Opinion
Civil Action No. 3:02-CV-2453-D
February 11, 2003
MEMORANDUM OPINION AND ORDER
Defendant's motion to dismiss for lack of diversity jurisdiction presents the question whether the parties are properly aligned. Because they are, and because under this alignment there is complete diversity of citizenship, the court denies the motion.
I
Plaintiff The Equitable Life Assurance Society of the United States ("Equitable"), a New York corporation with its principal place of business in New York, sues defendant-third-party plaintiff Mark Lafferty ("Lafferty"), a Texas citizen, seeking a judgment declaring that it is not liable to Lafferty for benefits under a disability income policy ("Policy"). It invokes this court's jurisdiction based on diversity of citizenship.
Lafferty originally obtained the Policy — which provides disability benefits for injury or sickness-caused total or residual disability — in 1991. Ten times between 1991 and 1997 Lafferty allowed the Policy to lapse. On nine of those occasions, Lafferty made, and Equitable accepted, late premium payments, and the Policy was automatically reinstated. Once, in 1994, Equitable required Lafferty to apply for reinstatement.
Third-party defendant Robert Fischer ("Fischer"), an Equitable agent and Texas citizen, presented Lafferty with the reinstatement application in 1994. The document provided that "`reinstated disability income or medical expense policy will cover only injury sustained or sickness contracted on or after the date of reinstatement.'" Compl. ¶ 8 (quoting application). Lafferty completed the application, representing that he had not received medical treatment for any condition in the prior five years. Based on Lafferty's representations and the signed agreement, Equitable reinstated the Policy.
In 2001 Lafferty made a claim for Policy benefits based on herniated discs in his back. Equitable maintains that this condition existed, and that Lafferty received treatment and surgery for the condition, before the 1994 Policy reinstatement. On this basis, Equitable denied Lafferty's claim for Policy benefits. Equitable also contends that Lafferty has continued to work and has failed to establish a basis to receive Policy benefits. It seeks a declaratory judgment that it is not liable under the Policy.
Lafferty counterclaims for breach of contract, common law fraud, negligent misrepresentation, quantum meruit, violation of the Texas Deceptive Trade Practices-Consumer Protection Act ("DTPA"), Tex. Bus. Com. Code Ann. §§ 17.41-17.826 (Vernon 2002), and violations of the Texas Insurance Code. He also brings a third-party action against Fischer for common law fraud, negligent misrepresentation, DTPA violations, and violations of the Texas Insurance Code. These claims are based on alleged misrepresentations made at the time Lafferty applied in 1994 for Policy reinstatement. Lafferty joined Fischer without leave of court under the proviso of Fed.R.Civ.P. 14(a) that "[t]he third-party plaintiff need not obtain leave to make the service if the third-party plaintiff files the third-party complaint not later than 10 days after serving the original answer."
Lafferty moves to dismiss for lack of subject matter jurisdiction under Rule 12(b)(1), contending that Fischer's Texas citizenship defeats complete diversity.
II
Perhaps because of the way Lafferty has framed his Rule 12(b)(1) motion, the parties have largely briefed it as if it presented Rule 19 issues regarding indispensable parties and compulsory joinder. Lafferty has already joined Fischer, however, under Rule 14. As they are now aligned, the parties are completely diverse. The controlling question that Lafferty's motion presents is whether Fischer should be realigned as a plaintiff.
For this court to have diversity jurisdiction, there must be complete diversity of citizenship between all plaintiffs and all defendants. Owen Equip. Erection Co. v. Kroger, 437 U.S. 365, 373-74 (1978); Strawbridge v. Curtiss, 7 U.S. (3 Cranch) 267 (1806). This means that no plaintiff can be a citizen of the same state as even one defendant. Here, while there is no diversity of citizenship between the third-party plaintiff and third-party defendant (nor is there federal question jurisdiction), the court is able to exercise supplemental jurisdiction over the impleaded claim under 28 U.S.C. § 1367 (a).
Because the liability of the third-party defendant to the defendant on the impleader claim is derivative of the defendant's underlying liability to the plaintiff in the underlying case, the impleader claim by definition is concerned with the same transaction or occurrence, or common nucleus of operative fact, as the underlying suit. Indeed, the test for impleader is actually narrower than an expressly transactional test, since the defendant can join additional claims that satisfy the test for supplemental jurisdiction while not satisfying the test for impleader. Even before the supplemental jurisdiction statute took effect, for cases filed on or after December 1, 1990, courts never had serious doubt that impleader claims satisfy the basic test for supplemental jurisdiction. No court has even hinted that the result should be different under the supplemental jurisdiction statute.
3 James Wm. Moore et al., Moore's Federal Practice § 14.41(4)(a) (3d ed. 2002) (footnote omitted). Therefore, with Fischer and Lafferty currently aligned as third-party plaintiff and defendant, there is supplemental jurisdiction and no basis to dismiss this action for lack of subject matter jurisdiction.
Lafferty appears to suggest that the court would lack supplemental jurisdiction if Fischer were realigned with Equitable as a plaintiff. Although this might eliminate jurisdiction, there is no reason to realign the parties because Fischer's and Equitable's interests are not aligned when they are analyzed in the proper context.
Because the relationship between Fischer and Lafferty would still be part of the same transaction and occurrence as the original suit, there is some question whether the court would have supplemental jurisdiction under § 1367. Because the court discerns no reason to realign the parties, it will not directly address the question whether supplemental jurisdiction would exist after realignment.
Both the Supreme Court and the Fifth Circuit recognize that "there must be an actual, substantial controversy between citizens of different states to sustain diversity jurisdiction." Zurn Indus., Inc. v. Acton Constr. Co., 847 F.2d 234, 236 (5th Cir. 1988) (citing City of Indianapolis v. Chase Nat'l Bank, 314 U.S. 63, 69 (1941)). To establish a substantial controversy, courts must "look beyond the pleadings, and arrange the parties according to their sides in the dispute." City of Indianapolis, 314 U.S. at 69 (internal quotation marks and citation omitted). "The necessary collision of interest has to be determined from the principal purpose of the suit, and the primary and controlling matter in dispute." Zurn, 847 F.2d at 236 (quoting City of Indianapolis, 314 U.S. at 69 (internal quotation marks and citations omitted)).
In determining alignment of the parties, the court examines only the primary claim in the suit. "The determination of the `primary and controlling matter in dispute' does not include the cross-claims and counterclaims filed by the defendants. Instead, it is to be determined by plaintiff's principal purpose for filing its suit." Id at 237. In this case, the primary claim is Equitable's declaratory judgment action. It is clear in this relevant context that the interests of Fischer and Equitable are not aligned and are, if anything, at odds. If Equitable obtains the declaratory judgment it seeks against Lafferty, Fischer may be exposed to liability to Lafferty for possible misrepresentations made to him in connection with the 1994 Policy reinstatement. If Equitable loses its claim and owes Lafferty Policy benefits, it is highly unlikely (if not impossible) that Fischer can be held liable to Lafferty based on the claims he asserts against him. Accordingly, regarding the primary issue, Fischer and Equitable do not have identical or even coinciding interests, and the parties are properly aligned. Equitable seeks a declaratory judgment that it does not owe Lafferty Policy benefits. Lafferty counterclaims for benefits and on related extra-contractual grounds. And Lafferty seeks to hold Fischer liable via third-party action if he is unsuccessful in defending against Equitable's claim and in prosecuting his counterclaim.
* * *
Lafferty's December 9, 2002 motion to dismiss for lack of diversity jurisdiction is denied.