Carlton v. Baww, Inc.

• Decision Date: 28 January 1985
• Docket Number: No. 84-1032,84-1032
• Parties: 12 Collier Bankr.Cas.2d 457, 12 Bankr.Ct.Dec. 1027, Bankr. L. Rep. P 70,234 Joan F. CARLTON, Individually and as Representative of the Estate of William R. Carlton, Deceased, and as Next Friend of Robert Carlton, Melissa Carlton, David Carlton and Lynne Carlton, Plaintiff-Appellee, v. BAWW, INC., et al., Defendants-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 781

751 F.2d 781

12 Collier Bankr.Cas.2d 457, 12 Bankr.Ct.Dec. 1027,

Bankr. L. Rep. P 70,234

Joan F. CARLTON, Individually and as Representative of the Estate of William R. Carlton, Deceased, and as Next Friend of Robert Carlton, Melissa Carlton, David Carlton and Lynne Carlton, Plaintiff-Appellee, v. BAWW, INC., et al., Defendants-Appellants.

No. 84-1032.

United States Court of Appeals Fifth Circuit.

Jan. 28, 1985.

Hobart Huson, Jr., San Antonio, Tex., for defendants-appellants.

Tinsman & Houser, Inc., Franklin D. Houser, Dennis P. Bujnoch, San Antonio, Tex., for plaintiff-appellee.

Appeal from the United States District Court for the Western District of Texas.

Before BROWN, RANDALL and TATE, Circuit Judges.

RANDALL, Circuit Judge:

Joan F. Carlton brought this diversity suit to void a fraudulent conveyance of real property under Texas law. Before trial, defendant Herbert M. Shelton, the transferor of the property, sought relief under Chapter 7 of the Bankruptcy Code, which, because of the Code's automatic stay, halted the proceedings in the district court. The bankruptcy court lifted the stay, however, and authorized the trustee of Shelton's estate to intervene in this suit. On the first day of trial, an amended petition was filed adding the trustee as a party-plaintiff. A jury found that Shelton fraudulently conveyed the property in question and the court entered judgment vesting title to the property in the trustee. The transferors and transferees of the property, defendants below, bring this appeal.

At oral argument, we raised the issue of subject matter jurisdiction sua sponte. Specifically, we inquired whether the trustee's joinder destroyed diversity. We received supplemental briefs on the issue and now hold that, although the jurisdictional allegations of the pleadings are defective, the district court properly exercised subject matter jurisdiction of this suit. Therefore, we grant appellees' motion, which accompanied their supplemental brief, for leave to amend the jurisdictional allegations of their complaint. On the merits, we affirm the district court's judgment.

I.

To frame the jurisdiction issue, we briefly recount the significant events that have occurred in this suit thus far. William Carlton died in October of 1978. Soon thereafter, Joan F. Carlton ("Carlton"), his wife, commenced for herself and her children a wrongful death suit in federal court against Shelton and another defendant. In January of 1980, Shelton allegedly conveyed some real property (the "property") to a corporation formed by his children. In expectation of recovering judgment in the wrongful death action, Carlton commenced this separate suit to void the conveyance under Texas law as a fraud on Shelton's creditors. In September of 1982, Carlton in fact obtained a substantial wrongful death judgment against Shelton, which we have since affirmed on appeal. See Carlton v. Shelton, 722 F.2d 203 (5th Cir.), cert. denied, --- U.S. ----, 104 S.Ct. 2389, 81 L.Ed.2d 347 (1984).

Pretrial matters in this suit proceeded until early February of 1983. At that time, Shelton filed for Chapter 7 relief, and proceedings herein were automatically stayed. See 11 U.S.C. Sec. 362. In late April of 1983, Carlton filed with the bankruptcy court an Original Complaint to Lift Stay seeking permission to continue prosecution of this suit. Before the complaint was heard, however, the bankruptcy court, on May 2, 1983, released Shelton from all dischargeable debts. ¹ The adversary complaint to lift stay was considered on May 24, 1983. On July 7, 1983, the bankruptcy court signed an order lifting the stay and allowing Carlton and Claiborne Gregory, the trustee of Shelton's estate (the "trustee"), to continue prosecution of this suit. ² In a subsequent order, the bankruptcy court authorized the trustee to hire Carlton's attorneys as special counsel to prosecute this lawsuit. Carlton filed her Third Amended Complaint, which adds the trustee as a party-plaintiff, on the first day of trial. The suit was prosecuted at trial by counsel originally retained by Carlton, who were apparently acting on behalf of both Carlton and the trustee. ³

II.

Carlton is a citizen of California; all defendants are citizens of Texas. Diversity jurisdiction was therefore properly invoked when this suit was initially filed. See 28 U.S.C. Sec. 1332; Strawbridge v. Curtiss, 7 U.S. 267, 2 L.Ed. 435 (1806). The general rule, of course, is that diversity is determined at the commencement of the lawsuit; subsequent occurrences will not normally divest the court of subject matter jurisdiction. See, e.g., Rosado v. Wyman, 397 U.S. 397, 405 n. 6, 90 S.Ct. 1207, 1214 n. 6, 25 L.Ed.2d 442 (1970) ("[A] federal court does not lose jurisdiction over a diversity action which was well founded at the outset even though one of the parties may later change domicile or the amount recovered falls short of $10,000."); Mas v. Perry, 489 F.2d 1396, 1399 (5th Cir.) (same), cert. denied, 419 U.S. 842, 95 S.Ct. 74, 42 L.Ed.2d 70 (1974). This rule is not limited, however, to cases involving an existing plaintiff or defendant who changes domicile while the lawsuit is pending; under certain circumstances, non-diverse parties may be joined after commencement of the lawsuit without destroying jurisdiction. See, e.g., Rogers v. Aetna Casualty and Surety Co., 601 F.2d 840, 843 n. 4 (5th Cir.1979) (Rule 14 impleader of non-diverse third-party defendant; ancillary jurisdiction); Ransom v. Brennan, 437 F.2d 513, 516 (5th Cir.) (Rule 25 substitution of non-diverse representative following death of original party), cert. denied, 403 U.S. 904, 91 S.Ct. 2205, 29 L.Ed.2d 680 (1971); Gaines v. Dixie Carriers, Inc., 434 F.2d 52, 54 (5th Cir.1970) (Rule 24(a) intervention as of right by one other than Rule 19(b) indispensable party). If, however, an amendment to the pleadings alters the nature of the action or adds a party without whom the case cannot continue, jurisdiction must be reassessed at the time of the change. See, e.g., Lewis v. Odell, 503 F.2d 445 (2d Cir.1974); Grady v. Irvine, 254 F.2d 224 (4th Cir.), cert. denied, 358 U.S. 819, 79 S.Ct. 30, 3 L.Ed.2d 60 (1958); 13B C. Wright, A. Miller & E. Cooper, Federal Practice and Procedure: Jurisdiction 2d Sec. 3608. As an initial matter, therefore, we must determine whether Shelton's bankruptcy made the trustee an essential party to this action or otherwise altered the nature of the case.

III.

Shelton's bankruptcy clearly had a profound impact on this action. In In re Mortgageamerica Corp., 714 F.2d 1266 (5th Cir.1983), we examined the effect of the transferor's intervening bankruptcy on a creditor's state-law attempts to void a fraudulent transfer. We held that property that the debtor has fraudulently conveyed remains "property of the estate," see 11 U.S.C. Sec. 541(a)(1): "The automatic stay under [11 U.S.C.] section 362(a) thus applies and prevents a creditor from continuing to pursue a cause of action under the Texas Fraudulent Transfers Act after a petition for bankruptcy has been filed [by the transferor]." Id. at 1275. Thus, Shelton's bankruptcy, standing alone, barred prosecution of this lawsuit.

Bankruptcy did not, however, forever extinguish the right to recover property that Shelton may have fraudulently conveyed. Bankruptcy simply caused that right to vest in the trustee and placed the future of this lawsuit within the control of the bankruptcy court. See In re Mortgageamerica Corp., 714 F.2d at 1275 (citing Glenny v. Langdon, 98 U.S. 20, 30, 25 L.Ed. 43 (1878)). Of course, the bankruptcy court has the authority "for cause" to lift the automatic stay and to allow creditors to continue actions against the debtor and his property. See 11 U.S.C. Sec. 362(d)(1). The Code also gives the trustee a series of avoidance powers through which he can recapture property of the estate. Among these is section 544(b) which allows the trustee, as statutory successor to the debtor's creditors, to void fraudulent conveyances to the extent permitted by applicable non-bankruptcy law. See 11 U.S.C. Sec. 544(b). ⁴ In this case, both of these powers were exercised: the bankruptcy court lifted the stay and authorized the trustee to intervene in this state-law suit, presumably in his role as section 544(b) successor to Carlton's creditor status.

All parties apparently concede that, in light of the automatic stay and the bankruptcy court's order authorizing intervention, the trustee became the only party who could prosecute this lawsuit. ⁵ Under settled principles of federal jurisdiction, belated joinder of such a party is clearly an event requiring reevaluation of subject matter jurisdiction. See, e.g., Haas v. Jefferson National Bank, 442 F.2d 394, 396 (5th Cir.1971); 7 C. Wright & A. Miller, Federal Practice and Procedure: Civil Sec. 1610 ("a person who is regarded as indispensable ... cannot be joined unless his presence in the action is consistent with the statutory limits on the subject matter jurisdiction of the federal courts"). If jurisdiction is based on diversity, for example, joinder of an indispensable party of non-diverse citizenship deprives the federal court of power to hear the case. See Haas v. Jefferson National Bank, 442 F.2d at 396 (citizenship of indispensable party must be considered). This case involves more than the joinder of an indispensable party and presents an even clearer case of a change requiring that jurisdiction be reexamined. Cf. Smith v. State Farm Fire & Cas. Co., 633 F.2d 401 (5th Cir.1980) (bankruptcy trustee not an indispensable party in debtor's state law action on insurance policy). The bankruptcy court's order lifting the stay and authorizing intervention not only made the trustee indispensable; it seems to us that it also made Carlton, who abandoned her claims for money damages prior to trial, Record Vol. II at 32, superfluous. Although, according to section 544(b) of the Bankruptcy Code, the rule of decision did...