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ALLENDALE MUT. INS. CO. v. EXCESS INS. CO. LTD.

August 12, 1999

ALLENDALE MUTUAL INSURANCE COMPANY, PLAINTIFF,
v.
EXCESS INSURANCE COMPANY LTD., ET AL., DEFENDANTS.



The opinion of the court was delivered by: Scheindlin, District Judge.

OPINION AND ORDER

This case presents the Court with the unfortunate dilemma of either dismissing an action for want of jurisdiction after more than three years of litigation including a trial or reconfiguring the case to create diversity jurisdiction where none exists. Because such reconfiguration would strain the Supreme Court's guidelines on diversity jurisdiction, the former course is more prudent. In addition, any efficiencies that might be gained by continuing this litigation in federal court would be squandered if the parties are forced to begin again in state court after appellate review of the jurisdictional issue.

I. BACKGROUND

A. Procedural History

Plaintiff Allendale Mutual Insurance Company ("Allendale") filed a Complaint on December 28, 1995 alleging that defendants Excess Insurance Company, et al. ("Reinsurers")*fn1 breached the parties' insurance agreement (the "contract"), in three ways: (1) by wrongfully refusing to pay a $7 million claim; (2) by failing to investigate that claim in good faith; and (3) by initiating suit on the contract in England in spite of the contract's forum-selection clause which requires that litigation arising from the contract be brought in New York. Defendant Reinsurers are sixteen London Market Companies and thirty-six Lloyd's of London syndicates comprised of thousands of individual underwriters.*fn2 After a seven-day bench trial held in December 1997, this Court ruled that defendants were entitled to a recission of the contract. As a result, defendants could not have breached and did not breach that contract when they refused to pay plaintiff's claim. I further found that defendants did not breach the contract's implied covenant of good faith and fair dealing. I did find, however, that the Reinsurers had breached the contract's forum selection clause by bringing suit in England. Consequently, Allendale was entitled to recover $62,273.15 in costs related to the English action.*fn3 See Allendale Mut. Ins. Co. v. Excess Ins. Co., Ltd., 992 F. Supp. 278, 286 (S.D.N.Y. 1998).

Allendale appealed, and Reinsurers cross-appealed. On March 2, 1999, the Second Circuit vacated and remanded, directing this Court "to determine if subject matter jurisdiction over this case may be preserved in light of" E.R. Squibb & Sons, Inc. v. Accident & Cas. Ins. Co., 160 F.3d 925 (2d Cir. 1998) ("Squibb I"). Allendale Mut. Ins. Co. v. Excess Ins. Co., Summary Order, No. 98-7521, No. 98-7599 (2d Cir. March 2, 1999). Needless to say, the appellate court did not reach the merits of the dispute.

B. The Squibb Case

In Squibb I, a case involving Lloyd's Underwriters at Lloyd's of London, the Court of Appeals examined whether subject matter jurisdiction was appropriate given the citizenship of the parties and remanded the case to the district court for further inquiry. In addressing the unique issue of the citizenship of the London insurance market defendants, the Second Circuit followed the Seventh Circuit by holding that each and every Name underwriter must meet the complete diversity rule.*fn4 See Indiana Gas Co. v. Home Ins. Co., 141 F.3d 314 (7th Cir. 1998); but see Certain Interested Underwriters at Lloyd's, London v. Layne, 26 F.3d 39 (6th Cir. 1994) (holding that lead underwriter is only real party in interest to controversy and hence it is only Lloyd's Name that must be completely diverse). The Second Circuit concluded:

  We hold that when a Lloyd's lead underwriter is
  sued in a representative capacity (but not in a
  class action) each and every Name whom the lead
  underwriter represents must be completely diverse.
  But we also hold that when a Lloyd's Name
  (including a lead underwriter) is properly sued only
  in an individual capacity, it is that Name's
  characteristics, both as to citizenship and
  jurisdictional amount, that are determinative for
  jurisdictional purposes. And the fact that other
  Lloyd's underwriters who are not diverse parties in
  the suit may be bound by the result of the suit
  (whether by contract or by preclusion) is of no
  consequence.

Squibb I, 160 F.3d at 939-40 (emphasis added).

On remand, the district court conducted a hearing to resolve the factual questions raised by the appellate court regarding the citizenship of the parties and the amount in controversy. After hearing from experts in the London insurance market and plaintiff and defense counsel who both, after sixteen years of litigation, vehemently supported the exercise of jurisdiction, Judge John Martin found that the parties satisfied the requirements of diversity jurisdiction. See E.R. Squibb & Sons, Inc. v. Accident & Cas. Ins. Co., 82 Civ. 7327, 1999 WL 350857, at *17 (S.D.N Y June 2, 1999) ("Squibb II").

Squibb, a citizen of Delaware and New Jersey, sued defendant Allen Haycock, a British subject, in his individual capacity and as a representative underwriter. The parties stipulated a decade before trial that Haycock would act as a representative for all the underwriters. After finding the citizenship of Squibb and Haycock to be diverse, Judge Martin found no reason to inquire whether the amount in controversy requirement had been met "since there has never been any suggestion in this case that the plaintiff did not act in good faith when it made the factual allegations that the amount in controversy exceeded $10,000 and there is no evidence of any collusion between the parties when the allegation was made." Squibb II, 1999 WL 350857, at *7. Judge Martin acknowledged the absurdity of dismissing a case that had consumed sixteen years of federal judicial effort based on the jurisdictional amount rule which serves to ensure that the federal court's time is not spent on trivial matters. See id. at *10 (citing Hatridge v. Aetna Cas. & Sur. Co., 415 F.2d 809, 815 (8th Cir. 1969) (citing C. Wright, Federal Courts § 34 (1964))).

Judge Martin found subject matter jurisdiction even if the amount in controversy was not satisfied because the claim against a foreign party need not satisfy the jurisdictional requirement if that claim is joined to a controversy between citizens of different states that satisfies the "amount in controversy" requirement. Id. at *9-10.*fn5 Finally, the court determined that the claim against Merrett, another Name underwriter sued in his individual capacity, met the diversity jurisdiction requirements including the amount in controversy.

After determining that jurisdiction existed over Haycock and Merrett in their individual capacities, Judge Martin addressed the suit against them in their representative capacities. Id. at *11. Judge Martin ruled that the Lloyd's member underwriters, other than Haycock and Merrett, were not "indispensable parties" because they had agreed to be bound by a judgment against named defendant Haycock or Merrett in their representative capacities. The court noted that "it is hard to imagine a case in which `equity and good conscience' so strongly indicate that the case should be allowed to proceed in the absence of other potential defendants." Id. at *11 (quoting Fed.R.Civ.P. 19(b)). He therefore permitted the suit to continue against Haycock and Merrett in their representative capacities.

Judge Martin provided an alternative ground for federal jurisdiction by recasting the action as a Rule 23 class action. In such actions, the citizenship of the class representative alone is considered in determining diversity. Accordingly, it would not defeat diversity if any of the Names were citizens of plaintiff's state. In addition, Judge Martin reasoned that despite the Supreme Court's ruling in Zahn v. International Paper Co., 414 U.S. 291, 94 S.Ct. 505, 38 L.Ed.2d 511 (1973), that a class action may not proceed on behalf of or against a party whose claim does not satisfy the jurisdictional amount, the thousands of Names who may be liable to Squibb are citizens of foreign states who need not satisfy the jurisdictional amount. Id. at *14-15; see supra note ___. In addition, Judge Martin found that the class of Names met the specific requirements for certification under Rule 23(b)(2), i.e., numerosity, commonality, typicality, fairness and adequacy of the class representative, superiority of the class action device, manageability, and notice; but that the class did not meet the requirements for a Rule 23(b)(3) action. Id. at *15-17.

C. Remand of the Instant Action

On remand here, plaintiff Allendale, evidently disappointed with the trial verdict, moves to dismiss for want of jurisdiction. Defendant Reinsurers object to dismissal and suggest several ways to reconfigure the case to achieve diversity.

II. Discussion

  A. Legal Principles Governing Federal Subject Matter
    Jurisdiction

Article III, § 2 of the Constitution provides: "The judicial Power shall extend . . . to Controversies . . . between Citizens of different States. . . ." Congress implemented this grant in 28 U.S.C. § 1332 conferring diversity jurisdiction in the district courts when a citizen of one state sues both aliens and citizens of a different state. Diversity jurisdiction rests not only upon diversity of citizenship, but also upon plaintiff's ability to meet the required amount in controversy — $50,000.*fn6 "Subject matter jurisdiction is an unwaivable sine qua non for the exercise of federal judicial power." Squibb I, 160 F.3d at 929 (quoting Curley v. Brignoli, 915 F.2d 81, 83 (2d Cir. 1990)). Its absence may be raised at any time, by the court or by any party, even a party who previously argued in favor of the exercise of jurisdiction. See Insurance Corp. of Ireland, Ltd. v. Compagnie des Bauxites de Guinee, 456 U.S. 694, 702, 102 S.Ct. 2099, 72 L.Ed.2d 492 (1982); American Fire & Cas. Co. v. Finn, 341 U.S. 6, 10, 71 S.Ct. 534, 95 L.Ed. 702 (1951). Where jurisdiction is absent, the parties cannot confer it by agreement among themselves. See Republic of Philippines v. Marcos, 806 F.2d 344 (2d Cir. 1986).

Nevertheless, the Supreme Court has encouraged courts to preserve diversity jurisdiction, if possible. "Once a diversity case has been tried in federal court, with rules of decision supplied by state law under the regime of [Erie], considerations of finality, efficiency, and economy become overwhelming." Caterpillar Inc. v. Lewis, 519 U.S. 61, 75, 117 S.Ct. 467, 136 L.Ed.2d 437 (1996) (district court's error in failing to remand a case improperly removed is not fatal to ensuing adjudication if federal jurisdictional requirements are met at time judgment entered). "[R]equiring dismissal after years of litigation would impose unnecessary and wasteful burdens on the parties, judges, and other litigants waiting for judicial attention." Newman-Green, Inc. v. Alfonzo-Larrain, 490 U.S. 826, 836, 109 S.Ct. 2218, 104 L.Ed.2d 893 (1989) (holding that courts of appeals had power to dismiss dispensable non-diverse parties to preserve jurisdiction); see also Penteco Corp. Ltd. v. Union Gas Sys., 929 F.2d 1519, 1523 (10th Cir. 1991) (after final judgment in district court despite unnoticed jurisdictional defect "the interests of justice, fairness and judicial economy require some additional opportunity to `cure'" pleading defects).

  B. The Court Lacks Subject Matter Jurisdiction Over the Case
    As It Is Currently Configured

Allendale, proceeding on the erroneous assumption that the Lloyd's syndicates were legal entities with the capacity to be sued, named thirty-six Lloyd's syndicates as defendants, rather than naming the individual underwriters. Nineteen of the thirty-six syndicates include individual underwriters who currently reside in plaintiff's state of Rhode Island, thereby destroying diversity of citizenship.*fn7

In addition, it is unlikely that any of the underwriters in the thirty-six syndicates can satisfy the $50,000 amount in controversy. The non-Lloyd's defendants, the London Market Companies, the vast majority of whom are British subjects, together account for slightly over 50% of the $12 million claim ($7 million of reinsurance liability plus defendants' `proportion of any expenses incurred' claim of $5 ...


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