Salazar v. Allstate Texas Lloyd's, Inc.

United States Court of Appeals
Fifth Circuit
F I L E D
In the July 10, 2006
United States Court of Appeals Charles R. Fulbruge III
for the Fifth Circuit Clerk
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m 04-41043
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JOSE SALAZAR,

Plaintiff-Appellant,

VERSUS

ALLSTATE TEXAS LLOYD’S, INC.,

Defendant-Appellee.

____________________________________

Appeals from the United States District Court
for the Southern District of Texas
_____________________________________

Before SMITH, WIENER, and STEWART, I.
Circuit Judges. Jose Salazar, a citizen of Texas, sought
coverage under his homeowner’s insurance
JERRY E. SMITH, Circuit Judge: policy, issued by Allstate Texas, for damage to
his house caused by a water leak. He was
Jose Salazar appeals the denial of his mo- dissatisfied with the way in which Allstate
tion to remand to state court his suit against Texas, also a citizen of Texas, had processed
Allstate Texas Lloyd’s, Inc. (“Allstate Texas”), his claim, so he sued it in state court, alleging
under a homeowners’ insurance policy issued breach of contract, breach of the duty of good
by Allstate Texas. We vacate and remand. faith and fair dealing, and violations of the
Texas Insurance Code and Texas Deceptive
Trade Practices Act. Salazar did not sue
Allstate Texas Lloyd’s Company (“Allstate
Illinois”), the entity that actually had under- Texas’s motions to add Allstate Illinois as a
written the policy. Allstate Illinois is an un- defendant and to dismiss the action against
incorporated association of underwriters, each Allstate Texas. These actions effectively sub-
of which is a citizen of Illinois. Accordingly, stituted Allstate Illinois for Allstate Texas as
Allstate Illinois is considered a citizen of the defendant. The court based its actions on
Illinois. Federal Rules of Civil Procedure 17(a), 19,
and 21.
Allstate Texas removed to federal court and
filed motions seeking to join Allstate Illinois as Pursuant to Federal Rule of Civil Procedure
a defendant and to dismiss the action against 54(b), the court also certified that the dismissal
Allstate Texas. In support of removal, Allstate of all claims against Allstate Texas was a final
Texas claimed diversity of citizenship. It judgment and hence immediately appealable.
argued that Allstate Illinois, and not Allstate Salazar accordingly appeals the dismissal on
Texas, was the proper defendant and that the ground that the district court lacked juris-
Salazar was attempting improperly to avoid diction.
federal jurisdiction by not suing Allstate Illi-
nois.1 After Salazar appealed the remand issue,
the district court entered summary judgment in
Salazar moved to remand. The district favor of Allstate Illinois on all claims against it.
court denied the motion and granted Allstate Although he did not then file a timely motion
to appeal the summary judgment, Salazar now
argues, as a part of his appeal from the dis-
1
Allstate Illinois is a “Lloyd’s plan insurer,” missal of Allstate Texas, that the order should
which, under Texas law, “consists of a group of be stricken for want of jurisdiction.
underwriters who join together to issue insurance
through an attorney in fact or other representative.” II.
Royal Ins. Co. of Am. v. Quinn-L Capital Corp., A.
3 F.3d 877, 882 (5th Cir. 1993). The group must
We review the denial of a motion to remand
appoint a Texas resident as the attorney in fact,
who acts as the group’s agent in the state. Id. The
de novo. McDonal v. Abbott Labs., 408 F.3d
attorney in fact is authorized to bind the associa- 177, 182 (5th Cir. 2005). We review a dis-
tion to contracts but is not a member of the group missal or joinder of parties for abuse of dis-
of underwriters. Id. cretion. Wieburg v. GTE Southwest Inc., 272
F.3d 302, 308 (5th Cir. 2001).
Allstate Texas is Allstate Illinois’s attorney in
fact. As Allstate Texas notes, pursuant to the B.
Amended Articles of Agreement appointing All- The central question is whether a district
state Texas as the attorney in fact, all policies is- court can appropriately assert removal juris-
sued by Allstate Texas are written “in the name of diction by dismissing a nondiverse in-state de-
Allstate [Illinois] and signed on behalf of the un- fendant and replacing it with a diverse foreign
derwriters.” Allstate Texas argues that because it defendant, where the nondiverse in-state de-
is not an underwriter, it is not liable on the policies
fendant was the only named defendant in the
it issues on behalf of the underwriters. For that
action when the suit was removed. So, we
reason, Allstate Texas contends that it is not a
proper defendant in suits such as this and that
must decide whether a district court can create
Salazar should have sued Allstate Illinois. removal jurisdiction based on diversity by sub-

2
stituting parties. It cannot. the action and is so situated that the dispo-
sition of the action in the person’s absence
The district court premised its swap, and may (i) as a practical matter impair or im-
concomitant assertion of jurisdiction, on rules pede the person’s ability to protect that
17(a), 19, and 21. Rule 17(a) provides that interest or (ii) leave any of the persons al-
ready parties subject to a substantial risk of
[e]very action shall be prosecuted in the incurring double, multiple, or otherwise in-
name of the real party in interest . . . . No consistent obligations by reason of the
action shall be dismissed on the ground that claimed interest. If the person has not been
it is not prosecuted in the name of the real so joined, the court shall order that the per-
party in interest until a reasonable time has son be made a party.
been allowed after objection for ratification
of commencement of the action by, or Rule 21 adds that
joinder or substitution of, the real party in
interest; and such ratification, joinder, or [m]isjoinder of parties is not ground for
substitution shall have the same effect as if dismissal of an action. Parties may be
the action had been commenced in the dropped or added by order of the court on
name of the real party in interest. motion of any party or of its own initiative
at any stage of the action and on such terms
The district court explained its reliance on rule as are just.
17(a) by stating that Allstate Illinois, and not
Allstate Texas, is the “real party in interest.” Finally, under the fraudulent joinder doc-
By its terms, however, rule 17(a) applies only trine, federal removal jurisdiction premised on
to plaintiffs: “Every action shall be prose- diversity cannot be defeated by the presence of
cuted in the name of the real party in interest . an improperly-joined nondiverse and/or
. .” (emphasis added). Because the rule does in-state defendant. See, e.g., Smallwood v. Ill.
not provide a mechanism for ensuring that a Cent. R.R., 385 F.3d 568 (5th Cir. 2004) (en
defendant is a real party in interest, it cannot banc), cert. denied, 544 U.S. 992 (2005).
support the district court’s action. “[T]he test for fraudulent joinder is whether
the defendant has demonstrated that there is
We must next consider whether rules 19 no possibility of recovery by the plaintiff
and 21, and our related jurisprudence regard- against an in-state [or nondiverse] defendant,
ing fraudulent joinder, authorize the substitu- which stated differently means that there is no
tion of parties to create diversity jurisdiction. reasonable basis for the district court to pre-
In relevant part, rule 19 provides that dict that the plaintiff might be able to recover
against an in-state [or nondiverse] defendant.”
[a] person who is subject to service of pro- Id. at 573.
cess and whose joinder will not deprive the
court of jurisdiction over the subject matter Allstate Texas argues that based on the
of the action shall be joined as a party in the above rules, the district court did not err in
action if (1) in the person’s absence com- dismissing Allstate Texas, adding Allstate Ill-
plete relief cannot be accorded among inois, and on that basis denying remand, be-
those already parties, or (2) the person cause (1) Allstate Illinois is an indispensable
claims an interest relating to the subject of party under rule 19 and was joined rightfully

3
by the district court; (2) Allstate Texas is a In an attempt to get around this “single de-
“fraudulently joined” party whose presence fendant” barrier, Allstate Texas argues that
was designed to defeat removal jurisdiction, pursuant to necessary joinder under rule 19, a
and therefore the district court correctly did court can in fact add a defendant before it per-
not consider the citizenship of Allstate Texas forms the fraudulent joinder analysis. That
in assessing jurisdiction; and (3) Allstate Texas two-step does not work, however, because al-
was not a necessary party under rule 19, and though district courts can employ rule 19 in a
accordingly the district court had the authority way that destroys diversity (by holding that a
to drop it from the action pursuant to rules 19 nonjoined nondiverse party is indispensable,
and 21. The fundamental flaw in Allstate and therefore that the action must be dismissed
Texas’s argument, however, is that because from federal court), it is not obvious from the
there has never been more than one defendant face of the rule that federal courts can employ
in this suit, this is not a typical fraudulent rule 19 to create diversity and thereby establish
joinder case. jurisdiction where there was none. Indeed,
this court has held that where an entity has not
In the paradigmatic fraudulent joinder case, properly been made a party in state court,
a plaintiff sues a nominal nondiverse/in-state removal jurisdiction cannot be premised on its
defendant along with a diverse foreign defen- presence in the action. See Housing Auth. v.
dant in an effort to make sure that its claims Millwood, 472 F.2d 268, 272 (5th Cir. 1973).
against the diverse defendant stay in state
court. At the time of removal, the diverse de- Accordingly, if the district court’s action in
fendant is already a party, and the only ques- this case is valid, it can only be because a sub-
tion is whether the court can disregard the stitution of parties is permitted under rule 21.
nondiverse/in-state defendant for purposes of As we have observed, rule 21 provides that
assessing jurisdiction. Indeed, all the cases cit- “[p]arties may be dropped or added by order
ed by Allstate Texas on this issue fall into this of the court on motion of any party or of its
pattern. own initiative at any stage of the action and on
such terms as are just.”
Salazar, however, did not hail Allstate Illi-
nois into state court and attempt to force the Although the broad language of rule 21
association to stay there by joining a nominal could be read as authorizing the substitution of
nondiverse/in-state defendant. Allstate Illinois parties, two circuits have held that the rule
was not a party at the time of removal, and does not contemplate substitution to create
accordingly our fraudulent joinder jurispru- jurisdiction. In N. Trust Co. v. Bunge Corp.,
dence offers no guidance on the validity of the 899 F.2d 591, 597 (7th Cir. 1990), the court
district court’s action. This court has estab- stated that while “the Supreme Court [has]
lished that in a multi-defendant case, a nominal permitted the addition of two parties as plain-
defendant can be disregarded in the jurisdic- tiffs to cure a perceived lack of standing,” “we
tional analysis. We have not established, under have found no case in which Rule 21 has been
the rubric of fraudulent joinder, that in a sin- used to add parties to cure a defect in statu-
gle-defendant case, a court can first join a tory jurisdiction.” In Field v. Volkswagenwerk
diverse foreign defendant and then perfect AG, 626 F.2d 293, 306 (3rd Cir. 1980), the
jurisdiction by dismissing the problematic court spoke more directly to the precise issue
nondiverse/in-state defendant. involved in this case, asserting that

4
 [W]hat the appellants endeavor to accom-
plish here is not to drop a misjoined party
or to add a nonjoined party, but to substi-
tute a diverse claimant for a non-diverse
plaintiff. This kind of practice is simply not
within the scope of Rule 21, which is not a
rule providing for the substitution of par-
ties.2

We agree with our colleagues on the Third
and Seventh Circuits: Rule 21 does not allow
for substitution of parties to create jurisdiction.
The district court therefore abused its discre-
tion by adding Allstate Illinois as a defendant,
dropping Allstate Texas from the suit, and
therebyasserting removal jurisdiction based on
diversity.

In summary, the suit, as removed, was be-
tween two nondiverse parties. The district
court accordingly lacked jurisdiction to enter-
tain the suit and had no authority to dismiss
Allstate Texas. Salazar’s motion to remand
should have been granted. We REVERSE the
dismissal of Allstate Texas. Because the dis-
trict court lacked jurisdiction ab initio, we
VACATE the summary judgment in favor of
Allstate Illinois and REMAND with instruction
to remand to state court.3

2
Although Field dealt specifically with a sub-
stitution of plaintiffs, its holding applies equally to
the substitution of defendants, because rule 21
mentions only “parties” and makes no distinction
between plaintiffs and defendants.
3
Salazar’s motion to strike, for want of juris-
diction, the district court’s order granting summary
judgment is DENIED as unnecessary.

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