In Thermoset Corp. v. Bldg. Materials Corp of Am., No. 15-13942, 2017 WL 816224, at *1 (11th Cir. Mar. 2, 2017), the Eleventh Circuit provided a reminder to everyone that a court can decide its subject matter jurisdiction at any time, even after judgment. And it provided a reminder that before asserting diversity jurisdiction, a party should make sure that all of the parties are truly diverse.
The facts of the case are fairly straightforward. In 2005, Thermoset Corporation, a roofing contractor, entered a contractor agreement with GAF Materials Corporation, a manufacturer of roofing products and systems, which enabled Thermoset to use GAF’s products on various jobs. Id. After Thermoset had developed a working relationship with GAF’s representatives, Thermoset was hired to install a roof system at an airport in Nassau, Bahamas. The Bahamas project had to satisfy certain requirements related to the Bahamian climate, including specifications built to withstand specific wind velocities and uplift pressures. Thermoset asked GAF if it manufactured a roof system that fit these specifications, and GAF recommended the “TPO system.” Id. Thermoset also discussed the TPO system and project requirements with Roofing Supply Group Orlando (“RSGO”), a distributor of GAF roofing products. Thermoset claimed it relied on recommendations from both RSGO and GAF in buying the roofing materials and components for the TPO system from RSGO. Id.
Thermoset began work on the project in March 2010, but the TPO system soon experienced serious malfunctions due to the detachment of the system’s outer membrane from the insulation, even though the roofing system was required by the specifications to withstand stronger wind velocities. Id. Thermoset claims it made demands from GAF and RSGO for compensation and assistance with repairs that went unanswered. Therefore, Thermoset eventually filed suit against both entities in Florida state court alleging it incurred losses upwards of $1 million. Id. at *2. Thermoset asserted claims for breach of warranty, negligent misrepresentation, and violation of Florida’s Deceptive and Unfair Trade Practices Act. Id.
On February 3, 2014, GAF removed the case to the United States District Court for the Southern District of Florida, invoking the federal court’s diversity jurisdiction. Id. After discovery, the defendants jointly moved and were granted summary judgment, and Thermoset appealed. On appeal, the court noticed that the pleadings below did not sufficiently allege the citizenship of RSGO, a limited liability company. Id. Because a limited liability company is a citizen of any state of which a member of the company is a citizen, the pleadings were required to provide the citizenship of each member of RSGO. The court raised this jurisdictional issue with the parties, and discovered that RSGO was not diverse at the time of removal because one of its members, like Thermoset, was a citizen of Florida. Therefore, the District Court did not have diversity jurisdiction over the action. Id.
However, the court recognized that federal courts must disregard “nominal or formal parties” to an action in determining whether jurisdiction exists Id. at *3. Therefore, if RSGO was a “nominal party,” the court could ignore its citizenship and exercise diversity jurisdiction over the entire action. To determine whether a party is “nominal,” the Eleventh Circuit examined “whether in the absence of the defendant, the Court can enter a final judgment consistent with equity and good conscience which would not be in any way unfair or inequitable to plaintiff.” Id. (quoting Tri–Cities Newspapers, Inc. v. Tri–Cities Printing Pressmen and Assistants’ Local 349, 427 F.2d 325, 327 (5th Cir. 1970)). Applying this analysis, the court determined that RSGO was more than a nominal defendant, primarily because its absence from the case at the time of removal “would have put Thermoset at risk of receiving inadequate relief.” Id. Florida is not a joint-and-several liability state. Therefore, a defendant’s liability in a product liability action is limited to damages proportional to its percentage of fault. If RSGO were not at trial, GAF could have argued that RSGO was responsible for Thermoset’s damages in order to limit its own liability, potentially leaving Thermoset with incomplete relief. Id. The court was not persuaded by defendants’ argument that RSGO should be categorized as “nominal” because GAF agreed to defend and indemnify RSGO for any losses resulting from an adverse judgment, since RSGO’s absence from trial would result in no opportunity for a jury to assess its liability in the first place, and the mere existence of an indemnity agreement did not eliminate the risk of inadequate relief. Id. The court also rejected defendants’ argument that RSGO was a nominal party because it played no active role in the alleged warranty, design, or manufacture of the roof system, because Thermoset pointed to evidence indicating that RSGO was in fact more than a mere middleman, and, even if its role were relegated to that of seller, it could be liable for some of Thermoset’s damages under certain breach of warranty theories of liability in Florida. Id.
Following similar reasoning, the court also found that it would not be proper to dismiss RSGO under Federal Rule of Civil Procedure 21 in order to preserve jurisdiction over the action. Dismissal of a non-diverse party under Rule 21 is proper only where no party would be prejudiced by the dismissal. To make the prejudice determination, the court examined whether RSGO was an “indispensable” party under Federal Rule of Civil Procedure 19. Under Rule 19’s two-step inquiry, the court first determined that RSGO was a “required party” because the court could not accord complete relief in RSGO’s absence. Id. at *4. Next, the court found that “in equity and good conscience,” the action should not proceed with RSGO. Among other equitable factors, the court considered that Thermoset would have an adequate remedy if the court dismissed the entire action, because it could continue its action against both GAF and RSGO in state court, where it initially filed the case. Id. at *5. The court also acknowledged defendants’ argument that the case had already been litigated to a final judgment so that considerations of finality, efficiency, and economy weighed against dismissal of the entire action. However, the court did not find this factor dispositive because the case had not gone to trial and at least some of the discovery obtained in the federal proceedings could be reused in state court. Id.
This opinion serves as a cautionary tale for defendants about the perils of removing an action to federal court on diversity grounds when the diversity of each of the parties is not firmly established. Of course, a court can dismiss a case at any time, and sua sponte, for lack of subject matter jurisdiction. However, for the defendants here—having already tasted the victory of a win on summary judgment—dismissal of the action carried particularly severe consequences. The fact that the diversity problem was first noticed by Circuit Court on appeal also raises the question of whether removed cases occasionally slip through the cracks and remain in federal court even though diversity does not technically exist. In either event, defendants should do their due diligence, consult the corporate citizenship rules, and verify the diversity of each party before alleging federal subject jurisdiction because, as the Eleventh Circuit has reminded us, remand can happen when you least expect it.