U.S. Fidelity and Guar. Co. v. Thomas Solvent Co., s. 91-1013

Decision Date04 February 1992
Docket NumberNos. 91-1013,s. 91-1013
Citation955 F.2d 1085
PartiesUNITED STATES FIDELITY AND GUARANTY CO., Canadian Universal Insurance Co., Inc., Allstate Insurance Co., successor in interest to Northbrook Excess & Surplus Insurance Co., St. Paul Fire and Marine Insurance Co., Great American Surplus Lines Insurance Co., Admiral Insurance Co., First State Insurance Co., Guaranty National Insurance Co., Gibralter Casualty Co., Hartford Accident & Indemnity Co., Northstar Re-Insurance Co., Plaintiffs-Appellants, v. THOMAS SOLVENT CO., Thermo-Chem, Inc., Continental Casualty Co., Auto-Owners Insurance Co., Idea Mutual Insurance Co., Richard E. Thomas, Thomas Development, Inc., Thomas Solvent Company of Muskegon, Inc., TSC Transportation, Inc., Thomas Solvent, Inc. of Indiana, Cora B. Adkins, Alliance for a Livable Environment, Thomas Solvent Company of Detroit, Grand Trunk Western Railroad Co., Defendants-Appellees. to 91-1018 and 91-1020 to 91-1023.
CourtU.S. Court of Appeals — Sixth Circuit

John W. Allen, Howard & Howard, Kalamazoo, Mich. (argued and briefed), for defendant-appellee Auto-Owners Ins. Co.

Todd R. Dickinson, Tolley, Fisher & Verwys, Grand Rapids, Mich. (argued and briefed), for defendant-appellant Allstate Ins. Co.

Jay E. Brant, Mark A. Goldsmith, Philip A. Grashoff, Jr., Honigman, Miller, Schwartz & Cohn, Detroit, Mich., for intervenor Richard E. Thomas.

Before KEITH and NORRIS, Circuit Judges, and JOHNSTONE, District Judge. *

KEITH, Circuit Judge.

Plaintiff United States Fidelity and Guaranty Company ("USF & G") appeals from the district court's order of October 30, 1990, 132 F.R.D. 660, to realign the parties in this action and to dismiss the case for lack of subject matter jurisdiction. For the reasons set forth below, we AFFIRM.

I. BACKGROUND

Defendant Thomas Solvent Company ("Thomas Solvent") operated chemical distribution facilities in Battle Creek, Michigan, from 1963 until 1986. From 1970 to 1981, the company was licensed by the State of Michigan as a liquid waste hauler and handled liquid industrial wastes. In 1981, the Michigan Department of Public Health discovered that a well-field which supplied water for the Battle Creek Municipal Water System was contaminated with organic chemicals. Thomas Solvent was one of several sources suspected of causing the pollution. The United States Environmental Protection Agency and the State of Michigan commenced actions against Thomas Solvent seeking injunctive relief and penalties. Thomas Solvent sought coverage from its insurers for expenses arising out of these actions. All of the insurers, except USF & G, denied coverage.

On September 18, 1985, USF & G instituted the present suit against Thomas Solvent, Thermo-Chem, and insurers of Thomas Solvent and related corporate entities (collectively "defendants"). The action was subsequently joined by other parties, including TSC Transportation Company, Thomas Development Company, Thomas Solvent Company of Detroit, Thomas Solvent Inc. of Indiana, Thomas Solvent Company of Muskegon, Richard E. Thomas and Letha Thomas (collectively, with Thomas Solvent and Thermo-Chem, the "Thomas Parties"), additional insurers, and parties asserting claims against certain or all of the Thomas Parties in various actions being litigated in the Michigan and federal courts. The case was filed in federal court on the basis of diversity jurisdiction.

In this action, USF & G initially sought a declaration that it did not have a duty to defend or indemnify any of the Thomas Parties. USF & G argued that if the district court determined that USF & G did have a duty to defend or indemnify the Thomas Parties, then that duty was shared by the defendant insurance companies. On January 8, 1988, the district court issued an opinion finding that certain of the insurers had a duty to defend certain of the Thomas Parties in the underlying actions. The district court did not determine whether the insurance companies had a duty to indemnify.

On October 5, 1989, USF & G filed a motion for realignment of the parties. On November 30, 1989, the magistrate-judge assigned to this case requested briefs on the issue of whether alignment would destroy diversity jurisdiction. One of the insurers, Auto-Owners Insurance Company ("Auto-Owners"), filed a motion in favor of realignment and for dismissal of the case for lack of subject matter jurisdiction. Auto-Owners contended that because all of the insurance companies sought a declaration that they had no duty to indemnify the Thomas Parties, they should be aligned together against the Thomas Parties. Since both Auto-Owners and some of the Thomas Parties are citizens of Michigan, such a realignment would destroy diversity jurisdiction and require dismissal of the entire action. Auto-Owners further contended that the order realigning the parties should be nunc pro tunc since the district court lacked jurisdiction at the outset. Such an order would render all action in the district court void.

On June 1, 1990, the magistrate-judge issued an opinion and order denying USF & G's and Auto-Owners' motions to realign the parties. The magistrate-judge concluded that "because the leading issue is which insurer owes what to whom, the court finds that all the insurance companies' interests are sufficiently in conflict to satisfy the actual, substantial controversy test." On the basis of his finding that there existed an "actual" and "substantial" conflict among and between the insurers, the magistrate-judge held that the district court had diversity jurisdiction.

Auto-Owners and Intervenor Grand Trunk Western Railroad Company ("Grand Trunk") filed motions for reconsideration and/or objections to the magistrate-judge's opinion and order, asking the district court to order realignment and to dismiss the action for lack of diversity. USF & G filed a response supporting the outcome reached by the magistrate-judge. The Thomas Parties filed a memorandum supporting Auto-Owners' motion.

On October 30, 1990, the Honorable Richard A. Enslen issued an opinion on the exceptions taken to the magistrate-judge's decision on realignment and diversity. Reviewing the magistrate-judge's decision de novo, Judge Enslen held that Auto-Owners' motion to realign the parties nunc pro tunc should be granted and the case dismissed for lack of subject matter jurisdiction. Judge Enslen concluded that the parties must be aligned according to the "principal purpose of the suit[;]" that is, "what each insurance company owes or doesn't owe each insured." This placed the Thomas Parties and intervenors on one side of the dispute and all of the insurers on the other. Since one of the insurers, Auto-Owners, is a Michigan company, and one or more of the Thomas Parties are Michigan citizens, the district court found a lack of diversity and dismissed the case.

USF & G filed a timely appeal, arguing that the parties in this action should not have been realigned so as to destroy diversity jurisdiction.

II. DISCUSSION
A. Standard of Review

Initially, we must determine whether the district court applied the proper standard of review in reversing the magistrate-judge's denial of Auto-Owner's motion for realignment and dismissal. The district court reviewed the magistrate-judge's ruling de novo.

A magistrate-judge is granted authority under 28 U.S.C. § 636, which provides in part:

(b)(1) Notwithstanding any provision of law to the contrary--

(A) a judge may designate a magistrate to hear and determine any pretrial matter pending before the court, except a motion for injunctive relief, for judgment on the pleadings, for summary judgment, to dismiss or quash an indictment or information made by the defendant, to suppress evidence in a criminal case, to dismiss or to permit maintenance of a class action, to dismiss for failure to state a claim upon which relief can be granted, and to involuntarily dismiss an action. A judge of the court may reconsider any pretrial matter under this subparagraph (A) where it has been shown that the magistrate's order is clearly erroneous or contrary to law.

28 U.S.C. § 636(b)(1)(A) (emphasis added). While most actions by a magistrate-judge are reviewed for clear error, a district court has de novo review of a magistrate-judge's ruling on dispositive motions, such as those excepted under subsection (A). See Roland v. Johnson, 856 F.2d 764, 768-69 (6th Cir.1988). USF & G argues that the magistrate-judge's ruling on realignment was not a dispositive ruling and the district court should have applied a clearly erroneous standard of review.

USF & G contends that the magistrate-judge made two distinct determinations: (1) that realignment was improper, and (2) that the court had subject matter jurisdiction. USF & G argues that the issue of realignment required a nondispositive determination. Therefore, the district court should have applied a clearly erroneous standard of review to the magistrate-judge's determination on realignment.

The district court disagreed that the issues raised by Auto-Owner's motion should be bifurcated for determining the standard of review as suggested by USF & G. The district court noted that Auto-Owners raised the issue of realignment for the sole purpose of having the case dismissed for lack of subject matter jurisdiction. It sought realignment nunc pro tunc, arguing that the parties were improperly aligned when the action was initially filed in federal court. Accordingly, the district court reasoned that the essential issue raised by Auto-Owner's motion was whether diversity jurisdiction existed at the time the action was initiated. The district court concluded that this was a dispositive issue over which it had de novo review.

We agree with the district court's analysis and conclusion. The determination whether to realign the parties in this action would automatically either destroy or preserve diversity jurisdiction. Therefore, the issues of realignment and...

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