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Fidelity and Deposit Co. v. City of Sheboygan Falls and Village of Kohler

decided: July 19, 1983.


Appeal from the United States District Court for the Eastern District of Wisconsin. No. 78 C 788 -- Terence T. Evans, Judge.

Cummings, Chief Judge, Posner, Circuit Judge, and Rosenn, Senior Circuit Judge.*fn*

Author: Posner

POSNER, Circuit Judge.

For a case to be within the diversity jurisdiction of the federal courts, diversity of citizenship must be "complete," meaning that no plaintiff may be a citizen of the same state as any defendant. Strawbridge v. Curtiss, 7 U.S. (3 Cranch) 267, 2 L. Ed. 435 (1806). The formal designation of a party in the complaint as plaintiff or defendant is not controlling; "the court will look beyond the pleadings, and arrange the parties according to their sides in the dispute." City of Dawson v. Columbia Avenue Saving Fund, Safe Deposit, Title & Trust Co., 197 U.S. 178, 180, 49 L. Ed. 713, 25 S. Ct. 420 (1905). Though the issue has not been raised, we must consider on our own initiative whether one of the nominal defendants in this case, Scotty Smith Construction Company ("Scotty"), should be realigned on the side of the plaintiff, the Fidelity and Deposit Company of Maryland, thus destroying complete diversity. Only if we decide that realignment is not required may we proceed to the substantive issues on this appeal, which are issues of Wisconsin contract law.

Two Wisconsin towns got together and hired Scotty, a Wisconsin corporation, to build for $710,000 an incinerator for burning their garbage. The towns required Scotty to post a performance bond in that amount. Fidelity, a citizen of Maryland for diversity purposes, see 28 U.S.C. § 1332(c), was the surety on the bond, and required Scotty to agree to indemnify it should it be forced to make good on the bond. Scotty built the incinerator, but the incinerator's air pollution control device -- a gas scrubber that had been supplied by one subcontractor, Krebs Engineers, a California corporation, and installed by another, Midwesco, Inc., an Illinois corporation -- did not perform up to the standard required by law and the incinerator had to be shut down. The towns took the position that the scrubber's failure to perform up to standard was a breach of contract by Scotty, and as they had paid all but $38,000 of the purchase price for a facility they could not use at all, they notified Fidelity that it must make good the difference in accordance with the bond.

Fidelity responded, several months later, by bringing this diversity action against the towns, Scotty, and the subcontractors. The complaint sought a declaration that Fidelity was not liable to the towns on the bond, because Scotty had not committed a breach of contract, but that if the court held otherwise, Scotty was liable to Fidelity under the indemnity agreement. The towns counterclaimed against Fidelity for payment of the bond and cross-claimed for breach of contract against Scotty and the subcontractors. Other cross-claims were also filed but are not before us. The district court, on motions for summary judgment, held that Scotty had not broken its contract with the towns, and the court entered judgment for Fidelity on its main claim and the towns' counterclaim and for Scotty and the subcontractors on the towns' cross-claims. Although these orders did not dispose of the entire litigation, the district court certified them for immediate appeal under Rule 54(b) of the Federal Rules of Civil Procedure, so we have appellate jurisdiction. There are other parties below but they are irrelevant to this appeal.

In the normal course this lawsuit would have been kicked off by the towns' suing Scotty for breach of contract and Fidelity for breach of its obligations under the bond. Such a suit would have had to be brought in state court with no possibility of removal to federal court, since the plaintiffs and one of the defendants, Scotty, would have been residents of the same state. Instead Fidelity precipitated the towns' suit by bringing a declaratory judgment action against them and Scotty, an action in which the plaintiff was a resident of Maryland and all the defendants were Wisconsin residents. Fidelity's invocation of the Declaratory Judgment Act, 28 U.S.C. § 2201, was wholly proper. The indemnity agreement gave it a potential claim of some magnitude against Scotty, but a claim on which Fidelity could not realize unless and until it was found to have defaulted on its obligations under the performance bond. Fidelity may have been concerned lest passage of time prevent its recouping from Scotty any money it might have to pay the towns. Only by forcing the towns to bring their action on the bond could Fidelity crystallize its own rights under the indemnity agreement. This is the kind of interest that the Declaratory Judgment Act was intended to protect. See, e.g., Illinois ex rel. Barra v. Archer Daniels Midland Co., 704 F.2d 935, 939-40 (7th Cir. 1983). Joining Scotty as a defendant obviated any need to bring a separate suit to enforce the indemnity agreement in the event that Fidelity lost its suit against the towns.

So far there is nothing to suggest that Fidelity and Scotty were not genuine adversaries. But Scotty's answer, filed eight months after Fidelity's complaint, admitted the principal allegations of the complaint and appears, though with something less than 100 percent clarity, to concede that if Scotty is found to have broken its contract with the towns it will be liable to Fidelity for any money that Fidelity has to pay on the performance bond though not necessarily for Fidelity's attorney's fees and other expenses of its litigation with the towns, which Fidelity's complaint against Scotty also claims. But City of Indianapolis v. Chase National Bank, 314 U.S. 63, 73 n.3, 86 L. Ed. 47, 62 S. Ct. 15 (1941), holds that a dispute over costs and attorney's fees is too flimsy a basis for preventing a realignment that will defeat the assertion of diversity jurisdiction.

Scotty's answer denies that it broke its contract with the towns, but this is not a defense against Fidelity, which also denies Scotty's breach, but against the towns. The potential conflict between Fidelity and Scotty over the latter's contingent liability under the indemnity agreement was eliminated (except for costs and attorney's fees) when the answer conceded liability, leaving Scotty with the defense that it had not broken the contract that Fidelity had insured. By staking its all on this defense, Scotty (of Wisconsin) aligned itself with Fidelity (of Maryland) on one side of the lawsuit against the towns on the other, thus putting Wisconsin residents on both sides.

Jurisdiction, however, depends on the facts as they exist when the complaint is filed rather than when the answer is filed, which in this case was months later. See, with specific reference to realignment, American Motorists Insurance Co. v. Trane Co., 657 F.2d 146, 151 n.3 (7th Cir. 1981); 3A Moore's Federal Practice para. 19.03[1], at pp. 19-52 to 19-53 (2d ed. 1982). Otherwise a party might take steps to defeat jurisdiction when he saw the case going against him -- in a diversity case might, for example, move to his opponent's state. So if Fidelity and Scotty were adverse parties when the complaint was filed, it would be irrelevant that something happened later to put them on the same side of the lawsuit.

For a similar reason it is irrelevant that the towns' cross-claim against Scotty put it in the same boat with Fidelity. In this respect a cross-claim under Rule 13(g) of the Federal Rules of Civil Procedure is similar to a third-party complaint under Rule 14(a); and it is clear that if a case is properly within the diversity jurisdiction and the defendant files a third-party complaint against a resident of the plaintiff's state the court does not lose jurisdiction over the plaintiff's claim. Fawvor v. Texaco, Inc., 546 F.2d 636, 638 (5th Cir. 1977); 6 Wright & Miller, Federal Practice and Procedure § 1444, at pp. 223-25 (1971). Although not consistent with the principle of complete diversity, this rule is required by the competing principle that jurisdiction should depend on the facts when the complaint was filed. The defendant is not permitted to defeat the plaintiff's right to a federal forum by impleading a resident of the plaintiff's state any more than he would be permitted to do so by becoming a resident of that state. True, if having sued a nonresident under the diversity jurisdiction a plaintiff later brings in a resident by filing a third-party complaint, the entire suit will be dismissed for lack of complete diversity. But that is because a plaintiff is not allowed to do in two steps what under Strawbridge would lead to dismissal if he did it in one by naming both defendants in his original complaint. Owen Equipment & Erection Co. v. Kroger, 437 U.S. 365, 374-75, 57 L. Ed. 2d 274, 98 S. Ct. 2396 (1978). That is not the situation here, if there was enough "adverseness" when the complaint was filed to allow Fidelity to name Scotty as a defendant.

Although it is possible that even then there was "no actual, substantial conflict between the parties that would justify placing them on opposite sides of the lawsuit," American Motorists Insurance Co. v. Trane Co., supra, 675 F.2d at 151, the mere possibility does not defeat jurisdiction. This would be clear enough if it were certain that Fidelity, the Maryland resident, did not know when it filed its complaint that Scotty, the Wisconsin resident, would in effect confess liability under the indemnity agreement. To hold that federal jurisdiction was only tentative until Scotty filed its answer would violate the principle that jurisdiction depends on the facts at the time of the complaint. Although we cannot be certain that Fidelity did not know that Scotty would answer the complaint in the way it did, Fidelity would be unlikely to sue Scotty knowing that Scotty would confess liability -- you do not ordinarily sue people with whom you have no quarrel -- unless this was a means of collusively invoking the diversity jurisdiction. That is also unlikely. If Fidelity had reached an accord with Scotty and wanted to minimize its chances of getting booted out of federal court for want of complete diversity, either it would not have named Scotty as a party at all, and simply hoped that Scotty would not be deemed an indispensable party, which could destroy complete diversity, see Acton Co. v. Bachman Foods, Inc., 668 F.2d 76, 80-81 (1st Cir. 1982) (more on this point shortly), or it would have asked Scotty not to concede in its answer that it was liable under the indemnity agreement. Fraud is too remote a possibility here to warrant going outside the complaint -- which pleaded a genuine controversy between Fidelity and Scotty over Scotty's liability on the indemnity agreement -- in order to decide whether the district court had jurisdiction five years ago when this suit began.

City of Indianapolis v. Chase National Bank, 314 U.S. 63, 86 L. Ed. 47, 62 S. Ct. 15 (1941), the leading case on realigning parties to defeat diversity, is distinguishable. There (to simplify the facts slightly) a bank, acting as the trustee of bondholders of a gas company, sued the company and a third party, citizens of the same state, to enforce a lease between them. The bank and the gas company -- that is, the bondholders and stockholders -- had the same interest in enforcing the lease, which was advantageous to the company; and the Supreme Court, relying in part on the defendant's answer, held that they belonged on the same side of the lawsuit. Although the bank had asked for a declaration that the lease was an asset from which the bondholders' claims could be satisfied, the third party -- the "real" defendant -- had denied that there was any actual controversy between the bank and the gas company, and the Supreme Court agreed. The bank "did not bring this suit in order to obtain a declaration that, regardless of the validity of the lease, [the gas company] is still ultimately responsible for the interest payments on its bonded indebtedness." Id. at 73 n. 3. The naming of the gas company as a defendant rather than a coplaintiff was therefore "window dressing designed to satisfy the requirements of diversity jurisdiction." Id. at 72. There was a vigorous dissent which cast the facts in a quite different light, but we must be guided by the majority's characterization and it is not applicable to this case. Scotty's answer does not establish that the naming of it as a defendant in Fidelity's complaint filed months earlier was "window dressing," or that Fidelity would not have sued Scotty for a declaration of Scotty's liability on the indemnity agreement except as a method -- a curious method -- of invoking diversity jurisdiction. So far as appears, Fidelity really did want a judgment declaring Scotty liable to it under the indemnity agreement.

There is, admittedly, some basis in the majority opinion in Indianapolis for requiring realignment whenever the plaintiff is allied on the primary issue in suit with the defendant to be realigned, though in conflict on a secondary issue. See 314 U.S. at 72. By this test, the dispute between Fidelity and Scotty was secondary to their alliance on the question whether Fidelity had broken its contract with the towns. But such a test has not been applied in subsequent cases (our circuit's decision in Trane, for example, requires an "actual, substantial conflict" but not that it be over the primary issue in the litigation), and we have recently expressed our distaste for spongy jurisdictional tests. See Illinois Dept. of Public Aid v. Schweiker, 707 F.2d 273, 278-79 (7th Cir. 1983). The "primary-secondary" test would involve potential judicial diseconomy as well as ...

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