Home Buyers Warranty Corp. v. Hanna

• Decision Date: 29 April 2014
• Docket Number: No. 13–1834.,13–1834.
• Citation: 750 F.3d 427
• Parties: HOME BUYERS WARRANTY CORPORATION, a Colorado corporation; National Home Insurance Company (a Risk Retention Group), a Colorado corporation; New Home Warranty Insurance Company (a Risk Retention Group), a Colorado corporation, Petitioners–Appellants, v. Lois HANNA, Respondent–Appellee.
• Court: U.S. Court of Appeals — Fourth Circuit

750 F.3d 427

HOME BUYERS WARRANTY CORPORATION, a Colorado corporation; National Home Insurance Company (a Risk Retention Group), a Colorado corporation; New Home Warranty Insurance Company (a Risk Retention Group), a Colorado corporation, Petitioners–Appellants,

v.Lois HANNA, Respondent–Appellee.

No. 13–1834.

United States Court of Appeals, Fourth Circuit.

Argued: March 18, 2014.

Decided: April 29, 2014.

ARGUED:Carlos Victor Yguico, Gemmill Baldridge & Yguico, Los Angeles, California, for Appellants. Christopher Brinkley, Masters Law Firm, LC, Charleston, West Virginia, for Appellee. ON BRIEF:James W. Marshall, Bailey & Wyant, PLLC, Charleston, West Virginia, for Appellants.

Before WILKINSON, MOTZ, and DIAZ, Circuit Judges.

Remanded with directions by published opinion. Judge WILKINSON wrote the opinion, in which Judge MOTZ and Judge DIAZ joined.

WILKINSON, Circuit Judge:

Lois Hanna filed a lawsuit in state court against multiple defendants alleging various construction defects in her recently completed home. Petitioners are a subset of defendants in the state court suit because of a warranty they issued on Hanna's home. They subsequently filed in federal district court a petition to compel Hanna to arbitrate her claims against them based on an arbitration clause in the warranty. Petitioners predicated subject matter jurisdiction on complete diversity of the parties under 28 U.S.C. § 1332. Hanna argues that petitioners failed to join necessary and indispensable parties, some of which are non-diverse from Hanna, under Rule 19 of the Federal Rules of Civil Procedure. We agree, and remand to the district court with directions to dismiss the petition for want of subject matter jurisdiction.

I.

A.

On August 1, 2009, Hanna signed a contract with Clark Lamp II and Innovative Design & Construction, LLC (“Innovative”), for the construction of a new home. Lamp provided Hanna with a Builder's Warranty and Certificate (“Builder's Warranty”) that covered workmanship and materials for one year, mechanical systems and appliances for two years, and the structure of the house for ten years. The Builder's Warranty named Lamp as the “Warrantor,” but it did not indicate that he would enroll Hanna's house in a warranty offered by a third party, nor did it authorize him to take such an action. It also provided that:

This Warranty shall be in addition to, and in no way reduce, all other rights and privileges which Owners may have in law or in equity or under any other instrument, and shall be binding on the Warrantor notwithstanding any provision to the contrary contained in the contract of purchase or any other instrument executed by the Owners.

J.A. 136. Lamp, Innovative, and several subcontractors and engineers (collectively “the Builders”), designed and built the house. Hanna moved into the structure in September 2010 and closed on the home purchase that December.

At some point before the closing, Lamp and Innovative enrolled Hanna's home in a 2–10 Home Owners Warranty (the “2–10 Warranty”) offered by the Home Buyers Warranty Corporation, the National Home Insurance Company, and the New Home Warranty Insurance Company (collectively “the Warranty Companies”). The 2–10 Warranty offered nearly identical protection as the Builder's Warranty: one year on the home's workmanship, two years on its systems, and ten years on its structure. The 2–10 Warranty also contained something that the Builder's Warranty did not: an arbitration clause. It stated, in relevant part:

Any and all claims, disputes and controversies by or between the owner, the Builder/Seller, the Warranty Insurer and/or [Home Buyers Warranty Corporation], or any combination of the foregoing, arising from or related to this Warranty, shall be settled by binding arbitration.... Any person in contractual privity with the Builder/Seller whom the Home owner contends is responsible for any construction defect in the Home shall be entitled to enforce this arbitration agreement.... The decision of the arbitrator shall be final and binding and may be entered as a judgment in any State or Federal court of competent jurisdiction.

J.A. 17 (boldface type omitted).

The 2–10 Warranty states that it was issued pursuant to a “Builder Application for Home Enrollment,” a document Hanna had purportedly “signed with [her] Builder.” J.A. 143. Hanna contends that she signed no such document and no application for enrollment appears in the present record. Additionally, the record contains no evidence that Hanna authorized Lamp and Innovative to enroll her home in the 2–10 Warranty. Hanna admits that she first heard that her home had been enrolled in the 2–10 Warranty in the fall of 2010, but contends that she did not learn about the arbitration clause until documents were mailed to her in February 2011, after the closing on her new house.

B.

Hanna came to believe that her home contained a number of defects and notified Lamp and Innovative, who then filed a claim with the Warranty Companies in November 2011. Hanna was not satisfied with the response of Lamp, Innovative, the Warranty Companies, or the two additional entities involved in the adjustment of her warranty claims (the “Claims Adjusters”). Therefore, on November 27, 2012, she filed suit in West Virginia state court against the Builders, Warranty Companies, and Claims Adjusters. See Hanna v. Innovative Design & Construction, LLC, Circuit Court of Kanawha County, West Virginia, Case No. 12–C2358. Hanna currently advances seven counts in that suit: “(1) negligence in the construction of the home; (2) breach of the construction contract, addenda, covenants and builder's warranty associated with the construction of the home; (3) breach of implied warranties of habitability and merchantability; (4) breach of the [2–10 Warranty]; (5) bad faith denial of Hanna's benefits under the [2–10 Warranty]; (6) fraud and misrepresentation with respect to the [2–10 Warranty]; and (7) punitive damages.” J.A. 321. All of her claims arise from state law.

Furthermore, Hanna contends that the arbitration provision in the 2–10 Warranty is unenforceable on various state law grounds. The Warranty Companies indicated in their federal petition that they intended to “plead arbitration as an affirmative defense” to Hanna's state court claims, J.A. 8, and their counsel confirmed at oral argument before this court that they have done so.

C.

On February 1, 2013, the Warranty Companies filed a Petition to Compel Arbitration before the U.S. District Court for the Southern District of West Virginia. In the petition they asked the district court to order Hanna to arbitrate her claims against them based on the arbitration clause in the 2–10 Warranty and to stay the state court proceedings against them while the arbitration was pending. The Warranty Companies predicated their petition on diversity jurisdiction under 28 U.S.C. § 1332. None of the Builders were joined as parties.

Hanna filed a Motion to Dismiss on April 5, arguing that the district court lacked subject matter jurisdiction because the entire controversy underlying the petition included nondiverse parties. In the alternative, she argued that the case had to be dismissed because those same non-diverse parties were necessary and indispensable parties that the Warranty Companies failed to join under Rule 19 of the Federal Rules of Civil Procedure. Hanna noted that, although the Warranty Companies are foreign corporations for diversity purposes, she shared West Virginia citizenship with Lamp, Innovative, and at least three of the other Builders.

The Warranty Companies contended that the parties to the petition were diverse and that the Federal Arbitration Act (“FAA”) and Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983), established that the codefendants in the state court action need not be joined as parties. They also requested that the district court exercise its power under 28 U.S.C. § 2283 to halt the state court proceedings against them.

On June 10, the district court abstained under Colorado River Water Conservation District v. United States, 424 U.S. 800, 96 S.Ct. 1236, 47 L.Ed.2d 483 (1976), from ruling on the merits of the petition to compel arbitration. The district court weighed the various Colorado River factors bearing upon abstention, ultimately concluding that it had “no reason to doubt the petitioners' ability to pursue their rights in the state court system” and that it could not “find that the arbitration issue can only be resolved efficiently in this court.” J.A. 325. The lower court did not address the parties' arguments on subject matter jurisdiction and simply ordered the petition dismissed. The Warranty Companies thereafter filed this timely appeal.

II.

We first consider the threshold issue of subject matter jurisdiction. The Warranty Companies contend that the district court has subject matter jurisdiction, that it erred in declining to exercise jurisdiction over their petition under the Colorado River abstention doctrine, and that the arbitration clause is enforceable against Hanna. We do not reach the questions of abstention or enforceability because we find that the district court lacked subject matter jurisdiction. Because it is a question of law, we review de novo whether such jurisdiction exists. Trans Energy, Inc. v. EQT Prod. Co., 743 F.3d 895, 900 (4th Cir.2014).

Fundamental to our federal system is the principle that “[f]ederal courts are courts of limited jurisdiction.” Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377, 114 S.Ct. 1673, 128 L.Ed.2d 391 (1994). District courts may only hear a case when they possess the “power authorized by Constitution and statute.” Exxon Mobil Corp. v. Allapattah Servs., Inc., 545 U.S. 546, 552, 125 S.Ct. 2611, 162 L.Ed.2d 502 (2005) (internal quotation marks omitted). When a party desires to proceed in a federal court, it “must allege and, when challenged, must...