Howery v. Allstate Ins Company

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 99-20878

ERROL P. HOWERY,

Plaintiff-Appellant,

versus

ALLSTATE INSURANCE CO.,

Defendant-Appellee.

Appeal from the United States District Court

for the Southern District of Texas

February 28, 2001

Before KING, Chief Judge, and HIGGINBOTHAM and DUHÉ, Circuit

Judges.

PATRICK E. HIGGINBOTHAM, Circuit Judge:

Errol Howery’s home burned down. When he demanded payment

from his insurer, Allstate Insurance Company, it refused, accusing

him of arson. Howery filed suit in Texas state court. After more

than two years, as the case was approaching trial, Allstate removed

this case to federal court, asserting federal question

jurisdiction. The district court denied Howery’s motion to remand.

After another year of litigation in federal court, a jury agreed

with Allstate.

Howery appealed, challenging federal subject-matter

jurisdiction and the district court’s refusal to remand. Because

Howery’s complaint does not raise a federal question and the record

fails to establish diversity of the parties, we vacate the judgment

of the district court and remand with instructions to dismiss for

lack of jurisdiction.

I

A

Errol Howery owned a townhome that he insured against fire

with Allstate Insurance Company. When Howery’s home burned down,

he filed a claim with Allstate. Allstate refused to pay, convinced

that Howery had committed arson.

On March 5, 1996, Howery filed suit against Allstate in a

state court of general jurisdiction in Texas. During the next two

and a half years, Howery filed ten amended complaints. Only in the

last was there any reference to federal law. In his Tenth Amended

Complaint, which he filed August 11, 1998, Howery mentioned for the

first time “Federal Trade Commission rules, regulations, and

statutes.”

Allstate filed a notice of removal on August 20, 1998,

asserting that Howery’s complaint raised a federal question.

Allstate did not allege the existence of diversity jurisdiction nor

state the citizenship of the parties.1 The case was removed to the

United States District Court for the Southern District of Texas.

After Howery deleted the reference to federal law in his complaint,

he moved for remand, which the district court denied. The court

1

Allstate alleged that the case was “not removable as originally

filed”—thereby disclaiming the existence of diversity.

2

also denied Howery’s subsequent motion to amend his complaint to

add federal claims.

The case proceeded on Howery’s claim of bad faith denial of

insurance coverage and breach of contract. The court granted

summary judgment for Allstate on the bad faith claim, and after

trial a jury sustained Allstate’s defense of arson. The court

entered judgment against Howery.

Howery filed an appeal of the judgment on September 3, 1999.

Howery argued that there was no federal question, and thus no

jurisdiction; he further argued that the district court abused its

discretion in refusing to remand the case to state court. Briefing

of the appeal was completed almost a year later, and oral arguments

were scheduled for January 8, 2001. At oral argument, counsel for

Allstate raised for the first time the issue of diversity

jurisdiction.

B

Howery’s tenth amended complaint is the center of the dispute

over federal question jurisdiction. It alleged, in relevant part:

The acts, omissions, and other wrongful conduct of Allstate

complained of in this petition constituted unconscionable

conduct or unconscionable course of conduct, and false,

misleading, or deceptive acts or practices. As such, Allstate

violated the Texas Deceptive Trade Practices Act, Sections

17.46, et seq., and the Texas Insurance Code, including

articles 21.21, 21.21-1, 21.55, and the rules and regulations

promulgated thereunder, specifically including 28 TAC Section

21.3, et seq. and 21.203.

. . .

Allstate’s destruction of [Howery’s] file . . . constituted a

further violation of the Texas Deceptive Trade Practices Act,

for which plaintiff sues for recovery. Allstate also engaged

3

in conduct in violation of the Federal Trade Commission rules,

regulations, and statutes by obtaining Plaintiff’s credit

report in a prohibited manner, a further violation of the

Texas Deceptive Trade Practices Act. . . .

As a further basis for this claim and further evidencing

Allstate’s statutory and common law violations, Howery would

show that Allstate has sought to profit from its denial of his

claim.

The complaint does not contain allegations of diversity or

lack of diversity. It states that Howery is a citizen of Texas,

but does not allege the citizenship of Allstate.

II

Federal courts are courts of limited jurisdiction.2 We must

presume that a suit lies outside this limited jurisdiction, and the

burden of establishing federal jurisdiction rests on the party

seeking the federal forum.3 In this case, Allstate invoked the

jurisdiction of the federal courts by removing Howery’s state court

case to federal court. Allstate must prove that federal

jurisdiction existed at the time of removal,4 or, at the very

least, have alleged facts prior to the entry of judgment in this

case that establish federal subject-matter jurisdiction.5 Without

2

Kokkonen v. Guardian Life Ins. Co. of America, 511 U.S. 375, 377 (1994).

3

Id.; see also Stafford v. Mobil Oil Corp., 945 F.2d 803, 804 (5th Cir.

1991) (“The burden of proving that complete diversity exists rests upon the party

who seeks to invoke the court’s diversity jurisdiction.”) (quoting Getty Oil

Corp. v. Ins. Co. of N. Am., 841 F.2d 1254, 1259 (5th Cir. 1988)).

4

See Texas Beef Group v. Winfrey, 201 F.3d 680, 686 (5th Cir. 2000).

5

See Caterpillar Inc. v. Lewis, 519 U.S. 61, 73, 75 (1996); H&D Tire &

Automotive-Hardware, Inc. v. Pitney Bowes Inc., 227 F.3d 326, 328 (5th Cir. 2000)

(“Even if a court lacks jurisdiction at the time of removal and regardless of

whether there was an objection to the removal, the judgment will stand if the

court had jurisdiction at the time it entered judgment. If, however, the court

4

the presence of such facts in the record, a federal court does not

have jurisdiction over the case.6

It is true that Caterpillar v. Lewis7 holds that improper

removal does not automatically nullify a subsequent federal court

judgment when the record establishes that the defect in federal

jurisdiction was cured before judgment,8 but Caterpillar merely

forgives “untimely compliance” with the removal statute;9 it still

requires that jurisdiction be established by the time judgment was

entered.10 We therefore examine the record of this case to

determine whether the facts or allegations in the record establish

the existence of subject-matter jurisdiction at the time of removal

or, at the latest, at the time of judgment. At the same time, we

need not address the denial of the motion to remand if the district

court lacked subject-matter jurisdiction.

lacked jurisdiction both at the time of removal and judgment, the judgment cannot

stand.”) (citations omitted); Texas Beef Group, 201 F.3d at 686.

6

See B., Inc. v. Miller Brewing Co., 663 F.2d 545, 548 (5th Cir. Unit A

1981) (“Where a federal court proceeds in a matter without first establishing

that the dispute is within the province of controversies assigned to it by the

Constitution and statute, the federal tribunal poaches upon the territory of a

coordinate judicial system, and its decisions, opinions, and orders are of no

effect.”).

7

519 U.S. 61 (1996).

8

Id. at 64.

9

Lexecon Inc. v. Milberg Weiss Bershad Hynes & Lerach, 523 U.S. 26, 43

(1998).

10

See Caterpillar, 519 U.S. at 76-77 (“[I]f, at the end of the day and

case, a jurisdictional defect remains uncured, the judgment must be vacated. .

. . In this case, however, no jurisdictional defect lingered through judgment

in the District Court.”).

5

III

A

We first consider federal question jurisdiction. Federal

district courts have jurisdiction over cases “arising under the

Constitution, laws, or treaties of the United States.”11 In

determining whether a case “arises under federal law” we look to

whether the “plaintiff’s well-pleaded complaint raises issues of

federal law.”12

The general rule for determining whether a case raises a

federal question was announced by Justice Holmes in American Well

Works Co. v. Layne & Bowler Co.13: a “suit arises under the law that

creates the cause of action.”14 This famous formulation actually

serves better to include than to exclude federal cases,15 however,

in that claims created by state law often incorporate federal

standards or require the interpretation of federal law. That is,

the claim arises from state law but may turn on a question of

11

28 U.S.C. § 1331 (2000).

12

City of Chicago v. Int’l College of Surgeons, 522 U.S. 156, 163 (1997)

(quoting Metropolitan Life Ins. Co. v. Taylor, 481 U.S. 58, 63 (1987)). Federal

question jurisdiction over a case removed from state court also depends on the

well-pleaded complaint rule. See Merrell Dow Pharmaceuticals Inc. v. Thompson,

478 U.S. 804, 808 (1986). “[T]he plaintiff’s well-pleaded complaint, not the

removal petition, must establish that the case arises under federal law.” Willy

v. Coastal Corp., 855 F.2d 1160, 1165 (5th Cir. 1988). The burden of

establishing jurisdiction rests on the party seeking removal. See id. at 1164.

13

241 U.S. 257 (1916).

14

Id. at 260.

15

See Franchise Tax Bd. v. Constr. Laborers Vacation Trust for S. Cal.,

463 U.S. 1, 9 (1983).

6

federal law embedded in the matrix of state law. But when this

federal question will sustain “arising under” jurisdiction is the

question. These cases are not answered by Holmes’s formulation.

In Gully v. First National Bank in Meridian,16 Justice Cardozo

offered one answer: “To bring a case within the [federal question

jurisdiction] statute, a right or immunity created by the

Constitution or laws of the United States must be an element, and

an essential one, of the plaintiff’s cause of action. The right or

immunity must be such that it will be supported if the Constitution

or laws of the United States are given one construction or effect,

and defeated if they receive another.”17 This was later refined in

Franchise Tax Board,18 which insisted that the embedded federal

question be substantial.19 Under American Well Works,

a complaint creates federal question jurisdiction when it states a

claim created by the Constitution or laws of the United States.

Under Gully and Franchise Tax Board, the complaint also creates

federal question jurisdiction when it states a cause of action

created by state law and (1) a federal right is an essential

16

299 U.S. 109 (1936).

17

Id. at 112 (citations omitted).

18

Franchise Tax Bd. v. Constr. Laborers Vacation Trust for S. Cal., 463

U.S. 1 (1983).

19

Id. at 13 (“[O]riginal federal jurisdiction is unavailable unless it

appears that some substantial, disputed question of federal law is a necessary

element of one of the well-pleaded state claims.”); see also Willy v. Coastal

Corp., 855 F.2d 1160, 1168 (5th Cir. 1988).

7

element of the state claim, (2) interpretation of the federal right

is necessary to resolve the case,20 and (3) the question of federal

law is substantial. Ultimately, whether a federal issue embedded

in the matrix of a state law claim will support federal question

jurisdiction entails a pragmatic assessment of the nature of the

federal interest at stake—a view embraced by two giants in this

field.21 Allstate argues that Howery’s complaint states a claim

created by federal law. In the alternative, Allstate claims that

Howery’s reference to federal law creates federal question

jurisdiction under Gully and Franchise Tax Board.

B

Allstate first argues that by mentioning the rules,

regulations, and statutes of the FTC, Howery is stating a claim

under the federal Fair Credit Reporting Act.22 A fair reading of

the complaint, however, makes clear that it was not invoking the

FCRA to state a federal claim. Howery’s mention of the FTC rules,

regulations, and statutes falls in the middle of a list of alleged

Allstate actions that Howery alleged were “further violation[s]” of

the Texas Deceptive Trade Practices Act.23 From its context, it

20

Even if a federal right is an element of the state claim, if differing

interpretations of the federal right would not affect the outcome of the case,

there is no federal question jurisdiction.

21

See David L. Shapiro, Jurisdiction and Discretion, 60 N.Y.U. L. Rev.

543, 568-69 (1985); Charles Alan Wright, Law of Federal Courts § 17, at 96 (4th

ed. 1983).

22

See 15 U.S.C. § 1681 et seq. (2000).

23

Tex. Bus. & Com. Code § 17.41 et seq. (2001).

8

appears that Howery’s mention of federal law merely served to

describe types of conduct that violated the DTPA, not to allege a

separate cause of action under the FCRA. This conclusion is

bolstered by the fact that the complaint explicitly alleges that

Allstate violated specific sections of the DTPA and Texas Insurance

Code and regulations, but makes no explicit mention of any specific

federal statute or regulation.

C

Federal jurisdiction is sustainable then only if Howery’s DTPA

claim requires resolution of a substantial question of federal law.

Allstate must show that (1) a federal right is an essential element

of Howery’s state claim, (2) interpretation of the federal right is

necessary to resolve the case, and (3) the question of federal law

is substantial. Allstate fails all three prongs of the test.

First, no federal right is an essential element of Howery’s

DTPA claim. The DTPA forbids a wide range of conduct, prohibiting

“[f]alse, misleading, or deceptive acts or practices in the conduct

of any trade or commerce”24 and enumerating a long list of specific

practices that violate the DTPA.25 Conduct that violates the FCRA

could possibly fall within the broad scope of the DTPA. But a

24

Tex. Bus. & Com. Code § 17.46(a).

25

Tex. Bus. & Com. Code § 17.46(b). The private right of action under the

DTPA is limited to recovery for injuries caused by conduct listed in this

subsection. See Tex. Bus. & Com. Code § 17.50.

9

violation of the FCRA is not an element of the DTPA; the statute

itself explicitly disclaims such a construction.26

Second, interpretation of a federal right is not necessary to

this case. Since no federal right is an element of Howery’s state

claim, no federal right needs to be interpreted. Even if a

violation of the FCRA were an element of a DTPA claim, Howery’s

complaint alleges that the FCRA violation is one of many alternate

grounds for finding a violation of the DTPA. As an alternate

theory supporting a single claim, the federal question is not a

necessary element of the state claim, and thus does not create

federal question jurisdiction. The Supreme Court has employed this

reasoning in the patent context in Christianson v. Colt Industries

Operating Corp.27

Allstate argues that Christianson is no longer the law.28 We

disagree. Christianson’s principle that a suit does not create

federal question jurisdiction when the federal question appears

only in an alternative argument for relief flows directly from the

holding in Gully that interpretation of the federal question must

be necessary to resolve the case. This principle recognizes that

26

“A violation of a provision of law other than this subchapter [the DTPA]

is not in and of itself a violation of this subchapter.” Tex. Bus. & Com. Code

§ 17.43.

27

486 U.S. 800, 809-810 (1988).

28

Allstate argues that Christianson should be confined to apply only to

its specific context in the area of patent law. This court has already rejected

such a narrow reading of Christianson. See Willy v. Coastal Corp., 855 F.2d 1160,

1170-71 (5th Cir. 1988) (applying Christianson to a non-patent law context).

10

Gully defines and narrows the class of cases in which there is

federal question jurisdiction when a claim arises from state law.29

An expansive interpretation of the federal question statute to

allow federal courts to assert jurisdiction over cases with

tangential and inessential federal components would step upon the

authority of state courts to decide state law and ignore the

capacity of state courts to decide questions of federal law. It

would allow a federal tail to wag the state dog. Franchise Tax

Board recognized as much with its insistence that the federal

question be substantial before a federal court takes jurisdiction

over a case stating only state law claims.30

Third, for reasons that are now wholly evident, the federal

question in this case is not “substantial.” The state law issues

overwhelm the federal law issues. No federal question jurisdiction

exists in this case.

IV

Allstate did not suggest the presence of diversity

jurisdiction until almost five years after Howery filed suit; and

it never raised the issue before the district court. It is true

that subject-matter jurisdiction cannot be created by waiver or

consent. It is equally true that federal courts must address

29

See Oliver v. Trunkline Gas Co., 796 F.2d 86, 88 (5th Cir. 1986)

(characterizing Franchise Tax Board as describing “narrow exceptions” to the rule

of American Well Works).

30

See Franchise Tax Board, 463 U.S. at 13.

11

jurisdictional questions whenever they are raised and must consider

jurisdiction sua sponte if not raised by the parties.31

The parties have rights to choice of forum. Exercising that

right should carry no pejorative cost of “forum shopping.” That

said, that Allstate did not remove for reason of diversity at the

outset was either an inadvertence or a tactical decision. Either

way, Allstate is not an attractive beneficiary of a last minute

save of jurisdiction. If that circumstance controlled the

decision, it is easily answered. But that is not the teaching of

Caterpillar.32 Rather, our concern is to bring an end in the most

efficient way possible to this case, if the federal courts have the

power to do so.33

The burden of establishing federal jurisdiction rests on the

party seeking the federal forum. For diversity jurisdiction, the

party asserting federal jurisdiction must “distinctly and

affirmatively allege[ ]” the citizenship of the parties.34 “Failure

adequately to allege the basis for diversity jurisdiction mandates

31

Kidd v. Southwest Airlines, Co., 891 F.2d 540, 546 (5th Cir. 1990).

32

See Caterpillar v. Lewis, 519 U.S. at 75-78.

33

See id. at 77 (“To wipe out the adjudication postjudgment, and return

to state court a case now satisfying all federal jurisdictional requirements,

would impose an exorbitant cost on our dual court system, a cost incompatible

with the fair and unprotracted administration of justice.”).

34

Stafford, 945 F.2d at 804 (quoting McGovern v. American Airlines, Inc.,

511 F.2d 653, 654 (5th Cir. 1975)); see also Whitmire v. Victus Limited T/A

Master Design Furniture, 212 F.3d 885, 887 (5th Cir. 2000); Getty Oil Corp. v.

Ins. Co. of N. Am., 841 F.2d 1254, 1259 (5th Cir. 1988) (noting that the rule

that citizenship must be distinctly and affirmatively alleged requires “strict

adherence”).

12

dismissal.”35 Allstate thus bears the burden of establishing

diversity; if it fails to meet that burden, we cannot presume the

existence of federal jurisdiction.

Allstate has never pleaded diversity of the parties. It

suggested that the parties were diverse for the first time at oral

argument before this court. We nonetheless will overlook

Allstate’s failure to plead diversity if Allstate can identify

allegations and evidence in the record demonstrating diversity.

This court allows parties to cure “technical defects or failure to

specifically allege the citizenship of a party . . . in the

appellate courts,”36 but only when the amendment “would do nothing

more than state an alternative jurisdictional basis for recovery

upon the facts previously alleged.”37 In other words, when the

record establishes the diversity of the parties, but the party

asserting federal jurisdiction has failed to specifically plead

that the parties are diverse, we allow that party to amend its

pleadings to correct for their technical deficiency.38 Yet, if

there is no evidence of diversity on the record, we cannot find

35

Stafford, 945 F.2d at 805.

36

Whitmire v. Victus Limited T/A Master Design Furniture, 212 F.3d 885,

888 (5th Cir. 2000).

37

Id. (emphasis added and internal quotation marks omitted).

38

See Stafford, 945 F.2d at 805-06; 28 U.S.C.A. § 1653 (2000).

13

diversity jurisdiction, and we must dismiss the action for lack of

jurisdiction.39

Allstate argues that the record establishes that Howery and

Allstate are diverse. It points to the federal pretrial order; to

Allstate’s answers to Howery’s amended complaints in federal court;

and to Allstate’s Certificate of Counsel with Notice of Disclosure

of Interested Persons, which it filed with its Notice of Removal.

The federal pretrial order makes no statements about the

citizenship, place of incorporation, or principal place of business

of Allstate. It merely states that Howery is a resident of

Houston, Texas, and that Allstate has subjected itself to the

personal jurisdiction of the court.

Allstate’s answers to Howery’s federal complaints specifically

deny the allegations of Howery’s complaints that Allstate “is a

domestic insurance carrier.” They admit the allegation that Howery

is a citizen of Texas. They make no other statements relevant to

diversity jurisdiction.

39

See Stafford, 945 F.2d at 806. Allstate asserted at oral argument that

our cases allow parties to present evidence in support of jurisdictional claims

on appeal. This is incorrect. As we have explained above, facts establishing

jurisdiction must have been alleged at the time judgment was entered. The case

cited by Allstate, Whitmire, 212 F.3d at 888, says as much. See also

Caterpillar, 519 U.S. at 76-77; cf. Getty Oil Corp. v. Ins. Co. of North America,

841 F.2d 1254, 1260 (5th Cir. 1988) (remanding to district court to rule on the

existence of diversity jurisdiction in the first instance, given that the record

was unclear). Of course, prior to judgment, a party may amend its pleadings to

allege omitted jurisdictional facts. See, e.g., D.J. McDuffie, Inc. v. Old

Reliable Fire Ins. Co., 608 F.2d 145, 146 (5th Cir. 1979) (affirming a finding

of diversity jurisdiction when the defendant, prior to judgment, amended its

removal petition to specifically allege the citizenship of the parties).

14

Allstate’s Certificate of Counsel with Notice of Disclosure of

Interested Persons lists Allstate as an interested person and

provides an Illinois address.40 It states that Allstate was formed

and incorporated under the laws of Illinois. It also notes that

“[t]he Texas Department of Insurance characterizes Allstate

Insurance Company as a foreign, stock, casualty and property

insurance company.” It makes no other statements relating to

jurisdiction.

As a corporation, Allstate is a citizen of two states: its

state of incorporation, and the state of its principal place of

business.41 The portions of the record cited by Allstate establish

that Howery is a citizen of Texas and that Allstate is incorporated

in Illinois, and thus a citizen of Illinois. This is not the end

of the inquiry, however. Diversity of parties must be complete,42

and therefore Allstate must establish that Allstate’s principal

place of business is not Texas.

Determining a corporation’s principal place of business is a

factual inquiry dependent on a number of factors. The “total

activity” test that this circuit applies is expounded upon at

40

It also lists Howery and provides a Texas address.

41

See 28 U.S.C. § 1332(c)(1) (2000).

42

See Lowe v. Ingalls Shipbuilding, A Div. of Litton Systems, Inc., 723

F.2d 1173, 1177 (5th Cir. 1984); see also Strawbridge v. Curtiss, 7 U.S. (3

Cranch) 267, 267 (1806).

15

length in J.A. Olson Co. v. City of Winona.43 This test is a

synthesis of the “place of activity” and “nerve center” tests some

courts have employed.44 Essentially, “[w]e look to the nature,

location, importance, and purpose of a corporation’s activities and

the degree to which those activities bring the corporation into

contact with the local community.”45

The record in this case lacks such evidence of Allstate’s

principal place of business. The portions of the record cited by

Allstate prove only (1) that Allstate has a mailing address in

Illinois and (2) that Allstate is a “foreign” insurance company, as

designated by the Texas Department of Insurance. Unfortunately for

Allstate, the designation “foreign” by the Texas Department of

Insurance merely indicates that the company was incorporated in

another state.46 From the record, we have no inkling as to

Allstate’s principal place of business.

43

818 F.2d 401, 404-10 (5th Cir. 1987).

44

See id. at 406, 409.

45

See Nauru Phosphate Royalties, Inc. v. Drago Daic Interests, Inc., 138

F.3d 160, 164 (5th Cir. 1998).

46

See Tex. Ins. Code art. 3.01 § 6 (defining “foreign company”). In our

own review of the record, we find indirect disavowals of diversity jurisdiction

by Allstate. In its removal-related motions, Allstate repeatedly asserts that

there was no basis for removal until Howery filed his tenth amended complaint.

This claim necessarily implies the absence of diversity jurisdiction. By taking

this position, Allstate avoided a remand to state court based on its failure to

remove the case within thirty days of the filing of Howery’s original complaint.

See 28 U.S.C. § 1446(b) (2000) (prohibiting removal more than thirty days after

the filing of a pleading that states a removable case).

16

Whether for tactical reasons or out of mere inadvertence,

Allstate has failed to plead or to present evidence of diversity of

the parties at any point in this case’s odyssey through state and

federal court. The record fails to establish federal jurisdiction

at either the time of removal or at the time of judgment.

V

Howery’s tenth amended complaint does not raise a federal

question that will support federal question jurisdiction. The

record does not contain allegations or evidence of diversity of the

parties. We then lack jurisdiction over this case and we need not

address Howery’s challenge to the district court’s refusal to

remand. We VACATE the judgment of the district court and REMAND

this case to the district court with instructions to DISMISS the

case for lack of jurisdiction.

17