Waco v. United States Fidelity & Guaranty Co.

Background

A Texas citizen sued two Texas contractors and the City of Waco for damages from hitting a street obstruction. The City, in turn, brought in an insurance company from Maryland (the surety on the contractors’ bond) by a cross-action, saying the surety would have to pay any amount judged against the City. The surety removed the case to federal court, claiming a separable controversy existed between it and the City. The original plaintiff asked the federal court to send the whole case back to state court and to dismiss the City’s cross-action against the surety.

Reasoning

The District Court first refused to remand, then found the surety was an improper party and dismissed the City’s cross-action, and finally remanded the remaining case to state court because diversity was gone. The City appealed only the dismissal of its cross-action. The Circuit Court of Appeals dismissed that appeal as moot because the District Court had remanded the case. The Supreme Court held that the dismissal of the cross-action occurred while the federal court still controlled the case and therefore could be appealed. The Court reversed the Circuit Court and ordered that the city’s appeal be reinstated and considered on the merits.

Real world impact

The ruling lets cities and other parties get federal review of orders dismissing cross-claims made before a case is sent back to state court. If the dismissal was wrong, the surety will remain a party when the dispute returns to state court, so rights and responsibilities tied to the bond can be resolved there with the surety still involved.