City of Vestavia Hills v. General Fidelity Insurance Co.

FILED
U.S. COURT OF APPEALS
ELEVENTH CIRCUIT
APRIL 13, 2012
JOHN LEY
CLERK
[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
________________________
No. 11-13091
________________________
D. C. Docket No. 2:11-cv-00500-RDP
CITY OF VESTAVIA HILLS,
a municipal corporation,
Plaintiff-Counter
Defendant-Appellant,
versus
GENERAL FIDELITY INSURANCE COMPANY,
Defendant-Counter
Claimant-Appellee.
________________________
Appeal from the United States District Court
for the Northern District of Alabama
________________________
(April 13, 2012)
Before BARKETT and HULL, Circuit Judges, and HUNT, District Judge.*
Honorable Willis B. Hunt, Jr., United States District Judge for the Northern District of*
Georgia, sitting by designation.

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HUNT, District Judge:
Plaintiff/Appellant, the City of Vestavia Hills, Alabama (“Vestavia Hills”)
appeals the district court’s denial of its motion to remand the matter back to state
court. We have jurisdiction under 28 U.S.C. § 1292(b), and, having concluded
that the district court properly denied Vestavia Hills’s motion to remand, we
affirm.
I. BACKGROUND AND VESTAVIA HILLS’S ARGUMENTS
Vestavia Hills won a judgment in state court against Cameron Development
Corporation (“Cameron”). Based on that judgment, Vestavia Hills is now entitled
to collect $442,263 from Cameron. Cameron submitted a claim for coverage on
the judgment to its insurer, Defendant/Appellee General Fidelity Insurance
Company (“General Fidelity”). General Fidelity denied Cameron’s claim
whereupon Vestavia Hills filed a one-count complaint in state court, suing
Cameron and General Fidelity pursuant to Alabama Code § 27-23-2. That code
section states, in relevant part:
Upon the recovery of a final judgment against any person . . . if the
defendant in such action was insured against the loss or damage . . . the
judgment creditor shall be entitled to have the insurance money
provided . . . and if the judgment is not satisfied . . . the judgment
creditor may proceed against the defendant and the insurer to reach and
apply the insurance money to the satisfaction of the judgment.
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In other words, in Alabama, if a party wins a judgment, and the defendant’s
insurer refuses to pay the judgment, the judgment creditor can sue the insurer
along with the defendant from the earlier suit to reach the insurance proceeds.
Vestavia Hills filed this action in state court, and General Fidelity removed
it to the Northern District of Alabama. As Vestavia Hills and Cameron are both
Alabama citizens, diversity jurisdiction was questionable. In denying Vestavia
Hills’s motion to remand, however, the district court realigned Cameron as a
plaintiff because Vestavia Hills’s and Cameron’s interests converged against
General Fidelity in that both Vestavia Hills and Cameron want to force General
Fidelity to provide coverage.
Vestavia Hills sought an interlocutory appeal, and the district court certified
the question to this Court of “whether a district court may, in a case brought under
Alabama Code § 27-23-2, which requires a plaintiff to initiate the action against
both the insured and the insurer, exercise its discretion to realign the parties based
upon their actual interests.”
Vestavia Hills concedes that the purpose of this action is solely to establish
whether General Fidelity must provide insurance coverage and that no claim is
raised against Cameron, but the city nonetheless argues that the district court erred
in realigning the parties because Alabama Code § 27-23-2 expressly states that
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both the insured and the insurer are to be named as defendants, and points out that
the Alabama Supreme Court has held that both parties must be named as
defendants. Vestavia Hills further argues that, even if the parties are realigned,
this matter must be remanded to state court because realignment would have the
effect of turning the case into a direct action under 28 U.S.C. § 1332(c), which
provides that, for purposes of diversity jurisdiction, an insurer is deemed a citizen
of the insured’s State of residence when the insurer is sued in an action to
determine the insured’s liability and the insured is not named in that suit.
II. DISCUSSION
1. Standard of Review
We review a district court’s denial of a motion to remand de novo. Conn.
State Dental Ass’n v. Anthem Health Plans, Inc., 591 F.3d 1337, 1343 (11th Cir.
2009). This Court reviews findings of jurisdictional facts for clear error. Scarfo v.
Ginsberg, 175 F.3d 957, 960 (11th Cir. 1999).
2. Analysis
Weighing the propriety of the district court’s decision to realign the parties
and deny Vestavia Hills’s motion to remand requires us to consider two different
interests. On the one hand, “[b]ecause removal jurisdiction raises significant
federalism concerns, federal courts are directed to construe removal statutes
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strictly. Indeed, all doubts about jurisdiction should be resolved in favor of
remand to state court.” Univ. of S. Ala. v. Am. Tobacco Co., 168 F.3d 405, 411
(11th Cir. 1999) (citation omitted). On the other hand, there exists also a strong1
federal preference to align the parties in line with their interests in the litigation.
We begin with the proposition, voiced by the Supreme Court that, “[f]or the
purpose of removal, the federal law determines who is plaintiff and who is
defendant. It is a question of the construction of the federal statute on removal,
and not the state statute. The latter’s procedural provisions cannot control the
privilege of removal granted by the federal statute.” Chicago, R.I. & P.R. Co. v.
Stude, 346 U.S. 574, 580, 74 S. Ct. 290, 294, 98 L. Ed. 317 (1954). Accordingly,
what Alabama Code § 27-23-2 or the Alabama Supreme Court have to say about
whether Cameron is a defendant or a plaintiff is immaterial, and, further, state
legislatures apparently cannot craft a statute in this manner to render certain
causes of action “unremovable.”
The removing party bears the burden of proof regarding the existence of federal subject1
matter jurisdiction. Conn. State Dental Ass’n, 591 F.3d at 1343. A defendant may remove an
action to a district court that would have original jurisdiction if complete diversity between the
parties exists and the amount in controversy exceeds $75,000. 28 U.S.C. § 1332. “Only state-
court actions that originally could have been filed in federal court may be removed to federal
court by the defendant.” Caterpillar, Inc. v. Williams, 482 U.S. 386, 392, 107 S. Ct. 2425, 2429,
96 L. Ed. 2d 318 (1987). Further, the removal statute forbids removal “if any of the parties in
interest properly joined and served as defendants is a citizen of the State in which such action is
brought.” 28 U.S.C. § 1441(b)(2).
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We next note that federal courts are required to realign the parties in an
action to reflect their interests in the litigation. The parties themselves cannot
confer diversity jurisdiction upon the federal courts by their own designation of
plaintiffs and defendants. City of Indianapolis v. Chase Nat’l Bank, 314 U.S. 63,
69, 62 S. Ct. 15, 17, 86 L. Ed. 47 (1941). This Court concludes that the converse
of this principle – that parties cannot avoid diversity by their designation of the
parties – is also true. Rather it is the “duty . . . of the lower federal courts[] to look
beyond the pleadings and arrange the parties according to their sides in the
dispute,” Northbrook Nat’l Ins. Co. v. Brewer, 493 U.S. 6, 16 n.5, 110 S. Ct. 297,
302 n.5, 107 L. Ed. 2d 223 (1989) (citations and quotations omitted), as
determined by “the principal purpose of the suit” and “the primary and controlling
matter in dispute,” City of Indianapolis, 314 U.S. at 69. Where the parties’
interests are the same, we have held that those parties must be aligned together and
have reversed a district court’s failure to do so, even where the parties’ interests
were in opposition outside of the issues raised in the subject action. Weller v.
Navigator Marine, Inc., 737 F.2d 1547, 1548 (11th Cir. 1984); see also Dev. Fin.
Corp. v. Alpha Hous. & Health Care, Inc., 54 F.3d 156 (3d Cir. 1995) (“‘[W]here
party designations have jurisdictional consequences,’ [the court] must align the
parties before determining jurisdiction.”)
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Having reviewed the single-count complaint, it is clear that Vestavia Hills
did not seek any relief from Cameron. C.f. Duffey v. Wheeler, 820 F.2d 1161
(11th Cir. 1987). There no longer is any dispute between Vestavia Hills and2
Cameron, and the only thing that Cameron could want out of this case is for
Vestavia Hills to win. Obviously, the two parties’ interests are identical or at least
materially so. As was noted by the Seventh Circuit in Home Insurance Co. of
Illinois v. Adco Oil Co., 154 F.3d 739, 741 (7th Cir. 1998), in determining subject
matter jurisdiction on the basis of diversity, “the normal alignment of parties in a
suit seeking a declaratory judgment of non-coverage is Insurer versus Insured and
Injured Party.”
Under Weller, Northbrook National Insurance Co., and City of Indianapolis,
cited above, it is equally clear that realignment would have been available to
Duffey was a shareholder derivative suit, and realignment in such cases differs from2
realignment in the context of this case. As we discussed in Duffey, 820 F.2d at 1163, in a
derivative suit, the action “is not [the shareholder’s] own but the corporation’s. [The corporation]
is the real party in interest and [the shareholder] is allowed to act in protection of its interest
somewhat as a ‘next friend’ might do for an individual, because [the corporation] is disabled
from protecting itself.” Koster v. Lumbermans Mut. Cas. Co., 330 U.S. 518, 522-23, 67 S. Ct.
828, 831, 91 L. Ed. 1067 (1947). As such, the rule is that corporations are always realigned as
the plaintiff in shareholder derivative suits unless “it is plain that the stockholder and those who
manage the corporation are completely and irrevocably opposed.” Smith v. Sperling, 354 U.S.
91, 97, 77 S. Ct. 1112, 1116, 1 L. Ed. 2d 1205 (1957). While realignment in this case is
certainly analogous, we do not imply that precedent from a shareholder derivative suit should
necessarily apply in other contexts but cite to Duffey for the proposition that realignment is
proper where no claim is made against a nominal Defendant. For a case involving facts
materially similar to this action, see Liebau v. Columbia Cas. Co., 176 F. Supp. 2d 1236 (D. Kan.
2001).
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Vestavia Hills if it had sought to bring the action in federal court in the first
instance. Those cases require the district courts to determine the principle purpose
of the suit and the primary and controlling matter in dispute and align the parties
accordingly regardless of the fact that the Alabama Code required Vestavia Hills
to name Cameron as a defendant. As such, we conclude that the district court did
not err in realigning Cameron as a plaintiff and in refusing to remand this matter to
state court. Accord Cleveland Hous. Renewal Project v. Deutsche Bank Trust Co.,
621 F.3d 554, 568 (6th Cir. 2010) (“For the foregoing reasons, we uphold the
district court’s realignment of the parties to establish complete diversity.”).
Turning to Vestavia Hills’s other contention that realignment would result
in the action being “converted” into a direct action within the meaning of 28
U.S.C. § 1332(c), the argument is unavailing as we are bound by the holding in
Fortson v. St. Paul Fire & Marine Insurance Co., 751 F.2d 1157, 1159 (11th Cir.
1985). In Fortson, the plaintiff had a potential medical malpractice claim against a
doctor, who carried malpractice insurance with the defendant insurer. Id. Both
the plaintiff and the doctor were Florida citizens, but the insurer was a non-Florida
citizen. Id. Before suing the doctor, the plaintiff notified the defendant insurer
about the plaintiff’s potential claim, but the defendant “den[ied] liability on behalf
of its insured.” Id. The plaintiff then filed suit in federal court against the
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insurance company for failure to settle the claim against the insured in good faith.
Id. The district court dismissed the suit for lack of subject matter jurisdiction,
determining that under § 1332(c), the plaintiff’s claim was a “direct action” and
thus no diversity between the parties existed. Id. at 1158.
This Court reversed, holding “that unless the cause of action against the
insurance company is of such a nature that the liability sought to be imposed could
be imposed against the insured, the action is not a direct action.” Id. at 1159. This
Court explained further that “courts have uniformly defined the term ‘direct
action’ as used in [§ 1332(c)(1)] as those cases in which a party suffering injuries
or damage for which another is legally responsible is entitled to bring suit against
the other’s liability insurer without joining the insured or first obtaining a
judgment against him.” Id. (quotations omitted.) Because the plaintiff’s claim
was based on the insurance company’s statutory duty to settle claims in good faith,
and not the doctor’s liability for malpractice, this Court determined the
§ 1332(c)(1) proviso was not applicable. Id.
Similar to the plaintiff in Fortson, Vestavia Hills could not have brought
this action against Cameron, as the single count relates to insurance and Vestavia
Hills has already obtained judgment against Cameron. An action brought under
Alabama Code § 27-23-2, where the injured party has already obtained a judgment
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against the insured, is not a direct action as contemplated by § 1332(c)(1) under
Fortson.
In Andalusia Enterprises, Inc. v. Evanston Insurance Co., 487 F. Supp. 2d
1290, 1298 (N.D. Ala. 2007), the court expressed the view that the result in
Fortson was contrary to the old Fifth Circuit’s opinion in O.M. Greene Livestock
Co. v. Azalea Meats, Inc., 516 F.2d 509 (5th Cir. 1975). Azalea Meats and3
Fortson are, however, distinguishable. In Azalea Meats, the plaintiff had a claim
against the insured and the insurer for a failure to pay for delivered goods, and the
plaintiff attempted to dismiss its claims against the insured in an attempt to
salvage diversity jurisdiction. Id. at 510. The old Fifth Circuit concluded that
when the plaintiff dismissed the insured, it converted the action into a direct
action. Id. In Fortson (and here) the claim raised against the insurer could not
have been raised against the insured.
We thus conclude that realignment of the parties does not result in
converting this case into a direct action under 28 U.S.C. § 1332(c).
For the above stated reasons, we affirm.
AFFIRMED.
In Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th Cir. 1981) (en banc), this Court3
adopted as binding precedent all decisions of the former Fifth Circuit handed down prior to
October 1, 1981.
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