Eleventh Circuit Aces Civil Procedure Exam in Thermoset Corp.

Eleventh Circuit Aces Civil Procedure Exam in Thermoset Corp.

Steven Zavodnick*

Acting sua sponte, the Eleventh Circuit reaffirmed the maxim that federal courts are courts of limited subject matter jurisdiction and vacated the district court’s order of summary judgment to the defendants in Thermoset Corp. v. Building Materials Corp. of America, 849 F.3d 1313, 1315 (11th Cir. 2017).

Thermoset Corp. (“Thermoset”) purchased roofing materials manufactured by Building Materials Corp. (“BMC”) and distributed by Roofing Supply Group Orlando (“RSGO”) for installation at a Bahamian airport. Id. at 1315. Because the airport is located in hurricane country, the roofing materials were required to meet wind velocity requirements. Employees of both BMC and RSGO assured Thermoset that its product met these specifications. Id. at 1316. Soon after the roofing system was installed, Tropical Storm Nicole caused significant damage to the airport’s roof despite wind speeds far below speeds the roofing system was warranted to withstand. Id. Thermoset’s demands for remuneration for its repairs to the damaged roof fell on deaf ears, so it sued both BMC and RSGO in Florida state court for breach of express and implied warranty negligent misrepresentation. Id.

BMC removed the case to federal court by invoking the court’s diversity of citizenship jurisdiction. Id. After discovery, BMC and RSGO jointly moved for, and were granted, summary judgment, and Thermoset appealed. Id. But before the Eleventh Circuit had the chance to review the lower court’s decision on its substantive merits, it noticed that the parties’ pleadings did not adequately allege diverse citizenship. Id. Thermoset’s state of incorporation and principal place of business was Florida, BMC was incorporated in Delaware and had its principal place of business in New Jersey, and RSGO was incorporated in Delaware and had its principal place of business in Texas. Id. RSGO, however, was an LLC, and an LLC is a citizen of any state of which a member is a citizen. Id. (citing Rolling Greens MHP v. Comcast SCH Holdings, 374 F.3d 1020, 1022 (11th Cir. 2004)). Like Thermoset, one of RSGO’s members was a citizen of Florida, so the parties were not diverse, and the case should not have been removed.  Notwithstanding the lack of complete diversity, the defendants argued that the judgment should stand because 1) RSGO was a nominal party and should be disregarded for jurisdictional purposes; or in the alternative, 2) RSGO should be dismissed from the action pursuant to Federal Rule of Civil Procedure 21. Thermoset, 849 F.3d at 1317.

Although the parties agreed that both Thermoset and RSGO were citizens of Florida at the time of removal, the defendants argued that RSGO was not a real party in interest, so its non-diverse citizenship should not destroy federal jurisdiction. Id. Federal courts must disregard nominal parties and “rest jurisdiction only upon the citizenship of real parties to the controversy.” Id. (quoting Navarro Sav. Ass’n v. Lee, 446 U.S. 458, 461 (1980)). The court’s test for determining whether a party is nominal was whether, in the party’s absence, the court could enter a decision that would be fair and equitable to the plaintiff. Thermoset, 849 F.3d at 1317 (citing Tri-Cities Newspapers, Inc. v. Tri-Cities Printing Pressmen & Assistants’ Local 349, 427 F.2d 325, 327 (5th Cir. 1970)). Without RSGO, there was a significant risk Thermoset would be deprived of fair and equitable relief because Florida is not a joint-and-several liability state. Thermoset, 849 F.3d at 1318 (citing Fla. Stat. § 768.81(3)). If RSGO were absent at trial, BMC could blame Thermoset’s damages on the “empty chair” vacated by RSGO. Furthermore, although RSGO played no part in the warranty, design, and manufacture of the allegedly faulty roof system, under Florida law, RSGO could be liable to Thermoset for breach of the implied warranty of merchantability. Thermoset, 849 F.3d at 1318. Lastly, BMC’s contractual indemnification of RSGO for any losses arising from the sale of its roofing products would only kick in after an adverse judgment was entered against RSGO, which would be impossible if RSGO was not a party to the lawsuit. Id. For the preceding three reasons, the court concluded that RSGO was a real party in interest because it could not “demonstrate that its absence would not have created any risk of inadequate relief” for the plaintiff, Thermoset. Id. 

Federal Rule of Civil Procedure Rule 21 gives federal courts the power to dismiss a non-diverse party to preserve its jurisdiction. Fed. R. Civ. P. 21. It is to be used “only if no party will be prejudiced by the dismissal.” Id. 1319 (quoting Molinos Valle Del Cibao v. Lama, 633 F.3d 1330, 1343 (11th Cir. 2011)). To determine prejudice in this context, courts first assess whether the non-diverse party is “indispensable” under Federal Rule of Civil Procedure 19. Molinos, 633 F.3d at 1343. If not, then the court determines whether the non-diverse party gave the other side a tactical advantage in the litigation. Id. at 1343–44.

The Eleventh Circuit concluded that RSGO was indispensable under Rule 19, so it did not need to move to the second factor in the Molinos test and, more importantly, it could not dismiss RSGO without prejudicing Thermoset. Thermoset, 849 F.3d at 1319. Under Rule 19’s two-step inquiry, the court first considered whether RSGO was a required party. Id. A party is required if “the court cannot accord complete relief among existing parties.”  Fed. R. Civ. P. 19(a)(1)(A). For the same reasons that the court concluded that RSGO was a real party in interest, it also determined that RSGO was required.  Thermoset, 849 F.3d at 1319.  Moving to section (b) of Rule 19, the court applied the rule’s four factors to determine that, in equity and good conscience, the suit could not continue without RSGO. Id.

To save their favorable judgment, BMC and RSGO argued that equity weighed against dismissal. Id. at 1320. They cited the Supreme Court’s decision in Caterpillar Inc. v. Lewis that stated “once a diversity case has been tried in federal court . . . considerations of finality, efficiency, and economy become overwhelming.” 519 U.S. 61, 75 (1996).  The Eleventh Circuit, however, distinguished Thermoset from Caterpillar because Thermoset was decided by summary judgment and not by jury verdict after a trial. Thermoset, 849 F.3d at 1321. The court determined that concerns over judicial efficiency would further be ameliorated by the Florida law that would allow the evidence developed in the federal proceeding to be reused in state court and the likelihood that Thermoset would sue RSGO in state court anyway if only RSGO—and not the entire lawsuit—was dismissed. Id.

*Steven Zavodnick is a member of the 2017-2018 Managing Board for Georgia Law Review.

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