American Fiber v. Tyco Healthcare

• Decision Date: 29 March 2004
• Docket Number: No. 03-2297.,03-2297.
• Citation: 362 F.3d 136
• Parties: AMERICAN FIBER & FINISHING, INC., Trustee of American Fiber & Finishing Realty Trust, Plaintiff, Appellant, v. TYCO HEALTHCARE GROUP, LP, Defendant, Appellee.
• Court: U.S. Court of Appeals — First Circuit

362 F.3d 136

AMERICAN FIBER & FINISHING, INC., Trustee of American Fiber & Finishing Realty Trust, Plaintiff, Appellant, v. TYCO HEALTHCARE GROUP, LP, Defendant, Appellee.

No. 03-2297.

United States Court of Appeals, First Circuit.

Submitted February 6, 2004.

Decided March 29, 2004.

Diane C. Tillotson, Joseph L. Bierwirth, Jr., Hemenway & Barnes, Martin E. Levin, and Stern, Shapiro, Weissberg & Garin, LP on brief and motion to dismiss for appellant.

Ben T. Clements and Clements & Clements, LLP on brief and opposition to motion for appellee.

Before BOUDIN, Chief Judge, TORRUELLA and SELYA, Circuit Judges.

SELYA, Circuit Judge.

This case began as a routine piece of environmental litigation. It has morphed into what could easily pass for a law school examination question in federal civil procedure. The tale follows.

On February 16, 2001, plaintiff-appellant American Fiber & Finishing, Inc. (AF & F), trustee of the American Fiber & Finishing Realty Trust, sued Tyco International (US), Inc. in the United States District Court for the District of Massachusetts. In its complaint, AF & F claimed that Tyco International was liable, as a successor in interest to Kendall Company, for response costs incurred in connection with the decontamination of an industrial site in Colrain, Massachusetts. Although AF & F asserted only state-law claims, federal jurisdiction attached based on diversity of citizenship (AF & F is a Delaware corporation that maintains its principal place of business in North Carolina and Tyco International is a Nevada corporation that maintains its principal place of business in New Hampshire) and the existence of a controversy exceeding $75,000 in amount. See 28 U.S.C. § 1332(a)(1).

Under Fed.R.Civ.P. 15(a), a plaintiff may amend its complaint once as of right before a responsive pleading is served. On April 2, 2001, AF & F exercised this prerogative and filed an amended complaint that dropped Tyco International as a defendant and inserted Tyco Healthcare Group, LP in its stead.¹ Otherwise, the amended complaint mimicked the original complaint: AF & F asserted the same state-law claims against Tyco Healthcare that it previously had asserted against Tyco International.

The switch of parties defendant worked a subtle change in the jurisdictional calculus. For purposes of diversity jurisdiction, a limited partnership is deemed to be a citizen of every state of which any of its general or limited partners are citizens. Carden v. Arkoma Assocs., 494 U.S. 185, 195-96, 110 S.Ct. 1015, 108 L.Ed.2d 157 (1990). Tyco Healthcare is a Delaware limited partnership and its general partner, SWD Holding, Inc. I, is incorporated in that state. Thus, Tyco Healthcare is deemed a citizen of Delaware for diversity purposes. So viewed, the change in parties should have raised a red flag about a possible lack of diversity, inasmuch as Tyco Healthcare and AF & F shared Delaware citizenship.

Although this land mine is obvious in hindsight, no one questioned the district court's subject matter jurisdiction at the time. By the same token, the use of Rule 15(a) to replace one party with another may be mildly controversial, see, e.g., Int'l Bhd. of Teamsters v. AFL-CIO, 32 F.R.D. 441, 442 (E.D.Mich.1963) (suggesting that the addition or discharge of parties is controlled by Rule 21 and that an amended pleading altering the identity of the parties therefore requires leave of court), but nobody raised that point. Indeed, Tyco Healthcare refrained from any sort of challenge to the propriety of the amended complaint, but, rather, answered it. From that point forward, the court presided over two years of pretrial discovery. On March 3, 2003, Tyco Healthcare moved for summary judgment. See Fed.R.Civ.P. 56(c). The district court granted the motion. Am. Fiber & Finishing, Inc. v. Tyco Healthcare Group, LP, 273 F.Supp.2d 155 (D.Mass.2003). This appeal ensued.

In short order, the character of the proceeding changed. Simultaneous with the filing of its appellate brief, AF & F moved to dismiss the appeal and to remand the case for the purpose of vacating the judgment. It asserted that, in preparing the jurisdictional statement for its appellate brief, it recognized for the first time that the parties were non-diverse and, accordingly, that the trial court lacked subject matter jurisdiction. Tyco Healthcare opposed the motion. We postponed oral argument on the appeal itself and took the motion to vacate under advisement. We turn now to the merits of that motion.

Federal courts are courts of limited jurisdiction. In the absence of jurisdiction, a court is powerless to act. Consistent with these principles, it is firmly settled that challenges to federal subject matter jurisdiction may be raised for the first time on appeal. See Kontrick v. Ryan, 540 U.S. 443, ___, 124 S.Ct. 906, 915, 157 L.Ed.2d 867 (2004); Halleran v. Hoffman, 966 F.2d 45, 47 (1st Cir.1992); see also Fed.R.Civ.P. 12(h)(3) ("Whenever it appears by suggestion of the parties or otherwise that the court lacks jurisdiction of the subject matter, the court shall dismiss the action."). Federal courts are expected to monitor their jurisdictional boundaries vigilantly and to guard carefully against expansion by distended judicial interpretation. Am. Fire & Cas. Co. v. Finn, 341 U.S. 6, 17-18, 71 S.Ct. 534, 95 L.Ed. 702 (1951). Just as a federal court cannot expand its jurisdictional horizon, parties cannot confer subject matter jurisdiction on a federal court "by indolence, oversight, acquiescence, or consent." United States v. Horn, 29 F.3d 754, 768 (1st Cir.1994).

In the case at hand, the parties concede that diversity is the only conceivable basis for federal subject matter jurisdiction. The initial complaint cleared this hurdle. The question, then, is what jurisdictional consequences attached to the replacement of Tyco International with Tyco Healthcare in AF & F's amended complaint. On this question, the protagonists part ways. AF & F contends that, even though it was unaware of the consequences at the time, Tyco Healthcare's arrival on the scene destroyed the requisite diversity and, thus, eliminated any vestige of federal subject matter jurisdiction. In contrast, Tyco Healthcare asseverates that the lack of diversity between it and AF & F did not divest the district court of jurisdiction because the original parties were diverse and the subsequent switch did not alter the fundamental nature of the action. After careful study of this conundrum, we are persuaded that AF & F's view is correct.

We begin with the abecedarian rule that there must be complete diversity among the parties to sustain diversity jurisdiction. See Strawbridge v. Curtiss, 7 U.S. (3 Cranch) 267, 267, 2 L.Ed. 435 (1806). That circumstance has not existed here from the moment that AF & F made Tyco Healthcare a party to the action and simultaneously dropped Tyco International from the equation. This appeal, therefore, appears to be a fish out of water.

Tyco Healthcare reminds us that appearances can be deceiving. Cf. Aesop, The Wolf in Sheep's Clothing (circa 550 B.C.). Indeed, "the rule that there must be complete diversity to sustain diversity jurisdiction is not absolute." Am. Nat'l Bank & Trust Co. v. Bailey, 750 F.2d 577, 582 (7th Cir.1984). For example, if the opposing parties are diverse at the moment of suit, but one of them then moves to the other's home state, diversity jurisdiction is not affected. See, e.g., Morgan's Heirs v. Morgan, 15 U.S. (2 Wheat.) 290, 297, 4 L.Ed. 242 (1817); Hawes v. Club Ecuestre El Comandante, 598 F.2d 698, 700-01 (1st Cir.1979).

Tyco Healthcare insists that the particular circumstances of this case — in which complete diversity existed when the action initially was commenced and was dissipated only by the subsequent filing of an amendment to the complaint — demand a finding of continued jurisdiction. In support of this claim, Tyco Healthcare holds fast to the Supreme Court's statement that it has "consistently held that if jurisdiction exists at the time an action is commenced, such jurisdiction may not be divested by subsequent events." Freeport-McMoRan, Inc. v. K N Energy, Inc., 498 U.S. 426, 428, 111 S.Ct. 858, 112 L.Ed.2d 951 (1991) (per curiam). Tyco Healthcare's reliance on this statement is understandable. Read literally, it seems to suggest that the later change in the identity of parties defendant could not destroy the diversity that originally existed. But it is risky to read judicial pronouncements in a vacuum, and adding context makes it pellucid that the quoted language cannot be taken literally.

In Freeport, a gas seller brought a breach of contract action against a diverse buyer in federal court. The seller subsequently assigned its interest in the contract and sought to add the non-diverse assignee as a plaintiff under Fed.R.Civ.P. 25(c).² Such a procedural move is available when there is a transfer of interest after the filing of suit. See Explosives Corp. of Am. v. Garlam Enters. Corp., 817 F.2d 894, 907 (1st Cir.1987). In a brief per curiam opinion, the Court held that diversity jurisdiction persisted, despite the introduction of a non-diverse party, because "[a] contrary rule could well have the effect of deterring normal business transactions during the pendency of what might be lengthy litigation." Freeport-McMoRan, 498 U.S. at 428-29, 111 S.Ct. 858.

The procedural circumstances and ratio decidendi of Freeport-McMoRan limit its precedential value. They make it clear that when the Court declared that "subsequent events" do not divest the district court of diversity jurisdiction, it was referring mainly to post-filing transfers of interest — not to all post-filing additions of non-diverse parties. Accordingly, we join several other courts of appeals that have read Freeport narrowly and restricted its precedential force to the precincts patrolled by Rule 25. See Estate of Alvarez v. Donaldson Co., 213 F.3d 993, 994-95 (7th Cir.2000)...