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ACA Financial Guaranty Corp. v. City of Buena Vista

United States District Court, W.D. Virginia, Lynchburg Division

December 19, 2017

ACA Financial Guaranty Corporation and UMB Bank, N.A., Plaintiffs,
v.
City of Buena Vista, Virginia, ET AL., Defendants.

          MEMORANDUM OPINION

          NORMAN K. MOON SENIOR UNITED STATES DISTRICT JUDGE.

         The plaintiffs in this case, a bank and a bond insurer, assert an enforceable obligation either in contract or tort against the defendants to receive repayment stemming from the refinancing of a municipal golf course. Before the Court is a Rule 12(b)(7) motion to dismiss for failure to join a necessary party. The motion relates to two deeds of trust executed in favor of plaintiff UMB Bank's predecessor. The deeds of trust pledged real estate as collateral in the event that the defendants (the City of Buena Vista, Virginia and its recreational authority) did not repay the bank. Defendants contend that the Trustees to the deeds are necessary parties whose presence is mandatory but would destroy the diversity jurisdiction of the Court.

         To prevail, Defendants must show that: first, the Trustees are necessary parties under Rule 19(a); second, their addition to the case would destroy complete diversity of citizenship; and third, the case cannot fairly proceed without the Trustees, per Rule 19(b).[1] The motion fails at the second step. The Trustees (who are Virginia citizens) should be added to this case as defendants. This leaves them on the same side of the case as the original Virginia defendants. Complete diversity is therefore preserved, and Defendants' Rule 12(b)(7) motion will be denied.

         This Court, in looking to Virginia law, previously held that the Trustees are necessary parties who “must, ” in the parlance of Rule 19(a), be joined. Dkt. 29, available at 2017 WL 3431592 (W.D. Va. Aug. 9, 2017); see Delta Fin. Corp. v. Paul D. Comanduras & Assocs., 973 F.2d 301, 305 (4th Cir. 1992) (holding that while federal standards ultimately govern, a “federal court must look to the state-law relationships between the parties when determining which parties are, as a practical matter, necessary for a just adjudication of the case.”). The next inquiry for Rule 12(b)(7) purposes, then, was whether adding the Trustees would jeopardize jurisdiction. The Court, however, previously lacked sufficient information to ascertain the Trustees' citizenship, so it ordered supplemental briefing on that and other issues bearing on the Rule 12(b)(7) motion. (Dkt. 30).

         The parties now agree that the Trustees are Virginians. (Dkt. 36 at 2; dkt. 37 at 1-2). So the question presented is: Should they be aligned as plaintiffs or defendants? Because Defendants are citizens of Virginia, see Complaint ¶¶ 3-4, aligning the Trustees as plaintiffs would destroy complete diversity and require a Rule 19(b) analysis to see if the case could proceed without them. On the other hand, if the Trustees are aligned as defendants, complete diversity remains (because Plaintiffs are citizens of Maryland, New York, and Missouri[2]), an indispensability analysis is unnecessary, and Defendants' motion to dismiss would fail.[3]

         When deciding how to align parties, the Fourth Circuit uses the “principal purpose test, ” which entails two steps. U.S. Fid. & Guar. Co. v. A & S Mfg. Co., 48 F.3d 131, 133 (4th Cir. 1995); see City of Indianapolis v. Chase Nat. Bank, 314 U.S. 63, 69-70 (1941). “First, the court must determine the primary issue in the controversy. Next, the court should align the parties according to their positions with respect to the primary issue.” A & S Mfg., 48 F.3d at 133.

         The Fourth Circuit has not provided an expansive explanation of how to identify a case's “primary issue.” Nonetheless, the “primary issue” inquiry is seen as a top-level summary of the claims rather than a discrete, narrow legal issue presented by the case. This point is best shown by considering how other courts have framed the matter.

• In a debt collection lawsuit by a phone company against a telephone customer, the plaintiffs primary purpose “was to collect [the customer's] debt.” Palisades Collections LLC v. Shorts, 552 F.3d 327, 337 (4th Cir. 2008).
• In a declaratory judgment action by an insurer against the insured and other insurers to determine which policies provided coverage for environmental liability, the Fourth Circuit concluded that the primary issue was whether the insurers owed the insured a duty to defend and a duty to indemnify. U.S. Fid. & Guar. Co. v. A & S Mfg. Co., 48 F.3d 131, 134 (4th Cir. 1995); see Lott v. Scottsdale Ins. Co., 811 F.Supp.2d 1220, 1224 (E.D. Va. 2011) (same).
• In a shareholder declaratory judgment derivative action to gain control of the company, the primary issue was whether the individual defendant “is a shareholder and/or has an interest” in the company. Gressette v. Sunset Grille, Inc., 447 F.Supp.2d 533, 536-37 (D.S.C. 2006).
• In a case filed to confirm an arbitration award terminating a sports ownership group from control over a team, the primary issue was “whether to confirm an arbitration award that terminated [defendant's] leave” from the league. Canadian Am. Ass'n of Prof'l Baseball, Ltd. v. Ottawa Rapidz, 686 F.Supp.2d 579, 588 (M.D. N.C. 2010).
• In a tort and contract case by a remediation company over unpaid invoices, the primary issue was the plaintiffs goal of receiving compensation for the work it performed. Ryan Envtl, Inc. v. Hess Oil Co., 718 F.Supp.2d 719, 728 (N.D. W.Va. 2010).

         In light of these authorities, the primary issue here is whether Defendants have breached various documents or acted tortiously by refusing to repay Plaintiffs for financing of a golf course. This framing accurately summarizes the heart of Plaintiffs' claims. Their “principal purpose for filing [this] suit, ” Palisades, 552 F.3d at 337, is to achieve to receive recompense in some form-such as payment, or possession and control of the encumbered property (or both)- for what Plaintiffs believe to be the City's wrongful refusal to appropriate funds. (E.g., Complaint ¶¶ 43-47, 60-64, 68-69, 71, 76, 88, 92, 97, 101, 108, 119, 131-35).

         Next, the Court must align the Trustees with respect to this issue. The Trustees are best understood as being adverse to Plaintiffs' purpose. The claims and relief they desire would upset the status quo in a way would largely oust (or at least diminish) the Trustees' usual role. For instance, by filing their lawsuit, Plaintiffs seek to have this Court decide whether the terms of the deeds of trust were breached, a determination which would ordinarily be left to the Trustees. (See Complaint ¶¶ 60, 62-63). Under § 4.4 of the deeds of trust, the Trustees have the power to adjudge whether the deeds of trust are satisfied and, if not, to: foreclose on the properties; repair and maintain them; and “manage and operate” them in order to make the payments Plaintiffs allege are owed. Yet Plaintiffs' lawsuit effectively asks the Court to assume the Trustees' role. (E.g., Complaint ¶¶ 71 (seeking permission “to enter, ...


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