Builders Mutual Insurance Company v. Dragas Management Corporation ( 2012 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 11-1722
BUILDERS MUTUAL INSURANCE COMPANY,
Plaintiff - Appellee,
v.
DRAGAS MANAGEMENT CORPORATION,
Defendant - Appellant,
and
DRAGAS ASSOCIATES X, LC; HAMPSHIRES ASSOCIATES, LC,
Counter-Plaintiffs - Appellants,
FIREMEN’S INSURANCE COMPANY OF WASHINGTON, D.C.,
Defendant - Appellee,
v.
THE HANOVER INSURANCE COMPANY; CITIZENS INSURANCE COMPANY OF
AMERICA,
Third Party Defendants - Appellees.
Appeal from the United States District Court for the Eastern
District of Virginia, at Norfolk. Rebecca Beach Smith, District
Judge. (2:09-cv-00185-RBS-TEM)
Argued: October 23, 2012 Decided: November 20, 2012
Before MOTZ, DUNCAN, and FLOYD, Circuit Judges.
Vacated and remanded by unpublished per curiam opinion.
ARGUED: R. Johan Conrod, Jr., KAUFMAN & CANOLES, PC, Norfolk,
Virginia, for Appellants. Danny Mark Howell, SANDS ANDERSON,
PC, McLean, Virginia, for Appellees. ON BRIEF: William E.
Spivey, KAUFMAN & CANOLES, PC, Norfolk, Virginia, for
Appellants. Mikhael D. Charnoff, Courtney South Schorr, SANDS
ANDERSON, PC, McLean, Virginia, for Appellee Builders Mutual
Insurance Company; John B. Mumford, Jr., Kathryn E. Kransdorf,
HANCOCK, DANIEL, JOHNSON & NAGLE, PC, Glen Allen, Virginia, for
Appellee Firemen's Insurance Company of Washington, D.C.; John
Malloy, ROBINSON & COLE, LLP, Hartford, Connecticut, for
Appellees Hanover Insurance Company and Citizens Insurance
Company of America.
Unpublished opinions are not binding precedent in this circuit.
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PER CURIAM:
This case presents a dispute over several insurers’ duties
to indemnify a general contractor for its remediation of
defective drywall in homes it had constructed. The district
court granted summary judgment to the insurers. For the reasons
that follow, we must vacate the judgment of the district court
and remand to that court so that it can dismiss the case for
lack of subject matter jurisdiction.
I.
Between 2005 and 2009, Dragas Management Corporation
(“DMC”) served as general contractor for two developments in
southeastern Virginia. DMC subcontracted the drywall
procurement and installation for both developments. Due to a
shortage of domestic drywall, the subcontractor purchased some
of its drywall from a Chinese facility. The Chinese drywall was
defective, and contained concentrations of elemental sulfur 375
times greater than that in representative domestic-manufactured
drywall. The subcontractor installed the Chinese drywall in
seventy-four homes within the two developments.
Over this period of time, DMC held a number of different
insurance policies from two insurers. DMC purchased a
commercial package policy for February 6, 2006 to February 6,
2007 from Builder’s Mutual Insurance Company, a commercial
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package policy and commercial umbrella policy for February 5,
2007 to February 5, 2008 from Firemen’s Insurance Company, and a
commercial package policy and commercial umbrella policy for
March 1, 2008 to March 1, 2009, again from Builders. Each
policy contained commercial general liability coverage for
“those sums that [DMC] becomes legally obligated to pay as
damages because of ‘bodily injury’ or ‘property damage’ to which
[the] insurance applies.”
The Chinese drywall’s sulfuric off-gassing damaged metal
fixtures, wiring, and connections within the homes containing
the drywall. DMC investigated complaints about the damage and
discovered the presence of the Chinese drywall. Beginning in
February 2009, DMC prepared a remediation plan and began
executing remediation agreements with individual homeowners.
Pursuant to the agreements, DMC agreed to remove and replace the
Chinese drywall, replace all damaged metal components, pay
relocation expenses, and compensate the homeowners for damages
to personal property. Neither Builders nor Firemen’s were party
to DMC’s remediation agreements with the homeowners.
When DMC sought indemnification for its remediation costs,
both Builders and Firemen’s denied coverage. On April 23, 2009,
Builders filed this action against DMC, in which it alleged
federal jurisdiction on the basis of diversity of citizenship
and sought a declaratory judgment that it owed no duty to
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indemnify DMC for its Chinese drywall remediation costs.
Builders also named Firemen’s as a defendant on the theory that,
if the court found that Builders owed DMC a duty to indemnify,
the court could allocate the costs equitably between the
insurers. On May 21, Firemen’s answered and filed a cross-claim
against DMC. On June 22, DMC answered Builders’ complaint and
Firemen’s crossclaim, and filed a counterclaim against Builders
and a crossclaim against Firemen’s. On July 7, DMC filed a
third-party complaint against its subcontractors’ insurers --
Hanover Insurance Company and Citizens Insurance Company of
America. Nine months later, on April 7, 2010, Dragas Associates
X, LC and Hampshire Associates, LC -- the developers of the
neighborhoods affected by the defective drywall -- joined the
case as counterclaim plaintiffs.
After more than two years of litigation, the district court
granted summary judgment to the insurers. The district court
held that the policies’ commercial general liability provisions
did not cover DMC’s remediation costs because DMC made the
remediation voluntarily, rather than under a legal obligation to
pay. DMC, Dragas Associates, and Hampshires Associates
(collectively, “Dragas”) noted an appeal. While the case was on
appeal, Dragas moved to dismiss the case for lack of subject
matter jurisdiction. We delayed ruling on that motion to allow
oral argument on both the jurisdictional motion and the merits.
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II.
We consider subject matter jurisdiction de novo, regardless
of whether a party has raised, or the district court addressed,
the issue. See Constantine v. Rectors & Visitors of George
Mason Univ., 411 F.3d 474, 480 (4th Cir. 2005). In its motion
to dismiss, Dragas argues that we lack diversity jurisdiction
over this case. Dragas’ argument proceeds in two parts. First,
Dragas contends that we must realign Firemen’s as a plaintiff in
the case, and that such realignment destroys complete diversity
because Firemen’s (a realigned plaintiff) and DMC (a defendant)
are both citizens of Virginia. Second, Dragas contends that
Firemen’s is a required and indispensable party to the case, and
thus we cannot dismiss Firemen’s to save diversity jurisdiction.
We take up each argument in turn.
A.
“Diversity jurisdiction cannot be conferred upon the
federal courts by the parties’ own determination of who are
plaintiffs and who defendants.” City of Indianapolis v. Chase
Nat’l Bank, 314 U.S. 63, 69 (1941). Instead, courts must “look
beyond the pleadings, and arrange the parties according to their
sides in the dispute.” Id. (internal quotation marks omitted).
To determine when to realign parties, we apply the two-step
“principal purpose” test. U.S. Fid. & Guar. Co. v. A & S Mfg.
Co. (Fidelity), 48 F.3d 131, 133 (4th Cir. 1995). First, we
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determine the primary issue in the controversy by considering
the “plaintiff’s principal purpose for filing its suit.”
Palisades Collections LLC v. Shorts, 552 F.3d 327, 337 (4th Cir.
2008) (internal quotation marks omitted). Second, “we align the
parties according to their positions with respect to the primary
issue.” Id. If the alignment differs from that in plaintiff’s
complaint, we look to whether diversity jurisdiction still
exists.
In Fidelity, an insurer filed a declaratory judgment action
against its insured and several co-insurers alleging, first,
that it owed no duty to indemnify the insured for certain
environmental liabilities, and, second, that if it must
indemnify, the co-insurers owed a duty of contribution. 48 F.3d
at 132. The district court applied the principal purpose test
and realigned all of the insurers as plaintiffs and the insured
as the sole defendant. The realignment destroyed complete
diversity, and the district court dismissed the action for lack
of jurisdiction. Id. at 132. We affirmed. In so doing, we
agreed with the district court that “any disputes existing among
the insurers regarding contribution are ancillary to the primary
issue of the duty to indemnify.” Id. at 134. Because all of
the insurers shared the principal purpose of avoiding liability
to the insured, realignment of the parties was required. Id.7
We find the case at hand indistinguishable from Fidelity.
Builders’ principal purpose in filing its action was to avoid a
duty to indemnify DMC for its Chinese drywall remediation costs.
Builders and Firemen’s share this principal purpose of
altogether avoiding liability to DMC; any disputes between the
insurers are merely “ancillary to the primary issue of the duty
to indemnify” and “hypothetical” until the insurers’ liabilities
are determined. Fidelity, 48 F.3d at 134. Therefore, we must
realign Firemen’s as a plaintiff.
B.
Our realignment of Firemen’s as a plaintiff destroys
complete diversity, for both Firemen’s and defendant DMC are
citizens of Virginia. Nonetheless, the insurers -- including
Firemen’s -- argue that we can save our jurisdiction by
dismissing Firemen’s from the case. Dragas counters that
Firemen’s is a required and indispensable party under Fed. R.
Civ. P. 19, and thus cannot be dismissed.
We may dismiss a dispensable non-diverse party to preserve
our jurisdiction. Eriline Co. S.A. v. Johnson, 440 F.3d 648,
652 (4th Cir. 2006). However, the Supreme Court has
“emphasize[d] that such authority should be exercised
sparingly,” with due consideration of “whether the dismissal of
[the] nondiverse party will prejudice any of the parties in the
litigation.” Newman-Green, Inc. v. Alfonzo-Larrain, 490 U.S.
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826, 837 (1989). Moreover, in order to dismiss a non-diverse
party from a case, we must be satisfied that it is not an
indispensable party under Rule 19. Eriline Co., 440 F.3d at
652.
Dragas relies on Schlumberger Industries, Inc. v. National
Surety Corp., 36 F.3d 1274 (4th Cir. 1994), to argue that
Firemen’s is an indispensable party. In Schlumberger, we held
that when multiple insurers issue policies covering the same
conduct, but for different time periods, and those policies are
potentially implicated by an insured’s environmental remediation
efforts, all of the insurers are required and indispensable
parties to a suit regarding any individual insurer’s coverage.
Id. at 1286. We emphasized that allowing cases to proceed with
fewer than all of the insurers subjected the insured to the
practical possibility of whipsaw where the insured could “wind
up with less than full coverage even though it was legally
entitled to full coverage.” Id. In particular, we identified
three questions that -- if presented to different courts --
might result in a whipsaw of prejudicially inconsistent
adjudication: (1) the legal question of whether the policies
provide coverage at all; (2) the legal question of what
constitutes a “trigger” for the coverage to attach; and (3) the
factual question of when -- if at all -- such a trigger
occurred. The risks of both legal and factual whipsaw strongly
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influenced our determination that all of the insurers were both
required and indispensable to any adjudication as to an
individual insurer’s coverage. Id. at 1287-88.
Schlumberger controls in this case. Firemen’s and Builders
both issued policies with commercial general liability
provisions covering the same conduct by DMC, but for different
time periods, and both insurers’ policies are potentially
implicated by DMC’s remediation efforts. As in Schlumberger,
separate litigation as to Builders and Firemen’s duties to
indemnify DMC would pose threats of both legal and factual
whipsaw.
All of Hanover and Firemen’s attempts to distinguish
Schlumberger fail. First, they argue that because the district
court granted summary judgment, this case presents a purely
legal question and negates the risk of factual whipsaw so
emphasized in Schlumberger. However, in doing so they ignore
the fact that Schlumberger also involved an appeal from a grant
of summary judgment for the insurers. The district court’s
dispositive legal conclusions did not palliate our concerns of
potential factual whipsaw in Schlumberger, and they do not here. *
*
A week after oral argument in this case, the Supreme Court
of Virginia decided Travco Insurance Co. v. Ward (No. 120347)
(Va. Nov. 1, 2012). In a post-argument filing, Builders argues
that the Travco decision disposes of the merits claim in this
case. Be that as it may, the existence of a dispositive state
(Continued)
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The insurers also argue that we should consider issues of
finality and judicial economy before dismissing a case filed
over three years ago that has gone to final judgment. Once
again, they ignore Schlumberger’s procedural posture. In
Schlumberger the case had also gone to final judgment, and we
nonetheless dismissed it for lack of jurisdiction over six years
after its original filing. Finally, and relatedly, the insurers
present several arguments regarding Dragas’ failure to raise
Firemen’s realignment and indispensability earlier; however,
such thinly veiled waiver arguments are ineffectual. For a
party may question subject matter jurisdiction at any stage of
litigation, even for the first time on appeal. Constantine, 411
F.3d at 480.
Therefore, we apply Schlumberger and hold that Firemen’s is
a required and indispensable party to this case; accordingly, we
cannot dismiss Firemen’s from the case to preserve our
jurisdiction.
decision regarding the merits does not affect our jurisdictional
analysis. Moreover, if Travco is as dispositive as Builders
suggests, Builders’ burden in relitigating this case -- if
refiled in state court at all -- will be trivial indeed.
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III.
For the reasons set forth above, we vacate the judgment of
the district court and remand to that court so that it can
dismiss the case for lack of subject matter jurisdiction.
VACATED AND REMANDED
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