Hartford Fire Insurance Company v. Harleysville Mutual Insurance Company

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 12-1761
HARTFORD FIRE INSURANCE COMPANY,
Plaintiff - Appellant,
v.
HARLEYSVILLE MUTUAL INSURANCE COMPANY; ASSURANCE COMPANY OF
AMERICA; FIRST FINANCIAL INSURANCE COMPANY; FIRST MERCURY
INSURANCE COMPANY; G. R. HAMMONDS INC.,
Defendants - Appellees.
Appeal from the United States District Court for the District of
South Carolina, at Charleston. Richard M. Gergel, District
Judge. (2:11-cv-03081-RMG)
Argued: September 17, 2013 Decided: November 15, 2013
Before WILKINSON, DUNCAN, and AGEE, Circuit Judges.
Affirmed by published opinion. Judge Wilkinson wrote the
opinion, in which Judge Duncan and Judge Agee joined.
ARGUED: Steven M. Klepper, KRAMON & GRAHAM, P.A., Baltimore,
Maryland, for Appellant. David Leonard Brown, NELSON LEVINE DE
LUCA & HAMILTON, LLC, Greensboro, North Carolina, for Appellees.
ON BRIEF: Lee H. Ogburn, KRAMON & GRAHAM, P.A., Baltimore,
Maryland, for Appellant. David G. Harris, II, NELSON LEVINE DE
LUCA & HAMILTON, LLC, Greensboro, North Carolina; Robert C.
Calamari, NELSON MULLINS RILEY & SCARBOROUGH LLP, Myrtle Beach,
South Carolina, for Appellee Harleysville Mutual Insurance
Company. Phillip E. Reeves, Elizabeth J. Smith, GALLIVAN WHITE
& BOYD, P.A., Greenville, South Carolina, for Appellee Assurance
Company of America. M. Dawes Cooke, Jr., BARNWELL WHALEY
PATTERSON HELMS, LLC, Charleston, South Carolina; Gary S. Kull,
CARROLL MCNULTY KULL, LLC, Basking Ridge, New Jersey, for
Appellee First Mercury Insurance Company. Mark S. Barrow,
SWEENY WINGATE & BARROW, P.A., Columbia, South Carolina, for
Appellee First Financial Insurance Company.
2
WILKINSON, Circuit Judge:
Nominal parties are excepted from the requirement that all
defendants join in or consent to removal to federal court. This
case concerns whether insured contractor G.R. Hammonds, Inc.
(“Hammonds”) is a nominal party in a contribution suit between
its insurers. We affirm the district court’s holding that
Hammonds is a nominal party for purposes of the nominal party
exception to the rule of unanimity governing removal.
I.
This action arises out of allegedly defective roofing work
performed by defendant Hammonds, a North Carolina corporation,
on a project in Charleston, South Carolina (the “Concord West
Project”). The work was completed between early 1998 and March
2001. A series of different companies issued Hammonds liability
insurance between 1995 and 2009. Plaintiff Hartford Fire
Insurance Company (“Hartford”), the appellant here, insured
Hammonds from 1995 to 2002. The remaining defendants, appellees
here, insured Hammonds for overlapping or subsequent years:
Assurance Company of America (“Zurich”) from 2001 to 2002; First
Financial Insurance Company (“First Financial”) from 2002 to
2003; Harleysville Mutual Insurance Company (“Harleysville”)
from 2003 to 2006; and First Mercury Insurance Company (“First
Mercury”) from 2006 to 2009.
3
Hammonds was sued in 2008 by homeowners and their
association in South Carolina state court for the alleged
defects in its work on the Concord West Project. That lawsuit
(the “Concord West Action”) was settled on September 1, 2011,
with all claims against Hammonds related to that construction
project being dismissed with prejudice. Hartford, Harleysville,
and Zurich each agreed to pay one third of a one-million-dollar
settlement, subject to each insurer’s right to subsequently
resolve the proper allocation of the settlement through
arbitration or litigation.
Five days later, Harleysville filed a declaratory judgment
action in the district court for the Eastern District of North
Carolina (“North Carolina Action”), joining Hammonds and all of
the aforementioned insurers as defendants. That suit sought a
declaration of the rights and obligations of the insurers with
respect to damages arising out of Hammonds’s work on the Concord
West Project, as well as its allegedly defective work on two
other projects. On September 21, 2011, Hartford filed the
present action for a declaratory judgment in South Carolina
state court. Hartford named Hammonds and the four other insurers
that had covered Hammonds as defendants. Hartford seeks a
declaration of each insurer’s respective share of the one-
million-dollar settlement in the Concord West Action and
4
equitable contribution from the other insurers to the extent
that Hartford is found to have overpaid its share.
Harleysville timely removed this action to the district
court for the District of South Carolina pursuant to 28 U.S.C.
§ 1332. The other defendant insurers consented to the removal on
the same day. Hammonds, however, neither consented nor objected
to removal, nor claimed an interest in the outcome of the
proceeding at that time. Upon removal, Harleysville filed a
motion to dismiss on the grounds that the present action was
duplicative of the parallel, previously-filed North Carolina
Action. 1 Hartford moved to remand the present case on the basis
of Hammonds’s failure to join in or consent to the notice of
removal. Months later, on February 24, 2012, Hammonds filed an
untimely answer to Hartford’s complaint in which it asserted an
interest in the outcome of the proceeding. 2
1
Although only Harleysville moved to dismiss, the district
court dismissed the case and entered judgment as to all the
defendants. Because “the claim raised by [Harleysville] in its
motion to dismiss would be equally effective in barring the
claim[s] against the [other insurers],” that dismissal was
proper. Robinson v. Sappington, 351 F.3d 317, 333 n.11 (7th
Cir. 2003) (internal marks omitted). Furthermore, we note that
the court was free to raise the issue of the first-to-file rule
sua sponte.
2
After oral argument, Hartford also filed a motion to
reconsider the clerk’s order of January 16, 2013 denying
Hammonds’s motion for leave to file a separate brief on appeal.
The motion was irregular in numerous respects, including the
fact that plaintiff-appellant Hartford was trying to coax a
(Continued)
5
The district court found that Hammonds was a nominal party
for purposes of the nominal party exception to the rule of
unanimity governing removal. The district court determined that
the action did not seek any relief from Hammonds but merely
sought to determine the percentage that each insurer was
required to pay of a settlement already agreed to by the
insurers on behalf of Hammonds. Applying two different tests for
nominal party status articulated by other circuits, the district
court held that it was not possible for Hartford to establish a
cause of action against Hammonds, and that there was no
reasonable basis for predicting that Hammonds could be held
liable in any way. It then dismissed the South Carolina suit
under the first-to-file rule. This appeal followed.
II.
We review a district court’s ruling on matters relating to
the propriety of removal de novo. Dixon v. Coburg Dairy, Inc.,
369 F.3d 811, 815 (4th Cir. 2004). The burden of demonstrating
jurisdiction and therefore the propriety of removal rests with
the removing party. Id.
second brief from a party styled as a defendant. Hammonds’s
original motion was thus rightfully denied, and we deny as well
the motion to reconsider.
6
A.
28 U.S.C. § 1441(a) provides that a “civil action brought
in a State court of which the district courts of the United
States have original jurisdiction, may be removed by the
defendant or the defendants.” To remove to federal court, the
defendant or defendants must file “a notice of removal . . .
containing a short and plain statement of grounds for removal.”
Id. § 1446(a). The Supreme Court has construed these statutes to
require all defendants in a case to join in or consent to
removal, creating the so-called “rule of unanimity.” See Mayo v.
Bd. of Educ. of Prince George's Cnty., 713 F.3d 735, 741 (4th
Cir. 2013) (citing Lapides v. Bd. of Regents of Univ. Sys. of
Ga., 535 U.S. 613, 620 (2002)). The rule of unanimity is
consistent with our obligation “to construe removal jurisdiction
strictly because of the significant federalism concerns
implicated.” Maryland Stadium Auth. v. Ellerbe Becket Inc., 407
F.3d 255, 260 (4th Cir. 2005) (internal quotation marks
omitted); see also Shamrock Oil & Gas Corp. v. Sheets, 313 U.S.
100, 109 (1941). The rule of unanimity helps to effectuate
Congress’s intent in limiting removal to prevent it from being
used too broadly or casually.
The federal courts have, however, long recognized an
exception to the rule of unanimity, which states that a nominal
party need not consent to removal. See Charles Alan Wright et
7
al., 14C Fed. Prac. & Proc. Juris. § 3730 (4th ed. 2009)
(collecting cases). This “nominal party exception” ensures that
only those parties with a palpable interest in the outcome of a
case, and not those without any real stake, determine whether a
federal court can hear a case. See Tri-Cities Newspapers, Inc.
v. Tri-Cities Printing Pressmen & Assistants' Local 349, Int'l
Printing Pressmen & Assistants' Union of N. Am., 427 F.2d 325,
327 (5th Cir. 1970) (“[N]ominal or formal parties, being neither
necessary nor indispensable, are not required to join in the
petition for removal”). This exception helps to prevent a party
from overriding congressionally prescribed bases for removal
through strategic pleading.
This court has never defined a nominal party for purposes
of the nominal party exception to the rule of unanimity
necessary for removal. Courts outside of this circuit have
devised various tests to define a nominal party. Some have
required that a defendant be indispensable in order to avoid the
nominal party exception. See Ryan v. State Bd. of Elections of
Ill., 661 F.2d 1130, 1134 (7th Cir. 1981). Others have required
only that a defendant be indispensable or necessary. See Farias
v. Bexar Cnty. Bd. of Trustees for Mental Health Mental
Retardation Servs., 925 F.2d 866, 871 (5th Cir. 1991); Tri-
Cities Newspapers, 427 F.2d at 327. Both formulations appear to
ask ”whether in the absence of the [defendant], the Court can
8
enter a final judgment consistent with equity and good
conscience which would not be in any way unfair or inequitable
to plaintiff.” Tri-Cities Newspapers, 427 F.2d 325 at 327
(internal quotation marks omitted). Meanwhile, another line of
case law provides that “[a] defendant is nominal if there is no
reasonable basis for predicting that it will be held liable.”
Shaw v. Dow Brands, Inc., 994 F.2d 364, 369 (7th Cir. 1993),
holding modified by Meridian Sec. Ins. Co. v. Sadowski, 441 F.3d
536 (7th Cir. 2006); see also Thorn v. Amalgamated Transit
Union, 305 F.3d 826, 833 (8th Cir. 2002) (describing nominal
defendants as “those against whom no real relief is sought”)
(internal quotation marks omitted); Farias v. Bexar Cnty, 925
F.2d at 871 (“[T]he removing party must show . . . that there is
no possibility that the plaintiff would be able to establish a
cause of action against the non-removing defendants in state
court”) (internal quotation marks omitted).
All these tests -- in discussing indispensable parties,
necessary parties, or what removing parties must show about non-
consenting parties -- may provide useful insights but they have
strayed from the fundamental inquiry. They over-massage what
ought to be a straightforward examination of the meaning of the
word “nominal” and the reasons for having the nominal party
exception. Nominal means simply a party having no immediately
apparent stake in the litigation either prior or subsequent to
9
the act of removal. In other words, the key inquiry is whether
the suit can be resolved without affecting the non-consenting
nominal defendant in any reasonably foreseeable way.
There are dangers to incorrectly calibrating the scope of
the nominal party exception in either direction. If courts
broaden the exception so as to disregard too many non-consenting
defendants, there is a possibility not only that the interests
of non-consenting parties may be overlooked but that the federal
courts will confer a basis for removal that the Supreme Court
has declared should not exist. See Lapides v. Bd. of Regents,
535 U.S. at 620 (noting that generally, all defendants must
consent to removal to federal court). If on the other hand, the
nominal party exception is read too narrowly to require consent
from defendants with no real or tangible interest in the
litigation’s outcome, then as noted, the statutory right of
removal would be impermissibly restricted.
All these different tests aside, the word nominal should be
taken to mean what a good dictionary says it should mean:
“trifling” or “[e]xisting in name only.” Black’s Law Dictionary
1148(9th ed. 2009); see also id. at 1232 (defining a “nominal
party” as “a party who has some immaterial interest in the
subject matter of a lawsuit and who will not be affected by any
judgment”). Established precedent outside of the removal context
has defined a nominal party in similar terms. See, e.g., Alfred
10
L. Snapp & Son, Inc. v. Puerto Rico, ex rel., Barez, 458 U.S.
592, 600 (1982) (describing a nominal party as one “without a
real interest of its own” for purposes of parens patriae
standing); Commodity Futures Trading Comm'n v. Kimberlynn Creek
Ranch, Inc., 276 F.3d 187, 191 (4th Cir. 2002) (finding that in
the context of the Securities Exchange Act of 1934, a nominal
defendant is a party that “has no ownership interest in the
property which is the subject of litigation”) (internal
quotation marks omitted).
We see no reason why this understanding should not apply in
the present context. Determining nominal party status is a
practical inquiry, focused on the particular facts and
circumstances of a case, which district courts can be relied
upon to apply with the same sound judgment demonstrated in this
action. See Shaughnessy v. Pedreiro, 349 U.S. 48, 54 (1955)
(noting that party status is determined by “practical
considerations”). Any venture into hypotheticals in which
nominal party status may or may not obtain would only complicate
and frustrate a trial court’s straightforward inquiry: whether
the non-removing party has an interest in the outcome of the
case.
B.
Hartford, one of Hammonds’s insurers, contends that
Hammonds is not a nominal defendant. It argues that Hammonds has
11
an interest in the contribution action because the allocation
between insurers could affect Hammonds’s future coverage limits.
Furthermore, Hartford claims that Hammonds asserted that
interest, foreclosing the possibility that it is a nominal
party. Finally, Hartford states that it has an interest of its
own in binding Hammonds in this judgment to prevent any
“whipsaw” effect down the road. 3
We find no reason to overturn the district court on this
issue. Hammonds does not possess a sufficient stake in this
proceeding to rise above the status of a nominal party. As a
result, its consent is not needed to remove this action to
federal court.
Hammonds’s interest would of course be more than nominal if
Hartford could provide a reasonable basis to believe that
Hammonds would be affected by the outcome of the case. See Shaw,
994 F.2d at 369. But Hartford cannot make any such showing. It
seeks no monetary judgment against Hammonds, nor does it seek
3
Hartford also argues that Hammonds is a necessary party
for purposes of the South Carolina Uniform Declaratory Judgments
Act. Federal courts sitting in diversity apply federal
procedural law and state substantive law. See Gasperini v. Ctr.
for Humanities, Inc., 518 U.S. 415, 427 (1996). We treat a state
court declaratory action that is removed as invoking the Federal
Declaratory Judgment Act, 28 U.S.C. § 2201. See Jones v. Sears
Roebuck & Co., 301 F. App'x 276, 281 n.12 (4th Cir. 2008).
Consequently, South Carolina law does not govern the nominal
party determination.
12
any non-declaratory injunctive relief. All of the claims against
Hammonds that underlie this action have been settled.
Furthermore, no party seeks any monetary or non-declaratory
injunctive relief from Hammonds in the North Carolina Action. As
a result, there is absolutely no reason to believe that Hammonds
will be affected by the eventual judgment here.
If Hammonds’s stake were more than nominal, its absence
from the proceeding would render a final judgment unfair to one
or more of the parties. See Tri-Cities Newspapers, 427 F.2d at
327. Here, that is clearly not the case. The underlying Concord
West Action has been settled and all other claims regarding the
Concord West Project have been dismissed. The present suit is a
pure contribution action; Hartford asks only for a declaration
of the respective shares of the other insurers of the one-
million-dollar Concord West Action settlement and for
reimbursement of any potential overpayment. It seeks nothing
from Hammonds. Were Hammonds not included in this action, it
would have no effect on Hartford’s ability to be made whole by
the other insurers. Hammonds’s absence would not prevent the
court from “be[ing] able to enter a final judgment in favor of
the plaintiff . . . without otherwise materially circumscribing
the relief due.” Blue Mako, Inc. v. Minidis, 472 F. Supp. 2d
690, 696 (M.D.N.C. 2007). Hammonds essentially has no dog in
this fight.
13
Hartford argues that were Hammonds not included as a
defendant, Hartford might indeed be deprived of due relief
because of what it calls a “whipsaw” effect. Under this
scenario, Hartford would first need to be found liable for the
entire one million dollars at issue in this suit. Then Hammonds,
were it not included as a defendant and therefore not bound by
the judgment, would have to allege in some other suit that some
of the one-million-dollar settlement was allocable to other
insurers in other policy periods. Consequently, Hammonds could
contend that it would not have reached the limits of its policy
with Hartford. If Hammonds succeeded in this argument (doubtless
years down the road), it could then attempt to claim additional
money from Hartford within its policy limit, and -- if and only
if the one-million-dollar settlement had exhausted the limits of
the policy -- force Hartford to pay beyond the limits of the
policy.
To lay out this scenario is to make apparent just how
speculative it is. Hartford has provided no information in the
record, such as relevant policy limits or settlement amounts in
other cases, to suggest that this parade of events has any real
possibility of transpiring. District courts, tasked with
resolving quickly and cost-effectively the concrete disputes
14
before them, should not be forced to push the far edges of
conjecture as they deal with the threshold question of removal. 4
C.
The nominal party exception helps to preserve the adversity
that is central to our system of justice. See Flast v. Cohen,
392 U.S. 83, 96-97 (1968); Shenandoah Valley Network v. Capka,
669 F.3d 194, 201-02 (4th Cir. 2012). Normally, one party seeks
relief from another in a suit. Here, however, plaintiff Hartford
is asserting no interest adverse to defendant Hammonds, let
alone requesting relief from it. This case is particularly odd
because the plaintiff, Hartford, attempts to assert what is, by
any measure, defendant Hammonds’s highly speculative interest.
Although it is not at all unusual for insurers to represent the
interests of their insureds, it is unusual for them to assert
this speculative an interest after the duties to defend and
indemnify have already been satisfied.
If we found Hammonds’s consent a condition for removal, we
would encourage the inclusion of party defendants for purely
4
Hartford points to Schlumberger Industries, Inc. v.
National Surety Corp., 36 F.3d 1274, 1286-87 (4th Cir. 1994), to
support its whipsaw argument. Schlumberger did not deal with the
nominal party exception to the rule of unanimity required for
removal to federal court. Instead, it addressed the joinder of
insurers as necessary and indispensable parties under Federal
Rule of Civil Procedure 19. That is a different question from
what we have here, meaning that Schlumberger does not control.
15
instrumental purposes. The resulting cases might contain none of
the adversity that typically extends across the v. Such a
decision would allow plaintiffs to forum shop between state and
federal court in a manner that § 1441 was not intended to
permit. A defendant with no palpable interest in the case could
defeat the rights of those with a real stake. It would exalt
form over substance instead of protecting congressional intent
regarding the removal process. See Kolibash v. Comm. on Legal
Ethics of W. Va. Bar, 872 F.2d 571, 576 (4th Cir. 1989)
(cautioning against elevating form over substance in the removal
context). 5
We emphasize that we make no categorical rules regarding
insureds in this case. There may well be instances in which the
interest of an insured would prevent removal by an insurer. What
we adopt is a simple, straightforward inquiry for determining
nominal party status that cuts across subject matter. The
outcome of that inquiry depends upon the facts. Here, absent a
5
Hartford relies heavily on Hammonds’s belated and
conclusory assertion of interest in a filing below to claim that
Hammonds is an interested party. First, it is worth noting that
Hammonds had numerous opportunities at every stage of this
proceeding to assert its interest more affirmatively and
directly, whether by moving to remand, joining in the briefing
below, or by appealing to this court. It did none of these.
Furthermore, if we allowed a conclusory statement of interest to
determine the nominal party question, we would open the door to
precisely the type of gamesmanship at the pleading stage that
the nominal party tests endeavor to prevent.
16
demonstration of any palpable interest Hammonds possesses in the
outcome of the case, we find that Hammonds is a nominal party
and need not consent to the removal of this action to federal
court.
III.
The judgment of the district court is affirmed.
AFFIRMED
17