A call for the end of the doctrine of realignment.

• Date: 01 December 2008
• Author: Sherkow, Jacob S.
• Published date: 01 December 2008
• Author: Sherkow, Jacob S.

In Indianapolis v. Chase National Bank, 1941, the Supreme Court established the doctrine of realignment, requiring federal courts to examine the issues in dispute and realign each party as plaintiff or defendant if necessary. Due to the complete diversity requirement, realignment gave the federal courts the ability to both create and destroy diversity jurisdiction. Since 1941, the federal courts have struggled to interpret the central holding in Indianapolis, and have created several competing "tests" for realignment. This confusion has made the doctrine of realignment unworkable. Realignment--along with each of the present tests--encourages jurisdictional abuses by forcing the federal courts to examine the merits of jurisdictionally questionable cases. The doctrine also discourages party joinder because parties fear jurisdictionally altering realignment. Rather than focusing on the language of Indianapolis and the current realignment tests, courts wary of improperly aligned pleadings should make use of newer jurisdictional statutes enacted after Indianapolis. In light of realignment's infirmity and the availability of newer, effective legislation, the federal courts should wholly abandon the doctrine of realignment.

TABLE OF CONTENTS INTRODUCTION I. THE LEGACY OF INDIANAPOLIS A. A Brief History of Diversity Jurisdiction B. Indianapolis v. Chase National Bank 1. The Indianapolis Gas Crisis of 1900 2. The Majority Opinion 3. Justice Jackson's Dissent C. The Schism Following Indianapolis 1. The Principal Purpose Test 2. The Substantial Controversy Test 3. Variants of Either Test II. REALIGNMENT ENCOURAGES, RATHER THAN PREVENTS, JURISDICTIONAL ABUSES A. Realignment Forces Courts to Address Difficult Questions of Substance Simply to Determine Easier Questions of Jurisdiction 1. The Principal Purpose Test 2. The Substantial Controversy Test B. Realignment Disincentivizes Efficient Party Joinder 1. Party Joinder 2. Claim Joinder C. Alternative Realignment Tests Fail for the Same Reason III. CURRENT JURISDICTIONAL STATUTES PROVIDE EXISTING SOLUTIONS TO THE PROBLEM OF REALIGNMENT A. 28 U.S.C. § 1359: Defining Realignment as an "Improper" Invocation of Jurisdiction B. 28 U.S.C. § 1332(c)(1): Expanding the Concept of a "Direct Action" Against Insurers to Ensure Incomplete Diversity CONCLUSION INTRODUCTION

Diversity jurisdiction has long been a bane of the federal judiciary. Since its inception, (1) jurists have regularly called for restrictions on its manufacture, imposed a number of judicially created barriers, and called for its general demise. (2) Indianapolis v. Chase National Bank may serve as the high water mark for such judicially created barriers. (3) In 1941, led by Justice Felix Frankfurter, the Supreme Court created a judicial remedy--realignment--in what was probably an effort to dispose of the most complex, multiparty cases whose access to the federal courts was based solely on the "accident" of complete diversity. To aid the federal judiciary in determining whether the specific alignment of parties was intended to "manufacture" complete diversity, the Court held as follows:

To sustain diversity jurisdiction there must exist an "actual," "substantial" controversy between citizens of different states.... Diversity jurisdiction cannot be conferred upon the federal courts by the parties' own determination of who are plaintiffs and who defendants. It is our duty, as it is that of the lower federal courts, to "look beyond the pleadings and arrange the parties according to their sides in the dispute." Litigation is the pursuit of practical ends, not a game of chess. Whether the necessary "collision of interests" exists, is therefore not to be determined by mechanical rules. It must be ascertained from the "principal purpose of the suit," and the "primary and controlling matter in dispute." (4) At its core, this holding gave the federal courts the power to control their own dockets. The Court's request that federal courts "'look beyond the pleadings and arrange the parties according to their sides in the dispute'" (5) possessed with it the ability to create and destroy complete diversity, and consequently, diversity jurisdiction. This is the "doctrine of realignment."

Despite close to three-quarters of a century of precedent, the precise contours of the doctrine of realignment remain unsettled. Currently, the Courts of Appeals are split on the proper application of Indianapolis. Perhaps finding the idea of "a transposition of parties" too "radical," (6) the Second, Seventh, and Eighth Circuits look only toward the first half of Indianapolis's holding, refusing to realign litigants as coparties where there is "an actual, substantial controversy between [them]." (7) The realignment of, or refusal to realign, coparties on the basis of a "substantial controversy" has become known as the "substantial controversy test." The Third, Fourth, Fifth, Sixth, and Ninth Circuits, as well as the District Court for the District of Columbia, however, read Indianapolis to require realigning the parties "in accordance with the primary dispute in the controversy, even where a different, legitimate dispute between the parties supports the original alignment." (8) The realignment of parties on the basis of a singular, principal purpose of a lawsuit has become known as the "principal purpose test." The First Circuit uses an amalgam of the two, (9) while courts within Tenth and Eleventh Circuits use yet another analysis. (10)

Sixty-seven years later, Indianapolis has had a perverse effect. The doctrine of realignment has created more room for the abuse of diversity jurisdiction, rather than less. The multitude of realignment tests and the current unsettled state of the law have done little to achieve the "practical ends" the Court so desperately sought in Indianapolis. Modern realignment, far from providing federal courts the power to control their dockets, has become fodder for "an imaginative lawyer [to] find some adversity between [the parties] to achieve federal jurisdiction or to defeat it in circumstances where diversity jurisdiction was intended to apply." (11) Clever litigants, especially insurance companies, have increasingly moved for realignment in order to create and destroy diversity jurisdiction as they see fit. (12) Today, almost half of realignment cases have one insurance company as a named party. (13) Commentators roundly reject the doctrine. (14) Despite the Indianapolis Court's admonishment that "[l]itigation is the pursuit of practical ends, not a game of chess," (15) its present-day result has been directly to the contrary.

This Note argues that federal courts should wholly abandon the doctrine of realignment in light of jurisdictional statutory enactments made since Indianapolis. Part I discusses the history behind diversity jurisdiction that colored the majority opinion in Indianapolis, and examines the current state of the doctrine of realignment. Part II criticizes both the principal purpose test and the substantial controversy test as procedurally defective and unsound as a matter of policy. In particular, Section II.A condemns both tests for delving too deeply into the merits of a lawsuit to resolve the jurisdictional question; Section II.B shows how the mechanics of either test discourage litigants from joining additional claims and parties; and Section II.C argues that a third realignment test seeking to avoid these traps would nevertheless fail for the same reasons. Part III proposes a solution: courts can use 28 U.S.C. § 1359, barring cases in which parties have been "improperly" joined, and 28 U.S.C. § 1332(c)(1), destroying complete diversity in "direct actions" against insurers, to curb abuses of diversity jurisdiction similar to those Indianapolis sought to eliminate. This Note concludes by calling for an end to the doctrine of realignment.

1. THE LEGACY OF INDIANAPOLIS

   Like other judicial jurisdictional remedies, the story of realignment is woven in the intellectual history of the power and purpose of the federal courts. Section I.A gives a brief account of the history of diversity jurisdiction. Section I.B analyzes the history of and the Court's opinion in Indianapolis, which gave root to the modern doctrine of realignment. Section I.C describes the modern schism resulting from courts' varied interpretations of Indianapolis.

   1. A Brief History of Diversity Jurisdiction

      Diversity jurisdiction has met loathing, in part, because it remains fairly unclear why the Framers included it the Constitution. The Records of the Federal Convention provide little guidance on its inclusion. (16) The only satisfactory historical explanation so far has been that the debt crisis of the 1780s made the Framers fearful that state courts would not allow out-of-state creditors to collect judgments from in-state debtors. (17) Federal jurisdiction was thought to rectify this problem by employing a jurist whose allegiances lay not to a particular state, but to the federal government. (18)

      This logic has become increasingly brittle today. (19) The worry that state court judges have a home-state bias has simply not held up empirically. (20) Further, there is no reason to believe that federal judges would be any more impartial toward out-of-state defendants than state court judges would be. "After all, federal judges, like state court judges, are drawn from the communities in which they live and work." (21) The practical realities of the federal judicial nomination process--befriending a Senator--bolster this counter-argument. (22)

      Perhaps because of this ambiguity, both Congress and the federal judiciary have sought to restrict the operation of diversity jurisdiction. Since its inception, Congress has successively restricted diversity jurisdiction by raising the amount-in-controversy requirement. (23) These enactments were made specifically "to check ... the rising caseload of the federal courts, especially with...