Federal Insurance Company v. TYCO INTERNATIONALFederal Insurance Company v. TYCO INTERNATIONAL
OPINION AND ORDER
Third-Pаrty Defendant Twin City Fire Insurance Company (“Twin City”) removed the present action,
Federal Insurance Co. v. Tyco et al.,
Index No. 04/601416 (N.Y.Sup.Ct.2004) (“Interpleader Action”) from state court. Third-Party Plaintiffs Mark A. Belnick (“Belnick”), L. Dennis Kozlowski (“Kozlowski”), Mark H. Swartz (“Swartz”), and Frank E. Walsh, Jr. (‘Walsh”) move to remand this case back to state court. Specifically, Third-Party Plaintiffs maintain that: (1) Twin City’s removal of the Interpleader Action was improper because third-party defendants may not remove under
Twin City opposes the motion, arguing that: (1) the remand motion is untimely; (2) Twin City, even as a third-party defendant, may remove this case under
For the reasons stated herein, the Motion to Remand is GRANTED, but the Motion for Attorneys’ Fees is DENIED.
I. Background
A. Facts
The Insured and Their Legal Troubles
This action arises from insurance coverage disputes between Interpleader Plaintiff Federal and Third-Party Defendant Twin City and their insured, Interpleader Defendants/Third-Party Plaintiffs Belnick, Kozlowski, Swartz, and Walsh. 1
Beginning in or around late 2000, allegations arose that Tyco engaged in questionable accounting practices. After these allegations arose, Tyco issued restatements of its earnings for fiscal year 1999 and the first half of fiscal year 2000. A criminal investigation resulted in indictments of Kozlowski, Walsh, Swartz, and Belnick, who were then prosecuted by the New York County District Attorney’s Office. This was soon followed by civil actions initiated by the Securities and Exchange Commission against these same four individuals, and an avalanche of ERISA and shareholder lawsuits in New York and around the country against Tyco and several of its directors and officers (“Underlying Actions”).
See Federal Ins. Co. v. Tyco Int’l Ltd.,
The first criminal trial resulted in an acquittal for Belnick and a hung jury for Kozlowski and Swartz. 3 The second criminal trial resulted in the conviction of Kozlowski and Swartz, who, in September 2005, were sentenced to eight and one-third to twenty-five years’ imprisonment, and were ordered to pay approximately $170 million in fines and restitution. (Letter from Nicholas J. Zoogman to the Court, Oct. 21, 2005)
The Insurance Carriers and Their Policies
Interpleader Plaintiff Federal is an insurance company organized under the laws of Indiana with its principal place of business in New Jersey. Third-Party Defendant Twin City is an insurance company also incorporated and existing under the laws of Indiana, with its principal place of business in Connecticut. Twin City also does business in New York.
Before its legal troubles began, Tyco purchased certain primary and excess directors and officers (“D & O”) liability insurance policies that provided coverage to Tyco and its officers and directors. Pursuant to Executive Protection Policy, No. 8121-34-42 (“Federal Policy”), Federal is the primary carrier of a policy sold to Tyco for the period March 15, 2001 to March 15, 2003, which provides $25 million in coverage after the satisfaction by Tyco of a $10 million retention. (Zoogman Aff. ¶ 10, Oct. 12, 2004 (hereinafter “Zoogman Aff.”); Zoogman Aff. Ex. 4)
4
The Federal Policy provides that it will pay on behalf of each insured all “Loss” for which an insured person “is not indemnified by the Insured Organization and which the Insured Person becomes legally obligated to pay on account of any Claim first made against him.” (Zoogman Aff. ¶ 16; Zoog
In addition, Tyco purchased excess coverage through several other carriers that ultimately provided over $200 million in coverage in excess of the coverage provided by the Federal Policy. Twin City is the first excess carrier. The Twin City Excess Financial Products Insurance Policy No. NDA 0144927-01 (“Twin City Policy”), like the other excess policies, contains a “follow-form” provision stating:
This policy is subject to the same warranties, terms, conditions, definitiоns, exclusions and endorsements (except as regards the premium, the amount and limits of liability, and duty to defend and except as otherwise provided herein) as. are contained in or as may be added to the policy of the Primary Insurer, together with all the warranties, terms, conditions, exclusions and limitations contained in or added by the endorsement to any Underlying Excess Policyfies).
(Zoogman Aff. Ex. 3, Excess Fin. Prod. Ins. Policy III.A) (emphasis added) The Twin City Policy initially covered the period between March 15, 2001 and March 15, 2002. This period was extended by Endorsement Number Six to March 15, 2003, after which the policy apparently was amended again to account for the recent allegations of wrongdoing against Tyco’s directors and officers. (Zoogman Aff. Ex. 3, Endorsement Nos. 6, 7; Twin City Opp’n Mem. 3) For example, Endorsement Numbers Nine and Ten reduce Twin City’s liability to $12.5 million from $25 million, with the remaining $12.5 million to be self-insured by Tyco, except where Tyco is prohibited by Bermuda law to indemnify its own directors and officers. Most importantly, Endorsement Number Eleven amends the Twin City Policy to explicitly exclude coverage for Swartz, Kozlowski, Belniek, and Walsh. Not surprisingly, it is this provision that has drawn the bulk of the Third-Party Plaintiffs’ fire.
B. Procedural History
The Rescission Action
The procedural history of this dispute is a long and winding road. The journey began in 2003 when Kozlowski notified Federal of the Underlying Actions pending against him and demanded that Federal provide him with legal representation or pay his defense costs. On February 13, 2003, Federal responded by rescinding its policy and returned the premiums on the ground that Kozlowski had made material misrepresentations in his insurance application. Federal also responded by commencing an action in the New York Supreme Court,
Federal Insurance Co. v. Tyco et al.,
Index. No. 6000507/03 (N.Y.Sup.Ct.) (“Rescission Action”), seeking a declaration that the Federal Policy was rescinded and void
ab initio,
or, in the alternative, that certain exclusions bar some of the insured from coverage.
See Fed. Ins. Co. v. Tyco Int’l,
The remaining defendants (KozlowsM, Swartz, and Walsh) counterclaimed, and KozlowsM brought a motion for partial summary judgment seeMng a declaration that Federal was required to defend him, or pay his defense costs on an on-going basis, in certain of the Underlying Actions, including the criminal action in New York State Supreme Court.
See Fed. Ins. Co.,
Subsequent to the return of the case to New York Supreme Court, as noted, KozlowsM was convicted on twenty-two felony counts based on millions of dollars of fraud. He nonetheless filed a motion for summary judgment in the Rescission Action seeMng $17.8 million in defense costs as a result of the criminal action. (Letter from David Newmann to the Court, Nov. 10, 2005) Citing KozlowsM’s conviction, Federal has opposed KozlowsM’s motion and has filed its own summary judgment motion. (Letter from David Newmann to the Court, Nov. 10, 2005) Belnick and Tyco have moved to intervene in the Rescission Action for the sole purpose of opposing KozlowsM’s motion. (Letter from Nicholas J. Zoogman to the Court, Oct. 21, 2005) Apparently, KozlowsM has not responded to the motions made on behalf of Federal, Belnick, or Tyco. (Letter from Newmann to the Court, Nov. 10, 2005; Letter from Zoogman to the Court, Oct. 21, 2005). These motions are sub judice.
The Interpleader Action
Federal also commenced the second action in this story, which was the instant Interpleader Action before Justice Freedman,
Federal Insurance Co. v. Tyco et al.,
Index No. 04/601416 (NY.Sup.Ct). This is a defensive interpleader action, brought pursuant to
At a September 9, 2004 status conference in the Interpleader Action, there was extensive discussion about impleading any excess carriers which might be part of the “tower” of coverage provided to Tyco and
On September 28, 2004, ten days after the initiation of the Bermuda action, discussed below, Kozlowski filed motion papers seeking to join Twin City and all other potentially liable excess insurance companies as third-party defendants in the Interpleader Action. (Twin City Opp’n Mem. 7, Ex. E; Zoogman Aff. ¶ 42) Kozlowski explained that “it appears from discussions amongst counsel that the total amount of defense costs thus far incurred ... under the Federal policy ... exceeds the limits of the policy.” Kozlowski argued that he had a right to have the entire “tower of insurance” maintained, and thus all excess carriers (with one exception) should be a party to the action. (Twin City Opp’n Mem. Ex. E ¶ 8)
On October 12, 2004, Kozlowski and Swartz filed a proposed Order to Show Cause, requesting Justice Freedman expedite consideration of the proposed joinder of Twin City to the Interpleader Action. On October 26, 2004, Justice Freedman granted Kozlowski and Swartz leave to add Twin City to the state court action. Justice Freedman’s Order reads:
Defendants, Kozlowski and Swartz move to join Twin City Fire Insurance Co. (“Twin City”) as a defendant in this interpleader action brought by Federal Insurance Company to determine which of various defendants are entitled to its insurance coverage. Twin City is one of the excess insurers affording coverage to some or all of the defendants, and is thus potentially liable for some of or similar coverage to that plaintiff is obligated to afford.
Pursuant to CPLR § 1007, “... a defendant may proceed against a person not a party who is or may be liable to that defendant for all or part of plaintiffs claim against that defendant by filing a third party summons.... ” The claim is denominated a third party complaint. Plaintiff, Federal Insurance Co. opposes the impleader on the ground thаt it owes nothing to Twin City or any other excess insurer. However, this “vouching in” type of provision of CPLR 1007 does not require plaintiff to have an obligation to any third party. Rather, it provides that where any part of the claim against the plaintiff may be satisfied by a third party (as here), third party impleader is permissible. See Vincent Alexander: Practice Commentaries, 7B McKinney’s Cons.L. § 1007, Page 12 et seq. This is consistent with the view of CPLR § 1007 that was adopted in the case of George Cohen Agency v. Donald S. Perl-man Agency,51 N.Y.2d 358 ,434 N.Y.S.2d 189 ,414 N.E.2d 689 (1980) where the court denied dismissal of a third party claim on the ground that a party may bring before the court another who had shared responsibility. The fact that such action affects removal does not negate its validity. See George Cohen Agency, supra.
Based on the foregoing, assuming that defendants Swartz and Kozlowski have served answers to plaintiffs complaint, they may serve a third party complaint against Twin City.
This is the decision of the Court.
Fed. Ins. Co. v. Tyco Int’l, Ltd.,
Bermuda Action
The third action in this string of litigation was brought by Twin City when, on or about September 17, 2004, Twin City commenced an action in the Supreme Court of Bermuda (2004 No. 294), seeking certain declaratory relief absolving it from providing coverage to Swartz, Kozlowski, Belnick, and/or Walsh (“the Bermuda Action”). (Twin City Opp’n Mem. Ex. D) Specifically, Twin City contended that in March 2003, Twin City and Tyco agreed, through the issuance of Endorsement Number Eleven, to retroactively restructure portions of the insurance policy to exclude coverage for Swartz, Kozlowski, Belnick, and Walsh. As relief, Twin City sought a declaration that Endorsement Number Eleven is valid and binding upon Tyco, Kozlowski, Swartz, Belnick, and Walsh, and a declaration that Twin City has no obligation and is not liable under the policy to provide coverage to those listed individuals.
Belnick Action
The fourth and final coverage action was filed on or about October 8, 2004 by Belnick in the Supreme Court of New York (Index No. 04603293) (“Belnick Action”). 6 Among other things, this action alleges that Twin City breached its obligations under the Twin City policy by refusing to defend the insured and that Twin City breached an implied covenant of good faith and fair dealing. Specifically, Belnick alleges breach of the covenant based on the negotiation of Endorsement Number Eleven. For relief, this action seeks a declaratory judgment that Twin City is obligated to рay defense costs of Belnick under the excess policies, and seeks to enjoin the Bermuda Action.
As Twin City notes, the third-party complaints in both the Kozlowski and Belnick Third-Party Actions are substantively identical to the complaints filed by those same parties in the Kozlowski and Belnick Actions. In fact, apart from renaming Kozlowski/Swartz and Belnick as “Interpleader defendants and Third-Party Plaintiffs” rather than “Plaintiffs,” and changing Twin City from a “Defendant” to a “Third-Party Defendant,” the Third-Party Complaints are in many parts exactly the same as the prior Complaints. (Twin City Opp’n Mem. 8 (citing for comparison Ex. F. with Ex. K; Ex. G with Ex. J))
Following removal, Belnick brought a motion to remand pursuant to the abstention doctrine.
7
Following oral argument, Belnick expressed an intention to seek dismissal of the claims without prejudice. Twin City, however, opposed such a dismissal, having already answered and filed a counterclaim for declaratory relief. Therefore, the Court issued an Order providing that Belnick submit the stipulation of dismissal, and setting a briefing schedule for Belnick’s motion to stay Twin City’s
Removal of the Interpleader Action and the Question of Remand
On November 17, 2004, Twin City filed a Notice of Removal of the Interpleader Action. Twin City outlines a number of bases for removal. First, Twin City maintained that it “may remove to this Court pursuant to
Second, Twin City argued that “[ajlternatively, this action may be removed to this Court by Twin City because this Court has original jurisdiction over the State Court Action pursuant to
Finally, Twin City maintained that “this action may be removed by this Court to Twin City because the true plaintiffs, to wit, Mssrs. Kozlowski, Swartz, Belnick and Walsh are of diverse citizenship in contrast to the true defendant, Twin City, and the amount in controversy exceeds the sum of Seventy-Five Thousand Dollars ($75,000.00), exclusive of interest and costs, such that jurisdiction is proper under
On December 16, 2004, Third-Party Plaintiffs filed a motion to remand, which the Court denied without prejudice for failure to comply with the Court’s individual practices requiring pre-motion letters and a pre-motion conference. (Docket Nos. 8, 9) A letter requesting a pre-motion conference was sent by Kozlowski’s counsel on January 5, 2005, and following the premotion conference, a briefing schedule was set.
Because of the obvious connection between the Interpleader and Belnick Actions, on August 9, 2005, the Court issued an Order providing, in relevant part:
Based on the issues raised at the oral argument on July 25, 2005, as well as the issues raised in the related action, Belnick v. Twin City Fire Insurance Company, 04 Civ. 7998, the Court directs the parties to submit supplemental briefs on the question of whether abstention is appropriate in either this action, 04 Civ. 9086, or the Belnick action, 04 Civ. 7998. In addressing this issue, the parties should consider how retention of jurisdiction over one of the cases might affect or not affect the decision to abstain in the related action.
(Order, Aug. 9, 2005)
On November 10, 2005, Federal requested the Court to immediately remand the
Based on the consensual remand of the underlying Interpleader Action, in an Order dated January 9, 2006, the Court then directed the parties to brief the question of what impact, if any, the remand of the Interpleader Action had on the remand motions filed by Belnick, Kozlowski, and Swartz. The parties timely submitted their memoranda of. law and the issue is now fully submitted.
II. Discussion
A. Removal and Remand
1. Applicable Principles
Twin City seeks to remove to this Court a ease that was initially filed in New York State Supreme Court. In determining the validity of Twin City’s removal, the Court must answer two questions: Does Twin City have a right to remove this action under the federal removal statute, and, if so, does this Court have jurisdiction over the removed case? In answering these questions, the Court starts with the baseline proposition that federal courts are courts of limited jurisdiction.
See Keene Corp. v. United States,
Aside from federalism principles, one practical consideration for the heavy presumption against suspect removal is that it conserves judicial resources. As one court has explained: “The question of subject-matter jurisdiction сan, after all, be raised by the parties or even by the court at any stage of the proceedings. It would therefore ill behoove us to retain the action if there is the slightest doubt as to our power to entertain it, and then face the possibility of jurisdictional dismissal by a higher court after the litigation had been fully concluded.”
Am. Mut. Liab. Ins. Co. v. The Flintkote Co.,
Another guiding principle is that the propriety of removal is to be determined by the pleadings at the time of removal.
See Pullman Co. v. Jenkins,
2. Timing of Motion to Remand
Twin City initially argues that Third-Party Plaintiffs waived their right to chai
A motion to remand the case on the basis of any defect other than lack of subject matter jurisdiction must be made within 30 days after the filing of the notice of removal under section 1446(a). If at any time before final judgment it appears that the district court lacks subject matter jurisdiction, the case shall be remanded.
“Congress placed a strict time limit on motions to remand in order to prevent the delay, inefficiency, and unfairness resulting from late-stage, forum-shopping remand motions.”
Pierpoint v. Barnes,
In this case, Third-Party Plaintiffs timely filed their original motion to remand, even if “one day prior to the expiration of the 30-day statutory deadline of
According to Twin City, this sequence of events makes the motion untimely. Specifically, Twin City argues that after the Court denied the motion without prejudice, “[Third-Party Plaintiffs] had one additional day to file their request for a pre-motion conference, thereby preventing the balance of their deadline from expiring. However, [Third-Party Plaintiffs] waited two weeks before finally sending their request....”
First, Twin City’s objection is based on an overly technical reading of the Court’s individual practices and the applicable statute. The Court’s denial of the timelyfíled motion was obviously not on the merits, but solely on the procedural default of Third-Party Plaintiffs to submit a premotion letter requesting a pre-motion conference. Because the Memorandum of Law provided the type of analysis typically required in a pre-motion letter, the only thing lacking from Third-Party Plaintiffs’ submission was a formal request for a conference. Had such a conference been requested contemporaneously with the Memorandum of Law, the Court could have scheduled the conference and formally tolled the time by which Third-Party Plaintiffs would have to file their motion. Indeed, the Court has since uniformly employed this practice when either a premotion letter is filed or a motion is filed in contravention of the Court’s individual practices precisely to avoid any confusion among the parties about the status of any applicable deadlines, the timing of any response to the pre-motion letter, and the scheduling of the pre-motion conference. That the Court did not do so explicitly here is no basis to deem the timely motion (timely, that is, under
While there appears to be no authority specifically addressing the unique facts of this case, the available case law supports the view that the timely filing of the motion to remand does not become untimely because of “quirks” in the local rules. For example, in
Phoenix Global Ventures,
the movant’s remand motion was twice rejected as a result of the district court’s electronic case file system, thus making the perfected motion technically untimely.
In another case,
Blanco v. Snyder’s of Hanover, Inc.,
No. 03 Civ. 385,
This application of the law is consistent with the rationale behind the thirty-day requirement for remand motions, which is intended to “prevent the delay, inefficiency, and unfairness resulting from late-stage, forum-shopping remand motions.”
Pierpoint v. Barnes,
A second reason to reject Twin City’s claim is that even if the motion is not fairly deemed to have been timely made, there is authority for deeming it to have been equitably tolled.
See Chamberlain v. AM-REP, Inc.,
No. 3:04-CV-1776-B,
In this case, the Third-Party Plaintiffs provided unambiguous and timely notice to Twin City of their intention to send this case back to state court, and the rationale in support of this intended course of action. The subsequent delay in scheduling the pre-motion conference was neither lengthy nor done for tactical gain. Indeed, it may very well be the case that Third-Party Plaintiffs believed the Court would schedule the pre-motion conference without any formal request. Thus, under these circumstances it is proper to view the thirty-day deadline to be equitably tolled simply as a means to permit Third-Party Plaintiffs to perfect their motion. Moreover, it cannot credibly be claimed that the Court’s application of its individual practices harmed Twin City. Indeed, it merely gave Twin City more time to respond to the motion. As such, Twin City has not identified any prejudice from the timing of the motion and, therefore, the Court is not persuaded that the motion should be denied as untimely.
See Phoenix Global Ventures,
S. Third-Party Defendant Removal Under Section 1111(a)
There is little doubt that measured by the quantum of decisions, the weight of authority decidedly tips in favor of Third-Party Plaintiffs.
See, e.g., ConocoPhillips Co. v. Turner Indus. Group, LLC,
No. Civ. G-05-516,
Of course, where there is a majority view, there is a minority view as well. “The courts in the minority, permitting third-party removal, have done so in varying degrees.... However, most courts permitting third party removal have done so only of the severed part” of a case, typically under
The judicial debate over the question of third-party removal has raged for years, so there is little left to be added to the discussion. After a comprehensive review of the case law (which does not yet include a decision from the Second Circuit), the Court is persuaded that the majority view is the superior one. To begin, the majority view is more faithful to the Supreme Court’s instruction in
Shamrock Oil
to strictly construe the removal statute,
see
The statute’s plain language limiting the removal right to a defendant also reflects a conscious decision by Congress to restrict, over time, the removal options of parties in state cases. In the first Judiciary Act of 1789, Congress initially granted the removal right to “the defendant.”
See Shamrock Oil,
A strict construction of the removal statute also serves the practical purpose of limiting a third-party from undermining the forum choices of both the plaintiff and defendant in a state action.
See Johnston,
In the midst of this vast sea of authority strongly suggesting that third-party defendants have no statutory right to remove cases, Twin City hitches its life raft to
Mignogna v. Sair Aviation, Inc.,
In any event, the Court is not persuaded by the rationale offered in favor of third-party defendant removal of cases. In support of its expansive reading of the removal statute, the
Mignogna
court suggests that the definition of “defendant,” which unquestionably is determined by federal law, should be construed to mean “someone who ‘has been haled into court involuntarily and must defend an action for relief against it.’ ”
Id.
at 189 (quoting
Ford Motor Credit Co. v. Aaron-Lincoln Mercury, Inc.,
From a policy perspective, the
Mignogna
court also suggests that to “adopt an inflexible rule barring removal by third-party defendants ... would have the curious effect of making a litigant’s right to have a claim heard in a federal forum turn on the fortuity of being sued in a third-party complaint rather than in a separate action.”
Mignogna,
This objection to strictly interpreting the removal statute to bar third-party removal stands the uniformity argument on its head. Indeed, “[a] uniformly applied federal rule barring removal by third-party defendants does not allow state procedure to control access to federal courts.”
Chase,
“Admittedly, the national disuniformity resulting from permitting removal only by defendants joined in the plaintiffs complaint provides some tension.”
Crawford,
L Fraudulent Joinder/Misjoinder
Twin City argues that even if third-party defendants have no statutory removal rights, it is “entitled to remove the Third-Party Actions under the fraudulent joinder doctrine because it was improperly joined as a party by [the Third-Party Plaintiffs] to defeat jurisdiction.” (Twin City Opp’n Mem. 26-27) Pivoting from there, Twin City claims that once the fraudulent joinder is recognized, the parties may be realigned, thus converting Twin City into a “simple defendant” whose citizenship is diverse from the true plaintiffs. (Twin City Opp’n Mem. 27) According to Twin City, the end result of this jurisdictional re-construction is a removable action over which this Court has jurisdiction. While not irrational, Twin City’s argument suffers from several fatal flaws, some at the removal stage and others at the jurisdictional stage. Either way, the result is the same: granting Third-Party Plaintiffs’ remand.
Beginning with the removal component, Twin City argues that under the so-called “fraudulent joinder” doctrine, “‘courts overlook the presence of a non-diverse defendant if from the pleadings there is no possibility that the claims against that defendant could be asserted in state court.’ ” (Twin City Opp’n Mem. 27) (quoting
Briarpatch Ltd., L.P. v. Phoenix Pictures, Inc.,
This argument, however, is misdirected, as the essence of Twin City’s objection is more akin to fraudulent “misjoinder,” than fraudulent joinder. “Fraudulent joinder occurs either when there is no possibility that a plaintiff can state a cause of action against nondiverse defendants in state court, or there has been outright fraud in plaintiffs pleading of jurisdictional facts.”
Hoosier Energy Rural Elec. Coop., Inc. v. Amoco Tax Leasing TV Corp.,
In order to show that naming a non-diverse defendant is a ‘fraudulent joinder’ effected to defeat diversity, the defendant must demonstrate, by clear and convincing evidence, either that there has been outright fraud committed in the plaintiffs pleadings, or that there is no possibility, based on the pleadings, that a plaintiff can state a cause of action against the non-diverse defendant in state court.
Pampillonia v. RJR Nabisco, Inc.,
Since Twin City acknowledges that it does not believe that Third-Party Plaintiffs committed “outright fraud,” by joining Twin City as a third-party defendant, the quеstion is whether Third-Party Plaintiffs can state a cause of action against Twin City, a test, Twin City notes, that is “akin
While Twin City asserts that federal law controls the question of whether there has been fraudulent joinder, “ ‘[j]oinder will be considered fraudulent when it is established that there can be no recovery [against the defendant] under the law of the state on the cause alleged.’ ”
Whitaker,
The wrong turn in Twin City’s argument, however, is not a failure to accurately state the law regarding fraudulent joinder. Rather, it is their belief that fraudulent joinder is the doctrine that applies here. Indeed, nothing in Twin City’s extensive briefing suggests that the relief that Third-Party Plaintiffs seek against Twin City — a declaratory judgment that Twin City is obligated to pay defense costs of Third-Party Plaintiffs — is impossible to obtain under New York state law. Instead, Twin City argues that the defect in the Third-Party Complaint is that the claims against Twin City were improperly (i.e., fraudulently) joined with claims made in the Interpleader Complaint, under both
“Fraudulent misjoinder” occurs when a plaintiff purposefully attempts “to defeat removal by joining together claims against two or more defendants where the presence of one would defeat removal and where in reality there is no sufficient factual nexus among the claims to satisfy the permissive joinder standard.”
Conk v. Richards & O’Neil, LLP,
Thus, under
Tapscott,
“procedural misjoinder may represent a third type of fraudulent joinder.” 14B Wright, Miller
&
Cooper § 3723, at 658;
see also In re Benjamin Moore & Co.,
Predictably, the courts have wrestled with the first question — the definition of an “egregious misjoinder” of claim. Indeed, it is this component of
Tapscott
that has been the focus of the critical commentary.
See Bowling v. Kerry, Inc.,
One possible means of clarifying the standard is to look at fraudulent misjoinder the same way that courts in this circuit analyze fraudulent joinder — can the defendant show either: (I) that there was there outright fraud, or (ii) that there is no possibility, based on the pleadings, that a plaintiff properly can join the claims brought against the third-party defendant.
See Conk,
The question of whether to apply state or federal law, however, does need to be resolved, because there can be little question that if this action were initially brought in federal court, Third-Party Plaintiffs would be hard pressed to justify the joinder of the third-party claims under
Under this analysis, there is a strong argument that Twin City is not a proper third party under
It is perhaps in recognition of this that Twin City asserts that “ ‘[t]he question whether a non-diverse party has been joined improperly is one of federal law.’ ”
New York State Ins. Fund,
The majority of cases applying the fraudulent misjoinder doctrine also have held that state law on joinder governs.
See Asher v. Minn. Mining and Mfg. Co.,
No. Civ. A 04 CV 522,
The Court is persuaded that it is more appropriate to apply state law in evaluating the pre-removal joinder of claims and/or parties. Initially, this appears to be the most rational way to view the propriety of any joinder since the question is one of joinder in the state action before it was removed. “[Severance of claims only when those claims were improperly joined under state law at the action’s inception ... shares the same conceptual rationale underlying the doctrine of fraudulent joinder. In both instances, the court, in examining its own jurisdiction, attempts to identify an infirmity in the plaintiffs complaint,
under the laio of the state in which it was originally brought. ” Jamison,
Significantly, limiting the question to the propriety of joinder at the time the state complaint was filed is consistent with the “heightened sensitivity to federalism concerns” that permeates the law of removal.
Osborn,
It is also significant to note, however, that permitting state joinder issues to be ruled on by state courts, and in particular to allow state courts to sever improperly joined actions, still allows third-party defendants to remove improperly joined actions to the federal courts.
See Bowling,
Indeed, it was based on this authority that the Court recently invited the parties to address the question of whether the consensual remand of the underlying Interpleader Actiоn, in effect, achieved the same thing as a state court severance of the lawsuit, thus permitting this Court to keep the Third-Party Actions. While this option still appeals to the Court, if for no other reason that it seems realistically possible that the Third-Party Actions will be severed by the state court and thereafter return to this Court, the law requires the Court to consider the propriety of removal only at the time it was perfected.
See In re Shell Oil Co.,
Finally, application of state joinder law is consistent both with the language of
This conclusion lines up with other authority that stands for the proposition that the federal courts are to apply the state law regarding proper service in state actions
before they are removed.
For example, federal courts routinely look to state law when evaluating the propriety of service of process in deciding motions to dismiss a complaint in diversity cases removed to federal court.
See, e.g., Norsyn, Inc. v. Desai,
The notion that the removal statute is to be uniformly applied, however, does not mean that the federal courts are to apply only one set of rules regarding pre-removal joinder of parties or claims. Instead, uniformity in this limited context means uniformly applying the law of the forum state to address the question of proper joinder of parties and/or claims. Indeed, this principle lies at the heart of the debate over the removal rights of third-party defendants. The minority of courts that believe third-party defendants have removal rights contend that to limit removal only to the defendant or defendants named in the plaintiffs complaint would subject the removal statute to the vagaries of state third-party practice.
See, e.g., Mignogna,
Nor does applying state joinder law mean that there will be a non-uniform determination of the removal rights of parties. On the contrary, the uniform rule is that properly joined third-party defendants may not remove cases to federal
Thus, the Court will look to New York law to determine if there has been a fraudulent misjoinder of Twin City in the Third-Party Actions. Because Twin City does not allege outright fraud, it can prevail only if there is no reasonable possibility that a state court would find that the Third-Party Plaintiffs’ claims against Twin City were properly joined with his claims against the other defendants.
17
See Conk,
Anticipating the possible application of state law, Twin City argues that “[t]hough federal law controls here, it bears noting that the result [improper joinder] should be no different under state law.” (Twin City Opp’n Mem. 14) The relevant state law provision,
Of course, the question of what a New York court might decide on this question is not abstract, for Justice Freedman explicitly permitted Third-Party Plaintiffs to bring the third-party action against Twin City.
See Federal Ins. Co.,
While Twin City is correct that Justice Freedman’s order should not be construed as a final ruling that the third-party claims against it are properly brought under
That said, it is far from clear to this Court how Twin City’s alleged obligations to Third-Party Plaintiffs are “sufficiently related to the main action to at least raise the question of whether the third-party defendant may be liable to defendant-third-party plaintiff.”
Rausch,
Accordingly, the Court finds that, because Twin City has failed to persuade this Court that it is a fraudulently joined Third-Party Defendant, Twin City has no statutory right to remove this action.
B. Whether This Court Has Original Jurisdiction Over This Action
Assuming it has a statutory right to remove, Twin City advances a number of arguments in support of its claim that this Court has original jurisdiction over this action. First, Twin City argues that diversity jurisdiction exists under the “fraudulent joinder” doctrine. Second, Twin City argues that diversity jurisdiction is present when the real parties in interest are properly realigned. Finally, Twin City argues that interpleader jurisdiction is proper under
1. Realignment and Diversity Jurisdiction
Twin City argues that “Federal’s citizenship does not count for purposes of ascertaining the presence of diversity, because Federal — as a mere interpleader plaintiff — is a ‘nominal’ party,” (Twin City Opp’n Mem. 17) and that there is complete diversity when the remaining parties are realigned according to their true interests. (Twin City Opp’n Mem. 18)
“It is a well settled general principle ... that diversity jurisdiction must be basеd only on the citizenship of the real parties in interest, ignoring the citizenship of merely nominal or formal parties. Parties that are considered nominal are those that have no personal stake in the outcome of the litigation and who are not necessary to an ultimate resolution.”
McAlpin v. RLI Ins. Co.,
“The removing party bears the burden of demonstrating that a nondiverse defendant is a formal or nominal party whose citizenship may be ignored for diversity purposes.”
McAlpin,
In addition, the Supreme Court has instructed that courts should realign parties to determine diversity jurisdiction:
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 interest 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. These familiar doctrines governing the alignment of parties for purposes of determining diversity of citizenshiр have consistently guided the lower federal courts and this Court.
City of Indianapolis v. Chase Nat. Bank of New York,
In implementing these principles, the Second Circuit has adopted the “collision of interests” test:
In Maryland Casualty, the Second Circuit adopted the “collision of interests” test, which requires “the existence of an actual, substantial controversy, or a collision of interests,” between citizens of different states. The Second Circuit rejected the “primary purpose” test, which aligns parties in accordance with the “primary dispute in the controversy.” Rather, the “broader” and “more flexible” “collision of interests” test permits courts “to consider the multiple interests and issues involved in the litigation.”
Fed. Ins. Co., v. Safeskin Corp.,
No. 98 Civ. 2194,
Twin City argues that “[a]n interpleader plaintiff fits squarely within th[e] definition of a ‘nominal party.’ Indeed, the very concept of an interpleader action is that the interpleader plaintiff — the ‘disinterested stakeholder’ — will deposit the stake to which competing claims exist into court in order to avoid potential liability.” (Twin City Opp’n Mem. 17) There is broad support for this claim.
See Ailing v. C.D. Cairns Irrevocable Trusts P’ship,
Twin City maintains that with Federal out of the picture, after application of the “collision of interests” test to realign the parties, there is complete diversity.
21
First, Twin City argues that “a real and substantial dispute exists between Twin City and its insured concerning the availability of coverage under the Twin City Policy.” (Twin City Opp’n Mem. 19) Thus, Twin City maintains an appropriate realignment is: Tyco (UK or NY), Belnick (Utah or NY), Kozlowski (FL), Swartz (FL), Walsh (NJ) v. Twin City (IN & CT). Viewing the parties this way, there appears to be complete diversity.
Alternatively, Twin City argues that “if the issue set forth in the initial Interpleader Complaint is viewed as the ‘primary issue in dispute,’ then the parties should be realigned according to the most salient fissure among their competing claims to Federal’s stake.” (Twin City Opp’n Mem. 20 (citing
Ailing,
The Court is unpersuaded by the argument that Twin City is properly aligned with Tyco as a plaintiff. First, under this scenario, it might matter whether New York is deemed Tyco’s principal place of business, and, likewise, whether Belnick is a citizen of Utah or New York. Obviously, if Tyco and Belnick are New York citizens, then the Court would lack diversity jurisdiction over this realigned case. At a minimum, the jurisdictional facts as alleged in the Interpleader Complaint raise serious doubts about the Court’s jurisdiction in this scenario, thus supporting remand.
See Jamison,
Thus, the only plausible realignment scenario is the first one, pitting Third-Party Plaintiffs as true plaintiffs
Twin City independently argues that the Court has original jurisdiction over the Interpleader Complaint pursuant to
Statutory interpleader “calls for diversity of citizenship between two or more of the adverse claimants and requires that the amount in controversy ... need only be $500.” 7 Wright, Miller
&
Kane § 1703, at 538. “The citizenship of the stakeholder is irrelevant for jurisdictional purposеs in statutory-interpleader actions.”
Id.; see also
Truckr-A-Tune,
Inc. v. Re,
There are two primary hurdles to Twin City’s ability to remove on the basis of original jurisdiction pursuant to
a. Whether Removal Is Authorized Under
While Third-Party Plaintiffs do not explicitly advance the argument, courts appear to be divided on the question of whether removal is permitted under
In
Albers,
the court found that removal of an action over which there is original jurisdiction pursuant to
Section 1335 , however, only extends this Court’s original jurisdiction to embrace actions that correspond to those described in the federal interpleader statute. It does not provide authority to remove to federal court actions that were filed in state courts which could have originally been filed in federal court. Rather, this Court must look to28 U.S.C. § 1441 for authority to remove an action from state court to federal court.... In all other cases [other than where a federal question exists] over which district courts have original jurisdiction, the basic principles of diversity jurisdiction, including the requirement of ‘complete diversity, ’ govern the removability of the action.... This Court concludes, however, that§ 1335 does not provide the type of substantive right requisite to the existence of federal question jurisdiction. The federal inter-pleader statute is jurisdictional. It simply grants district courts original jurisdiction over cases that fit the description provided in§ 1335 , and provides a forum in which adverse claimants to a fund can determine their rights in a single proceeding.
In addition, a number of cases take the view that the limitation of
To the extent Belnick is considered a resident of New York, as is alleged in the Interpleader Complaint, these cases suggest that removal pursuant to
The Second Circuit does not appear to have addressed this issue. While other courts do not appear to have adopted a clear majority rule, the balance of authority suggests that a party may not remove a case that could have originally been brought in federal court under
b. Jurisdictional Doubts from Lack of Deposited Funds
Apart from the question of whether
removal
of a
As a general rule, when a sum of money is involved, a district court has no jurisdiction of an action of interpleader if the stakeholder deposits a sum smaller than that claimed by the claimants.Section 1335 gives the district courts jurisdiction over such actions when a stakeholder has in his possession money or property ‘of the value of $500 or more,’ if ‘two or more * * * claimants * * * are claiming or may claim to be entitled to such money or property’ and if the stakeholder ‘has deposited such money * * * into the 1 registry of the court.’ This language means that the court will not have jurisdiction in an action of interpleader unless the stakeholder has deposited the entire sum in its possession which the claimants claim.
Twin City cites to
Price & Pierce Int'l Inc. v. Spicers Int’l Paper Sales, Inc.,
No. 84 Civ. 3728,
Practically speaking, deposit is not a prerequisite to obtaining jurisdiction, but rather, a condition of maintaining it. Otherwise, no Court would have the power to even order a fund deposited thereby ensuring its continued control over the matter....
The purpose of the deposit requirement is to assure the safety of the disputed stake, thereby facilitating enforcement of the Court’s ultimate judgment. Cases which have held failure to deposit a fund to be a jurisdictional defect, generally involve plaintiffs [sic] who deliberately withhold funds. Accordingly, where deposit is not required for security by the stakeholder, it should not be a jurisdictional condition.
Id.
at *2-3. To the extent that
Price
stands for the proposition that the deposit requirement is not jurisdictional, this does not appear to find support in the case law:
“[Price]
and authority quoted therein predate
National Fire Union.
Moreover, since
National Fire Union,
courts in the Second Circuit have consistently followed the rule that a deposit or a bond is a jurisdictional prerequisite for statutory interpleader relief.”
Coopers & Lybrand,
While the deposit requirement may be jurisdictional, however, “it is equally clear that the failure to deposit the stake with the Court’s registry alone would not warrant outright dismissal of the interpleader action for lack of jurisdiction. Rather, it would be error to dismiss the complaint ‘without affording an opportunity to cure.’ ”
Travelers Ins. Co. v. Estate of Zenifer Garcia,
No. 00-CV-2130,
Thus, while deposit of funds appears to be a jurisdictional requirement, it could be argued that Federal should be given an opportunity to deposit such funds before this Court considers whether dismissal is appropriate. However, at argument, the Court inquired of counsel for Federal if such a deposit would be forthcoming. Counsel demurred (Tr. 45-46, July 28, 2005), and then indicated a strong desire to send the Interpleader Action back to state court (Tr. 55, July 28, 2005), which Court ultimately did on the consent of the parties. Given these circumstances, it is fair for the Court to infer that Federal will not deposit the funds and, therefore, that there is palpable doubt that the Court has the jurisdiction to retain the Interpleader Action under
In sum, while Twin City has made an admirable effort at demonstrating that this Court has jurisdiction over the removed action, the effort is not sufficiently free of doubt to justify denial of the remand motion.
See Wilds v. United Parcel Serv., Inc.,
C. Imposition of Attorneys’Fees
Finally, Third-Party Plaintiffs argue that “[b]ecause Twin City has absolutely no basis for removal this Court should impose on Twin City movants’ costs of this motion pursuant to
The Court has no difficulty in rejecting this claim.
Here, even though the Court grants the Motion to Remand, the grounds for removal are substantial, particularly in light of the unusual facts and the number of complicated questions raised in this case which have not been explicitly resolved by the Second Circuit. Accordingly, the Court finds that there was an objective basis for Twin City to seek removal, as reflected in its well-presented opposition to the Motion to Remand. Therefore, the Motion for Attorneys’ Fees is DENIED.
III. Conclusion
For the reasons set forth above, the Motion to Remand is GRANTED, but the Motion for Attorneys’ Fees is DENIED.
SO ORDERED.
Notes
. This is one of two actions before this Court related to the coverage disputes between the insured and the insurance carriers. The other action is Belnick v. Twin City Fire Insurance Co., 04 Civ. 7998 ("Belnick Action”), which was filed in New York Supreme Court and removed to this Court by Twin City before this Interpleader Action was removed. Accompanying this Opinion is an Order staying consideration of Belnick's application to remand that action based on abstention principles and placing that case on the suspense calendar pending any motion by Twin City to challenge in state court the joinder of the Third-Party Actions in the Interpleader Action in state court.
. It bears noting that in the Belnick Action complaint against Twin City, Belnick claims to be a Utah resident, but also admits to maintaining a residence in New York. (Bеlnick Compl. Index No. 603293-04 ¶ 1) This complaint is discussed in further detail below.
. Walsh pled guilty in New York State Supreme Court in December 2002 to securities fraud, and settled the SEC's securities fraud action.
.The Zoogman Affidavit was submitted in connection with the Belnick Action, but contains facts directly relevant to the instant motion.
. In affirming the lower court’s decision, the First Department modified the judgment below "to declare that [Federal’s] obligations with respect to the criminal proceeding and the securities action are limited to defense costs incurred, subject to apportionment and reimbursement for the cost of the defense of non-covered claims.”
Fed. Ins. Co.,
. Once upon a time, there was a fifth case. On October 12, 2004, Kozlowski and Swartz filed a complaint against Twin City (Index No. 04603345) that substantially mirrored the allegations made by Belnick. On October 14, 2004, Twin City filed a notice of removal in Kozlowski et al. v. Twin City Fire Ins. Co., 04-cv-08084 ("Kozlowski Action”), which was assigned to this Court as related to the Belnick Action. Kozlowski and Swartz apparently filed a notice of discontinuance of the Kozlowski Action the same or the following day after filing it, and Twin City subsequently withdrew its removal upon receiving notice that the case had been discontinued.
. Belnick styled his argument as seeking an "Order to Show Cause to Remand.”
. During the November 14, 2005 conference, the parties advised the Court of the new round of litigation involving Kozlowski, Federal, Tyco, and Belnick, which some suggested may have avoided exhaustion of the limits of the Federal Policy. Subsequent conferenees with the parties have made clear to the Court, however, that it is in fact foreseeable that the Federal Policy will be exhausted, thus requiring the parties to resolve their differences over the Twin City Policy.
. Previously the "applicable version of
. Twin City cites to a number of cases in support of the claim that the thirty-day time limit is strictly enforced. (Twin City Opp'n Mem. 25-26) A number of these cases, however, do not appear to support the proposition for which they are cited. For example,
Harris Corp. v. Kollsman, Inc.,
. Even if Third-Party Plaintiffs’ objection based on
. Until it was amended in 1990,
Even these cases, however, generally found that there was no right to removal by a third-party defendant under
. Of course, the Court recognizes that Twin City believes that whatever interplay there may be between the Rescission and Inter-pleader Actions is of no import to the questions of, first, what relationship, if any, exists between the Interpleader Action and the Third Party Complaints brought against Twin City and, second, whether the claims against the Interpleader Defendants/Third Party Plaintiffs should be joined with the third рarty claims against Twin City. This issue will be discussed below.
. As Twin City points out, "fraudulent joinder” is a "term of art.”
See Sanchez v. Univ. of Pa. Museum, of Archaeology & Anthropology,
No. 04 Civ. 1253,
. Though the fraudulent misjoinder doctrine materialized in the context of traditional joinder, the Court is aware of no principle or authority that would suggest it is inapplicable to third-party joinder.
. There are some decisions stating rather broadly that the question of service in a removed action is a procedural one and therefore is to be governed by federal procedural law. For example, in
Stan Winston,
the court dealt with the question of service of a resident defendant, who if, properly served, would defeat removal.
See
In making this statement regarding the general inapplicability of state law, Wright, Miller, and Cooper cited the Seventh Circuit’s decision in
Roe v. O'Donohue,
. As noted, the Court is not applying the "egregious joinder” standard first announced in Tapscott.
. In this sentence of the order, it appears as though the reference to ''plaintiff'' should be to "defendant.”
. In further support of its fraudulent joinder claim, Twin City points out that "Kozlowski even supported his argument to the Supreme Court requesting leave to join Twin City by arguing that while Twin City had removed the Belnick Action, Twin City's common Indiana citizenship with Federal would bar Twin City from removing if added to the Interpleader Action.” (Twin City Opp’n Mem. 16 (citing Ex. H, Affirmation 3)) It is unclear that this argument has any legal significance. As Justice Freedman noted in her order, the New York Court of Appeals has explicitly rejected the suggestion that a third-party complaint should not be permitted because it might undermine federal jurisdiction:
Finally, Continental contends that Perl-man’s third-party complaint should be dismissed because it somehow impedes Continental’s right, as a foreign corporation, to "remove” the case to Federal court pursuant to subdivision (c) ofsection 1441 of title 28 of the United States Code. This contention is without merit. The doctrine of "removal” is uniquely a Federal power to be exercised by Federal courts, applying Federal law. We see no reason to alter the civil practice of the State of New York to either encourage or discourage the exercise of that power. Thus, while a litigant may well believe that the exercise by the Federal court of its removal power would be beneficial in a particular case, his remedy is merely to seek such removal in Federal court, taking State procedure as he finds it.
George Cohen Agency,
. The Second Circuit's approach differs from that of other circuits:
In interpreting City of Indianapolis, the circuits arе split on whether to use the "primary purpose” test or the "substantial dispute” test to determine realignment. The Third, Fourth, Fifth, Sixth, and Ninth Circuits utilize the "primary dispute” test. These courts find that in a declaratory judgment action regarding insurance coverage,the parties should be realigned according to the primary dispute, with the insured on one side and the insurers on the other. Concomitantly, they find that contribution and allocation disputes between the insurers are secondary and hypothetical until the insurers' liability is determined.
In contrast, the Second, Seventh, Eighth, and Tenth Circuits use the "substantial dispute” test. Applying this test to declaratory judgment insurance disputes, those circuits find that realignment is improper if there is any substantial conflict between opposing parties. Thus, where an insurer brings suit against its insured claiming no duty to provide coverage and against other insurers seeking contribution, the court must not realign the parties because the dispute between the plaintiff insurer and the defendant insurers constitutes a substantial dispute.
Aetna Cas. & Sur. Co. v. Dow Chem., Co.,
. The same realignment, Twin City argues, makes it a defendant for purposes of exercising its statutory removal rights under
. Twin City could argue that further realignment, based on the collision of interests, might result in a remodeled law suit of Third-Party Plaintiffs as true plaintiffs against Federal and Twin City as true defendants, but even this would not change the result. First, even if this realignment might create diversity jurisdiction (which is questionable), Twin City's removal would be deficient in the absence of consent by Federal, which has not happened, and, given Federal's request to remand the Interpleader Action, is not likely to happen. Thus, the unanimity rule would be violated and the removal would be improper.
See In re "WorldCom, Inc. Sec. Litig.,
Furthermore, if Twin City is realigned to become a plaintiff, as noted above, it would have no removal rights. Given the axiom that the Court is to strictly construe the removal statute, where realignment does not require the removing party to be viewed as the defendant, the courts have refused to engage in jurisdictional gymnastics to accept removed actions.
See, e.g., Tune, Entrekin & White, 220
F.Supp.2d at 892 (“Faced with such a decision [over how to realign the parties], this Court finds persuasive those courts which have simply declined to realign the parties at all. Given that federal jurisdiction and removal statutes are supposed to be strictly construed, the Court should err in favor of remanding and allowing the state court to either decide the case or realign the parties.”);
O’Keefe, Ashenden, Lyons & Ward v. Nat’l Telecomm. Consultants, Inc.,
No. 91 C 2688,
. There are two avenues for filing an inter-pleader action in federal court: (1) rule inter-pleader, pursuant to
(a) The district courts shall have original jurisdiction of any civil action of interpleader or in the nature of interpleader filed by any person, firm, or corporation, association, or society having in his or its custody or possession money or property of the value of $500 or more, or having issued a note, bond, certificate, policy of insurance, or other instrument of value or amount of $500 or more, or providing for the delivery or payment or the loan of money or property of such amount or value, or being under any obligation written or unwritten to the amount of $500 or more, if
(1) Two or more adverse claimants, of diverse citizenship as defined in subsection (a) or (d) ofsection 1332 of this title, are claiming or may claim to be entitled to such money or property, or to any one or more of the benefits arising by virtue of any note, bond, certificate, policy or other instrument, or arising by virtue of any such obligation; and if (2) the plaintiff has deposited such money or property or has paid the amount of or the loan or other value of such instrument or the amount due under such obligation into the registry of the court, there to abide the judgment of the court, or has given bond payable to the clerk of the court in such amount and with such surety as the court or judge may deem proper, conditioned upon the compliance by the plaintiff with the future order or judgment of the court with respect to the subject matter of the controversy.
. The conclusion in
Albers
arguably is
dicta.
The court there concluded that "[e]ven if, however, subject-matter jurisdiction is lacking under the statutory interpleader provisions of
A number of the other cases cited by Twin City do not appear to support the claim that a party may remove a case over which there is original jurisdiction pursuant to
. To the extent the Court finds that there is original jurisdiction apart from
. That provision provides, in pertinent part, that ”[a]n order remanding the case may require payment of just costs and any actual expenses, including attorney fees, incurred as a result of the removal.”