American Motorists Ins. Co. v. Trane Co.

• Decision Date: 19 August 1981
• Docket Number: No. 80-2747,80-2747
• Parties: AMERICAN MOTORISTS INSURANCE COMPANY, an Illinois corporation, Plaintiff-Appellee, v. The TRANE COMPANY, a Wisconsin corporation, Defendant-Appellant, and Employers Mutual Liability Insurance Company of Wisconsin, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 146

657 F.2d 146

AMERICAN MOTORISTS INSURANCE COMPANY, an Illinois

corporation, Plaintiff-Appellee, v. The TRANE COMPANY, a Wisconsin corporation, Defendant-Appellant,

and

Employers Mutual Liability Insurance Company of Wisconsin,

et al., Defendants-Appellees.

No. 80-2747.

United States Court of Appeals, Seventh Circuit.

Argued May 15, 1981.

Decided Aug. 19, 1981.

Christian L. Campbell, Sidley & Austin, Chicago, Ill., for defendant-appellant.

Eugene O. Gehl, Brynelson, Herrick, Gehl & Bucaida, Madison, Wis., for defendant-appellee.

Richard P. Ruh, Schlotthauer, Johnson, Mohs, MacDonald & Widder, John F. Jenswold, Jenswold, Studt, Hanson, Clark & Kaufmann, Madison, Wis., for plaintiff-appellee.

Before BAUER, Circuit Judge, NICHOLS, Judge, ^* and WOOD, Circuit Judge.

HARLINGTON WOOD, Jr., Circuit Judge.

This is an appeal from the district court's order realigning the parties to a diversity action for declaratory judgment and dismissing the action for want of subject matter jurisdiction. The issue is whether a finding that one of the defendant insurers shared an interest with the plaintiff insurance company in avoiding liability to the defendant insured necessitates realignment. The district judge held that it does and realigned the parties, thereby depriving the court of diversity jurisdiction. We reverse.

I.

Defendant-appellant Trane Company ("Trane") is a Wisconsin corporation that manufactures and sells heat transfer units and air conditioning devices. The appellees are Employers Insurance of Wausau ("Employers"), a Wisconsin corporation; American Motorists Insurance Company ("American Motorists"), an Illinois corporation; St. Paul Fire and Marine Insurance Company ("St. Paul"), a Minnesota corporation; and American Home Assurance Company ("American Home"), a New York corporation. During the periods relevant to this litigation, Trane was insured by Employers for claims up to $300,000; by American Motorists for claims from $300,000 to $5,000,000; by St. Paul for claims from $5,000,000 to $10,000,000; and by American Home for claims from $10,000,000 to $20,000,000.

This dispute arises out of Trane's sale of heat exchanger units to several related contractors to whom we refer collectively as "Pritchard." A disagreement arose over the quality of the units, and in May, 1974 Trane brought an action in federal court seeking money due on its contracts. Pritchard counterclaimed, alleging breach of warranty and negligent design. This dispute was settled on April 14, 1978, after extensive discovery by both parties.

Prior to this settlement, Trane tendered defense of the Pritchard claims to each of its insurers. Each of the insurers refused, and Trane was thus required to defend the claims through outside counsel. On November 6, 1974, American Motorists filed the instant action seeking a declaration of the rights and liabilities of the four insurers, naming Trane, Pritchard and the other three insurance companies, as defendants. Pritchard moved to dismiss the claim against it, arguing that there was no controversy between it and the plaintiff. The district judge denied the motion, but subsequently dismissed Pritchard for want of personal jurisdiction.

Following the settlement with Pritchard in 1978, Trane requested and was granted leave to amend its answer to include counterclaims against American Motorists and cross-claims against the other insurers. These claims sought damages incurred in defending the Pritchard claims, indemnification for amounts paid under the Pritchard claims, ¹ and punitive damages. On May 9, 1978, American Home filed a motion asking the district court to realign Employers as a plaintiff and dismiss the action. While a ruling on that motion was pending, all of the parties moved for summary judgment or partial summary judgment. On November 12, 1980, the district judge granted the motion to realign, and dismissed the entire action including Trane's cross-claims against American Home and St. Paul and its counterclaims against American Motorists. This appeal followed.

II.

Where jurisdiction is based on diversity of citizenship, the court may ascertain whether the alignment of the parties as plaintiff and defendant conforms with their true interests in the litigation. Indianapolis v. Chase National Bank, 314 U.S. 63, 62 S.Ct. 15, 86 L.Ed. 47 (1941). Realignment is proper when the court finds that no actual, substantial controversy exists between parties on one side of the dispute and their named opponents, although realignment may destroy diversity and deprive the court of jurisdiction. Id. "Diversity jurisdiction cannot be conferred upon the federal courts by the parties' own determination of who are plaintiffs and who defendants." Id. at 69, 62 S.Ct. at 17. Metropolis Theatre Co. v. Barkhausen, 170 F.2d 481 (7th Cir. 1948), cert. denied, 336 U.S. 945, 69 S.Ct. 812, 93 L.Ed. 1101 (1949). In conducing its inquiry, the court may look beyond the pleadings and consider the nature of the dispute in order to assess the parties' real interests. Green v. Green, 218 F.2d 130 (7th Cir. 1954). However, the facts which form the basis for realignment must have been in existence at the time the action was commenced. Subsequent events will not deprive the court of its jurisdiction over parties properly aligned. 3A Moore's Federal Practice (2d ed. 1980), P 19.03(1) at 52.

In the instant case, the district judge found that the pleadings were of little guidance in determining the interests of the parties and looked instead to American Motorists' brief in support of its motion for summary judgment. In that brief, American Motorists argued that the facts set forth in the Pritchard claims did not constitute an "occurrence" under either its policy or Employers', and therefore neither insurer had a duty to defend Trane. ² From this, the district judge concluded that "the 'attitudes of the parties' seem insufficiently in conflict to place them on opposite sides of this lawsuit. While it is possible that the two insurers might be in conflict if American Motorists had claimed that the Employers policies covered the Pritchard allegations, that is not the situation presented to this Court.... It would be improper to go further at this point and make findings on the merits to determine whether those attitudes might change sometime in the future." In essence, then, the rationale underlying the district court's order was that because both insurers shared an interest in escaping liability on the Pritchard claims, their interests in the litigation were the same and realignment was proper. We cannot agree.

Any two insurers may share an interest in escaping liability to a party they both insure. Thus, in an action such as the one at bar, a defendant insurer might join the plaintiff insurer in a motion to dismiss the insured's counterclaim, where dismissal would also free that defendant from liability. It does not follow that the insurers' interests are harmonious.

Reference to the pleadings and the terms of the insurers' policies discloses a substantial conflict between American Motorists and Employers on the duty to defend, notwithstanding their common interest in avoiding liability. Because Employers is the underlying insurer, American Motorists would benefit from a holding that Employers had a duty to defend Trane. Conversely, if Employers were found not to be liable, American Motorists would then have the burden of proving that it had no duty to defend Trane. That American Motorists would benefit from a holding adverse to Employers is a fact which has been in existence since the beginning of this lawsuit, and is not diminished by the former's urgings that neither it nor Employers has a duty to defend.

The cases cited by the district court, Smith v. Sperling, 354 U.S. 91, 77 S.Ct. 1112, 1 L.Ed.2d 1205 (1957); Sutton v. English, 246 U.S. 199, 38 S.Ct. 254, 62 L.Ed. 664 (1918); Green v. Green, 218 F.2d 130 (7th Cir. 1954), do not support the realignment ordered below. The Green and Sutton cases stand for the proposition that a party's interest may be determined by his or her "attitude and conduct towards the controversy." 218 F.2d at 144. It does not follow that a court must realign a party whenever it shares an interest with an opposing party in being dismissed from the action, especially where a denial of the motion to dismiss could put the parties in open conflict. In Smith, the court held that the issue of the propriety of alignment should be resolved as a preliminary matter, before reaching the merits of the case. If anything, this suggests that the district judge's reliance on the plaintiff's brief in support of its...