Lawrence Family Fund, LLC v. Westchester Surplus Lines Ins. Co.

661 F.Supp.3d 635

LAWRENCE FAMILY FUND, LLC v. WESTCHESTER SURPLUS LINES INSURANCE COMPANY, et al.

CIVIL NO. 4:22-CV-240-SDJ

United States District Court, E.D. Texas, Sherman Division

Signed March 10, 2023

William Lee Calhoun, III, Calhoun Law Firm, PLLC, San Antonio, TX, Michelle Calhoun, Speights & Worrich, San Antonio, TX, for Lawrence Family Fund, LLC.

James B. Harper, Alicia G. Curran, Cozen O'Connor, Dallas, TX, for Westchester

Surplus Lines Insurance Company, Engle Martin & Associates, Inc.

MEMORANDUM OPINION AND ORDER

SEAN D. JORDAN, UNITED STATES DISTRICT JUDGE

This case involves an insurance dispute arising under Texas law. Although the case was originally filed in state court, Defendants Westchester Surplus Lines Insurance Company ("Westchester") and Engle Martin & Associates, LLC ("Engle Martin") removed the action and asserted diversity jurisdiction pursuant to 28 U.S.C. § 1332. (Dkt. #1, #15). The parties agree that one Defendant, Frederick Achala, is a non-diverse party, thus ostensibly defeating complete diversity. (Dkt. #15, #17). However, Westchester and Engle Martin maintain that Achala is improperly joined and therefore should be dismissed from the case and disregarded for purposes of establishing diversity jurisdiction. (Dkt. #15 at 4-10). Because the Court finds that Achala is not improperly joined, the Court concludes that complete diversity is lacking and therefore the Court does not have jurisdiction under 28 U.S.C. § 1332. Accordingly, remand is warranted.

I. BACKGROUND

At issue in this case is Westchester's denial of Plaintiff Lawrence Family Fund LLC's ("Lawrence") insurance claim for theft and damage caused due to a burglary at its vacant commercial property in Denton, Texas. (Dkt. #15-2). Through Defendant Patrick Burton Insurance Agency, Inc. ("Burton"), Lawrence obtained an insurance policy with Westchester for that property. (Dkt. #15-2 at 8). In August 2020, the building was burglarized, and Lawrence filed an insurance claim with Westchester. (Dkt. #15-2 at 8). Westchester assigned Engle Martin to evaluate the claim, who in turn sent Frederick Achala, a local claims adjuster, to investigate. (Dkt. #15-2 at 8).

During the investigation, Lawrence's trustee, Dr. Troy Lawrence, provided Achala with information about the building and burglary. (Dkt. #15-10 at 1). Dr. Lawrence stated that, when the burglary occurred, the building had no electricity and did not have a functioning alarm system. (Dkt. #15-10 at 1). Based on that information, Westchester denied Lawrence's claim on the basis that there was no burglary alarm system in place at the time of the loss—a requirement under the insurance policy. (Dkt. #15-2 at 8-9).

Lawrence now claims that the building had both electricity and a functioning alarm system at the time of the burglary and that Achala would have discovered this fact had he conducted a reasonable investigation to verify the validity of Dr. Lawrence's statement. (Dkt. #15-2 at 9). Lawrence filed suit in the 16th Judicial District Court of Denton County, Texas against Westchester, Burton, Engle Martin, and Achala claiming that the Defendants engaged in unfair insurance practices in violation of Texas law. (Dkt. #15-2). Among its claims, Lawrence contends that Achala failed to conduct a reasonable investigation and that both Achala and Westchester violated Texas Insurance Code § 541.060(a)(7) by rejecting its claim based on Achala's inadequate investigation. (Dkt. #15-2 at 11).

Westchester and Engle Martin subsequently removed the case to federal court pursuant to 28 U.S.C. § 1441, asserting diversity jurisdiction under 28 U.S.C. § 1332. (Dkt. #1). Westchester and Engle Martin contend that, while on the face of the pleadings there is not complete diversity between the parties because Lawrence and Achala are both citizens of Texas, the Court nevertheless has jurisdiction because Achala was improperly joined and therefore must be disregarded for the purpose of determining jurisdiction.¹ (Dkt. #15). In support of their improper joinder argument, Westchester and Engle Martin maintain that Lawrence has "no reasonable basis . . . to recover against Achala," and therefore the Court must disregard his citizenship, dismiss him from the case, and exercise jurisdiction over the remaining non-diverse Defendants. (Dkt. #15 at 6). For the reasons that follow, the Court holds that Achala was not improperly joined, and thus concludes that removal was improper.

II. LEGAL STANDARD

The "starting point" for analyzing claims of improper joinder is the federal removal statute. Smallwood v. Ill. Cent. R.R. Co., 385 F.3d 568, 572 (5th Cir. 2004) (en banc). That statute permits the removal of "any civil action brought in a State court of which the district courts of the United States have original jurisdiction." 28 U.S.C. § 1441(a). It further provides that suits "may not be removed if any of the parties in interest properly joined and served as defendants is a citizen of the State in which such action is brought." 28 U.S.C. § 1441(b)(2) (emphasis added). Thus, proper joinder must be established for a federal district court to exercise jurisdiction over a removed action.

If a party establishes improper joinder, "the court may disregard the citizenship of that [improperly joined] defendant, dismiss the non-diverse defendant from the case, and exercise subject matter jurisdiction over the remaining diverse defendant." Advanced Indicator & Manufacturing, Inc. v. Acadia Insurance Co., 50 F.4th 469, 473 (5th Cir. 2022) (per curiam) (quoting Flagg v. Stryker Corp., 819 F.3d 132, 136 (5th Cir. 2016) (en banc)). Improper joinder may be established in two ways: "(1) actual fraud in the pleading of jurisdictional facts, or (2) inability of the plaintiff to establish a cause of action against the non-diverse party in state court." Smallwood, 385 F.3d at 573 (quoting Travis v. Irby, 326 F.3d 644, 646-47 (5th Cir. 2003)). Here, because there is no claim of fraud in the jurisdictional pleadings, only the latter option is in play.

For the latter option, a defendant must show, under a Rule 12(b)(6)-type analysis, "that there is absolutely no possibility that the plaintiff will be able to establish a cause of action against the [non-diverse] defendant in state court." Great Plains Tr. Co. v. Morgan Stanley Dean Witter & Co., 313 F.3d 305, 312 (5th Cir. 2002) (quotations omitted); see also Advanced Indicator, 50 F.4th at 473 (quoting Travis, 326 F.3d at 646-47) (same). There is a temporal component to this analysis, as the court must determine "the plaintiff's possibility of recovery against that defendant at the time of removal." Advanced Indicator, 50 F.4th at 473 (quoting Flagg, 819 F.3d at 137) (emphasis in original).

"The burden of demonstrating [improper] joinder is a heavy one." Griggs v. State Farm Lloyds, 181 F.3d 694, 701 (5th Cir. 1999). In deciding whether a non-diverse party was improperly joined, federal courts must "resolve all contested factual issues and ambiguities of state law in favor of the plaintiff." Gasch v. Hartford Acc. & Indem. Co., 491 F.3d 278, 281 (5th Cir. 2007). This is because the practical effect of removal is "to deprive the state court of an action properly before it" raising "significant federalism concerns." Id. (quotations omitted). Given these concerns, "[t]he removal statute is therefore to be strictly construed, and any doubt about the propriety of removal must be resolved in favor of remand." Id. at 281-82. Thus, "the existence of even a single valid cause of action against a [non-diverse defendant] (despite the pleading of several unavailing claims) requires remand of the entire case to state court." Gray ex rel. Rudd v. Beverly Enters.-Miss., Inc., 390 F.3d 400, 412 (5th Cir. 2004).

III. DISCUSSION

In its state court petition, Lawrence's claims against Achala fall into three categories: (1) unfair insurance practices under Texas Insurance Code Chapter 541; (2) deceptive trade practices under Texas's Deceptive Trade Practices Act; and (3) breach of the common law duty of good faith and fair dealing. (Dkt. #15-2 at 16-20). Westchester and Engle Martin assert that none of these claims against Achala is viable under Texas law, and thus Achala was improperly joined. However, if the Court determines that Lawrence has a possibility of recovery against Achala on even one of these claims, the entire case must be remanded. See Gray ex rel. Rudd, 390 F.3d at 412. Because the Court concludes that Lawrence has a viable Chapter 541 claim against Achala, it need not analyze the other causes of action. Id.

A. The Court Looks to Texas Courts' Construction of Chapter 541 of the Texas Insurance Code to Determine Its Application to Adjusters.

At the outset, the Court notes that there has been substantial disagreement among federal district courts as to which provisions of Chapter 541 of the Texas Insurance Code apply to adjusters individually. Compare, e.g., Messersmith v. Nationwide Mut. Fire Ins. Co., 10 F.Supp.3d 721, 724-25 (N.D. Tex. 2014) (finding that an adjuster could not be held liable under Sections 541.060(a)(2) and (a)(7)), with Exch. Servs., Inc. v. Seneca Ins. Co., No. 3:15-CV-01873-M, 2015 WL 6163383, at *4-5 (N.D. Tex. Oct. 16, 2015) (finding that an adjuster could be individually liable under Sections 541.060(a)(2), (a)(3), (a)(4), and (a)(7)); see also Waste Management, Inc. v. AIG Specialty Insurance Co., 974 F.3d 528, 533 (5th Cir. 2020) (collecting cases). Some of the disagreement among federal district courts concerning Chapter 541 has been premised on a flawed approach to analyzing this issue of substantive Texas law.

Specifically, some courts have engaged in their own, independent review and interpretation of Chapter 541's provisions when conducting improper-joinder analysis, without any consideration of how the Texas Supreme Court and Texas intermediate appellate courts construe Chapter 541. In doing so, these courts have departed from the well-established principle...