Salazar v. Allstate Texas Lloyd's, Inc.

• Decision Date: 10 July 2006
• Docket Number: No. 04-41043.,04-41043.
• Citation: 455 F.3d 571
• Parties: Jose SALAZAR, Plaintiff-Appellant, v. ALLSTATE TEXAS LLOYD'S, INC., Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 571

455 F.3d 571

Jose SALAZAR, Plaintiff-Appellant, v. ALLSTATE TEXAS LLOYD'S, INC., Defendant-Appellee.

No. 04-41043.

United States Court of Appeals, Fifth Circuit.

July 10, 2006.

Daniel M. Downey (argued), Austin, TX, Peter E. Ferraro, Ferraro Law Office, Austin, TX, John H. Eaton, Eaton & McCarthy, McAllen, TX, for Salazar.

Michael James Murray (argued), Sharon E. Callaway, Crofts & Callaway, Douglas Pennebaker, Adami, Goldman & Shuffield, San Antonio, TX, for Defendant-Appellee.

Appeals from the United States District Court for the Southern District of Texas.

Before SMITH, WIENER, and STEWART, Circuit Judges.

JERRY E. SMITH, Circuit Judge:

Jose Salazar appeals the denial of his motion to remand to state court his suit against Allstate Texas Lloyd's, Inc. ("Allstate Texas"), under a homeowners' insurance policy issued by Allstate Texas. We vacate and remand.

I.

Jose Salazar, a citizen of Texas, sought coverage under his homeowner's insurance policy, issued by Allstate Texas, for damage to his house caused by a water leak. He was dissatisfied with the way in which Allstate Texas, also a citizen of Texas, had processed his claim, so he sued it in state court, alleging breach of contract, breach of the duty of good faith and fair dealing, and violations of the Texas Insurance Code and Texas Deceptive Trade Practices Act. Salazar did not sue Allstate Texas Lloyd's Company ("Allstate Illinois"), the entity that actually had underwritten the policy. Allstate Illinois is an unincorporated association of underwriters, each of which is a citizen of Illinois. Accordingly, Allstate Illinois is considered a citizen of Illinois.

Allstate Texas removed to federal court and filed motions seeking to join Allstate Illinois as a defendant and to dismiss the action against Allstate Texas. In support of removal, Allstate Texas claimed diversity of citizenship. It argued that Allstate Illinois, and not Allstate Texas, was the proper defendant and that Salazar was attempting improperly to avoid federal jurisdiction by not suing Allstate Illinois.¹

Salazar moved to remand. The district court denied the motion and granted Allstate Texas's motions to add Allstate Illinois as a defendant and to dismiss the action against Allstate Texas. These actions effectively substituted Allstate Illinois for Allstate Texas as the defendant. The court based its actions on Federal Rules of Civil Procedure 17(a), 19, and 21.

Pursuant to Federal Rule of Civil Procedure 54(b), the court also certified that the dismissal of all claims against Allstate Texas was a final judgment and hence immediately appealable. Salazar accordingly appeals the dismissal on the ground that the district court lacked jurisdiction.

After Salazar appealed the remand issue, the district court entered summary judgment in favor of Allstate Illinois on all claims against it. Although he did not then file a timely motion to appeal the summary judgment, Salazar now argues, as a part of his appeal from the dismissal of Allstate Texas, that the order should be stricken for want of jurisdiction.

II.

A.

We review the denial of a motion to remand de novo. McDonal v. Abbott Labs., 408 F.3d 177, 182 (5th Cir.2005). We review a dismissal or joinder of parties for abuse of discretion. Wieburg v. GTE Southwest Inc., 272 F.3d 302, 308 (5th Cir.2001).

B.

The central question is whether a district court can appropriately assert removal jurisdiction by dismissing a nondiverse in-state defendant and replacing it with a diverse foreign defendant, where the nondiverse in-state defendant was the only named defendant in the action when the suit was removed. So, we must decide whether a district court can create removal jurisdiction based on diversity by substituting parties. It cannot.

The district court premised its swap, and concomitant assertion of jurisdiction, on rules 17(a), 19, and 21. Rule 17(a) provides that

[e]very action shall be prosecuted in the name of the real party in interest .... No action shall be dismissed on the ground that it is not prosecuted in the name of the real party in interest until a reasonable time has been allowed after objection for ratification of commencement of the action by, or joinder or substitution of, the real party in interest; and such ratification, joinder, or substitution shall have the same effect as if the action had been commenced in the name of the real party in interest.

The district court explained its reliance on rule 17(a) by stating that Allstate Illinois, and not Allstate Texas, is the "real party in interest." By its terms, however, rule 17(a) applies only to plaintiffs: "Every action shall be prosecuted in the name of the real party in interest ..." (emphasis added). Because the rule does not provide a mechanism for ensuring that a defendant is a real party in interest, it cannot support the district court's action.

We must next consider whether rules 19 and 21, and our related jurisprudence regarding fraudulent joinder, authorize the substitution of parties to create diversity jurisdiction. In relevant part, rule 19 provides that

[a] person who is subject to service of process and whose joinder will not deprive the court of jurisdiction over the subject matter of the action shall be joined as a party in the action if (1) in the person's absence complete relief cannot be accorded among those already parties, or (2) the person claims an interest relating to the subject of the action and is so situated that the disposition of the action in the person's absence may (i) as a practical matter impair or impede the person's ability to protect that interest or (ii) leave any of the persons already parties subject to a substantial risk of incurring double, multiple or otherwise inconsistent obligations by reason of the claimed interest. If the person has not been so joined, the court shall order that the person be made a party.

Rule 21 adds that

[m]isjoinder of parties is not ground for dismissal of an action. Parties may be dropped or added by order of the court on motion of any party or of its own initiative at any stage of the action and on such terms as are just.

Finally, under the fraudulent joinder doctrine, federal removal jurisdiction premised on diversity cannot be defeated by the presence of an improperly-joined nondiverse and/or in-state defendant. See, e.g., Smallwood v. Ill. Cent. R.R., 385 F.3d 568 (5th Cir.2004) (en banc), cert. denied, 544 U.S. 992, 125 S.Ct. 1825, 161 L.Ed.2d 755 (2005). "[T]he test for fraudulent joinder is whether the defendant has demonstrated that there is no possibility of recovery by the plaintiff against an in-state [or nondiverse] defendant, which stated differently means that there is no reasonable basis for the district court to predict that the plaintiff might be able to recover against an in-state [or nondiverse] defendant." Id. at 573.

Allstate Texas argues that based on the above rules, the district court did not err in dismissing Allstate Texas, adding Allstate Illinois, and on that basis denying remand, because (1) Allstate Illinois is an indispensable party under rule 19 and was joined rightfully by the district court; (2) Allstate Texas is a "fraudulently joined" party whose presence was designed to defeat removal jurisdiction, and therefore the district court correctly did not consider the citizenship of Allstate Texas in assessing jurisdiction; and (3) Allstate Texas was not a necessary party under rule 19, and accordingly the district court had the authority to drop it from the action pursuant to rules 19 and 21. The fundamental flaw in Allstate Texas's argument, however, is that because there has never been more than one defendant in this suit, this is not a typical fraudulent joinder case.

In the paradigmatic fraudulent joinder case, a plaintiff sues a nominal nondiverse/in-state defendant along with a diverse foreign defendant in an effort to make sure that its claims against the diverse defendant stay in state court. At the time of removal, the diverse defendant is already a party, and the only question is whether the court can disregard the nondiverse/in-state defendant for purposes of assessing jurisdiction. Indeed, all the cases cited by Allstate Texas on this issue fall into this pattern.

Salazar, however, did not hail Allstate Illinois into state court and attempt to force the association to stay there by joining a nominal nondiverse/in-state defendant. Allstate Illinois was not a party at the time of removal, and accordingly our fraudulent joinder jurisprudence offers no...