LEONARD D. MORGAN, et al., Plaintiffs, v. CHUBB LLOYDS INSURANCE COMPANY OF TEXAS, Defendant.
Civil Action No. 4:21-cv-00100-P
IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS FORT WORTH DIVISION
May 25, 2021
In this first-party-insurance case, the Court must first decide a Texas statute‘s effect on its subject-matter jurisdiction. See
Now before the Court is Plaintiffs’ motion to remand, which forces the Court to answer this question: in determining diversity jurisdiction, does the Court consider Smith‘s citizenship? The Fifth Circuit has not ruled on this question and the district courts are deeply divided. See Ramirez v. Allstate Vehicle & Prop. Ins. Co., 490 F. Supp. 3d 1092 (S.D. Tex. 2020) (citing cases). Having now considered the parties’ arguments and applicable law, the Court concludes that it must consider Smith‘s citizenship. Accordingly, this Court lacks jurisdiction and will REMAND.
BACKGROUND
This is a simple state-law coverage dispute. Plaintiffs allege that a storm damaged their property during their Chubb insurance policy‘s term. Pls.’ Amend. Pet. at 4, ECF No. 1-4. Plaintiffs submitted the damage to Chubb, and Chubb assigned Sean Smith to investigate the claim. Id. According to Plaintiffs, Chubb and Smith “performed an outcome-oriented investigation” and improperly denied Plaintiffs’ claim. Pls.’ Amend. Pet. at 4-6.
On September 28, 2020, Plaintiffs filed this case in Texas state courts, naming both Chubb and Smith as defendants. Pls.’ Orig. Pet. at 1, ECF No. 1-3. On November 11, Chubb invoked the newly enacted
Now with the only remaining defendant being Chubb, a New Jersey, New York, and Pennsylvania citizen, Chubb filed its notice of removal based on diversity jurisdiction. ECF No. 1. Plaintiffs timely filed a motion to remand, arguing that they properly joined Smith and his dismissal was involuntary, requiring remand. Pls.’ Mot.
LEGAL STANDARD
Motions to remand are governed by
DISCUSSION OF APPLICABLE LAW
To determine whether Smith‘s citizenship should be considered for jurisdictional purposes, the Court must resolve two conflicting rules within removal jurisdiction. First, Plaintiffs raise the voluntary-involuntary rule, which states that “an action nonremovable when commenced may become removable thereafter only by the voluntary act of the plaintiff.” Hoyt v. Lane Const. Corp., 927 F.3d 287, 295 (5th Cir. 2019). Second, Defendants cite the improper-joinder rule, which allows defendants to remove actions when the plaintiff cannot “establish a cause of action against the non-diverse party in state court.” Id. Although there have now been dozens of district court cases analyzing this conflict, no clear consensus has emerged regarding the rules’ interaction. See Ramirez, 490 F. Supp. 3d at 1102-03. In an effort to properly apply these rules, the Court sets out the rules’ pedigrees and rationales.
After conducting this inquiry below, the Court concludes that the two rules protect different interests that sit in tension: the voluntary-involuntary rule protects a plaintiff‘s right to choose its forum; the improper-joinder rule protects a defendant‘s right to a federal forum. Each rule must have some application, and neither can destroy the other.
A. Principles of federalism and separation of powers limit federal jurisdiction to the statutory text.
“Federal courts are courts of limited jurisdiction, possessing only that power authorized by Constitution and statute.” Gunn v. Minton, 568 U.S. 251, 256 (2013) (Roberts, C.J.) (quoting Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994)); cf. Bank of U.S. v. Deveaux, 9 U.S. 61, 87 (1809) (Marshall, C.J.) (“The duties of this court, to exercise jurisdiction where it is conferred, and not to usurp it where it is not conferred, are of equal obligation.“), overruled in part by Louisville, C. & C.R. Co. v. Letson, 43 U.S. 497 (1844). Federal courts must “scrupulously confine” their jurisdiction to the statutory text that gives jurisdiction:
The policy of the [diversity] statute calls for its strict construction. The power reserved to the states, under the Constitution (Amendment 10), to provide for the determination of controversies in their courts, may be restricted only by the action of Congress in conformity to
the judiciary sections of the Constitution (article 3). Due regard for the rightful independence of state governments, which should actuate federal courts, requires that they scrupulously confine their own jurisdiction to the precise limits which the statute has defined.
Healy v. Ratta, 292 U.S. 263, 270 (1934); cf. City of Indianapolis v. Chase Nat. Bank of City of New York, 314 U.S. 63, 76 (1941) (“The dominant note in the successive enactments of Congress relating to diversity jurisdiction is one of jealous restriction, of avoiding offense to state sensitiveness, and of relieving the federal courts of the overwhelming burden of ‘business that intrinsically belongs to the state courts’ in order to keep them free for their distinctive federal business.“). These concerns require this Court to “presume that a suit lies outside [its] limited jurisdiction.” Howery v. Allstate ins. Co., 243 F.3d 912, 916 (5th Cir. 2001).1
B. Section 1441 permits defendants to remove cases with complete diversity.
Chubb argues that the Court has removal jurisdiction. See
Except as otherwise expressly provided by Act of Congress, any civil action brought in a State court of which the district courts of the United States have original jurisdiction, may be removed by the defendant or the defendants, to the district court of the United States for the district and division embracing the place where such action is pending.
In this case, Chubb relies on the original-jurisdiction ground of diversity jurisdiction. See
C. Under Section 1446(b), a case not originally removable can become removable, but only through the plaintiff‘s voluntary act.
If a case develops diversity jurisdiction after the initial pleading, then it can also be removed. Hoyt, 927 F.3d at 295.
[I]f the case stated by the initial pleading is not removable, a notice of removal may be filed within 30 days after receipt by the defendant, through service or otherwise, of a copy of an amended pleading, motion, order or other paper from which it may first be ascertained that the case is one which is or has become removable.
The Supreme Court originally created this removal ground. Weems v. Louis Dreyfus Corp., 380 F.2d 545, 547 (5th Cir. 1967). In 1898, the Supreme Court approved a defendant removing a case after the plaintiff dismissed the only non-diverse defendant. See Powers v. Chesapeake & O. Ry., 169 U.S. 92 (1898). The Court acknowledged that diversity did not exist when the plaintiff filed in state court, but it held that jurisdiction arises “as the action assumes the shape of a removable case in the court in which it was brought.” Id. at 101.
A few years later, the Supreme Court clarified that only the plaintiff‘s voluntary act can create federal jurisdiction. Whitcomb v. Smithson, 175 U.S. 635 (1900). By 1918, the Supreme Court was able to say that it was
settled that a case . . . cannot be converted into a removable one by evidence of the defendant or by an order of the court upon any issue tried upon the merits, but that such conversion can only be accomplished by the voluntary amendment of his pleadings by the plaintiff or, where the case is not removable because of joinder of defendants, by the voluntary dismissal or nonsuit by him of a party or of parties defendant.
Great N. Ry. Co. v. Alexander, 246 U.S. 276, 280 (1918) (emphasis added). By the 1940s, the rule was well known:
[I]f the resident defendant was dismissed from the case by the voluntary act of the plaintiff, the case became removable, but if the dismissal was the result of either the defendant‘s or the court‘s acting against the wish of the plaintiff, the case could not be removed.
This rule reflects the well-cited policy of making the plaintiff the master of the complaint. JAMES WM. MOORE, 16 MOORE‘S FED. PRAC. § 107.140[3][a][C] (3rd ed. 2020). The Supreme Court relied on this policy. See e.g., Alexander, 246 U.S. at 282 (“The obvious principle of these decisions is that . . . the plaintiff may by the allegations of his complaint determine the status with respect to removability of a case .. when it is commenced, and that this power to determine the removability of his case continues with the plaintiff throughout the litigation . . . .“). This makes the voluntary-involuntary rule the diversity-jurisdiction corollary to the well-pleaded complaint rule. 16 MOORE‘S FED. PRAC. § 107.140[3][a][C]. Since this rationale underlies the rule, this Court must adhere to it. BRYAN A. GARNER ET AL., THE LAW OF JUDICIAL PRECEDENT, 27 (2016) (“The rule is that courts must adhere not just to the result but also to any reasoning necessary to that result.“).
Even though the Supreme Court held that the voluntary-involuntary rule arises from the plaintiff‘s control over the case, later courts justified the voluntary-involuntary rule because it prevents removal of state-court actions on grounds that may get reversed. See Hoyt, 927 F.3d at 297 (“When a state court order creates diversity
In 1949, Congress codified the voluntary-involuntary rule. Weems, 380 F.2d at 547. The original statute, and all subsequent versions, do not explicitly include the voluntary-involuntary rule, but after analyzing this issue, the Fifth Circuit came to the “firm conviction” that the “voluntary-involuntary rule was not affected by the amendment, and therefore remains part of today‘s applicable law.” Id. at 548. This statutory interpretation remains the law today. See GARNER ET AL., THE LAW OF JUDICIAL PRECEDENT, 333 (“Stare decisis applies with special force to questions of statutory construction.“); Halliburton Co. v. Erica P. John Fund, Inc., 573 U.S. 258, 274 (2014) (Roberts, C.J.) (“The principle of stare decisis has special force in respect to statutory interpretation because Congress remains free to alter what we have done.“) (quoting John R. Sand & Gravel Co. v. U.S., 552 U.S. 130, 139 (2008). Since then, this interpretation has been routinely followed and relied upon by district courts. See e.g., Mumfrey v. Anco Insulations, Inc., CV No. 11-2284, 2011 WL 4745626 (E.D. La. 2011) (remanding case based on voluntary-involuntary rule); Jenkins, 650 F. Supp. at 611 (remanding and noting that ”
D. The judge-made improper-joinder rule precludes a plaintiff from improperly joining a non-diverse defendant to defeat diversity.
A separate rule relating to removal jurisdiction is the improper-joinder rule. Under this rule, a defendant can claim that a plaintiff improperly added a non-diverse defendant to defeat diversity jurisdiction. See Pullman Co. v. Jenkins, 305 U.S. 534, 541 (1939) (“It is always open to the non-resident defendant to show that the resident defendant has not been joined in good faith and for that reason should not be considered in determining the right to remove.“). “The doctrine of improper joinder rests on . . . statutory underpinnings, which entitle a defendant to remove to a federal forum unless an in-state defendant has been ‘properly joined.‘” Smallwood v. Illinois Cent. R. Co., 385 F.3d 568, 573 (5th Cir. 2004) (en banc) (citing
A non-diverse defendant is improperly joined if “there is no reasonable basis for the district court to predict that
The Fifth Circuit affirmed this broad application of the improper-joinder rule in Hoyt, 927 F.3d 287. In Hoyt, the state court entered summary judgment in favor of the non-diverse defendant. The Hoyt majority concluded the summary judgment dismissed the non-diverse defendant from the case and that the plaintiff had abandoned any appeal.2 Id. at 297. Thus, according to the Hoyt majority, recovery against the non-diverse defendant was impossible, and the district court‘s order assuming diversity jurisdiction was affirmed. Id. From this case, some district courts have induced a bright-line rule: a non-diverse defendant is improperly joined when “the [diverse] defendant has demonstrated
that there is no possibility of recovery by the plaintiff against the in-state defendant . . . .” Ramirez, 490 F. Supp. 3d at 1105.
ANALYSIS
District courts have struggled to apply these rules to cases removed after a
- Stephens View: In this view, sometimes called the “majority view,” the “timing of an insurer‘s election is critical to a court‘s improper joinder inquiry.... [If the] election is made after an insured commences action, a diverse defendant-insurer cannot rely solely on the fact that the insured is now prohibited from recovering against the non-diverse adjuster.” Stephens v. Ins. Co. of Ind., No. 4:18-CV-595, 2019 WL 109395, at *6-7 (E.D. Tex. Jan. 4, 2019) (Mazzant, J.). Thus, “even though there is no possibility a plaintiff will recover against the non-diverse defendant in state court following an insurer‘s post-suit election, these courts have declined to find improper joinder and granted remand.” Bexar Diversified MF-1, LLC v. Gen. Star Indem. Co., No. SA-19-CV-773-XR, 2019 WL 6131455, at *3 (W.D. Tex. Nov. 18, 2019).
- Ramirez View: This view, sometimes called the “minority view,” holds that, after a
§ 542A.006 election, a non-diverse agent is improperly joined. A “§ 542[A].006 election made after a lawsuit commences but before removal renders the in state adjuster improperly joined because the election, which requires that the adjuster be dismissed with prejudice, precludes any recovery against the adjuster.” Ramirez, 490 F. Supp. 3d at 1103.
Complicating matters further, while the district courts were working this issue out, the Fifth Circuit issued the Hoyt opinion. Since then, the tables have turned and the minority view has been dominant. See e.g., Southbound, Inc. v. Firemen‘s Ins. Co. of Washington, D.C., No SA-21-CV-78-XR, 2021 WL 932045, at *3 (W.D. Tex. Mar. 10, 2021).
For the reasons below, the Court adopts the Stephens line of cases. In doing so, the Court accepts and enlarges the rationale the majority view rests on.
A. There is no removal jurisdiction because Plaintiffs did not voluntarily create diversity.
The parties do not dispute that the state-court order dismissing Smith from the case did not result from Plaintiffs’ voluntary action. Def.‘s Remand Resp. at ¶ 7, ECF No. 13. At the time Plaintiffs filed their original petition in Texas state court, Chubb had not elected to accept its adjuster‘s liability. And it can hardly be disputed that, as a general matter, an insured Texan may maintain a claim against an insurance adjuster related to its denial of insurance benefits. See, e.g., Gasch, 491 F.3d 282-84; Denley Group, LLC v. Safeco Ins. Co. of Indiana, No. 3:15-CV-1183-B, 2015 WL 5836226, at *3 (N.D. Tex. Sept. 30, 2015) (Boyle, J.) (“Both the Texas Supreme Court and the Fifth Circuit have recognized that an insurance adjuster may be held individually liable for violating
Under
B. Chubb failed to establish that a post-filing § 542A.006 election either qualifies as an improper joinder or that the improper-joinder rule overrides the voluntary-involuntary rule.
Chubb argues that it has established that Smith was improperly joined and that the improper-joinder rule is an exception to the voluntary-involuntary rule. In support, Chubb cites two Northern District cases. Def.‘s Remand Resp. at ¶ 8 (citing Bowers v. Chubb Lloyd‘s Ins. Co., No. 3:20-CV-1684-G, 2020 WL 5702275 (N.D. Tex. Sept. 24, 2020) (holding that a post-filing
For the reasons below, the undersigned respectfully disagrees and adopts the Stephens view. First, Chubb‘s authority is factually distinguishable or dicta. No binding authority controls this conflict between the two rules. In the absence of binding authority, the Court turned to the rules’ underlying policies and rationales to determine whether it should extend Hoyt‘s reasoning to this case.
Second, these rules’ policies clarify that a post-filing
Third, properly understood, improper-joinder rule acts not as an exception to the voluntary-involuntary rule, but as a counterweight. The Ramirez view fails to properly weigh the interest protected by the voluntary-involuntary rule, leading to the
Finally, this conclusion is buttressed by the bedrock principles of federalism and separation of powers, which caution against expanding federal jurisdiction in close cases.3 Viewed through this lens,
1. No binding authority controls § 542A.006 removals.
Chubb and the minority rule claim that Fifth Circuit precedent binds the Court to find that Plaintiffs improperly joined Smith because jurisdictional facts must be determined
at the time of removal. According to this view, an in-state defendant is improperly joined when “the [diverse] defendant has demonstrated that there is no possibility of recovery by the plaintiff against the in-state defendant . . . .” Ramirez, 490 F. Supp. 3d at 1105. This rule flows from Hoyt and is most faithfully and logically applied by the Honorable Judge Alvarez in Ramirez, 490 F. Supp. 3d 1092. As Ramirez correctly notes, the Fifth Circuit has repeatedly stated that, in removal cases, district courts must “consider the claims in the state court petition as they existed at the time of removal . . . .” Id. at 1104 (emphasis in original) (citing cases). And after a
But the phrase this rule rests on—“at the time of removal“—has never been part of Fifth Circuit holdings. None of the holdings cited in either Ramirez or Hoyt relied on the analysis‘s timing. In each opinion, no material facts changed between the plaintiff filing the case and the defendant‘s removal. See Hoyt, 927 F.3d 287 (holding plaintiff‘s claim against non-diverse defendant was never valid); Chavez v. State Farm Lloyds, 746 F. App‘x 337 (5th Cir. 2018) (deciding removal jurisdiction under
These authorities’ holdings contrast with this case‘s facts. In this case, “[t]here is no question that this case could not be removed at the time it was filed ....” Def.‘s Remand Resp. at 2, ECF No. 13. That is because, at the time of filing, Plaintiffs had claims against the non-diverse defendant, Smith. Only after Plaintiffs filed the case did Chubb‘s
This distinguishing fact is important because there are no actual binding authorities that control this situation. The minority view and Ramirez rely on the phrase, “at the time of removal” for its analysis. But as shown, this is not binding. The majority view also bases its analysis on one short phrase: “the focus of the [improper-joinder] inquiry must be on the joinder, not on the merits of the plaintiff‘s case.” Smallwood, 385 F.3d at 573. The majority view reasons that this phrase dictates that the analysis must be made at the time of filing. See Stephens, 2019 WL 109395, at *6-7. But as Ramirez correctly notes, that line too, which is quoted in numerous Fifth Circuit opinions, is dicta. The result of all this is that the factual situation caused by
2. The improper-joinder rule‘s rationale does not apply to post-filing § 542A.006 elections.
Without binding authority, the Court must rely on the policy and rationale supporting the improper-joinder rule. The improper-joinder rule holds that the non-diverse defendant never should have been a party. 16 MOORE‘S FED. PRAC. § 107.140[3][a] (“When, however, a case is dismissed because . . . there was a fraudulent joinder of parties, the court‘s finding amounts to a determination that the resident defendant was never properly before the court . . . .“). As the Fifth Circuit has said: “If no reasonable basis of recovery exists, a conclusion can be drawn that the plaintiff‘s decision to join the local defendant was indeed fraudulent . . .,” and therefore improper. McDonal, 408 F.3d at 183. As shown above, this rationale explains the improper-joinder rule‘s past application.
But the rationale does not support an improper-joinder finding when the plaintiff‘s claims against the non-diverse defendant were initially valid. In this situation, it is false to say an improper-joinder finding amounts to a determination that the non-diverse defendant was never properly before the court. It was. So far as this Court is aware, no Fifth Circuit case holds that the improper-joinder rule requires courts to pretend that a defendant that was initially joined properly became improperly joined later. This does not follow from the rule‘s rationale.
3. The improper-joinder rule is not an exception to the voluntary-involuntary rule.
Chubb cites cases that state the improper-joinder rule acts as an exception to the voluntary-involuntary rule. But this is a misnomer. See Jeff Fisher, Note,
And this is not mere semantics. Using this “exception” as its foundation, the Ramirez view effectively wipes out the voluntary-involuntary rule. See Fisher, 60 Bay. L. Rev. at 1017 (predicting that treating the improper-joinder rule as an exception to the voluntary-involuntary rule “could herald the end of the V-I rule“). As articulated in Ramirez, the improper-joinder test eviscerates the voluntary-involuntary rule. The Ramirez view results in all of plaintiff‘s involuntary dismissals leading to removal. The Hoyt majority opinion demonstrates this danger: even a contested summary judgment fails to implicate the voluntary-involuntary rule. If that is not an involuntary dismissal, then nothing is. The same is true here. Plaintiffs alleged an undisputedly valid claim against a non-diverse defendant. Later, due to Chubb‘s
This is unwise because the voluntary-involuntary rule protects the plaintiff‘s right to “determine the removability of his case . . . .” Alexander, 246 U.S. at 282. In other words, the plaintiff remains the master of the complaint. 16 MOORE‘S FED. PRAC. § 107.140[3][a][C]. As shown above, the Fifth Circuit has followed the wrong rationale for the improper-joinder rule—that the state-court dismissal cannot be reversed. The Supreme Court has never endorsed this rationale, and it has explicitly articulated the alternate rationale that a plaintiff has the right to choose its forum. See Jenkins, 650 F. Supp. at 613-14. Here, Plaintiffs want to be in state court. Under these facts, the voluntary-involuntary rule protects their right.
Not only is this “exception” unwise, it is impermissible. As noted above, the voluntary-involuntary rule has been incorporated into statute. See Weems, 380 F.2d at 548; Jenkins, 650 F. Supp. at 611 (stating that ”
4. The standard of review dictates remand.
Ultimately, this is a close question of law in an area—improper-joinder jurisprudence—that is notoriously opaque. See Ramirez, 490 F. Supp. 3d at 1107 (stating this law has “confusing precedent“). It is therefore paramount to view it through the proper lens. Federal courts “must presume that a suit lies outside [its] limited jurisdiction.” Howery, 243 F.3d at 916. Removal statutes must be “strictly construed, and
Thus, viewing the law and facts through the appropriate lens, the Court concludes that the majority view, as articulated in the Stephens line of cases, is the most compelling and adds a separate basis for adopting this position. See Stephens, 2019 WL 109395, at *7 (“Simply put, if an insurer elects to accept full responsibility of an agent/adjuster after the insured commences action in state court, the insurer must prove that the non-diverse adjuster is improperly joined for reasons independent of the election made under
CONCLUSION
For these reasons, the Court concludes that Plaintiffs’ voluntary acts did not create diversity and that Chubb failed to establish that Plaintiffs improperly joined Smith. Accordingly, Plaintiffs’ motion to remand is GRANTED and the Court hereby ORDERS that this case is REMANDED to the 96th District Court of Tarrant County, Texas. The Clerk of this Court is INSTRUCTED to mail a certified copy of this Order to the District Court of Tarrant County, Texas.
SO ORDERED on this 25th day of May, 2021.
Mark T. Pittman
Mark T. Pittman
UNITED STATES DISTRICT JUDGE