S.C. Dept. of Disabilities v. Hoover Universal

• Decision Date: 30 July 2008
• Docket Number: No. 07-1202.,No. 07-1190.,07-1190.,07-1202.
• Parties: SOUTH CAROLINA DEPARTMENT OF DISABILITIES AND SPECIAL NEEDS; South Carolina State Budget And Control Board And Control Board-Insurance Reserve Fund, Plaintiffs-Appellees, v. HOOVER UNIVERSAL, INCORPORATED, Defendant-Appellant. South Carolina Department of Mental Health; South Carolina State Budget and Control Board and Control Board-Insurance Reserve Fund, Plaintiffs-Appellees, v. Hoover Universal, Incorporated, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fourth Circuit

535 F.3d 300

SOUTH CAROLINA DEPARTMENT OF DISABILITIES AND SPECIAL NEEDS; South Carolina State Budget And Control Board And Control Board-Insurance Reserve Fund, Plaintiffs-Appellees, v. HOOVER UNIVERSAL, INCORPORATED, Defendant-Appellant.

South Carolina Department of Mental Health; South Carolina State Budget and Control Board and Control Board-Insurance Reserve Fund, Plaintiffs-Appellees, v. Hoover Universal, Incorporated, Defendant-Appellant.

No. 07-1190.

No. 07-1202.

United States Court of Appeals, Fourth Circuit.

Argued: May 15, 2008.

Decided: July 30, 2008.

ARGUED: Richard K. Wray, Reed Smith, LLP, Chicago, Illinois, for Appellant. Andrew Frederick Lindemann, Davidson, Morrison & Lindemann, PA, Columbia, South Carolina, for Appellees. ON BRIEF: Casey L. Westover, Reed Smith, LLP, Chicago, Illinois; William Toal, George C. Johnson, Johnson, Toal & Battiste, PA, Columbia, South Carolina, for Appellant.

Before NIEMEYER and DUNCAN, Circuit Judges, and CLAUDE M. HILTON, Senior United States District Judge for the Eastern District of Virginia, sitting by designation.

Affirmed by published opinion. Judge NIEMEYER wrote the opinion, in which Judge DUNCAN and Senior Judge HILTON joined.

OPINION

NIEMEYER, Circuit Judge:

The South Carolina Department of Mental Health, the South Carolina Department of Disabilities and Special Needs, and the South Carolina State Budget and Control Board-Insurance Reserve Fund commenced these product liability actions against Hoover Universal, Inc., invoking diversity jurisdiction and alleging damages resulting from Hoover's sale to the plaintiffs of defective trusses and sheathing, which were incorporated into public buildings constructed in the 1970s. Relying mainly on South Carolina's statute of repose and statutes of limitations, the district court entered summary judgments in favor of Hoover.

While appeals were pending in this court, the plaintiffs filed a motion to vacate the judgments in the district court under Federal Rule of Civil Procedure 60(b), asserting that under 28 U.S.C. § 1332(a)(1), they were not "citizens" for diversity purposes and therefore the district court never had subject matter jurisdiction. After we granted a limited remand for consideration of the jurisdiction issue, the district court granted the plaintiffs' motion. We now affirm, albeit reluctantly in view of the plaintiffs' original invocation of diversity jurisdiction and their late recognition of the lack of subject matter jurisdiction.

I

The South Carolina Department of Mental Health and the South Carolina Department of Disabilities and Special Needs constructed 23 buildings during the 1970s, using roof trusses and sheathing treated with a fire-retardant chemical sold by the predecessor of Hoover Universal, Inc., a Michigan corporation. After the roof of a building unexpectedly collapsed, a survey was conducted in 2001 of all state-insured buildings using the trusses. From the survey, these Departments discovered that the trusses and sheathing used in their buildings were suffering from delamination and deterioration, allegedly caused by the fire-retardant chemical, and the wood therefore was losing structural strength. Experts also explained that the roof framing systems that included the trusses would become worse and therefore needed replacement. As a result, these Departments had to replace the roofing and roof framing systems, incurring costs and damages exceeding seven million dollars.

The large majority of the losses were initially paid by the Office of the Insurance Reserve Fund, a division of the South Carolina State Budget and Control Board, which insured the property of both the Department of Mental Health and the Department of Disabilities and Special Needs. The two Departments, as well as the Budget and Control Board-Insurance Reserve Fund, as subrogee, then commenced these two actions against Hoover in federal court under South Carolina statutory and common law, invoking diversity jurisdiction conferred by 28 U.S.C. § 1332(a)(1).

On Hoover's motions for summary judgment, the district court dismissed the actions, concluding they were barred mainly by South Carolina's statute of repose and various statutes of limitations. From these judgments, entered on March 8, 2006, the plaintiffs appealed.

While the appeals were pending, the plaintiffs filed a motion in the district court to vacate the judgments for lack of subject matter jurisdiction. Even though it was the plaintiffs who had commenced these actions in federal court by invoking diversity jurisdiction, they now argued for the first time that "as arms of the state of South Carolina, the Plaintiffs [were] not `citizens' for purposes of diversity jurisdiction," as required by 28 U.S.C. § 1332(a)(1). Following the procedure outlined in Fobian v. Storage Technology Corp., 164 F.3d 887, 891 (4th Cir.1999), the district court entered an order notifying the parties that it was inclined to grant the motion to vacate the judgments, and we remanded the cases for the limited purpose of having the district court consider the motion.

The district court granted the motion to vacate both judgments, finding that the plaintiffs were alter egos of the State of South Carolina and therefore were not "citizens" for purposes of diversity jurisdiction. From the district court's judgments dated February 21, 2007, dismissing the cases for lack of subject matter jurisdiction, Hoover appealed, contending that the district court erred in concluding that the plaintiffs were alter egos of the State, because the plaintiffs, although created by state law, functioned sufficiently independently of the State to be considered "citizens" for diversity purposes.

II

An undoubtedly inequitable hardship results from allowing the plaintiffs to prosecute actions in federal court and, after they lose on motions for summary judgment, granting their motions to vacate the judgments because of a lack of subject matter jurisdiction. As Hoover laments "Plaintiffs have presented the federal courts with a procedural morass of their own making, and should not be rewarded at this late stage of the proceedings with a `do over' in state court." In most situations, this argument would be persuasive. But subject matter jurisdiction goes to the very power of the court to act, and regardless of the waste resulting from having completed proceedings later vacated by a late-discovered jurisdictional defect, an order or judgment entered by a court without subject matter jurisdiction is a nullity.

In these cases, the plaintiffs invoked diversity jurisdiction under 28 U.S.C. § 1332(a)(1), which confers jurisdiction on a federal court over actions between "citizens of different States" where the amount in controversy exceeds $75,000. To satisfy the diversity requirement, the plaintiffs alleged (by implication) that Hoover was a citizen of Michigan and that the plaintiffs were citizens of South Carolina. The complaint actually alleged, "the parties are diverse; therefore, jurisdiction in this Court is appropriate."

It is well established that for purposes of diversity jurisdiction, a State is not a "citizen." See Moor v. County of Alameda, 411 U.S. 693, 717, 93 S.Ct. 1785, 36 L.Ed.2d 596 (1973). Moreover, a public entity created under state law, which is "the arm or alter ego of the State," is likewise not a citizen for purposes of diversity jurisdiction. Id. (internal quotation marks omitted) (emphasis omitted); see also Maryland Stadium Auth. v. Ellerbe Becket Inc., 407 F.3d 255, 260 (4th Cir. 2005). But an entity created by the State which functions independently of the State with authority to sue and be sued, such as an independent authority or a political subdivision of the State, can be a "citizen" for purposes of diversity jurisdiction. Moor, 411 U.S. at 717-18, 93 S.Ct. 1785; Maryland Stadium Auth., 407 F.3d at 260.

The line separating a State-created entity functioning independently of the State from a State-created entity functioning as an arm of the State or its alter ego is determined by the particular legal and factual circumstances of the entity itself. To define that line, we have articulated a nonexclusive list of four factors to be considered: (1) whether any judgment against the entity as defendant will be paid by the State or whether any recovery by the entity as plaintiff will inure to the benefit of the State; (2) the degree of autonomy exercised by the entity, including such circumstances as who appoints the entity's directors or officers, who funds the entity, and whether the State retains a veto over the entity's actions; (3) whether the entity is involved with state concerns as distinct from non-state concerns, including local concerns; and (4) how the entity is treated under state law, such as whether the entity's relationship with "the State [is] sufficiently close to make the entity an arm of the State." See Maryland Stadium Auth., 407 F.3d at 261-62 (alteration in original) (drawing factors from Lake Country Estates, Inc. v. Tahoe Reg'l Planning Agency, 440 U.S. 391, 99 S.Ct. 1171, 59 L.Ed.2d 401 (1979) and Ram Ditta v. Maryland Nat'l Capital Park & Planning Comm'n, 822 F.2d 456 (4th Cir.1987), and quoting Cash v. Granville County Bd. of Educ., 242 F.3d 219, 224 (4th Cir.2001)).

Hoover contends that neither the Budget and Control Board-Insurance Reserve Fund nor the two Departments are alter egos of South Carolina. It asserts:

The IRF [Budget and Control Board-Insurance Reserve Fund] is a proprietary insurance operation that funds itself through the sale of insurance to, and the collection of premiums from, its insureds — property owners that include both state and local governmental entities. Similar to any other insurance company, any subrogation recovery by the IRF in this case would be retained by the IRF in a trust fund. In analogous cases involving state-created trust funds, this Court and others have found that the entity in question is...