American Fiber & Finishing, Inc. v. Tyco Healthcare Group, LP

United States Court of Appeals
For the First Circuit

No. 03-2297

AMERICAN FIBER & FINISHING, INC.,
TRUSTEE OF AMERICAN FIBER & FINISHING REALTY TRUST,

Plaintiff, Appellant,

v.

TYCO HEALTHCARE GROUP, LP,

Defendant, Appellee.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. George A. O'Toole, Jr., U.S. District Judge]

Before

Boudin, Chief Judge,

Torruella and Selya, Circuit Judges.

Diane C. Tillotson, Joseph L. Bierwirth, Jr., Hemenway &
Barnes, Martin E. Levin, and Stern, Shapiro, Weissberg & Garin, LP
on brief and motion to dismiss for appellant.
Ben T. Clements and Clements & Clements, LLP on brief and
opposition to motion for appellee.

March 29, 2004
 SELYA, Circuit Judge. This case began as a routine piece

of environmental litigation. It has morphed into what could easily

pass for a law school examination question in federal civil

procedure. The tale follows.

On February 16, 2001, plaintiff-appellant American Fiber

& Finishing, Inc. (AF&F), trustee of the American Fiber & Finishing

Realty Trust, sued Tyco International (US), Inc. in the United

States District Court for the District of Massachusetts. In its

complaint, AF&F claimed that Tyco International was liable, as a

successor in interest to Kendall Company, for response costs

incurred in connection with the decontamination of an industrial

site in Colrain, Massachusetts. Although AF&F asserted only state-

law claims, federal jurisdiction attached based on diversity of

citizenship (AF&F is a Delaware corporation that maintains its

principal place of business in North Carolina and Tyco

International is a Nevada corporation that maintains its principal

place of business in New Hampshire) and the existence of a

controversy exceeding $75,000 in amount. See 28 U.S.C. §

1332(a)(1).

Under Fed. R. Civ. P. 15(a), a plaintiff may amend its

complaint once as of right before a responsive pleading is served.

On April 2, 2001, AF&F exercised this prerogative and filed an

amended complaint that dropped Tyco International as a defendant

-2-
and inserted Tyco Healthcare Group, LP in its stead.1 Otherwise,

the amended complaint mimicked the original complaint: AF&F

asserted the same state-law claims against Tyco Healthcare that it

previously had asserted against Tyco International.

The switch of parties defendant worked a subtle change in

the jurisdictional calculus. For purposes of diversity

jurisdiction, a limited partnership is deemed to be a citizen of

every state of which any of its general or limited partners are

citizens. Carden v. Arkoma Assocs., 494 U.S. 185, 195-96 (1990).

Tyco Healthcare is a Delaware limited partnership and its general

partner, SWD Holding, Inc. I, is incorporated in that state. Thus,

Tyco Healthcare is deemed a citizen of Delaware for diversity

purposes. So viewed, the change in parties should have raised a

red flag about a possible lack of diversity, inasmuch as Tyco

Healthcare and AF&F shared Delaware citizenship.

Although this land mine is obvious in hindsight, no one

questioned the district court's subject matter jurisdiction at the

time. By the same token, the use of Rule 15(a) to replace one

party with another may be mildly controversial, see, e.g., Int'l

Bhd. of Teamsters v. AFL-CIO, 32 F.R.D. 441, 442 (E.D. Mich. 1963)

1
The record suggests that AF&F substituted Tyco Healthcare as
the defendant after ascertaining that, by October of 1998, Tyco
Healthcare (then known as "The Kendall Company LP") had acquired
all of Kendall Company's assets and liabilities. That information
apparently led AF&F to conclude that Tyco Healthcare was Kendall's
ultimate successor in interest.

-3-
(suggesting that the addition or discharge of parties is controlled

by Rule 21 and that an amended pleading altering the identity of

the parties therefore requires leave of court), but nobody raised

that point. Indeed, Tyco Healthcare refrained from any sort of

challenge to the propriety of the amended complaint, but, rather,

answered it. From that point forward, the court presided over two

years of pretrial discovery. On March 3, 2003, Tyco Healthcare

moved for summary judgment. See Fed. R. Civ. P. 56(c). The

district court granted the motion. Am. Fiber & Finishing, Inc. v.

Tyco Healthcare Group, LP, 273 F. Supp. 2d 155 (D. Mass. 2003).

This appeal ensued.

In short order, the character of the proceeding changed.

Simultaneous with the filing of its appellate brief, AF&F moved to

dismiss the appeal and to remand the case for the purpose of

vacating the judgment. It asserted that, in preparing the

jurisdictional statement for its appellate brief, it recognized for

the first time that the parties were non-diverse and, accordingly,

that the trial court lacked subject matter jurisdiction. Tyco

Healthcare opposed the motion. We postponed oral argument on the

appeal itself and took the motion to vacate under advisement. We

turn now to the merits of that motion.

Federal courts are courts of limited jurisdiction. In

the absence of jurisdiction, a court is powerless to act.

Consistent with these principles, it is firmly settled that

-4-
challenges to federal subject matter jurisdiction may be raised for

the first time on appeal. See Kontrick v. Ryan, 124 S. Ct. 906,

915 (2004); Halleran v. Hoffman, 966 F.2d 45, 47 (1st Cir. 1992);

see also Fed. R. Civ. P. 12(h)(3) ("Whenever it appears by

suggestion of the parties or otherwise that the court lacks

jurisdiction of the subject matter, the court shall dismiss the

action."). Federal courts are expected to monitor their

jurisdictional boundaries vigilantly and to guard carefully against

expansion by distended judicial interpretation. Am. Fire & Cas.

Co. v. Finn, 341 U.S. 6, 17-18 (1951). Just as a federal court

cannot expand its jurisdictional horizon, parties cannot confer

subject matter jurisdiction on a federal court "by indolence,

oversight, acquiescence, or consent." United States v. Horn, 29

F.3d 754, 768 (1st Cir. 1994).

In the case at hand, the parties concede that diversity

is the only conceivable basis for federal subject matter

jurisdiction. The initial complaint cleared this hurdle. The

question, then, is what jurisdictional consequences attached to the

replacement of Tyco International with Tyco Healthcare in AF&F's

amended complaint. On this question, the protagonists part ways.

AF&F contends that, even though it was unaware of the consequences

at the time, Tyco Healthcare's arrival on the scene destroyed the

requisite diversity and, thus, eliminated any vestige of federal

subject matter jurisdiction. In contrast, Tyco Healthcare

-5-
asseverates that the lack of diversity between it and AF&F did not

divest the district court of jurisdiction because the original

parties were diverse and the subsequent switch did not alter the

fundamental nature of the action. After careful study of this

conundrum, we are persuaded that AF&F's view is correct.

We begin with the abecedarian rule that there must be

complete diversity among the parties to sustain diversity

jurisdiction. See Strawbridge v. Curtiss, 7 U.S. (3 Cranch) 267,

267 (1806). That circumstance has not existed here from the moment

that AF&F made Tyco Healthcare a party to the action and

simultaneously dropped Tyco International from the equation. This

appeal, therefore, appears to be a fish out of water.

Tyco Healthcare reminds us that appearances can be

deceiving. Cf. Aesop, The Wolf in Sheep's Clothing (circa 550

B.C.). Indeed, "the rule that there must be complete diversity to

sustain diversity jurisdiction is not absolute." Am. Nat'l Bank &

Trust Co. v. Bailey, 750 F.2d 577, 582 (7th Cir. 1984). For

example, if the opposing parties are diverse at the moment of suit,

but one of them then moves to the other's home state, diversity

jurisdiction is not affected. See, e.g., Morgan's Heirs v. Morgan,

15 U.S. (2 Wheat.) 290, 297 (1817); Hawes v. Club Ecuestre El

Comandante, 598 F.2d 698, 700-01 (1st Cir. 1979).

Tyco Healthcare insists that the particular circumstances

of this case — in which complete diversity existed when the action

-6-
initially was commenced and was dissipated only by the subsequent

filing of an amendment to the complaint — demand a finding of

continued jurisdiction. In support of this claim, Tyco Healthcare

holds fast to the Supreme Court's statement that it has

"consistently held that if jurisdiction exists at the time an

action is commenced, such jurisdiction may not be divested by

subsequent events." Freeport-McMoRan, Inc. v. K N Energy, Inc.,

498 U.S. 426, 428 (1991) (per curiam). Tyco Healthcare's reliance

on this statement is understandable. Read literally, it seems to

suggest that the later change in the identity of parties defendant

could not destroy the diversity that originally existed. But it is

risky to read judicial pronouncements in a vacuum, and adding

context makes it pellucid that the quoted language cannot be taken

literally.

In Freeport, a gas seller brought a breach of contract

action against a diverse buyer in federal court. The seller

subsequently assigned its interest in the contract and sought to

add the non-diverse assignee as a plaintiff under Fed. R. Civ. P.

25(c).2 Such a procedural move is available when there is a

transfer of interest after the filing of suit. See Explosives

2
Fed. R. Civ. P. 25(c) provides in pertinent part:

In case of any transfer of interest, the action may be
continued by or against the original party, unless the
court upon motion directs the person to whom the interest
is transferred to be substituted in the action or joined
with the original party.

-7-
Corp. of Am. v. Garlam Enters. Corp., 817 F.2d 894, 907 (1st Cir.

1987). In a brief per curiam opinion, the Court held that

diversity jurisdiction persisted, despite the introduction of a

non-diverse party, because "[a] contrary rule could well have the

effect of deterring normal business transactions during the

pendency of what might be lengthy litigation." Freeport, 498 U.S.

at 428-29.

The procedural circumstances and ratio decidendi of

Freeport limit its precedential value. They make it clear that

when the Court declared that "subsequent events" do not divest the

district court of diversity jurisdiction, it was referring mainly

to post-filing transfers of interest — not to all post-filing

additions of non-diverse parties. Accordingly, we join several

other courts of appeals that have read Freeport narrowly and

restricted its precedential force to the precincts patrolled by

Rule 25. See Estate of Alvarez v. Donaldson Co., 213 F.3d 993,

994-95 (7th Cir. 2000) (refusing to read Freeport as standing for

the general proposition that once diversity jurisdiction is

established it cannot be destroyed by later developments); Cobb v.

Delta Exps., Inc., 186 F.3d 675, 680-81 (5th Cir. 1999) (limiting

Freeport to the context of adding parties under Fed. R. Civ. P.

25); Ingram v. CSX Transp., Inc., 146 F.3d 858, 861 (11th Cir.

1998) ("Freeport does not stand for the proposition that all

-8-
additions of nondiverse parties are permissible as long as complete

diversity existed at the time of commencement of the lawsuit.").

In contrast to Freeport, there was no post-filing

transfer of interest in the instant case. Tyco Healthcare had

acquired all of Kendall's assets and liabilities by October of

1998. See supra note 1. That was over two years before AF&F

commenced this action. A finding of subject matter jurisdiction

under these circumstances would allow for the easy circumvention of

28 U.S.C. § 1332(a)(1) and would expand the reach of diversity

jurisdiction beyond what Congress intended. We are unwilling to

give our imprimatur to so large a loophole.

We find further support for our initial impression in

Casas Office Machines, Inc. v. Mita Copystar America, Inc., 42 F.3d

668 (1st Cir. 1994). There, the plaintiff replaced fictitious

defendants with named, non-diverse defendants after removal to

federal court. Id. at 670. On appeal, we ruled that this

substitution defeated diversity jurisdiction. Id. at 675. Of

particular pertinence for present purposes, we rejected the

plaintiff's absolutist interpretation of Freeport. See id. at 673-

74. At least two other courts have taken a similar stance where,

as here, a plaintiff has introduced a non-diverse defendant to an

action by amending his or her complaint under Rule 15(a). See

Alvarez, 213 F.3d at 995-96 (holding that the introduction of new

parties destroyed the federal court's subject matter jurisdiction);

-9-
Ingram, 146 F.3d at 861-62 (similar); cf. 13B Charles A. Wright et

al., Federal Practice and Procedure § 3608, at 454 (2d ed. 1984 &

Supp. 2003) (explaining that parties joined under Rules 19 and 20

must independently satisfy applicable jurisdictional requirements).

The Supreme Court's opinion in Owen Equipment & Erection

Co. v. Kroger, 437 U.S. 365 (1978), confirms the notion that

subject matter jurisdiction is lacking here. In Owen — a case that

Freeport expressly declined to overrule, see 498 U.S. at 429 — the

plaintiff amended her complaint to bring a state-law claim against

a non-diverse third-party defendant who had been impleaded by the

original (diverse) defendant pursuant to Fed. R. Civ. P. 14(a).

Owen, 437 U.S. at 367-68. The Court found no basis for federal

jurisdiction over the plaintiff's claim against the non-diverse

party, explaining that:

[I]t is clear that the [plaintiff] could not
originally have brought suit in federal court
naming [the non-diverse third-party defendant]
and [the diverse original defendant] as
codefendants, since citizens of Iowa would
have been on both sides of the litigation.
Yet the identical lawsuit resulted when she
amended her complaint. Complete diversity was
destroyed just as surely as if she had sued
[the non-diverse defendant] initially. In
either situation, in the plain language of the
statute, the "matter in controversy" could not
be "between . . . citizens of different
States."

Id. at 374.

So here: it is nose-on-the-face plain that AF&F could

not originally have brought suit in federal court against Tyco

-10-
Healthcare, since citizens of Delaware would have been perched on

both sides of the litigation. When it amended its complaint to

configure its suit in precisely that fashion, complete diversity

was destroyed just as surely as if it had sued Tyco Healthcare in

the first instance. As the Seventh Circuit put it, "the plaintiff

was doing in two steps what, if [the plaintiff] had done it in one,

would have clearly disclosed the absence of federal jurisdiction .

. . ." Am. Nat'l Bank, 750 F.2d at 583. The extra step

obfuscates, but does not alter, the jurisdictional calculus.

We do not pretend that the jurisdictional question is

totally free from doubt. Even apart from Rule 25, some courts have

found diversity jurisdiction to exist despite the introduction of

a non-diverse litigant into the mix. See, e.g., Dean v. Holiday

Inns, Inc., 860 F.2d 670, 671-72 (6th Cir. 1988) (finding that

intervention of former attorney to litigate fee dispute within the

larger case did not destroy diversity jurisdiction); Gaines v.

Dixie Carriers, Inc., 434 F.2d 52, 54 (5th Cir. 1970) (per curiam)

(finding that diversity jurisdiction persisted even after Rule

24(a) intervention by a non-diverse litigant); Brough v. Strathmann

Supply Co., 358 F.2d 374, 375-76 (3d Cir. 1966) (finding that

diversity jurisdiction endured where non-diverse minor was

substituted for his diverse guardian upon reaching maturity). But

most of those decisions predate the Supreme Court's opinion in Owen

and all of them involve circumstances materially different from

-11-
those of the instant case. In the last analysis, we are faced with

a plaintiff who belatedly ascertained that it had sued the wrong

entity and proceeded to replace the only existing defendant with a

non-diverse defendant. The transfer of interest that made Tyco

Healthcare potentially liable occurred prior to the inception of

the litigation. Thus, although an exact precedential match has

proven elusive, closely related case law and general policy

concerns lead us to the ineluctable conclusion that the swapping of

parties defeased the court of jurisdiction.

In a final effort to salvage its case, Tyco Healthcare

contends that estoppel principles should prevent AF&F from

challenging subject matter jurisdiction at this late date. It

finds AF&F's belated discovery that the federal courts lack

jurisdiction over this matter — a discovery made after almost three

years of litigation and a crushing defeat on the merits — much too

convenient, and it voices concerns about manipulation. We are not

without empathy for Tyco Healthcare's predicament, but its estoppel

rationale is not backed by any persuasive authority. Nor would we

expect it to be: diversity jurisdiction is, in general, not a

matter subject to the exercise of judicial discretion. New Engl.

Concrete Pipe Corp. v. D/C Sys. of New Engl., Inc., 658 F.2d 867,

874 (1st Cir. 1981). To permit the exercise of jurisdiction in

this case based solely on estoppel principles would give federal

courts power that Congress saw fit to deny to them, and that would

-12-
"work a wrongful extension of federal jurisdiction." Am. Fire &

Cas., 341 U.S. at 18. We therefore decline Tyco Healthcare's

invitation to use estoppel as a hook on which to hang federal

jurisdiction.

For the reasons elucidated above, we hold that the

introduction of Tyco Healthcare into this action divested the

district court of jurisdiction. That holding, however, does not

necessarily end our journey. Under certain circumstances, federal

appellate courts have the authority to dismiss non-diverse parties

to cure defects in diversity jurisdiction. See Newman-Green, Inc.

v. Alfonzo-Larrain, 490 U.S. 826, 837 (1989) (extending to courts

of appeals the power found in Fed. R. Civ. P. 21); Casas, 42 F.3d

at 678 (ordering dismissal of two non-diverse defendants in order

to restore diversity jurisdiction). The decision to dismiss

revolves largely around whether the non-diverse litigant is a

dispensable or indispensable party. See Newman, 490 U.S. at 837;

Casas, 42 F.3d at 675; see also 13B Federal Practice and Procedure,

supra § 3606, at 413-14 (explaining that "when the party whose

presence would destroy jurisdiction is not 'indispensable' it may

be possible for plaintiff to have the action dismissed as to that

individual and thereby preserve jurisdiction"); see generally Fed.

R. Civ. P. 19. In a classic battle of dueling footnotes, the

parties dispute Tyco Healthcare's proper classification as a

dispensable or indispensable party. We eschew any resolution of

-13-
this issue. When a defendant is the only defendant remaining in

the action, any dismissal of it from the case would necessarily

terminate the action itself. That principle obtains here.

To sum up, AF&F destroyed diversity jurisdiction when it

amended its complaint and jettisoned Tyco International (a diverse

party) in favor of Tyco Healthcare (a non-diverse party).

Accordingly, we vacate the judgment below and remand to the

district court for dismissal of the action without prejudice to its

maintenance in a court of competent jurisdiction. See Fed. R. Civ.

P. 41(b).

We add an eschatocol of sorts. There is admittedly

something unsettling about a party bringing a case in a federal

court, taking the case to final judgment, losing, and then invoking

a jurisdictional defect that it created — with the result that it

escapes from the judgment and returns, albeit in a different venue,

to relitigate the merits. But the federal courts are courts of

limited jurisdiction and their institutional interest in policing

the margins of that jurisdiction is of greater concern than any

perceived inequity that may exist here. We add, moreover, that

although the jurisdictional fault was of AF&F's making, the shoe

could have been on the other foot — AF&F might have won in the

district court only to have its victory snatched away by the

belated discovery of the jurisdictional snafu. That said, we think

-14-
it fair in these circumstances that costs be taxed in favor of Tyco

Healthcare.

So Ordered.

-15-