Salazar v. Allstate TX Lloyds

United States Court of Appeals
Fifth Circuit
F I L E D
July 10, 2006
Charles R. Fulbruge III
Clerk
In the
United States Court of Appeals
for the Fifth Circuit
_______________
m 04-41043
_______________
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,
Circuit Judges.
JERRY E. SMITH, Circuit Judge:
Jose Salazar appeals the denial of his mo-
tion to remand to state court his suit against
Allstate Texas Lloyd’s, Inc. (“Allstate Texas”),
under a homeowners’ insurance policy issued
by Allstate Texas. We vacate and remand.
I.
Jose Salazar, a citizen of Texas, sought
coverage under his homeowner’s insurance
policy, issued by Allstate Texas, for damage to
his house caused by a water leak. He was
dissatisfied with the way in which Allstate
Texas, also a citizen of Texas, had processed
his claim, so he sued it in state court, alleging
breach of contract, breach of the duty of good
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

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

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

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

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[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 removaljurisdiction 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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