Peace Church Risk Retention Gr v. Johnson Controls Fire Protecti ( 2022 )

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
____________
No. 21-2923
____________
PEACE CHURCH RISK RETENTION GROUP, (A
RECIPROCAL), AS SUBROGEE OF BARCLAY
FRIENDS; CARING COMMUNITIES, (A RECIPROCAL),
AS SUBROGEE OF BARCLAY FRIENDS
v.
JOHNSON CONTROLS FIRE PROTECTION LP, FKA
SimplexGrinnell LP,
Appellant
____________
On Appeal from the United States District Court
for the Eastern District of Pennsylvania
District Court No. 5-19-cv-05377
U.S. District Judge: Honorable R. Barclay Surrick
____________
Submitted Under Third Circuit LAR 34.1(a)
July 8, 2022
Before: SHWARTZ, KRAUSE, and ROTH, Circuit Judges
(Opinion Filed: September 20, 2022)
Catherine G. Bryan
Jeffrey L. O’Hara
Connell Foley
1085 Raymond Boulevard
One Newark Center, 19th Floor
Newark, NJ 07102
Timothy K. Lewis
Schnader Harrison Segal & Lewis
120 Fifth Avenue
Suite 2700
Pittsburgh, PA 15222
Bruce P. Merenstein
Schnader Harrison Segal & Lewis
1600 Market Street
Suite 3600
Philadelphia, PA 19103
Attorneys for Johnson Controls Fire Protection LP
Morgan S. Birch
Thomas B. Fiddler
Justin E. Proper
White & Williams
1650 Market Street
One Liberty Place, Suite 1800
Attorneys for Peach Church Risk Retention Group and
Caring Communities
2
____________
OPINION OF THE COURT
____________
KRAUSE, Circuit Judge.
The parties’ initial briefs asked us to decide the
availability of particular tort claims under Pennsylvania law.
But before any federal court can decide the merits of such a
question, it must have the jurisdiction to do so, and
supplemental briefing on a jurisdictional issue submitted to this
Court convinces us that it may be lacking here. That is because
the federal courts’ authority to entertain this case is premised
on diversity jurisdiction, but we conclude that the citizenship
of reciprocal insurance exchanges, such as Plaintiffs-
Appellees, turns on the citizenship of their subscribers, who
may not be completely diverse from Defendant-Appellant. As
additional factfinding is needed on this issue, we will vacate
the District Court’s denial of the motion to dismiss under Rule
12(b)(6) and remand for that Court to determine the existence
of diversity jurisdiction in the first instance.
I. FACTUAL AND PROCEDURAL BACKGROUND
This action arises out of a tragic fire at the Barclays
Friends assisted living facility in 2017 that caused four
residents’ deaths. The estates of those residents sued Barclay
Friends and Defendant-Appellant Johnson Controls Fire
Protection LP (“Johnson Controls”) (formerly known as
SimplexGrinnell), which maintained and monitored Barclay
Friends’s fire-suppression system at the time of this terrible
incident.
3
After Barclay Friends—and by extension its liability
insurers, the Plaintiffs-Appellees Peach Church Risk Retention
Group (“Peace Church”) and Caring Communities
(collectively, the “Liability Insurers”)—settled with the
estates, the Liability Insurers filed the instant suit against
Johnson Controls in federal court, asserting diversity
jurisdiction. They alleged that because Johnson Controls’s
tortious conduct caused the fire—and the fire caused the
residents’ deaths, eventually leading to Barclay Friends’s
voluntary settlement of the estates’ claims—the Liability
Insurers, standing in the shoes of Barclay Friends as its
subrogees, are entitled to damages in the amount of the
settlement payments they made on Barclay Friends’s behalf.
The Liability Insurers’ complaint asserted claims against
Johnson Controls for a variety of torts, including negligence,
gross negligence, wanton and willful misconduct, negligent
misrepresentation, intentional misrepresentation, fraud, and
breach of implied warranty of workmanlike services.
Johnson Controls moved to dismiss under Rule
12(b)(6), arguing that there was no legal basis for the Liability
Insurers to recover the settlement payments they independently
chose to make to third parties without bringing traditional
indemnity or contribution claims. The District Court,
reasoning, among other things, that there was no clear
prohibition under Pennsylvania subrogation law on insurers
“asserting tort-based claims against third party tortfeasors,”
denied the motion. Given the novelty of the Liability Insurers’
theory of liability, however, it granted Johnson Controls’s
motion to certify the order for interlocutory appeal, and we
then granted the ensuing petition to appeal.
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II. JURISDICTION AND STANDARD OF REVIEW
The complaint asserts that the District Court had
jurisdiction based on the diversity of the parties under 28
U.S.C. § 1332, and the case culminated in an interlocutory
order. Having previously granted Johnson Controls’s petition
to appeal, we ordinarily would exercise jurisdiction to review
that order pursuant to 28 U.S.C. § 1292(b). Here, however, a
threshold question has arisen as to the existence of diversity
jurisdiction, and despite the fact that the appeal in this case was
limited to the merits of the District Court’s dismissal, we have
a continuing obligation to assess subject matter jurisdiction sua
sponte at all stages of the proceeding, even when parties do not
raise the issue. See Samuel-Bassett v. KIA Motors Am., Inc.,
357 F.3d 392, 395 (3d Cir. 2004). And while “the absence of
complete diversity [would] deprive[] all federal courts of
subject matter jurisdiction over this action, a federal court
always has jurisdiction to determine its jurisdiction.” Zambelli
Fireworks Mfg. Co., Inc. v. Wood, 592 F.3d 412, 418 (3d Cir.
2010) (citing United States v. Ruiz, 536 U.S. 622, 628 (2002)).
We exercise plenary review over issues of subject
matter jurisdiction. Johnson v. SmithKline Beecham Corp.,
724 F.3d 337, 345 (3d Cir. 2013).
III. DISCUSSION
Federal courts are courts of limited jurisdiction, and we
must therefore be certain that there is a basis for our authority
to hear each suit before proceeding to the merits. See Zambelli
Fireworks, 592 F.3d at 418. One such basis, diversity
jurisdiction, “as its name indicates, . . . requires that opposing
parties be citizens of diverse states.” GBForefront, L.P. v.
Forefront Mgmt. Grp., LLC, 888 F.3d 29, 34 (3d Cir. 2018).
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In order to meet the strictures of the diversity statute, complete
diversity is required, meaning that at the time the complaint is
filed, no party can be a citizen of the same state as any opposing
party.1 Lincoln Ben. Life Co. v. AEI Life, LLC, 800 F.3d 99,
104 & n.9 (3d Cir. 2015); S. Cross Overseas Agencies, Inc. v.
Wah Kwong Shipping Grp. Ltd., 181 F.3d 410, 414 n.2 (3d Cir.
1999).
A. Citizenship Determinations
For the most part, the rules for determining the
citizenship of individuals and the various types of business
entities are “well-established.” GBForefront, 888 F.3d at 34
(citing Zambelli Fireworks, 592 F.3d at 419). For example,
“[a] natural person is deemed to be a citizen of the state where
he is domiciled,” while “[a] corporation is a citizen both of the
state where it is incorporated and of the state where it has its
principal place of business.” Zambelli Fireworks, 592 F.3d at
419. For “artificial entities other than corporations,” the
general rule is that the citizenship of the entity is determined
by the citizenship of “all [its] members.” Americold Realty Tr.
v. Conagra Foods, Inc., 577 U.S. 378, 381 (2016) (internal
quotation omitted) (alteration in the original).
The Supreme Court has applied this rule to many
common forms of unincorporated entities, such as unions, joint
stock companies, and partnerships. See Americold, 577 U.S. at
1
Section 1332(a) provides, in relevant part: “The
district courts shall have original jurisdiction of all civil actions
where the matter in controversy exceeds the sum or value of
$75,000, exclusive of interest and costs, and is between . . .
citizens of different States.” 28 U.S.C. § 1332(a)(1).
6
381 (citing Carden v. Arkoma Assocs., 494 U.S. 185, 189–90
(1990)); see also Chapman v. Barney, 129 U.S. 677, 682
(1889) (joint stock companies); Great S. Fire Proof Hotel Co.
v. Jones, 177 U.S. 449, 457 (1900) (partnerships); United
Steelworkers of Am. v. R.H. Bouligny, Inc., 382 U.S. 145, 146–
47 (1965) (unions). As a result, there is no question of how the
citizenship of Johnson Controls is to be determined. In Carden
v. Arkoma Associates, the Supreme Court held that for
diversity purposes, the citizenship of a limited partnership is
the same as the citizenship(s) of all of its partners, including its
limited partners, 494 U.S. at 195–96; see also GBForefront,
888 F.3d at 37, so Johnson Controls is a citizen of every state
of which its partners are citizens.2
There remain some unincorporated associations,
however, for which it is not entirely clear who or what counts
as a “member.” That is because, while the Supreme Court has
“never expressly defined the term,” it has developed a
“principle” of “equat[ing] an association’s members with its
owners or ‘the several persons composing such association,’”
Americold, 577 U.S. at 381 (quoting Carden, 494 U.S. at 196),
2
Its partners, of course, may be either natural persons
or artificial entities themselves, and the citizenship rules will
need to be applied to them in turn in order to determine all the
states of which Johnson Controls is a citizen. See, e.g.,
GBForefront, 888 F.3d at 36 (explaining that “[w]hen a
business entity consists of constituent parts that are also
business forms, the inquiry into jurisdictional citizenship ‘can
become quite complicated’” because “‘[t]he citizenship of
unincorporated associations must be traced through however
many layers of partners or members there may be’” (quoting
Lincoln, 800 F.3d at 105 n.16).
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and it is left to the courts to apply that principle to novel types
of unincorporated entities as they arise.
The Liability Insurers fit that category.3 Each of them
is structured as a reciprocal insurance exchange—also known
as a reciprocal exchange or interinsurance exchange—which
is, in general, a distinct legal entity that can sue or be sued in
its own name, but unlike traditional mutual insurance
companies, has no corporate existence. 43 AM. JUR. 2D
INSURANCE §§ 72, 77. It is instead an unincorporated
association whose subscribers “exchange contracts and pay
premiums . . . for the purpose of insuring themselves and each
other.” Reciprocal Exchange, BLACK’S LAW DICTIONARY
(11th ed. 2019); see Baer v. United Servs. Auto. Ass’n, 503
F.2d 393, 395 n.3 (2d Cir. 1974) (“[I]n a reciprocal insurance
association the members, by exchanging contracts of
insurance, are both the insurers and the insureds.”); James G.
Davis Const. Corp. v. Erie Ins. Exch., 953 F. Supp. 2d 607,
610–11 (D. Md. 2013) (“[I]n a reciprocal insurance exchange,
‘[e]ach subscriber is both an insurer and an insured.’” (second
alteration and emphasis in original) (quoting Michael A.
Haskel, The Legal Relationship Among A Reciprocal Insurer’s
Subscribers, Advisory Committee and Attorney-in-Fact, 6 N.Y.
CITY L. REV. 35, 36 (2003))). The subscribers are thus
simultaneously both the insureds of and insurers to one
another, with the exchanges of insurance between them
effected by a common representative (the “attorney-in-fact”),
3
We consider the Liability Insurers’ citizenship rather
than Barclay Friends’s because Barclay Friends subrogated its
rights to the insurers. See Fallat v. Gouran, 220 F.2d 325, 326
(3d Cir. 1955); St. Paul Fire & Marine Ins. Co. v. Universal
Builders Supply, 409 F.3d 73, 80–82 (2d Cir. 2005).
8
who acts as an agent for each individual subscriber. 43 AM.
JUR. 2D INS. § 72. A reciprocal insurance exchange is thus
“something more than a partnership and something less than
an insurance corporation”; it is, essentially, an aggregation of
subscribers who swap liabilities amongst themselves. 3
COUCH ON INS. § 39:48 (3d ed.); see also, e.g., True v. Robles,
571 F.3d 412, 421–23 & n.2 (5th Cir. 2009); Lewis v. United
Servs. Auto. Ass’n, 45 F.3d 433 (8th Cir. 1994) (unpublished
table decision); Baer, 503 F.2d at 394–96 & n.3; Arbuthnot v.
State Auto. Ins. Ass’n, 264 F.2d 260, 261–62 (10th Cir. 1959).
The question, then, is whether these subscribers are
merely customers of the exchange, or, alternatively,
“members” of the exchange whose citizenship then determines
the citizenship of the exchange itself. We have not previously
had cause to consider this question. We hold here that
subscribers to reciprocal insurance exchanges must be treated
as members for diversity purposes.
We reach that conclusion for this form of business entity
by looking to the laws of the states in which the entity is
organized. In Americold, the Supreme Court instructed us to
do just that when considering a form of unincorporated
artificial entity for the first time in the context of diversity
jurisdiction. See 577 U.S. at 382 (considering a “real estate
investment trust” organized under Maryland law and noting
that “Maryland law provides an answer” as to who its members
are). Here, according to the complaint, Peace Church is
organized under the laws of Vermont, and Caring
Communities is organized under the laws of the District of
Columbia.
9
Both Vermont and the District of Columbia allow for
the creation of reciprocal insurance exchanges that follow the
general organizational principles outlined above;4 and their
laws and regulations confirm that for this type of entity, its
“members”—that is, its “owners,” or “the several persons
composing such [an] association,” Americold, 577 U.S. at 381
(internal quotation omitted)—are its subscribers. It is they
(along with their agent, the attorney-in-fact) who comprise the
reciprocal insurance exchange and are considered a single
entity as to all of the exchange’s operations, D.C. Mun. Regs.
tit. 26, § 4005.3; Vt. Stat. Ann. tit. 8, § 4835(b); who have the
authority to set the rules pursuant to which its governance
committee is selected, D.C. Mun. Regs. tit. 26, § 4017; Vt.
Stat. Ann. tit. 8, § 4847; who are ultimately responsible for
making up the deficiency when the reciprocal insurance
exchange cannot discharge its liabilities, D.C. Mun. Regs. tit.
26, § 4026; Vt. Stat. Ann. tit. 8, § 4856; and who may receive
4
See D.C. Mun. Regs. tit. 26, § 4099 (defining
“[r]eciprocal insurers” or “reciprocals” as “an unincorporated
insurance company, under a common name, in which
subscribers exchange insurance policies through an Attorney
in Fact, having the authority to obligate each subscriber both
as insured and insurer, for the purpose of transferring and
distributing insurance risks among its subscribers”); id. at §
4006.1 (authorizing such organizations); Vt. Stat. Ann. tit. 8
§ 4831(2)–(3) (defining “[r]eciprocal” insurance as “that
resulting from an interchange among persons, known as
subscribers, of reciprocal agreements of indemnity, the
interchange being effectuated through an attorney-in-fact
common to all such persons” and “[s]ubscribers” as “persons
who enter into reciprocal insurance agreements under this
chapter”); id. at § 4836(a) (authorizing such organizations).
10
the remaining assets of a liquidated reciprocal insurance
exchange after it has, among other things, discharged its
liabilities, D.C. Mun. Regs. tit. 26, § 4024; Vt. Stat. Ann. tit. 8,
§ 4854.
Because the members of a reciprocal insurance
exchange are its subscribers, we look to the citizenships of
those subscribers to determine the citizenship of the exchange
itself. See Carden, 494 U.S. at 195–96. And that brings us to
the exchanges here, the Liability Insurers, and the question of
whether diversity is present in this case.
B. Diversity of Citizenship in This Case
According to the parties’ supplemental submissions on
this issue, the Liability Insurers have subscribers who are
located in a multitude of states, including, as relevant here,
Delaware and Wisconsin. On the other side of the “v.”, the
opposing party, Johnson Controls, a limited partnership,
identifies its members as other LLCs and LPs that make it a
citizen of Delaware and Wisconsin.5 In short, diversity
jurisdiction appears to be lacking.
That said, we are not prepared to rest on appearances
when additional factfinding is clearly required. For one thing,
although the Liability Insurers correctly note that diversity of
citizenship is determined at the time the complaint is filed, it is
5
Johnson Controls lists its members as Simplex Time
Recorder LLC, Tyco Fire Protection LLC, STR Grinnell GP
Holding, LLC, and Master Protection LP, and the members of
those entities, in turn, are considered in tracing Johnson
Controls’s citizenship to these two states.
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nevertheless not sufficiently clear from the affidavits submitted
with their supplemental briefing whether the subscribers they
“ha[ve]” were citizens of the enumerated states (and
subscribers) at the time they filed their complaint; Johnson
Controls’ submission similarly fails to specify whether it
reflects its make-up as of the relevant time.6 Cf. Washington
v. Hovensa LLC, 652 F.3d 340, 344 (3d Cir. 2011) (noting that
citizenship of the parties must be determined “based on the
relevant facts at the time the complaint was filed”). The
subscribers’ citizenship, moreover, will depend on whether
they are natural persons or artificial entities and, potentially, on
indicia beyond mere physical presence in the state to establish
citizenship. See, e.g., Frett-Smith v. Vanterpool, 511 F.3d 396,
400–01 (3d Cir. 2008); Johnson, 724 F.3d at 347–49.
In the normal course, because the “[h]istorical or
chronological data which underl[ie] a court’s determination of
diversity jurisdiction are factual in nature,” our role is to review
6
Johnson Controls’s letter also indicates that its
citizenship traces back to an entity “handled as a
corporation.” It is not clear what Johnson Controls means by
this, so the District Court should inquire into this
representation as well, applying the principles set forth
above. See Americold, 577 U.S. at 382–83 (looking to state
law but noting that “so long as . . . an entity is unincorporated,
we apply our oft-repeated rule that it possesses the citizenship
of all of its members” (quotation marks omitted)); see also
Fairfield Castings, LLC v. Hofmeister, 112 F. Supp. 3d 850,
853 (S.D. Iowa 2015) (noting an entity’s “elective decision to
be treated as a corporation for tax purposes does not somehow
transform its LLC status for purposes of evaluating diversity
jurisdiction”).
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the district court’s findings on these points for clear error.
Krasnov v. Dinan, 465 F.2d 1298, 1299–1300 (3d Cir. 1972).
In this case, however, there are no factual findings for us to
review because the District Court did not have the opportunity
to evaluate jurisdiction in light of the supplemental
submissions and our holding today regarding the treatment of
reciprocal insurance exchanges. We will therefore remand for
the Liability Insurers to provide more specificity about their
citizenship and for the District Court, in the first instance, to
make findings and conclusions concerning its jurisdiction.
See, e.g., GBForefront, 888 F.3d at 36, 41.
* * *
For the foregoing reasons, we will vacate the District
Court’s denial of the motion to dismiss under Rule 12(b)(6)
and remand for proceedings consistent with this opinion.
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