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State National Insurance v. Yates

Court: Court of Appeals for the Fifth Circuit
Date filed: 2004-11-12
Citations: 391 F.3d 577
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                                                        United States Court of Appeals
                                                                 Fifth Circuit
                                                              F I L E D
                IN THE UNITED STATES COURT OF APPEALS
                                                             November 12, 2004
                        FOR THE FIFTH CIRCUIT
                                                          Charles R. Fulbruge III
                                                                  Clerk
                            No. 04-60157


STATE NATIONAL INSURANCE COMPANY INC,

                                           Plaintiff-Appellant,

                               versus

CALVIN YATES,

                                           Defendant-Appellee.



          Appeal from the United States District Court
            for the Northern District of Mississippi


Before KING, Chief Judge, and HIGGINBOTHAM and DAVIS, Circuit
Judges.

PATRICK E. HIGGINBOTHAM, Circuit Judge:

     The district court dismissed this suit for want of

jurisdiction pursuant to Federal Rule of Civil Procedure 19.

Plaintiff State National Insurance Company appeals.      The district

court concluded that it could not proceed without a third party,

Bruce Insurance Agency, the joinder of which would defeat subject

matter jurisdiction.   Persuaded that supplemental jurisdiction

supported the additional party to the counterclaim, we vacate the

district court’s dismissal and remand for further proceedings.

                                  I

     Rebuffed by his insurance company when a landowner sued him

for cutting down her trees, Yates, a logger, and various
insurance entities filed suits in state and federal courts.     In

the case before us, State National filed a diversity action in

federal district court seeking a declaratory judgment that

Yates’s liability insurance policy did not provide Yates with

coverage.1    Yates counterclaimed against State National for

breach of contract and bad faith breach of contract and also

asserted claims against an additional party, the local agent,

Bruce Insurance Agency, for professional negligence and negligent

misrepresentation.2     Yates then urged dismissal under Rule 19,

arguing that Bruce was a necessary and indispensable party whose

joinder would destroy subject matter jurisdiction.3     The district

court agreed and dismissed the action.     State National filed a

timely appeal.

                                   II

     We review dismissal for inability to join an indispensable

party under an abuse-of-discretion standard.4     Given that it is a

“highly practical, fact-based decision,” we have noted that “a

district court will ordinarily be in a better position to make a


     1
       State National is a Texas citizen and Yates is a citizen of
Mississippi.
     2
      FED. R. CIV. P. 13(h) permits joinder of additional parties to
a counterclaim “in accordance with the provisions of Rules 19 and
20.”
     3
         See FED. R. CIV. P. 19.
     4
        See HR Res., Inc., 327 F.3d 432, 438 (5th Cir. 2003);
Pulitzer-Polster v. Pulitzer, 784 F.2d 1305, 1309 (5th Cir. 1986).

                                   2
Rule 19 decision than a circuit court would be.”5

     Rule 19(a) requires certain persons to be joined, as long as

“joinder will not deprive the court of jurisdiction over the

subject matter of the action.”6     The district court found that

the addition of Bruce “would destroy federal diversity

jurisdiction.”7      Its finding that Bruce “cannot be made a party”

paved the way for the conclusion that Bruce was an “indispensable

party” under Rule 19(b)8 and, therefore, that the action should

be dismissed.

     Although Yates and Bruce are both citizens of Mississippi

and Yates asserts only state law claims, the district court erred

in failing to recognize that there was supplemental jurisdiction

over Yates’s counterclaim against Bruce.       We need not address the

more fact-intensive aspects of Rule 19.

                                   A

     Federal courts have supplemental jurisdiction under 28

U.S.C. § 1367.9    It grants supplemental jurisdiction over other



     5
         Pulitzer-Polster, 784 F.2d at 1309.
     6
         FED. R. CIV. P. 19(a).
     7
      State Nat’l Ins. Co. v. Yates, No. 3:03-CV-104-P, at 1 (N.D.
Miss. 2003) (memorandum opinion).
     8
         FED. R. CIV. PRO 19(b).
     9
       In 1990, Congress added 28 U.S.C. § 1367, in part in an
effort to clarify the extent of federal courts’ ancillary and
pendant jurisdiction, combining them under the umbrella term
“supplemental jurisdiction.”

                                   3
claims that do not independently come within the jurisdiction of

the district court but form part of the same Article III “case or

controversy.”10

     Under § 1367(a), “the district courts shall have

supplemental jurisdiction over all other claims that are so

related to claims in the action within such original jurisdiction

that they form part of the same case or controversy under Article

III of the United States Constitution.”11      Furthermore, “[s]uch

supplemental jurisdiction shall include claims that involve the

joinder . . . of additional parties.”12

     Yates’s claims against State National and Bruce easily

satisfy this requirement since they all arise out of the same

disputed insurance policy.       Yates purchased a State National

liability insurance policy from Bruce, the local agent, and State

National subsequently refused to provide Yates with a defense.

Yates is asserting that State National breached the contract or

that Bruce misrepresented the extent of the coverage.       Yates’s

claims against State National and Bruce “form part of the same

case or controversy” and “derive from a common nucleus of

operative fact” so as to meet the demands of § 1367(a) and




     10
          See Jinks v. Richland County, S.C., 538 U.S. 456, 458
(2003).
     11
          28 U.S.C. § 1367(a).
     12
          Id.

                                     4
Article III.13

                                B

     Section 1367(b), however, withdraws some of the jurisdiction

that § 1367(a) would otherwise allow.   Where, as here, the

district court’s original jurisdiction is based solely on

diversity, the district court does not have supplemental

jurisdiction “over claims by plaintiffs against persons made

parties under Rule 14, 19, 20 or 24” when “exercising

supplemental jurisdiction over such claims would be inconsistent

with the jurisdictional requirements of [28 U.S.C. § 1332, the

statutory grant of diversity jurisdiction].”14

     While the district court’s jurisdiction is based solely on

diversity, this case does not fall within § 1367(b).    Yates’s

claims against Bruce are against a “person[] made part[y] under

[Rule 19 or 20],” but they are not claims by a plaintiff.15


     13
        28 U.S.C. § 1367(a); United Mine Workers of Am. v. Gibbs,
383 U.S. 715, 725, (1966); see also City of Chicago v. Int’l
College of Surgeons, 522 U.S. 156, 165 (1997) (applying Gibbs’s
“common   nucleus”   test   in  the   analysis   of  supplemental
jurisdiction).
     14
        28 U.S.C. § 1367(b).  District courts    also do not have
jurisdiction over “claims by persons proposed     to be joined as
plaintiffs under Rule 19 . . . or seeking         to intervene as
plaintiffs under Rule 24.” Id. This provision    does not apply to
the instant case.
     15
        Id. Bruce was made a party to the action under Rule 13(h),
in turn either via Rule 19 or 20, as described above. See supra
note 6.
     Our reasoning today is not in tension with our decision in
Abbott Labs where, without addressing the presence of multiple

                                5
Yates is the defendant in this action.

     The fact that Yates has asserted a counterclaim does not

make him a “plaintiff” for purposes of § 1367(b).   Although we

have not directly addressed this issue in the past, today we hold

that “plaintiff” in § 1367(b) refers to the original plaintiff in

the action – not to a defendant that happens also to be a

counter-plaintiff, cross-plaintiff, or third-party-plaintiff.     In

doing so, we follow the numerous other circuits that have come to

the same conclusion.16   This also comports with our case law that


defendants that were presumably joined by Rule 20, we held that
§ 1367 overrules Zahn v. International Paper Co., 414 U.S. 291
(1973). See In re Abbott Laboratories, 65 F.3d 33 (5th Cir. 1995).
In that case, we had no need to address the joinder of parties
under Rule 20 since, with Zahn out of the picture, the exercise of
supplemental jurisdiction in that case would not be “inconsistent
with the jurisdictional requirements of [28 U.S.C. § 1332].” 28
U.S.C. § 1367(b). In other words, the force of the argument that
§ 1367 overrules Zahn is untouched by the presence of multiple
defendants unless we adopt the illogical (indeed, absurd)
conclusion that § 1367 overrules Zahn only in single defendant
cases.
     In contrast, in the case before us, the fact that the counter-
defendant, Bruce, was joined via either Rule 19 or 20 does matter
since Yates’s claim against Bruce would otherwise run afoul of
§ 1332.
     16
       See, e.g., Grimes v. Mazda N. Am. Operations, 355 F.3d 566,
572 (6th Cir. 2004) (“The supplemental jurisdiction provision, 28
U.S.C. § 1367(b), states congressional intent to prevent original
plaintiffs – but not defendants or third parties – from
circumventing the requirements of diversity.”); Viacom Int’l, Inc.
v. Kearney, 212 F.3d 721, 726-27 (2d Cir. 2000) (“Significantly, §
1367(b) reflects Congress’ intent to prevent original plaintiffs –
but not defendants or third parties – from circumventing the
requirements of diversity.”); United Capitol Ins. Co. v. Kapiloff,
155 F.3d 488, 492 (4th Cir. 1998) (“Thus, the limitation of §
1367(b) applies only to plaintiffs’ efforts to join nondiverse
parties.” (emphasis in original)); Dev. Fin. Corp. v. Alpha Housing

                                 6
predates § 1367, which was enacted in 1990.17

     “In conducting statutory interpretation, we begin our

inquiry with the plain language of the statute.”18    Section

1367(b) is deliberate in only withholding jurisdiction over such

“claims by plaintiffs.”19    Congress could have used the word

“parties” or could have omitted “by plaintiffs” entirely had it

intended to include counter-plaintiffs, cross-plaintiff, and

third-party plaintiffs.     Indeed, adopting such an interpretation

would render the “by plaintiffs” language superfluous since any

party with a claim in the action could in some sense be

considered a “plaintiff.”    Given that the “plain language of the


& Health Care, Inc., 54 F.3d 156, 160 (3d Cir. 1995) (“The plain
language of § 1367(b) limits supplemental jurisdiction over claims
of plaintiffs against persons made parties under Rule 14, 19, 20,
or 24, and of parties who join or intervene as plaintiffs pursuant
to Rule 19 or 24. The section has little to say about defendants.”
(emphasis in original)).
     17
        See Zurn Indus., Inc. v. Acton Constr. Co., Inc., 847 F.2d
234, 236-37 (5th Cir. 1988) (“If the claim is a compulsory
counterclaim, FED. R. CIV. P. 13(a), a cross-claim, FED. R. CIV. P.
13(g), or if the party is added pursuant to a counterclaim or
cross-claim, FED. R. CIV. P. 13(h), or impleaded, FED. R. CIV. P. 14,
the court has ancillary jurisdiction over the claim or party even
in the absence of an independent basis for federal jurisdiction.”);
H. L. Peterson Co. v. Applewhite, 383 F.2d 430, 433 (5th Cir. 1967)
(“It is settled that where as here the counterclaim is compulsory
. . ., no independent jurisdictional ground need exist where an
additional party . . . is brought into the case by the
counterclaimant.”).
     18
       United States v. Morales-Palacios, 369 F.3d 442, 446 (5th
Cir. 2004) (citing Staples v. United States, 511 U.S. 600, 605
(1994)).
     19
          28 U.S.C. § 1367(b) (emphasis added).

                                   7
statute is unambiguous, resort to legislative history for its

interpretation is not necessary.”20

     In any case, confining the restrictions in § 1367(b) to

claims by plaintiffs comports with congressional intent to

prevent plaintiffs from using supplemental jurisdiction to

circumvent the diversity requirement by amending to add a non-

diverse party.21    In contrast, “[b]ecause defendants are

involuntarily brought into court, their joinders and impleaders

were not deemed as suspect as those of the plaintiff, who is

master of his complaint.”22

     In sum, Yates’s counterclaims against Bruce do not fall

within § 1367(b)’s exclusions since Yates is not a plaintiff in

the original action.    Therefore, the court has supplemental

jurisdiction over those claims as per § 1367(a).


     20
       Peavy v. WFAA-TV, Inc., 221 F.3d 158, 169 (5th Cir. 2000);
but see United States v. Fernandez, 379 F.3d 270, 274 (5th Cir.
2004) (“Although we believe that the plain language [is
dispositive], we look to the legislative history to be sure there
is not ‘a clear contrary legislative intention.’” (quoting United
States v. Scrimgeour, 636 F.2d 1019, 1022-23 (5th Cir. 1981)).
     21
       See H.R. Rep. No. 101-734, at 29 (1990), reprinted in 1990
U.S.C.C.A.N. 6860, 6875 (“In diversity-only actions the district
courts may not hear plaintiffs' supplemental claims when exercising
supplemental jurisdiction would encourage plaintiffs to evade the
jurisdictional requirement of 28 U.S.C. § 1332 by the simple
expedient of naming initially only those defendants whose joinder
satisfies section 1332's requirements and later adding claims not
within original federal jurisdiction against other defendants who
have intervened or been joined on a supplemental basis.” (emphasis
added)).
     22
          Kapiloff, 155 F.3d at 493.

                                  8
                                  C

     Since the district court had jurisdiction over Yates’s

counterclaims against Bruce, we need not address State National’s

other arguments regarding the failure of the district court to

directly address Rule 19(a) and State National’s contention that

the district court’s Rule 19(b) analysis was flawed.   We also

express no opinion regarding the discretion of the district court

under 28 U.S.C. § 1367(c) or the Declaratory Judgment Act.23

                                 III

     The district court had supplemental jurisdiction over the

defendant’s counterclaims against the additional party, Bruce,

notwithstanding the lack of diversity between those two parties.

Therefore, the district court erred in dismissing the case under

Rule 19 premised on the proposition that joinder of Bruce would

destroy subject matter jurisdiction.

     VACATED AND REMANDED.




     23
          See 28 U.S.C. §§ 2201-2202.

                                  9