Opinion
No. C 01-03317 WHA.
December 3, 2001.
ORDER REMANDING CASE; MOOTING DEFENDANT'S MOTION TO DISMISS, STAY, OR TRANSFER; VACATING HEARING
INTRODUCTION
This dispute presents the question of how Lloyd's of London is classified for purposes of determining diversity jurisdiction. This order follows the weight of appellate authority and every other court in this district and REMANDS this state-law insurance-coverage dispute to San Francisco Superior Court. Defendant's motion to dismiss, stay, or transfer this action is MOOT since jurisdiction does not exist. The hearing is VACATED.
STATEMENT
Plaintiff Certain Underwriters at Lloyd's, London filed this action against defendant Raytheon Co. in San Francisco Superior Court in July 2001. Lloyd's provided excess coverage to Raytheon under comprehensive general liability policies, issued by, inter alia, Continental Casualty Company. In this action, Lloyd's seeks a declaration regarding its duty to indemnify and defend Raytheon for polluting more than 76 sites, resulting in more than $100 million in liability.
The dispute between Lloyd's and Raytheon began in 1993, when Raytheon filed suit against Lloyd's for coverage on related issues in San Francisco Superior Court. The initial phase of that case was tried to a jury last year. Many issues, however, remain outstanding, and the case is still proceeding. About one year ago, Raytheon sued Continental Casualty in Massachusetts. That action is ongoing as well.
The same day that Lloyd's brought this action in state court, Raytheon filed a similar suit in federal court in Massachusetts, where Raytheon is headquartered. Raytheon then removed the instant action. Raytheon seeks to dismiss, transfer, or stay this action, which it contends is duplicative of the one it filed in Massachusetts, and should be consolidated with its ongoing suit against Continental Casualty, a primary insurer. Lloyd's, on the other hand, moves to remand this action to state court.
ANALYSIS
State-law claims may be removed to federal court when there is complete diversity between the parties. 28 U.S.C. § 1332. Every plaintiff must be diverse from every defendant. Strawbridge v. Curtiss, 7 U.S. 267 (1806). The amount in controversy must exceed $75,000. 28 U.S.C. § 1332. The party seeking to establish diversity jurisdiction bears the burden of proof on each element. Kokkonen v. Guardian Life Ins. Co., 511 U.S. 375, 377 (1994). Doubts as to removability are resolved in favor of remand. Shamrock Oil Gas Corp. v. Sheets, 313 U.S. 108-9 (1941); Gaus v. Miles, Inc., 980 F.2d 564, 566 (9th Cir. 1992).
Complete Diversity
As stated, the key issue herein is how Lloyd's of London is analyzed for purposes of determining whether complete diversity exists. Lloyd's is uniquely structured. It is a product of early English law that eludes a precise American analog. It is not an insurance company. Rather, it provides a market for members to buy and sell risk. Members are called "Names." Each Name invests in a percentage of an insurance policy risk. A Name is severally, but not jointly, liable for his or her share of the risk. Names do not actively participate in the insurance business. Instead, they comprise "Syndicates," groups of hundreds to thousands of Names. Each Syndicate, in turn, has a lead underwriter, who subscribes to insurance risks on behalf of the Names in the Syndicate. Lloyd's insurance is sold by a broker, who can spread risk among a number of Syndicates.
The circuits are split on how to classify Lloyd's for diversity purposes, and the Ninth Circuit is yet to decide. Both the Second and Seventh Circuit, as well as several district courts including two within this district, hold that the citizenship of every Name must be considered. E.R. Squibb Sons, Inc. v. Accident Cas. Ins. Co., 160 F.3d 925 (2d Cir. 1998); Indiana Gas Co., Inc. v. Home Ins. Co., 141 F.3d 314 (7th Cir. 1998). In contrast, the Sixth Circuit only examines the names of the lead underwriters. Certain Interested Underwriters at Lloyd's, London v. Layne, 26 F.3d 39 (6th Cir. 1994).
See also Majestic Ins. Co. v. Allianz Int'l Ins. Co., 133 F. Supp.2d 1218 (ND. Cal. 2001); Genstar Container Corp. v. Certain Underwriters At Lloyd's, Nos. C 00-1013, 00-0361, 99-5179, 2000 WL 189729 (N.D. Cal. Dec. 22, 2000); Queen Victoria Corp. v. Ins. Specialists of Hawaii, Inc., 711 F. Supp. 553 (D. Haw. 1989).
Plaintiffs concede that there is diversity between the lead underwriters and defendant. They have, however, submitted a declaration stating that at least one Name that brought this action is a citizen of Massachusetts, defendant's principal place of business, and one Name is a citizen of Delaware, defendant's state of incorporation (Holland Decl. ¶ 3). Defendant has provided no evidence regarding the citizenship of the myriad of Names in the 226 Syndicates suing it. Presented is a pure issue of law. If defendant is correct, jurisdiction exists. If plaintiffs are correct, defendant has not met its burden, and this action must be remanded.
In Indiana Gas, the Seventh Circuit analogized the structure of Lloyd's to the structure of partnerships, noting: "Every name in a syndicate faces unlimited personal liability, like a partner in a general partnership. Syndicates are run, however, much like limited partnerships, with a lead member . . . able to transact business without consulting the investors." 141 F.3d at 316. It reasoned that: "General partnerships, limited partnerships, and unincorporated membership associations are all treated as citizens of every state of which any partner or member is a citizen." Id. at 317 (citing Carden v. Arkoma Assocs., 494 U.S. 185 (1990); United Steelworkers of Am. v. R.H. Bouligny, Inc., 382 U.S. 145 (1965); Chapman v. Barney, 129 U.S. 677 (1889)).
Similarly, in Squibb, the Second Circuit stated that the general rule is that a court must "look to the individuals being represented rather than their collective representation to determine whether diversity of citizenship exists." 160 F.3d at 931. It noted that the rule has three exceptions: (i) corporations, (ii) trusts, and (iii) class actions. Then it concluded that Lloyd's did not fall into any of these exceptions. It noted that Lloyd's was not a corporation. Nor was it a trust, since "[t]rustees own the corpus" and the lead underwriters do not own the wealth of the Names or exercise any control over it beyond underwriting risks. Ibid. (citing Indiana Gas, 141 F.3d at 318). At the request of both sides, it then considered recharacterizing the suit as a class action. It determined, however, that due to the several liability of the Names, the amount in controversy requirement might not be met.
The Sixth Circuit, on the other hand, treated the lead underwriters as agents for the Names and applied the "venerable common law rule that an agent for an undisclosed principal is personally liable on a contract." Layne, 26 F.3d at 43. It concluded that: "the underwriters are "real parties in interest' because they are liable on the contract. They actually wrote the insurance, processed the claim, and are authorized to sue on the policy." Ibid.
This order finds the majority view more persuasive. As noted in Indiana Gas and Squibb, Lloyd's has the management structure of a general partnership and the liability structure of a limited partnership. In Carden v. Arkoma Associates, 494 U.S. 185 (1990), the Supreme Court set out a flat rule that a court must consider the citizenship of every member of a partnership for determining diversity. It held:
In sum, we reject the contention that to determine, for diversity purposes, the citizenship of an artificial entity, the court may consult the citizenship of less than all of the entity's members. We adhere to our oft-repeated rule that diversity jurisdiction in a suit by or against the entity depends on the citizenship of all the members.Id. at 196 (quotation omitted). The Court further cautioned that exceptions to this rule are left to Congress. Id. at 196-97. As stated in Indiana Gas and Squibb, Lloyd's falls into none of the exceptions to this rule. Even under the possible class-action exception noted in Squibb, plaintiffs did not bring this suit as a class action. This action was brought by "Certain Underwriters at Lloyd's, London, each for himself/herself and not for any other, appearing separately and severally, and not jointly, who subscribed or allegedly subscribed to certain excess liability insurance in favor of Raytheon" (Compl. ¶ 2). Converting this action into a class action simply to find diversity jurisdiction would be improper. Indiana Gas, 141 F.3d at 321; Majestic, 133 F. Supp. 2d at 1223. Especially so since plaintiffs oppose such a metamorphosis.
Moreover, the Names are parties in interest. Every Name possesses unlimited several liability for his or her share of a policy risk. As the court in Indiana Gas pointed out, if Names were not real parties in interest, "it would follow that no insured could rely on their promises or use their wealth to support the insurance agreement." 141 F.3d at 319.
Accordingly, this order holds that for federal jurisdiction to exist there must be complete diversity between Raytheon and every Name. Since Raytheon has not offered any evidence that complete diversity exists, this order does not reach whether the amount of controversy requirement is satisfied. Raytheon has failed to meet its burden of establishing jurisdiction. Accordingly, this action is REMANDED.
CONCLUSION
For the foregoing reasons, this action is REMANDED to San Francisco Superior Court. Defendant's motion to dismiss, stay, or transfer this action is MOOT. The hearing is VACATED.