Desert Empire Bank v. Insurance Co. of North America

• Citation: 623 F.2d 1371
• Decision Date: 25 July 1980
• Docket Number: No. 78-2491,78-2491
• Parties: DESERT EMPIRE BANK, etc., Plaintiff-Appellant, v. INSURANCE CO. OF NORTH AMERICA, etc., et al., Defendant-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

Page 1371

623 F.2d 1371

DESERT EMPIRE BANK, etc., Plaintiff-Appellant, v. INSURANCE CO. OF NORTH AMERICA, etc., et al., Defendant-Appellee.

No. 78-2491.

United States Court of Appeals Ninth Circuit.

Submitted March 6, 1980.

Decided July 25, 1980.

Richards, Watson, Dreyfuss & Gershon, Los Angeles, Cal., Floyd H. Schenk, Palm Springs, Cal., for plaintiff-appellant.

David T. DiBiase, Los Angeles, Cal., for defendant-appellee.

Appeal from the United States District Court for the Central District of California.

Before PECK, ^* ANDERSON and NELSON, Circuit Judges.

JOHN W. PECK, Circuit Judge.

In October 1973, the Insurance Company of North America (INA) extended insurance coverage to the Desert Empire Bank (DEB) under "Banker's Blanket Bond No. S725542" and "Bank Employee Dishonesty Blanket Bond No. S796699." In general terms, these bonds provided coverage to DEB for any dishonest, fraudulent or criminal acts that were committed by any of the Bank's employees and that were discovered during the period of the bond coverage. INA renewed the bonds first on October 1, 1974, and again on October 1, 1975; then, on or about December 8, 1975, INA sent DEB a notice of cancellation. INA listed the effective date of cancellation of Bond No. S796699 as February 9, 1976, and the effective date of cancellation of Bond No. S725542 as February 13, 1976. Although DEB acknowledged receipt of INA's cancellation notice, DEB alleged that E. Ronald Schulte, an authorized agent of INA, had informed DEB on January 22, 1976, that he had submitted an application for blanket bond coverage to the St. Paul Fire and Marine Insurance Company ¹ on DEB's behalf, and that INA had agreed to keep its bonds in effect until DEB had obtained coverage from another carrier.

The present action arose when DEB discovered in May of 1976 that it had suffered a loss of $2,678,216.46 through the dishonesty of its president. DEB sought to recover this loss from INA, based on the alleged representations that agent Schulte had made on January 22, 1976. According to its allegations, DEB believed, consistent with the representations of agent Schulte, that INA's bond coverage was still in effect when the loss in question was discovered in May of 1976. In response to DEB's claim, INA contended that both of its bonds had been effectively cancelled in February of 1976, and the company refused to honor DEB's claim. Shortly thereafter, DEB brought suit against INA in the Superior Court of Riverside County, California. DEB is a corporation that is organized under the laws of the State of California, and INA is a corporation that is organized under the laws of the State of Pennsylvania. Each has its principal place of business in its respective state of incorporation. INA petitioned the state court for removal of DEB's action to the federal district court, pursuant to the provisions of 28 U.S.C. § 1441 and § 1446 (diversity of citizenship and amount in controversy in excess of $10,000), and the state court properly granted INA's petition.

Following removal of its action to the federal court, DEB sought to amend its complaint to include agent Schulte as a party defendant. In amendments filed March 15 and March 30, 1978, DEB charged agent Schulte alternatively with fraud and with intentional or negligent misrepresentation. At approximately this same time, INA petitioned the district court to grant summary judgment in its favor, on the ground that DEB's loss had not been discovered during the period of the bond coverage. On April 10, 1978, the district court granted DEB leave to amend its complaint to add agent Schulte as a party defendant. Immediately thereafter, the court granted summary judgment in favor of INA.

We conclude that the diversity jurisdiction of the district court was destroyed at the moment the court granted DEB leave to add Schulte as a party defendant. This conclusion is based on the fact that defendant Schulte is a resident of the State of California, the same state in which plaintiff DEB is incorporated. Thus, the district court lacked the jurisdiction to enter summary judgment in favor of INA, and the present action should have been remanded to the state court for further proceedings therein.

In the context of this appeal, plaintiff's petition to amend its pleadings to add Schulte as a party defendant brings into consideration Rules 15 and 20 of the Federal Rules of Civil Procedure. Rule 15 provides that a party may amend its pleadings after a responsive pleading has been served, ". . . only by leave of the court or by written consent of the adverse party." The Rule further provides that such ". . . leave shall be freely given when justice so requires." In conjunction with Rule 15, Rule 20, Fed.R.Civ.Pro., allows the permissive joinder of parties, and in particular of party defendants, ". . . if there is asserted against (the defendants) jointly, severally, or in the alternative, any right to relief in respect to or arising out of the same transaction, occurrence, or series of transactions of occurrences and if any question of law or fact common to all defendants will arise in the action." We need not decide whether E. Ronald Schulte was a "person needed for just adjudication" of this litigation, or was a so-called "indispensable" or "necessary" party who should have been joined, if feasible, under Rule 19 of the Federal Rules of Civil Procedure. For a discussion of "indispensable" or "necessary" parties, see 3A J. Moore, Federal Practice P 19.01 et seq. We conclude that defendant Schulte was, at the least, a "proper" party to the litigation, and that the district court correctly allowed his joinder pursuant to the provisions for permissive joinder under Rule 20. For a discussion of "proper" parties, see 3A J. Moore, Federal Practice P 20.01 et seq. ²

On a threshold level, Rule 20(a) imposes two specific requirements for the permissive joinder of parties: (1) a right to relief must be asserted by, or against, each plaintiff or defendant relating to or arising out of the same transaction or occurrence or series of transactions or occurrences; and (2) some question of law or fact common to all parties must arise in the action. See League to Save Lake Tahoe v. Tahoe Regional Planning Agency, 558 F.2d 914 (9th Cir. 1977). See generally Wright & Miller, Federal Practice and Procedure: Civil § 1653. Plaintiff's petition to add Schulte as a party defendant satisfied these specific requirements of Rule 20. First, plaintiff's claims against both of the defendants arose out of the same series of occurrences; that is, INA's alleged cancellation of DEB's bond coverage in February 1976, coupled with agent Schulte's alleged representation of January 22, 1976, that INA had agreed to keep its bond coverage in effect until DEB had secured comparable coverage from another carrier. Second, plaintiff's action against both of the defendants raised questions of law and fact common to all of the parties. There were several material questions that were common both to the claims of plaintiff DEB and to the responses of defendants Schulte and INA. For example, did agent Schulte in fact make the alleged representations of January 22, 1976, and if so, was Schulte acting within the scope of his authority as an agent of INA at the time that such representations were made? ³

On a second level, the district court's decision to grant DEB leave to add Schulte as a party defendant rested within the discretion vested in the court by the provisions of Rule 20. Although the specific requirements of Rule 20, discussed above, may be satisfied, a trial court must also examine the other relevant factors in a case in order to determine whether the permissive joinder of a party will comport with the principles of fundamental fairness. For example, when making a decision whether to allow the permissive joinder of a party, a court should consider such factors as the possible prejudice that may result to any of the parties in the litigation, the delay of the moving party in seeking an amendment to his pleadings, the motive that the moving party has in seeking such amendment, the closeness of the relationship between the new and the old parties, the effect of an amendment on the court's jurisdiction, and the new party's notice of the pending action. See also, cases cited in 3A J. Moore, Federal Practice P 15.08(4)-(5). We note that, in exercising the discretion provided by Rules 15 and 20, courts have shown a strong liberality in allowing parties to amend their pleadings when such amendments have satisfied the explicit requirements of the rules. See, e. g., League to Save Lake Tahoe, supra, 558 F.2d 914 (9th Cir. 1977) ("We start with the premise that Rule 20, Fed.Rules Civ.Proc., regarding permissive joinder is to be construed liberally in order to promote trial convenience and to expedite the final determination of disputes, thereby preventing multiple lawsuits.") Specifically, the Supreme Court has consistently adhered to the mandate of Rule 15(a) that leave to amend ". . . shall be freely given when justice so requires." See, e. g., Foman v. Davis, 371 U.S. 178, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962).

In the light of the factors set out above, we conclude that the district court acted with proper discretion when it granted DEB leave to add agent Schulte as a party defendant. DEB sought to amend its pleadings during the preliminary phase of the proceedings; that is, DEB first filed an amended complaint naming Schulte as a party defendant on March 15, 1978, seven days after counsel had argued INA's motion for summary judgment. Given this time frame, DEB cannot properly be accused of engaging in delay tactics in relation to the joinder of agent Schulte. More importantly, there existed a very close, and in fact a legally recognized relationship between defendant INA and agent Schulte. Specifically, the series of events which allegedly gave rise to plaintiff's cause of action consisted...