Scottsdale Insurance Company v. Flora Bioscience, Inc.

Background

Scottsdale Insurance Company brought an insurance-coverage action against Flora Bioscience, Inc., Robert Robbins, and Marc Stoll. Robbins and Stoll were members of Flora’s board of directors. Scottsdale sought a declaration that it did not have to defend or indemnify the defendants in a derivative lawsuit brought by Flora shareholder Terry Gross. Scottsdale relied on an “Insured v. Insured Exclusion” in its policy, which excluded coverage for claims brought by one insured against the company or another insured.

Robbins and Stoll moved to dismiss for lack of subject-matter jurisdiction or, alternatively, for failure to join an indispensable party. Scottsdale dismissed its claim against Robbins on October 16, 2023, one day before the motion to dismiss was filed.

Jurisdiction

The parties did not dispute that complete diversity was missing when Scottsdale filed its complaint. Scottsdale was incorporated in Ohio and had its principal place of business in Arizona. The court found that Robbins was a citizen of Arizona and had not been a California citizen since 2012. Because Scottsdale and Robbins were both Arizona citizens at filing, the original complaint did not satisfy the complete-diversity requirement under 28 U.S.C. § 1332.

The court held, however, that Scottsdale was entitled to dismiss its claims against Robbins to cure that original jurisdictional defect. The court explained that the time-of-filing rule has an exception allowing a dispensable nondiverse party to be dropped.

Rule 19 Analysis

The court then considered whether Robbins was a required party under Federal Rule of Civil Procedure 19. Rule 19 generally requires joining a person whose legally protected interest could be impaired by the person’s absence or whose absence could expose an existing party to inconsistent obligations. If the person cannot be joined without eliminating subject-matter jurisdiction, Rule 19(b) requires the court to decide whether the case should proceed or be dismissed in fairness and in the interests of justice.

The court found that Robbins had a legally protected interest because a ruling in the case could potentially prevent him from litigating the same insurance-coverage issue in a later California state-court proceeding. Robbins and Stoll were jointly insured under Scottsdale’s policy and had identical coverage claims. The court therefore concluded that Robbins was a necessary party because his ability to protect his insurance interests could be impaired if the case proceeded without him.

The court also found Robbins indispensable. Proceeding without him could substantially prejudice him because the lawsuit concerned his insurance interest and Scottsdale might use the court’s rulings in later litigation against him. By contrast, the court found Scottsdale’s prejudice from dismissal minimal because Scottsdale could sue Robbins and Stoll together in one state-court proceeding. The court concluded that fairness strongly favored resolving Scottsdale’s claims against both individuals in a single proceeding.

Disposition

The court granted Robbins and Stoll’s motion to dismiss on the failure-to-join basis. It ruled that the lawsuit could not proceed without Robbins and, under Rule 19(b), dismissed the matter without prejudice. The court did not decide the underlying insurance-coverage dispute.