint, the parties engaged in discovery and motion
practice, and the District Court entered an order granting a
contested motion for class certification, In re Cmty. Bank, Nos.
03cv0425 and 05cv0688, 2013 WL 3972458, at *9 (W.D. Pa.
July 31, 2013), which we affirmed, In re Cmty. Bank, 795 F.3d
380, 410 (3d Cir. 2015). Thereafter, the parties reached a class
settlement, which the District Court approved. The Court
permitted the parties to use a three-arbitrator panel to conduct
a “high-low” arbitration to fix the actual settlement amount and
the fee award. The Court’s final order retained jurisdiction
over any dispute or cause of action “related to the
administration and/or enforcement of the Agreement,
Settlement, [or] Order,” App. 204, but it excised the section of
the order concerning attorneys’ fees and expenses. The Court
also denied without prejudice the pending motion for attorney




                                  6
fees “since jurisdiction lies with the Arbitration Panel.” App.
290.

       In March 2017, the panel determined the value of the
settlement, establishing a $24 million common fund from
which it awarded $8.4 million in counsel fees. The arbitrators
did not allocate the $8.4 million among plaintiffs’ counsel.
Instead, the panel stated that class counsel

       have irrevocably agreed on an allocation of
       attorneys’ fees and reimbursable expenses
       among themselves . . . . Such attorneys’ fees are
       . . . to be allocated among the various Class
       Counsel as they have previously agreed. No
       fees, costs or expenses are approved or
       authorized except as described herein.

App. 209-10. The attorneys’ fees were distributed to class
counsel, including Carlson.

        In June 2017, SSEM sued Carlson in the Court of
Common Pleas of Allegheny County, Pennsylvania, arguing
that Carlson breached their 2004 Separation Agreement and
seeking $1.9 million. Carlson moved the District Court for
orders staying the state court action and confirming his fee
award. The Court exercised ancillary jurisdiction, stayed the
state court action, and granted Carlson’s motion to confirm his
fee award. In re Cmty. Bank, No. 03CV0425, 2017 WL
3621509, at *8 (W.D. Pa. Aug. 23, 2017). With respect to its
exercise of ancillary jurisdiction, the Court explained

       the utter lack of attendance on the part of any
       representative of SSEM, the Court’s own




                                  7
      experience with the Parties’ counsel during the
      complex negotiations which ultimately led to the
      Settlement Agreement (ECF 759-1) and the
      Court-approved Notice (ECF 761), and the
      statements contained in paragraph 5 of the
      decision . . . of the Arbitration Panel (ECF 778),
      that the payment of attorneys’ fees were (and are)
      inextricably intertwined with the final resolution
      of this 14-year old lawsuit. This Court, the
      Parties, and their counsel have a vital interest in
      the arrangements insofar as the payment of
      attorneys’ fees is concerned given not only the
      lengthy history of this case, but to preserve the
      integrity of the various legal processes
      (mediation, court intervention/involvement, and
      final and binding arbitration) that brought about
      a hard-fought and creative resolution to this
      matter.

Id. at *7; see also id. at *3-4. With respect to confirming
Carlson’s fee award, the Court determined that Carlson was
entitled to the full amount of fees he received from the CBNV
litigation because the agreements between SSEM and Carlson
contained an unfulfilled condition precedent that excused
Carlson from performance. Id. at *7-8. SSEM appeals.




                              II




                                   8
                                A

       The threshold issue for us to resolve is whether the
District Court properly exercised ancillary jurisdiction over the
state contract dispute.1 We have jurisdiction to review the
Court’s exercise of jurisdiction pursuant to 28 U.S.C. § 1291
and review that decision de novo. See Bryan v. Erie Cty.
Office of Children & Youth, 752 F.3d 316, 321 n.1 (3d Cir.
2014).

                                B

       “Federal courts are courts of limited jurisdiction. They
possess only that power authorized by [the United States]
Constitution and [federal] statute[s.]” Kokkonen v. Guardian
Life Ins. Co. of Am., 511 U.S. 375, 377 (1994). The burden of
demonstrating that a case falls within the jurisdiction of the
federal court rests upon the party asserting jurisdiction. Id.
The most common grounds for a federal court’s jurisdiction are
federal question jurisdiction and diversity jurisdiction. 28
U.S.C. §§ 1331, 1332. Courts may also assert ancillary
jurisdiction “for two separate, though sometimes related,
purposes: (1) to permit disposition by a single court of claims
that are, in varying respects and degrees, factually
interdependent2 and (2) to enable a court to function

       1
          The District Court lacked original jurisdiction over the
state law breach of contract claim because it involves neither
federal question nor diversity jurisdiction.
        2
          Congress codified this principle under the heading of
“supplemental jurisdiction” in 28 U.S.C. § 1367. Except for
exclusions not applicable here, § 1367(a) provides




                                    9
successfully, that is, to manage its proceedings, vindicate its
authority, and effectuate its decrees.”3 Kokkonen, 511 U.S. at
379-80 (footnote inserted) (citations omitted).

                               C

        Neither of these purposes is advanced through the
exercise of ancillary jurisdiction in this case. As a preliminary
matter, contrary to Carlson’s assertion, the District Court did
not retain jurisdiction over disputes arising from the allocation
of fees among counsel. The allocation of the fee award to class
counsel occurred pursuant to a confidential agreement among
counsel and the allocation was not the subject of a ruling by the
arbitrators or the Court.4 More significantly, the Court struck


       the district courts shall have supplemental
       jurisdiction over all other claims that are so
       related to claims in the action within such
       original jurisdiction that they form part of the
       same case or controversy under Article III of the
       United States Constitution.

28 U.S.C. § 1367(a). The exercise of supplemental jurisdiction
is discretionary. Id. at § 1367(c).
        3
          For instance, the exercise of ancillary jurisdiction is
appropriate where, without exercising such jurisdiction, a
pending federal case would be contingent on a state
proceeding. See Bryan, 752 F.3d at 322 (reversing court’s
ruling that it did not have jurisdiction to consider dispute
regarding enforceability of high-low settlement agreement).
        4
          Neither the District Court nor the Arbitration Panel
was involved in the allocation of fees among plaintiffs’
counsel. Thus, the cases Carlson cites for his argument that a




                                   10
the paragraphs of the final order approving the class action
pertaining to fees. App. 200-04, 290. In its final approval
order with the stricken language, the Court stated

       this Court expressly retains jurisdiction as to all
       matters relating to the administration and
       enforcement of the Agreement and Settlement
       and of this Order, and for any other necessary
       purpose as permitted by law, including, without
       limitation
       ....
       entering such additional Orders as may be
       necessary or appropriate to protect or effectuate
       the Court’s Orders and/or to ensure the fair and
       orderly administration of the settlement and the
       distribution of the Arbitration Panel’s awards[.]

App. 204. By striking the fee language, it excluded fee issues
from matters over which it retained jurisdiction.5


court may “reject a fee allocation agreement where it finds that
the agreement rewards an attorney in disproportion to the
benefits that attorney conferred upon the class—even if the
allocation in fact has no impact on the class,” are inapposite.
See Appellee’s Br. at 31-32 (quoting In re FPI/Agretech Sec.
Litig., 105 F.3d 469, 473 (9th Cir. 1997); citing Jones v.
Amalgamated Warbasse Houses, Inc., 721 F.2d 881, 884 (2d
Cir. 1983); then citing In re MRRM, P.A., 404 F.3d 863, 867-
69 (4th Cir. 2005)).
        5
          Moreover, once the class action has been settled and
dismissed, the mere fact of that original federal jurisdiction is
not “the basis for federal-court jurisdiction over the contract
dispute.” Kokkonen, 511 U.S. at 381.




                                  11
        While the District Court’s decision not to retain
jurisdiction over attorney fee disputes may be sufficient for it
to decline to exercise ancillary jurisdiction here, there are
additional reasons why exercising ancillary jurisdiction was an
error. First, SSEM’s breach of contract claim is not factually
interdependent with the federal claims asserted in CBNV.6
CBNV involved federal statutory claims arising from allegedly
deceptive lending practices, whereas the state case involved a
state law contract dispute between an attorney and his former

       6
          See Schwab v. H.J. Heinz Co., Civ. No. 11-6463
(KM), 2015 WL 13236643, at *4 (D.N.J. Nov. 6, 2015) (“This
is a dispute between attorneys only . . . . Nor is [the attorney]
trying to either vacate or enforce the settlement. Rather, [the
attorney] as a third party is asserting a claim against a fee that
presumably is in the hands of another attorney . . . . Such a
dispute between non-parties to the underlying action bears a
tenuous relation to the underlying action. Analysis of the
merits of such a claim would involve contract law and the law
of attorney and client; neither the fact-finding nor the legal
analysis would have much to do with the merits of the
underlying products liability action. In short, this is a poor
candidate for the court’s discretionary exercise of ancillary
jurisdiction. This is a state-law dispute between attorneys that
should be pursued, if anywhere, in state court.” (citing Barreto
v. Reed, No. CIV. A. 93–2811, 1994 WL 396425, at *1 (E.D.
Pa. July 28, 1994) (declining to exercise ancillary jurisdiction
over a dispute between attorneys where dispute did not arise
from transaction at issue in the underlying action, court would
have to engage in new fact-finding, and state proceedings
would determine the attorney’s respective rights and
obligations))).




                                   12
firm as to how they would split a fee award. The fee-splitting
case is not the type of dispute one would expect to be tried with
the federal deceptive lending claims in CBNV. See City of
Chicago v. Int’l Coll. of Surgeons, 522 U.S. 156, 164-65
(1997) (explaining that “the federal courts’ original jurisdiction
over federal questions carries with it jurisdiction over state law
claims that ‘derive from a common nucleus of operative fact,’
such that ‘the relationship between [the federal] claim and the
state claim permits the conclusion that the entire action before
the court comprises but one constitutional “case.”’” (quoting
United Mine Workers of Am. v. Gibbs, 383 U.S. 715, 725
(1966))).

        Second, exercising jurisdiction over the breach of
contract claim was not necessary for the District Court to
“manage its proceedings, vindicate its authority, [or] effectuate
its decrees.” Kokkonen, 511 U.S. at 380. Courts have
exercised ancillary jurisdiction over fee disputes between
clients and former counsel where resolution of the fee dispute
enables the court to resolve the underlying action over which
the court has jurisdiction, see Novinger v. E.I. DuPont de
Nemours & Co., Inc., 809 F.2d 212, 217 (3d Cir. 1987), but
that is not the situation here. In this case, the underlying action
is settled and we are asked to decide “whether ancillary
jurisdiction [nevertheless] extends to the resolution of a post
settlement fee dispute between two attorneys, only one of
whom was attorney of record,” a question we explicitly
declined to address in Novinger. Id. at 218 n.4. Today, we
resolve that open question and join the Court of Appeals for
the Fourth Circuit in holding that a federal court should decline
to exercise ancillary jurisdiction over a fee dispute between
two attorneys where the court has no control over the funds and
the fee-splitting dispute has no impact on the timing or




                                   13
substance of the litigants’ relief in the underlying case over
which the federal court has jurisdiction. In reaching the same
conclusion, the court in Taylor v. Kelsey, 666 F.2d 53, 54 (4th
Cir. 1981), observed

      [t]he fee dispute did not arise as a matter of
      necessity from anything which occurred in the
      proceedings of the [underlying] litigation, nor
      did the district court have control over the fee in
      the sense that the court was required to establish
      and distribute a fee. Instead, the controversy
      arose purely from a private contract dispute
      between two Virginia residents. Under these
      circumstances, we see no basis for ancillary
      jurisdiction.

Id. That is the exact situation presented here. SSEM and
Carlson’s dispute is between two Pennsylvania residents and
did not arise as a result of any rulings in CBNV. While their
fight became ripe when Carlson allegedly failed to share with
SSEM the fees he received from the class settlement, any
obligation he may have had to do so is based upon a private
agreement between him and his former firm. Thus, the
disputed issue “did not arise as a matter of necessity from
anything” that occurred in the CBNV proceedings. Id.
Moreover, the resolution of the fee-splitting case will have no
impact on the class or the fee award.7

      7
         Carlson’s reliance on a district court’s role as a
fiduciary for a class does not alter this conclusion. Here, the
District Court satisfied its duty to thoroughly review fee
applications. In re Cendant Corp. PRIDES Litig., 243 F.3d
722, 728, 730 (3d Cir. 2001) (citation omitted). It approved a




                                 14
        Courts exercising ancillary jurisdiction over fee
disputes between attorneys have done so where the district
court had control over the disputed funds. Law Offices of
David Efron v. Matthews & Fullmer Law Firm, 782 F.3d 46,
52 (1st Cir. 2015) (exercising ancillary jurisdiction over fee
dispute between attorneys where “court’s control over . . . the
partially executed judgment . . . conferred authority to
determine the proper recipients of those funds in order to
conclude the court’s responsibilities in the underlying action”);
see Baer v. First Options of Chi., Inc., 72 F.3d 1294, 1300-01
(7th Cir. 1995) (exercising jurisdiction where court had


settlement that ensured that the class was compensated at one
of two amounts to be selected by an arbitration panel, and there
is no assertion that the $24 million award the arbitrators
selected was not in the class’ interest. In addition, there has
been no challenge to the reasonableness of the $8.4 million fee
award. Resolution of the state court case will not impact the
amount of the common fund awarded to the class or the amount
of attorney’s fees payable from that fund to class counsel. Cf.
Grimes v. Chrysler Motors Corp., 565 F.2d 841, 844 (2d Cir.
1977) (affirming the exercise of ancillary jurisdiction in a fee
dispute between the attorney of record and the trial counsel,
both from New York, in a personal injury action because
“distribution of the Grimes settlement funds and its
determination of appropriate disbursements was clearly
ancillary to its approval of the settlement in the case”). Put
differently, the class members’ recovery was fixed and it
would not be reduced by how Carlson may split the fee award
he received. In short, those to whom the Court owed a
fiduciary duty are in no way impacted by this private fee-
splitting dispute.




                                  15
retained it and held disputed funds in escrow); Grimes v.
Chrysler Motors Corp., 565 F.2d 841, 844 (2d Cir. 1977)
(exercising jurisdiction where court had control of funds).8
Here, as in Taylor, 666 F.2d at 54, the funds have been
distributed and thus the District Court had no control over them
when Carlson asked the Court to exercise ancillary jurisdiction
over SSEM’s state court action and confirm his fee award.

       The District Court was understandably troubled by the
fact that SSEM provided no notice of its interest in the fee
award despite the fact both the firm and Carlson were bound
by their Separation Agreement to do so.               It is also
understandable that the Court had an interest in bringing to
conclusion any matters that could have even tangentially
touched upon CBNV, a case over which it presided for fourteen
years. In re Cmty. Bank, 2017 WL 3621509, at *7; see also id.
at *3-4 (discussing Novinger, 809 F.2d at 214). Nonetheless,
the Court did not retain jurisdiction over disputes regarding the
allocation of fees among counsel, SSEM’s breach of contract
claim is not factually interdependent with the federal deceptive
lending claims asserted in CBNV, exercising jurisdiction was
not necessary for the Court to manage its affairs, and the Court
had no control over the funds SSEM seeks.9 Accordingly, the
Court erred in exercising ancillary jurisdiction.

       8
         See also Edwards v. Doe, 331 F. App’x. 563, 570 (10th
Cir. 2009) (exercising jurisdiction even though court did not
retain it or have control over the disputed funds where the
dispute involved an attorney’s lien that “create[d] a direct
connection to the underlying litigation”).
       9
         In addition, no federal interest is implicated by the fee
dispute. That the federal claims against the bank in CBNV
permit an award of attorney’s fees, 12 U.S.C. § 2607(d)(5)




                                   16
       Because the District Court lacked jurisdiction, it
wrongly stayed the state proceedings and adjudicated the
contract dispute. We will therefore lift the stay, vacate the
order confirming the fee award, and leave for the state court to
decide the merits of the contract dispute.

                              III

       For the foregoing reasons, we will reverse the order
exercising ancillary jurisdiction, lift the stay, and vacate the
order confirming Carlson’s fees.




(RESPA fee provision); 15 U.S.C. 1640(a)(3) (TILA and
HOEPA fee provision); 18 U.S.C. 1964(c) (RICO fee
provision), and many class settlements under Federal Rule of
Civil Procedure 23 include fee awards that are subject to court
approval, does not prevent, nor is any federal policy interest
implicated by, resolution of this fee dispute in state court.




                                    17
