James G. Davis Construction Corp. v. Erie Insurance Exchange
Docket: Civil No. 12-2715 PJM
Court: District Court, D. Maryland; May 20, 2013; Federal District Court
James G. Davis Construction Corporation, a Virginia corporation with its principal business in Maryland, has filed a lawsuit against Erie Insurance Exchange, a Pennsylvania unincorporated association, for breach of contract concerning Erie’s refusal to cover Davis's legal defense costs in a Maryland tort lawsuit. Davis seeks both legal fees and indemnification through a declaratory judgment. Erie has moved to dismiss the case for lack of subject matter jurisdiction under Rule 12(b)(1).
The court highlights that a 12(b)(1) motion allows for fact-finding related to jurisdictional claims, enabling the court to review various forms of evidence without transforming the motion into a summary judgment. The plaintiff bears the burden of proving jurisdiction. In contrast, a 12(b)(6) motion assumes the truth of the plaintiff's allegations and is evaluated based solely on the pleadings. Erie’s motion did not clarify whether it was under 12(b)(1) or 12(b)(6), but the court interprets it as a 12(b)(1) motion due to Erie's challenge of Davis's assertion that Erie is a 'corporation' and the evidence presented regarding its business structure.
Federal jurisdiction requires complete diversity of citizenship, meaning no plaintiff can share a state of citizenship with any defendant, and the amount in controversy must exceed $75,000. Individuals are citizens of their domicile, corporations are citizens of their incorporation and principal place of business, while unincorporated associations are deemed citizens of the states where their members reside.
Erie is classified as an unincorporated association, meaning its citizenship for federal diversity jurisdiction is determined by its members, according to the precedent set by True v. Robles. The jurisdictional issue hinges on the definition of Erie's 'members.' Erie claims its policyholders are its members, creating common citizenship with Davis, which eliminates complete diversity. Conversely, Davis argues that Erie's citizenship should be based on Pennsylvania, its state of formation, and that policyholders are merely customers, not members, which supports the presence of complete diversity.
This issue has caused a split in judicial opinions within the District: Judge Legg ruled that policyholders are customers, while Judges Davis and Quarles recognized them as members. The Fourth Circuit has not yet addressed this matter. The Court concludes that Erie’s members include its policyholders, necessitating complete diversity for federal jurisdiction.
Additionally, a reciprocal insurance exchange consists of subscribers who mutually insure one another, with each subscriber acting as both insurer and insured. Subscribers bear liability limited to their premium contributions, and the exchange operates through an attorney-in-fact for administrative functions. This structure reinforces the Court's view that policyholders, as members, are integral to the exchange, as they collectively assume both risks and responsibilities. When a policyholder sues the exchange, they effectively sue their fellow members.
Davis argues that under Maryland statutory law and the Fifth Circuit case Royal Insurance Co. of America v. Quinn-L Capital Corp., Erie’s underwriters should be considered its members, not its policyholders. The Court disagrees, stating that even if state law allows unincorporated associations to sue or be sued, the citizenship of all members must be assessed for federal diversity jurisdiction. Federal courts have consistently rejected the notion that an unincorporated association is only a citizen of its state of incorporation. The case of Royal is distinguished because it pertains to a Lloyd’s plan, which differs from a reciprocal insurance exchange like Erie. In a Lloyd's model, there is a clear separation between policyholders and underwriters, whereas in a reciprocal exchange, the participants serve as both insurers and insureds. Davis appears to believe Erie is attempting to circumvent federal diversity jurisdiction by claiming unincorporated association status, a sentiment echoed by some Congress members proposing changes to the diversity jurisdiction statute. Until such amendments are enacted, the Court finds it cannot exercise jurisdiction based on diversity in this case. The Motion to Dismiss is granted. Although the First Amended Complaint identifies Erie as a Pennsylvania corporation, it is acknowledged as an unincorporated association, which impacts diversity claims. Erie also contends that the lack of a specified amount in controversy undermines diversity jurisdiction, but this issue is moot due to the Court's decision on other grounds. Ultimately, subscribers or policyholders are customers, not members of the association, and merely entering into a contract does not confer membership. Davis's reliance on Maryland law is questioned, as both parties recognize Erie operates under Pennsylvania law.
