Court Opinion

ID: 812248
Source: CourtListenerOpinion
Date Created: 2012-11-20 19:47:19+00
Date Added: 2024-06-11T18:00:44.218568
License: Public Domain

UNPUBLISHED

                   UNITED STATES COURT OF APPEALS
                       FOR THE FOURTH CIRCUIT

                             No. 11-1722

BUILDERS MUTUAL INSURANCE COMPANY,

                 Plaintiff - Appellee,

           v.

DRAGAS MANAGEMENT CORPORATION,

                 Defendant - Appellant,

           and

DRAGAS ASSOCIATES X, LC; HAMPSHIRES ASSOCIATES, LC,

                 Counter-Plaintiffs - Appellants,

FIREMEN’S INSURANCE COMPANY OF WASHINGTON, D.C.,

                 Defendant - Appellee,

           v.

THE HANOVER INSURANCE COMPANY; CITIZENS INSURANCE COMPANY OF
AMERICA,

                 Third Party Defendants - Appellees.

Appeal from the United States District Court for the Eastern
District of Virginia, at Norfolk. Rebecca Beach Smith, District
Judge. (2:09-cv-00185-RBS-TEM)

Argued:   October 23, 2012               Decided:   November 20, 2012

Before MOTZ, DUNCAN, and FLOYD, Circuit Judges.
Vacated and remanded by unpublished per curiam opinion.

ARGUED: R. Johan Conrod, Jr., KAUFMAN & CANOLES, PC, Norfolk,
Virginia, for Appellants.    Danny Mark Howell, SANDS ANDERSON,
PC, McLean, Virginia, for Appellees.      ON BRIEF: William E.
Spivey,   KAUFMAN   &  CANOLES,   PC,  Norfolk,  Virginia,  for
Appellants.   Mikhael D. Charnoff, Courtney South Schorr, SANDS
ANDERSON, PC, McLean, Virginia, for Appellee Builders Mutual
Insurance Company; John B. Mumford, Jr., Kathryn E. Kransdorf,
HANCOCK, DANIEL, JOHNSON & NAGLE, PC, Glen Allen, Virginia, for
Appellee Firemen's Insurance Company of Washington, D.C.; John
Malloy, ROBINSON & COLE, LLP, Hartford, Connecticut, for
Appellees Hanover Insurance Company and Citizens Insurance
Company of America.

Unpublished opinions are not binding precedent in this circuit.

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PER CURIAM:

       This case presents a dispute over several insurers’ duties

to     indemnify    a     general    contractor           for   its   remediation    of

defective drywall in homes it had constructed.                           The district

court granted summary judgment to the insurers.                       For the reasons

that follow, we must vacate the judgment of the district court

and remand to that court so that it can dismiss the case for

lack of subject matter jurisdiction.

                                            I.

       Between     2005     and     2009,        Dragas     Management       Corporation

(“DMC”) served as general contractor for two developments in

southeastern       Virginia.            DMC        subcontracted         the    drywall

procurement and installation for both developments.                            Due to a

shortage of domestic drywall, the subcontractor purchased some

of its drywall from a Chinese facility.                     The Chinese drywall was

defective, and contained concentrations of elemental sulfur 375

times greater than that in representative domestic-manufactured

drywall.       The subcontractor installed the Chinese drywall in

seventy-four homes within the two developments.

       Over this period of time, DMC held a number of different

insurance      policies      from     two        insurers.        DMC    purchased    a

commercial package policy for February 6, 2006 to February 6,

2007    from     Builder’s    Mutual        Insurance       Company,     a   commercial

                                             3
package policy and commercial umbrella policy for February 5,

2007 to February 5, 2008 from Firemen’s Insurance Company, and a

commercial     package        policy    and    commercial      umbrella       policy       for

March 1, 2008 to March 1, 2009, again from Builders.                                    Each

policy      contained     commercial          general      liability        coverage       for

“those    sums   that     [DMC]    becomes         legally    obligated       to     pay   as

damages because of ‘bodily injury’ or ‘property damage’ to which

[the] insurance applies.”

      The    Chinese     drywall’s      sulfuric        off-gassing     damaged        metal

fixtures, wiring, and connections within the homes containing

the drywall.         DMC investigated complaints about the damage and

discovered the presence of the Chinese drywall.                             Beginning in

February     2009,      DMC    prepared        a   remediation        plan     and     began

executing      remediation       agreements         with     individual       homeowners.

Pursuant to the agreements, DMC agreed to remove and replace the

Chinese     drywall,     replace       all     damaged       metal    components,          pay

relocation expenses, and compensate the homeowners for damages

to personal property.            Neither Builders nor Firemen’s were party

to DMC’s remediation agreements with the homeowners.

      When DMC sought indemnification for its remediation costs,

both Builders and Firemen’s denied coverage.                        On April 23, 2009,

Builders     filed    this     action    against      DMC,     in    which    it     alleged

federal jurisdiction on the basis of diversity of citizenship

and   sought     a   declaratory        judgment      that    it     owed    no    duty    to

                                              4
indemnify       DMC    for     its     Chinese      drywall     remediation       costs.

Builders also named Firemen’s as a defendant on the theory that,

if the court found that Builders owed DMC a duty to indemnify,

the    court     could    allocate       the       costs     equitably    between      the

insurers.      On May 21, Firemen’s answered and filed a cross-claim

against DMC.          On June 22, DMC answered Builders’ complaint and

Firemen’s crossclaim, and filed a counterclaim against Builders

and a crossclaim against Firemen’s.                        On July 7, DMC filed a

third-party      complaint      against       its    subcontractors’      insurers      --

Hanover      Insurance       Company    and       Citizens    Insurance    Company      of

America.       Nine months later, on April 7, 2010, Dragas Associates

X, LC and Hampshire Associates, LC -- the developers of the

neighborhoods affected by the defective drywall -- joined the

case as counterclaim plaintiffs.

       After more than two years of litigation, the district court

granted summary judgment to the insurers.                        The district court

held that the policies’ commercial general liability provisions

did    not   cover     DMC’s    remediation         costs    because     DMC    made   the

remediation voluntarily, rather than under a legal obligation to

pay.         DMC,     Dragas    Associates,          and     Hampshires        Associates

(collectively, “Dragas”) noted an appeal.                     While the case was on

appeal, Dragas moved to dismiss the case for lack of subject

matter jurisdiction.           We delayed ruling on that motion to allow

oral argument on both the jurisdictional motion and the merits.

                                              5
                                        II.

      We consider subject matter jurisdiction de novo, regardless

of whether a party has raised, or the district court addressed,

the issue.       See Constantine v. Rectors & Visitors of George

Mason Univ., 411 F.3d 474, 480 (4th Cir. 2005).                         In its motion

to dismiss, Dragas argues that we lack diversity jurisdiction

over this case.     Dragas’ argument proceeds in two parts.                      First,

Dragas contends that we must realign Firemen’s as a plaintiff in

the case, and that such realignment destroys complete diversity

because Firemen’s (a realigned plaintiff) and DMC (a defendant)

are both citizens of Virginia.                Second, Dragas contends that

Firemen’s is a required and indispensable party to the case, and

thus we cannot dismiss Firemen’s to save diversity jurisdiction.

We take up each argument in turn.

                                        A.

      “Diversity    jurisdiction        cannot       be        conferred      upon    the

federal   courts   by   the   parties’        own   determination          of   who   are

plaintiffs and who defendants.”               City of Indianapolis v. Chase

Nat’l Bank, 314 U.S. 63, 69 (1941).                 Instead, courts must “look

beyond the pleadings, and arrange the parties according to their

sides in the dispute.”         Id. (internal quotation marks omitted).

To   determine   when   to    realign    parties,         we    apply   the     two-step

“principal purpose” test.         U.S. Fid. & Guar. Co. v. A & S Mfg.

Co. (Fidelity), 48 F.3d 131, 133 (4th Cir. 1995).                             First, we

                                         6
determine the primary issue in the controversy by considering

the    “plaintiff’s         principal      purpose       for      filing    its        suit.”

Palisades Collections LLC v. Shorts, 552 F.3d 327, 337 (4th Cir.

2008) (internal quotation marks omitted).                       Second, “we align the

parties according to their positions with respect to the primary

issue.”     Id.        If the alignment differs from that in plaintiff’s

complaint,        we    look   to    whether        diversity     jurisdiction          still

exists.

       In Fidelity, an insurer filed a declaratory judgment action

against     its    insured     and   several         co-insurers    alleging,          first,

that   it   owed       no   duty    to   indemnify       the     insured    for    certain

environmental          liabilities,       and,        second,     that     if     it     must

indemnify, the co-insurers owed a duty of contribution.                            48 F.3d

at 132.      The district court applied the principal purpose test

and realigned all of the insurers as plaintiffs and the insured

as    the   sole       defendant.        The       realignment    destroyed       complete

diversity, and the district court dismissed the action for lack

of jurisdiction.            Id. at 132.            We affirmed.      In so doing, we

agreed with the district court that “any disputes existing among

the insurers regarding contribution are ancillary to the primary

issue of the duty to indemnify.”                     Id. at 134.         Because all of

the insurers shared the principal purpose of avoiding liability

to the insured, realignment of the parties was required.                           Id.

                                               7
      We find the case at hand indistinguishable from Fidelity.

Builders’ principal purpose in filing its action was to avoid a

duty to indemnify DMC for its Chinese drywall remediation costs.

Builders     and     Firemen’s       share       this     principal            purpose     of

altogether avoiding liability to DMC; any disputes between the

insurers are merely “ancillary to the primary issue of the duty

to indemnify” and “hypothetical” until the insurers’ liabilities

are determined.       Fidelity, 48 F.3d at 134.                     Therefore, we must

realign Firemen’s as a plaintiff.

                                           B.

      Our    realignment      of     Firemen’s      as        a     plaintiff     destroys

complete diversity, for both Firemen’s and defendant DMC are

citizens of Virginia.           Nonetheless, the insurers -- including

Firemen’s    --    argue      that    we    can    save           our   jurisdiction       by

dismissing     Firemen’s      from    the       case.         Dragas      counters       that

Firemen’s is a required and indispensable party under Fed. R.

Civ. P. 19, and thus cannot be dismissed.

      We may dismiss a dispensable non-diverse party to preserve

our jurisdiction.           Eriline Co. S.A. v. Johnson, 440 F.3d 648,

652   (4th    Cir.     2006).         However,          the        Supreme      Court    has

“emphasize[d]        that     such     authority          should          be     exercised

sparingly,” with due consideration of “whether the dismissal of

[the] nondiverse party will prejudice any of the parties in the

litigation.”       Newman-Green, Inc. v. Alfonzo-Larrain, 490 U.S.

                                            8
826, 837 (1989).            Moreover, in order to dismiss a non-diverse

party    from   a    case,       we    must     be       satisfied       that    it    is    not   an

indispensable party under Rule 19.                              Eriline Co., 440 F.3d at

652.

       Dragas relies on Schlumberger Industries, Inc. v. National

Surety      Corp.,    36    F.3d       1274     (4th       Cir.     1994),      to     argue     that

Firemen’s is an indispensable party.                             In Schlumberger, we held

that when multiple insurers issue policies covering the same

conduct, but for different time periods, and those policies are

potentially implicated by an insured’s environmental remediation

efforts,     all     of    the    insurers          are    required       and        indispensable

parties to a suit regarding any individual insurer’s coverage.

Id. at 1286.         We emphasized that allowing cases to proceed with

fewer than all of the insurers subjected the insured to the

practical possibility of whipsaw where the insured could “wind

up   with    less    than    full       coverage          even     though       it    was    legally

entitled to full coverage.”                    Id.        In particular, we identified

three    questions        that    --    if    presented           to   different        courts     --

might     result      in     a        whipsaw        of        prejudicially          inconsistent

adjudication:         (1) the legal question of whether the policies

provide      coverage       at    all;        (2)        the     legal    question          of   what

constitutes a “trigger” for the coverage to attach; and (3) the

factual      question      of     when    --        if    at     all     --   such      a    trigger

occurred.       The risks of both legal and factual whipsaw strongly

                                                 9
influenced our determination that all of the insurers were both

required       and     indispensable           to    any     adjudication        as       to   an

individual insurer’s coverage.                  Id. at 1287-88.

       Schlumberger controls in this case.                        Firemen’s and Builders

both       issued      policies         with        commercial        general     liability

provisions covering the same conduct by DMC, but for different

time       periods,    and      both     insurers’         policies      are    potentially

implicated by DMC’s remediation efforts.                             As in Schlumberger,

separate      litigation        as     to    Builders       and    Firemen’s     duties        to

indemnify      DMC     would    pose        threats    of    both     legal     and       factual

whipsaw.

       All     of     Hanover     and       Firemen’s        attempts     to    distinguish

Schlumberger fail.             First, they argue that because the district

court      granted     summary       judgment,       this     case    presents        a    purely

legal      question     and     negates        the    risk    of     factual    whipsaw        so

emphasized in Schlumberger.                    However, in doing so they ignore

the fact that Schlumberger also involved an appeal from a grant

of   summary        judgment    for     the    insurers.           The   district         court’s

dispositive legal conclusions did not palliate our concerns of

potential factual whipsaw in Schlumberger, and they do not here. *

       *
       A week after oral argument in this case, the Supreme Court
of Virginia decided Travco Insurance Co. v. Ward (No. 120347)
(Va. Nov. 1, 2012). In a post-argument filing, Builders argues
that the Travco decision disposes of the merits claim in this
case.   Be that as it may, the existence of a dispositive state
(Continued)
                                               10
       The insurers also argue that we should consider issues of

finality and judicial economy before dismissing a case filed

over three years ago that has gone to final judgment.                       Once

again,    they   ignore    Schlumberger’s        procedural     posture.         In

Schlumberger the case had also gone to final judgment, and we

nonetheless dismissed it for lack of jurisdiction over six years

after its original filing.         Finally, and relatedly, the insurers

present   several    arguments     regarding     Dragas’   failure    to   raise

Firemen’s   realignment     and    indispensability        earlier;   however,

such   thinly    veiled   waiver   arguments     are   ineffectual.        For   a

party may question subject matter jurisdiction at any stage of

litigation, even for the first time on appeal.                Constantine, 411

F.3d at 480.

       Therefore, we apply Schlumberger and hold that Firemen’s is

a required and indispensable party to this case; accordingly, we

cannot    dismiss    Firemen’s     from    the     case    to   preserve     our

jurisdiction.

decision regarding the merits does not affect our jurisdictional
analysis.   Moreover, if Travco is as dispositive as Builders
suggests, Builders’ burden in relitigating this case -- if
refiled in state court at all -- will be trivial indeed.

                                      11
                              III.

     For the reasons set forth above, we vacate the judgment of

the district court and remand to that court so that it can

dismiss the case for lack of subject matter jurisdiction.

                                             VACATED AND REMANDED

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