Opinion
No. SA-04-CV-480.
October 21, 2004
ORDER GRANTING PLAINTIFF'S MOTION TO REMAND
BEFORE THE COURT is Defendants' Motion to Remand (Docket No. 7), as well as Plaintiff's Response. Defendants removed to this Court, arguing that Defendant Norris Carnes ("Carnes") was fraudulently joined to defeat federal diversity jurisdiction and that Plaintiff has stated no facts upon which a cause of action against Carnes may be stated. Because the Court finds that Plaintiff has alleged facts which could support a finding of liability on his state law claims against Defendant Carnes, Plaintiff's Motion to Remand (Docket No. 7) should be GRANTED. As a result, the Court is without jurisdiction to entertain any other motions.
Factual and Procedural Background
Plaintiff's claims arise out of damage to his home and real property in San Antonio, Texas. Defendant Chubb Lloyds Insurance Company of Texas ("Chubb Lloyds") provided homeowner's insurance coverage to Plaintiff for his dwelling and personal property at 245 Genesco Road, San Antonio, Texas. During the period of those policies, Plaintiff sustained losses due to accidental plumbing or air conditioning leaks and discharges, water damage and damages to the architectural finishes of the home. In addition, Plaintiff also sustained losses for the necessary destruction and restoration of the home due to water damage.
In February 2003, Defendant Carnes, a licensed insurance adjuster, inspected Plaintiff's home. The parties dispute the purpose of Carnes's visit to Plaintiff's residence. Plaintiff alleges that Carnes inspected his home in order to look for damage to the home and find reasons to non-renew his insurance policy. Plaintiff further alleges that Carnes found extensive water and possible mold damage, failed to inform Plaintiff, and that Chubb Lloyds later used this information to non-renew Plaintiff's policy. Plaintiff claims that in April 2003 Chubb Lloyds notified Plaintiff that his homeowner's policy was not being renewed, "due to lack of acceptable property inspection."
Plf.'s Mot. to Remand, Exs. 2, A.
Defendants contend that Carnes was serving as an appraiser when he inspected Plaintiff's residence at the request of Chubb Lloyds. Defendants argue that Carnes never worked as an adjuster with regard to any claim filed by Plaintiff. Indeed, Defendants argue that Carnes has never adjusted any claim for Chubb Lloyds and cannot be held individually liable as an adjuster under Texas law. Defendants maintain that Carnes took no role in making decisions related to Plaintiff's insurance policy and submit testimonial evidence in support of all their arguments.
Def.'s Resp. In Opp. to Remand, Exs. A B.
Following the April 2003 notice of non-renewal, Plaintiff reported water and mold damage at his residence and requested that the insurance company inspect the damage. Pursuant to this claim, Chubb Lloyds quantified the damage at $52,753.96 and has paid Plaintiff this amount. Plaintiff complains that Chubb Lloyds failed to address and pay for other, related damage to his home. On May 3, 2004, Plaintiff filed his Original Petition in state court in Bexar County, Texas, alleging causes of action for breach of contract, breach of the duty of good faith and fair dealing, violations of Article 21.21 of the Texas Insurance Code and violations of the Texas Deceptive Trade Practices Act. Defendants jointly removed to this Court, and filed a Motion to Dismiss under Rule 12(b)(6), alleging that Carnes was fraudulently joined to defeat federal subject matter jurisdiction.
TEX. INS. CODEANN. art. 21.21 § 4 (Vernon 2003).
TEX. BUS. COMM CODE ANN. art. 17.01 et seq. (Vernon 2003).
On August 5, 2004, the Court denied Carnes's Motion to Dismiss without prejudice and allowed Plaintiff an opportunity to amend his pleading. On August 17, 2004, Plaintiff filed his First Amended Complaint, restating his cause of action against Defendants. Defendants again move under Rule 12(b)(6), arguing that Plaintiff's claims against Defendant Carnes must be dismissed because Carnes is not subject to individual liability because he was not acting as a claim adjuster with regard to any of Plaintiff's claims.
In their Second Motion to Dismiss, Defendants do not explicitly raise the argument that Defendant Carnes was fraudulently joined. However, constitutional limits on a federal district court's jurisdiction over a particular subject matter require it to police, on its own initiative, access to the federal forum. If the Court is without subject matter jurisdiction because Defendant Carnes — who is non-diverse from Plaintiff — was properly joined, then the lawsuit must be dismissed and remanded back to the state court for resolution.
See Ruhrgas AG v. Marathon Oil Co., 526 U.S. 574, 583-84 (1999); FED. R. CIV. P. 12(h)(3) ("Whenever it appears . . . that the court lacks jurisdiction of the subject matter, the court shall dismiss the action.").
See Sid Richardson Carbon Gasoline Co. v. Interenergy Res., Ltd., 99 F.3d 746, 751 (5th Cir. 1996).
Discussion
I. Motion to RemandPlaintiff moves the Court to remand this cause back to state court, arguing that allegations against Defendant Carnes are well-founded and supported by case law and the language of the Texas Insurance Code, Article 21.21. On the face of the complaint, complete diversity of parties seems to be lacking because both Plaintiff and Carnes are citizens of Texas. Chubb Lloyds avers in its Notice of Removal that it is a an unincorporated association and that each of its members is a citizen of the State of New Jersey. Based upon this, Chubb Lloyds claims complete diversity exists in the absence of Carnes's joinder. The parties do not dispute that the amount in controversy exceeds the minimum requirements for federal subject matter jurisdiction.
See 28 U.S.C. § 1332.
In support of its Notice of Removal, Defendants argue that notwithstanding the apparent lack of diversity, removal is warranted because Plaintiff fraudulently joined Carnes. Although this is a valid basis for removal, a defendant alleging fraudulent joinder bears the heavy burden of showing that there is no arguably reasonable basis for predicting that the plaintiff could establish a cause of action against the in-state defendant, or that there has been outright fraud in the plaintiff's recitation of the jurisdictional facts.
Badon v. R J R Nabisco, Inc., 224 F.3d 382 (5th Cir. 2000) ( Badon I), op. after certified question declined, 236 F.3d 282, 286 (5th Cir. 2000) ( Badon II).
The recent en banc decision of the Fifth Circuit Court of Appeals in Smallwood v. Illinois Central Railroad Co. guides this Court's determination of whether Carnes was improperly joined to defeat diversity jurisdiction. As the Fifth Circuit wrote in Smallwood, "The starting point for analyzing claims of improper joinder must be the statutes authorizing removal to federal court of cases filed in state court." The relevant statutory language allows for removal of "any civil action brought in a State court of which the district courts of the United States have original jurisdiction." Section 1332 requires "complete diversity," that is, the citizenship of each plaintiff must be diverse from the citizenship of each defendant.
2004 WL 2047314 (5th Cir. Sept. 10, 2004) ( en banc). The decision of the Fifth Circuit adopts the term "improper joinder" as more accurately characterizing the concept that is frequently referred to as "fraudulent joinder." Id. at *1 n. 1.
Interestingly enough, Defendants argue that Smallwood has no applicability here. The Court disagrees, finding that it is applicable, and will apply it to this fact situation.
Id. at *2. See also 28 U.S.C. §§ 1332, 1441, 1446.
Caterpillar Inc. v. Lewis, 519 U.S. 61, 67-68 (1996).
While suits arising under federal law are removable irrespective of the citizenship of the parties, all other suits are removable "only if none of the parties in interest properly joined and served as defendants is a citizen of the State in which such action is brought." If any party in the case has been improperly or collusively joined to manufacture federal diversity jurisdiction, the district court is prohibited from exercising jurisdiction over the suit. Federal courts should both carefully protect the right to proceed in federal court and allow state courts in proper cases to retain their own jurisdiction.
Smallwood, 2004 WL 2047314, at *2 (citing 28 U.S.C. § 1441(b)).
14 CHARLES ALAN WRIGHT et al., FEDERAL PRACTICE PROCEDURE § 3641, at 173 (3d ed. 1998).
With these goals in mind, the Fifth Circuit in Smallwood recognized two ways to establish improper joinder: "(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." As articulated in Travis v. Irby and explicitly reaffirmed in Smallwood, the test for fraudulent or improper joinder is whether the defendant has demonstrated that there is no possibility of recovery by the plaintiff against an in-state defendant. Put another way, there is improper joinder if there is no reasonable basis for predicting that the plaintiff might be able to recover against an in-state defendant.
2004 WL 2047314, at *2 (quoting Travis v. Irby, 326 F.3d 644, 646-47 (5th Cir. 2003)).
Id.; Travis v. Irby, 326 F.3d at 648.
Smallwood, 2004 WL 2047314, at *2. To reduce possible confusion, the Fifth Circuit expressly adopted this phrasing of the required proof and rejected all others, whether they appear to describe the same standard or not. Id. n. 9 (quoting Badon II, 236 F.3d 282, 286 n. 4 ("A `mere theoretical possibility of recovery under local law' will not preclude a finding of improper joinder.")).
In Smallwood, the Fifth Circuit also clarified the proper procedures for predicting whether a plaintiff has a reasonable basis of recovery under state law, concluding that courts may resolve the issue in one of two ways. One method is for the court to conduct "a Rule 12(b)(6)-type analysis, looking initially at the allegations of the complaint to determine whether the complaint states a claim under state law against the in-state defendant." The other option is for the court to pierce the pleadings and conduct a summary inquiry, an approach appropriate only when a plaintiff has stated a claim but has "misstated or omitted discrete facts that would determine the propriety of joinder." The choice between these procedures is within the discretion of the trial court, with the favored approach being the former, 12(b)(6)-type analysis.
Id.
Id. (quoting McKee v. Kansas City S. Ry. Co., 358 F.3d 329, 334 (5th Cir. 2004)).
Id.
Id.
Since Defendants filed a Second Motion to Dismiss under Rule 12(b)(6) after Plaintiff filed his Amended Complaint and Plaintiff responded, the Court is provided with the parties' arguments as to whether the Amended Complaint states a claim against Carnes under Texas state law.
II. Rule 12(b)(6) Analysis
For a court to grant a dismissal of a claim for failure to state a claim upon which relief can be granted, it must appear "beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." In making this determination, courts should accept as true all well-pleaded facts and view all reasonable inferences drawn therefrom in a light most favorable to the plaintiff. Gauging the likelihood of success on the merits is not appropriate; rather, courts should determine whether the complaint contains "either direct allegations on every material point necessary to sustain a recovery or . . . allegations from which an inference fairly may be drawn that evidence on these material points will be introduced at trial." However, the Court does not accept as true conclusory allegations or unwarranted deductions of fact. The nature and posture of Plaintiff's claims require the Court to construe Texas law to determine whether Plaintiff's Amended Complaint states a proper claim for individual liability against Defendant Carnes.
Conley v. Gibson, 355 U.S. 41, 45-46 (1957).
See Jones v. Greninger, 188 F.3d 322 (5th Cir. 1999).
WRIGHT MILLER § 1216 at 156-59.
Tuchman v. DSC Communications Corp., 14 F.3d 1061, 1067 (5th Cir. 1994).
A. Individual Liability Under Article 21.21
Under the Texas Insurance Code, a person may be held liable for engaging in deceptive trade practices, as defined in Article 21.21. Several sections of Article 21.21 are relevant here. Section 4 sets out a list of deceptive insurance practices including misrepresentation, false advertising, defamation, coercion, and unfair discrimination. Section 16 provides a private cause of action against a person that engages in one of the enumerated deceptive actions. The term "person" is construed to include individuals engaged in the business of insurance, not just insurance companies. Under Section 2(a), any individual or company engaged in the business of insurance — including "agents, brokers, adjusters, and life insurance counselors" — may be liable for deceptive insurance practices. Thus, an insurance claims adjuster may be held individually liable if he is found to have engaged in any of the deceptive practices proscribed in Section 16. However, in order to establish a claim against an individual who engages in the business of insurance in the course of his employment with an insurance company, there must be "evidence sufficient to sustain a finding that the employee himself committed a violation of Article 21.21 (or the DPTA) (and that such violation was the cause of damage or legally recognized harm to the plaintiff)."
TEX. INS. CODEANN., art. 21.21, § 16(a).
Liberty Mutual Ins. Co. v. Garrison Contractors, Inc., 966 S.W.2d 482, 485 (Tex. 1998).
TEX. INS. CODEANN., art. 21.21, § 2(a).
Hornbuckle v. State Farm Lloyds, 2004 WL 201 1409, at * 5 (5th Cir. Sept. 10, 2004) (emphasis in original).
Plaintiff complains that Defendant Carnes failed to provide him with certain information about the mold and water damage and that it may have been covered under Plaintiff's Chubb Lloyds policy. Plaintiff also complains that Carnes misrepresented to Plaintiff that Carnes was present at his home to appraise its value and that the damage discovered did not exceed Plaintiff's deductible amount. Finally, Plaintiff complains that Carnes failed to take a number of other actions — including conduct a reasonable investigation, issue a damage report to Plaintiff, issue an "appraisal," and warn Plaintiff that the mold could affect his health — in violation of the Texas Insurance Code.
Plf.'s First Amended Compl. at 6, para. 12.
Id. at 6-7.
The Court is conscious of its role at this stage: to determine whether Plaintiff's complaint provides a reasonable basis for predicting that the plaintiff might be able to recover against an instate defendant. The appropriate task before the Court is not to ascertain the merits of Plaintiff's claim. Instead, the question is merely whether Plaintiff can prove a set of facts that would entitle him to relief against Carnes. Article 21.21 proscribes as an unfair insurance practice "making any misrepresentation to any policyholder insured in any company. . . ." This language is designed to be liberally construed in order to fulfill its legislative purpose. Plaintiff has effectively alleged that Carnes misrepresented himself and the purpose of his visit to Plaintiff's home in February 2003. The Court must determine whether Carnes is subject to individual liability under Article 21.21.
Smallwood, 2004 WL 2047314, at *2.
Conley v. Gibson, 355 U.S. at 45-46.
TEX. INS. CODEANN., art. 21.21, § 4(1).
Id. § 1(b); Transport Ins. Co. v. Faircloth, 861 S.W.2d 926, 939 (Tex.App. 1993), reversed on other grounds, 898 S.W.2d 269.
Defendants challenge Plaintiff's claims under Article 21.21 against Carnes, arguing primarily that Carnes is not a "person" subject to suit under Article 21.21. They emphasize that even though Carnes is a licensed adjuster, he did not serve as an adjuster at any time relevant to this action. Defendants insist that Plaintiff misstates Carnes's role in the February 2003 inspection, arguing that Carnes was acting as an appraiser or "estimator," and that he is not subject to liability as a result. Defendants argue in light of the statutory definition of "adjuster" — which supposes an existing insurance claim — that Carnes could not have been an adjuster for Plaintiff's claims because they were not filed until April 2003, months after Carnes's visit.
See TEX. INS. CODEANN., art. 21.07-4, § 1(b)(3) (specifically excluding from personal liability persons employed only for purposes of furnishing technical assistance to licensed adjusters).
Def.'s Mot. at 3; Reply at 2.
The parties thus dispute whether Carnes's role was adjuster, appraiser, or mere estimator when he inspected Plaintiff's residence. The parties' argument on this point suggest that individuals may only be liable under Article 21.21 when acting as adjusters. This conclusion is supported neither by the plain language of the statute nor the cases construing it. Article 21.21 clearly states that "any individual" who is "engaged in the business of insurance" may be liable under Section 16. While not every insurance company employee is a "person" under Article 21.21, individuals who need special insurance expertise in order to perform their jobs are considered to be engaged in the business of insurance and subject to individual liability under Article 21.21.
TEX. INS. CODEANN., art. 21.21, § 2(a).
See, e.g., Liberty Mutual, 966 S.W.2d at 486.
Thus, whether Carnes was acting as an adjuster per se when he inspected Plaintiff's residence is an ancillary issue with which the Court need not directly concern itself. The critical element that would support claims of individual liability against Carnes is whether he violated Article 21.21's proscriptions while engaging in the business of insurance. Defendants argue that Carnes played no part in any decisions that Chubb Lloyds made regarding Plaintiff's insurance policy or claims for losses to Plaintiff's residence because Carnes was only working as an appraiser or estimator in February 2003. As a result, Defendants claim that Carnes had no part in "servicing" Plaintiff's policy and did not otherwise engage in the business of insurance. However, Defendants do not allege that Carnes was engaged in providing merely technical assistance to a licensed adjuster, which would relieve him of potential individual liability under Section § 1(b)(3).
Liberty Mutual, 966 S.W.2d at 486 (only persons "engaged in the business of insurance" subject to suit under Article 21.21, § 16).
Further, as Defendants concede, Carnes's duties for Chubb Lloyds included assessing the risk of insuring residences, including Plaintiff's residence. Despite Defendants' arguments to the contrary, these types of duties do appear to fall within the definition of engaging "in the business of insurance" set out by the Texas Supreme Court in Liberty Mutual. While the court did not precisely define the parameters of this concept, it noted that insurance company employees who needed specialized knowledge to perform their jobs were acting in the business of insurance.
Def.'s Reply at 2-3.
See Liberty Mutual, 966 S.W.2d at 486.
Id.; Vargas v. State Farm Lloyds, 216 F.Supp.2d 643, 648 (S.D. Tex. 2002).
The Texas Supreme Court contrasted this situation with clerical workers or janitors, who have no special insurance expertise and were thus not engaged in the business of insurance. Since assessing risk is a specialized job within the insurance industry that is defined and regulated by the State of Texas, Plaintiff would likely be able to prove that persons who perform this service for an insurance company are engaging in the business of insurance. Thus, Plaintiff could reasonably prove that by assessing the risk of insuring Plaintiff's home for Chubb Lloyds, Carnes engaged in the business of insurance and thus subject to individual liability under Article 21.21 and cases decided thereunder. This meets the test articulated in Smallwood, since there is now clearly a reasonable basis for predicting that Plaintiff could be able to recover against the in-state Defendant Carnes.
Liberty Mutual at 486; Vargas, 216 F.Supp.2d at 648.
See Tex. Ins. Code, art. 21.14-1, § 2.
B. Fifth Circuit's Decision in Griggs
For support, Defendants also point to the Fifth Circuit's decision in Griggs v. State Farm Lloyds, affirming a district court's dismissal of claims against an individual insurance agent. In that case, the plaintiff failed to show a special relationship between himself and the agent sufficient to support a finding of liability on the part of the agent. Indeed, neither the original nor amended petition in Griggs alleged any actionable facts giving rise to individual liability on the part of the defendant agent. Likening the facts in that case to those before this Court, Defendants argue that the holding in Griggs dictates dismissal of Plaintiff's claims against Carnes. Defendants read the Fifth Circuit's decision about the potential liability of the individual defendant in Griggs as hinging on the amount of decision-making authority that the individual defendant had in that case.
181 F.3d 694 (5th Cir. 1999).
See Griggs, 181 F.3d at 699.
Def.'s Mot. at 4; Reply at 4.
Reply at 4.
However, the portion of the Griggs opinion emphasizing the defendant's decision-making authority discussed the potential contract liability against the individual defendant. The Griggs panel did not focus on the individual's decision-making authority when discussing liability under Article 21.21. Instead, that court focused on the relevant question, whether the plaintiff there had plead any facts which could support a finding of liability under Article 21.21. The Griggs decision makes clear that plaintiffs must plead facts showing an actionable deceptive practice under Article 21.21 and that the defendant's conduct was the cause in fact of actual damages.
See Griggs, 181 F.3d at 700.
Id. at 700-01.
Id. at 702.
The situation in Griggs is easily distinguishable from the situation before this Court. Plaintiff here has alleged several actions and misrepresentations against Defendant Carnes which this Court believes are sufficient to state a claim against Carnes for individual liability under Article 21.21. The situation is nothing like that in Griggs where "the only factual allegation even mentioning [the individual defendant]" merely stated that individual acted as the local agent for the policy at issue. Here, Plaintiff has enumerated several specific allegations in support of his claim that Carnes's conduct violated Article 21.21's proscription against deceptive acts or practices. Thus, the Griggs case is not binding on this Court in its determination of whether Plaintiff has alleged a cause of action against Carnes sufficient to support a finding of individual liability under Article 21.21.
Id. at 700-01.
If anything, the Griggs decision provides further support for this Court's determination that Plaintiff has stated facts sufficient to defeat Defendants' Rule 12(b)(6) motion to dismiss. Of course, when his claims are actually heard on their merits, Plaintiff will be required to prove that Carnes engaged in the actions prohibited by Article 21.21 and that Carnes's actions were the cause in fact of Plaintiff's damages. However, this Court need not weigh that evidence and make those determinations. Since Plaintiff's Amended Complaint provides the Court with a reasonable basis for predicting that Plaintiff could recover against the in-state Defendant Carnes for violations of Article 21.21, the Smallwood test is met and joinder was proper, thereby defeating complete diversity. As a result, the Court is without jurisdiction to entertain this case and must remand it back to state court for proceedings on the merits of Plaintiff's claims against Defendants.
Conclusion
For the foregoing reasons, it is hereby ORDERED that Plaintiff's Motion to Remand (Docket No. 7) is GRANTED. The Court being without jurisdiction to hear any other claims or take any other action in the matter, the cause is REMANDED to the 285th Judicial District, Bexar County, Texas.