Allstate Ins. Co. v. James
| Citation | 779 F.2d 1536 |
| Decision Date | 14 January 1986 |
| Docket Number | No. 84-7701,84-7701 |
| Parties | ALLSTATE INSURANCE COMPANY, Plaintiff-Counterclaim Defendant-Appellee, v. Norman J. JAMES and Vera M. James, Defendants-Counterclaim Plaintiffs-Appellees, Felipe M. REYES, Sr., and Shirley P. Reyes, Defendants-Counterclaim Plaintiffs-Appellants, v. FIRST SMALL BUSINESS INVESTMENT COMPANY OF ALABAMA, Defendant-Intervenor. |
| Court | United States Courts of Appeals. United States Court of Appeals (11th Circuit) |
Jim H. Fernandez, Mobile, Ala., for Reyes.
John D. Richardson, Mobile, Ala., for Allstate Ins. Co.
Mark E. Spear, Brown, Hudgens & Richardson, P.C., Mobile, Ala., for James.
Appeal from the United States District Court for the Southern District of Alabama.
Before RONEY and HILL, Circuit Judges, and PITTMAN *, District judge.
Mr. and Mrs. Reyes (mortgagees) appeal the dismissal of their foreclosure claims, and the order requiring Allstate Insurance Company (Allstate) to pay to mortgagees the debt principal, without interest since default or attorney's fees, in exchange for the assignment of the mortgagees' note and mortgage. We conclude the district court erred in dismissing the foreclosure claims asserted by the Reyes' cross-claim against defendants James.
The mortgagees conveyed the property involved in this appeal to Mr. and Mrs. James (mortgagors) in exchange for a promissory note secured by a mortgage on the property. The note required the mortgagors to pay "all costs of collection, including a reasonable attorneys fee" on default. The mortgagors were required to insure the subject property for fire by a policy which "shall provide that loss, if any, shall be payable to [the mortgagees] as ... [their] interest may appear...."
The mortgagors purchased a policy with a liability limit for dwelling and personal property protection of $113,900.00. The policy contained the required loss-payee clause, which provided for the mortgagees to receive the insurance proceeds to "the extent of their interest." The property was totally destroyed by fire in April, 1983. The mortgagors submitted a written claim to Allstate for $113,900.00 and Allstate began to investigate the claim, believing the fire to be of incendiary origin.
The mortgagors defaulted on the note in June, 1983. The note was accelerated so that the secured debt owed was $17,966.08. The mortgagees hired an attorney to initiate collection and made a claim to the insurance company for the proceeds due for the secured debt amount, plus attorney's fees and post-default interest. Allstate refused to pay the attorney's fees and interest.
In July, 1983, Allstate paid into court its total liability on the fire insurance policy, $113,900.00, and filed a declaratory judgment action against the mortgagors. In September, 1983, the mortgagees were added as party defendants. While motions for summary judgment were pending, the mortgagees amended their answer to include counter and cross-claims requesting that their foreclosure rights be established. The district court granted the mortgagees' summary judgment motion to the extent that they sought judgment for the principal debt, but denied it as to attorney's fees. Interest was awarded from the date the funds were paid into court, but denied from the date of default until submission into court. The court required the mortgagees to assign their rights under the note and mortgage to Allstate. This appeal followed.
This action is in federal court because of the diversity of citizenship between Allstate, organized under the laws of, and with its principal place of business in the State of Illinois, and both defendants, who are citizens of Alabama.
There is a question of whether or not the federal court has jurisdiction to entertain the cross-claim, which seeks foreclosure between two Alabama citizens, in this declaratory judgment action by Allstate.
It is the duty of the court to examine the question of subject matter jurisdiction whenever it appears by suggestion of the parties or otherwise that the court lacks jurisdiction. Fed.R.Civ.P. 12(h)(3). The mortgagees, defendants-counterclaimants, filed a claim against their co-defendants, the mortgagors. Both the mortgagees and the mortgagors are citizens of Alabama.
The mortgagees' claim against the mortgagors is within the court's ancillary jurisdiction if it is truly a cross-claim. Revere Copper & Brass, Inc. v. Aetna Casualty & Surety Co., 426 F.2d 709, 715 (5th Cir.1970). The mere filing of a claim denominated as a cross-claim does not settle the issue whether the claim is actually ancillary. Amco Constr. Co. v. Mississippi State Building Comm'n, 602 F.2d 730, 732 (5th Cir.1979). An action which satisfies the "transaction or occurrence" test of Rule 13(g) must, by necessity, be closely related to the original claim, and would, therefore fall within the court's ancillary jurisdiction. Id. Under the doctrine of ancillary jurisdiction, a federal court, otherwise a court of limited jurisdiction, is empowered to adjudicate claims involving state law without an independent jurisdictional basis. Eagerton v. Valuations, Inc., 698 F.2d 1115, 1118 (11th Cir.1983). This type of jurisdiction is required if the federal court is to make effective disposition of the cases properly before it. See generally, C. Wright, Law of Federal Courts, Sec. 9 (4th ed. 1983).
Any recovery had by the mortgagees against the mortgagors would necessarily reduce the mortgagees' recovery against Allstate. If the foreclosure and sale of the property brought the full amount of the debt, the note and mortgage would be extinguished, see, e.g., Muscle Shoals Nat'l Bank v. Hallmark, 399 So.2d 297 (Ala.1981), and Allstate would not be liable to the mortgagees under the loss payable clause of the policy. Gordon's Transport Federal Credit Union v. Alabama Farm Bureau Mutual Casualty Ins. Co., 278 Ala. 338, 178 So.2d 164 (1965). If the sale does not bring the full amount due to the mortgagees, the liability of Allstate to the mortgagees would be reduced. See Aetna Ins. Co. v. Baldwin County Savings & Loan Ass'n, 231 Ala. 102, 163 So. 604 (1935).
This court has held that ancillary jurisdiction is appropriate "when there is a tight nexus with a subject matter properly in federal court." Eagerton, 698 F.2d at 1119. Here the original claim, Allstate's declaratory action against the mortgagors and the mortgagees, and the counterclaim, the mortgagees' action against Allstate, are properly before the federal court. There is complete diversity between the plaintiff and the defendants. Strawbridge v. Curtiss, 7 U.S. (3 Cranch) 267, 2 L.Ed. 435 (1806). The matter in controversy exceeds $10,000.00. 28 U.S.C. 1332(a). Resolution of the cross-claim affects the original action and the counterclaim. These claims are inexorably intertwined and are the type which should be tried together. Applying the principles discussed above, it would appear that the mortgagees' claim against the mortgagors would meet both Rule 13(g)'s definition of cross-claim and the doctrine of ancillary jurisdiction. A tighter nexus is not required.
When addressing the rights of a mortgagee vis-a-vis the insurer where the secured property is damaged or destroyed by fire before the mortgagor defaults, the Alabama Supreme Court has stated:
Where ... the loss precedes the [default] ... the mortgagee has an election as to how he may satisfy the mortgage indebtedness.... He may look to the insurance company for payment as mortgagee under the [loss payable] clause and may recover, up to the limits of the policy, the full amount of the mortgage debt at the time of the loss. In this event he would have no additional recourse against the mortgagor for the reason that his debt has been fully satisfied.
The second alternative available to the mortgagee is satisfaction of the mortgage debt by foreclosure. If the mortgagee elects to pursue this latter option, and the foreclosure sale does not bring the full amount of the mortgage debt at the time of the loss, he may recover the balance due under the insurance policy as owner. If the foreclosure does fully satisfy the mortgage debt, he, of course, has no additional recourse against the insurance company, as his debt has been fully satisfied. Aetna Ins. Co. v. Baldwin Co. Building & Loan Association, 231 Ala. 102, 163 So. 604 (1935).
Nationwide Mutual Fire Ins. Co. v. Wilborn, 291 Ala. 193, 198, 279 So.2d 460, 463-64 (1973).
The mortgagee may seek to recover the entire debt from the mortgagor by foreclosure and sale. The proceeds from the sale must be applied to the mortgage debt. Muscle Shoals Nat'l Bank v. Hallmark, 399 So.2d 297 (Ala.1981)....
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