Opinion
No. 3-01-CV-1862-H
April 24, 2002
FINDINGS AND RECOMMENDATION OF THE UNITED STATES MAGISTRATE JUDGE
Plaintiff Texas True Choice, Inc. ("TTC") has filed a motion to remand this case to state court. The motion has been referred to United States Magistrate Judge Jeff Kaplan for recommendation pursuant to 28 U.S.C. § 636(b) and an order of reference dated April 16, 2002.
I.
TTC operates preferred provider organizations throughout the State of Texas. (Plf. Orig. Pet. at 3, ¶ 8). Sometime in 1999, TTC became interested in purchasing Ethix Southwest, Inc. ("Ethix"), a healthcare service organization owned and operated by Ethix Corporation, an affiliate of Aetna Inc. ("Aetna"). ( Id. at 3-4, ¶¶ 9, 11). Aetna had acquired Ethix from NYLCare Gulf Coast HMO, Inc. ("NYLCare") in July 1998. ( Id. at 3, ¶ 9). As part of its due diligence investigation, TTC met with representatives of Aetna and Ethix in San Antonio, Texas on June 3-4, 1999. ( Id. at 3-4, ¶ 11). TTC also reviewed financial statements prepared by NYLCare. According to TTC, "NYL Care of the Gulf Coast, Inc. knew that this information was being provided to, and relied upon by, potential purchasers of Ethix Southwest." ( Id.).
Based on oral representations made at the June meeting and information contained in the financial statements prepared by NYLCare, TTC submitted a bid of $2.8 million for the purchase of Ethix stock. ( Id. at 4-5, ¶ 13). The bid was accepted and closing was scheduled for September 30, 1999. ( Id..). However, the closing was repeatedly delayed due to various difficulties encountered by the seller. ( Id.. at 5, ¶ 14). By the end of 1999, TTC began to have reservations about the stock acquisition. ( Id.. at 5, ¶ 16). This concern led to further negotiations between the parties. A; a result of these discussions, Aetna agreed to lower the purchase price to $2 million, finance pat t of the sale, and include another healthcare service organization, Passport PPO, in the transaction. ( Id.. at 6, ¶ 17). Aenta's representative at these meetings, Jerry Davis, continued to represent that Ethix had approximately $1 million in collectable accounts receivable, was entitled to a 2.5% operation fee from its providers, and had no contingent liabilities. ( Id.. at 5, ¶ 15; see also id. at 4, ¶ 12). TTC ultimately purchased 10,000 shares of Ethix common stock and 1,000 shares of preferred stock for $2 million. Aetna was paid $1.1 million in cash at the time of closing and TTC executed a promissory note for the balance of $900,000.00. The details of this transaction are memorialized in a Stock Purchase Agreement dated June 23, 2000. ( Id.. at ¶ 18).
Thereafter, Aetna refused to consummate the Passport PPO sale. This caused TTC to reexamine the entire Ethix transaction. As a result of this investigation, TTC learned that the Closing Date Balance Sheet provided by Aetna overstated Ethix's account receivables by $272,638.00. In addition, income from operational fees was grossly overstated on the financial statements and there was a substantial contingent liability owed to various hospitals relating to those overpayments. ( Id.. at 7, ¶ 20). After discovering these misrepresentations, TTC demanded an adjustment to the purchase price to account for the decreased value of the company. ( Id.. at 8, ¶ 22). Aetna refused. ( Id.. at 8, ¶ 23.
On August 7, 2001, TTC sued Aetna, Ethix Corporation, NYLCare, and Davis in Texas state court for common law fraud and violations of the Texas Securities Act. Defendants timely removed the case to federal court alleging that NYLCare was fraudulently joined to defeat federal diversity jurisdiction. TTC has filed a motion to remand the case to state court. The motion has been fully briefed by the parties and is ripe for determination.
On April 13, 2001, Aetna and Ethix Corporation filed suit against TTC in the Eastern District of Pennsylvania alleging breach of the Stock Purchase Agreement. Aetna Inc., et al. v. Texas True Choice, Inc., No. 01-CV-1835. By separate motion, defendants seek to transfer the instant case to Eastern District of Pennsylvania pursuant to 28 U.S.C. § 1404(a). That motion has been stayed pending resolution of the remand issue. See ORDER, 11/16/01.
NYLCare is a Texas corporation headquartered in Richardson, Texas. (Plf. Orig. Pet. at 2, ¶ 4). TTC is also a citizen of Texas. ( Id.. at 1, ¶ 1). Aetna and Ethix Corporation are incorporated in Pennsylvania and Delaware, respectively, and both have their principal place of business in Blue Bell, Pennsylvania. ( Id.. at 1-2, ¶¶ 2, 3). Davis s an individual who resides in Middletown, Connecticut. ( id. at 2, ¶ 4). Since complete diversity does not exist, federal subject matter jurisdiction is proper only if defendants can prove that NYLCare was fraudulently joined. See Burden v. General Dynamics Corp., 60 F.3d 213, 218 (5th Cir. 1995).
II.
The fraudulent joinder of an in-state defendant will not defeat federal diversity jurisdiction. Burden v. General Dynamics Corp., 60 F.3d 213, 221 (5th Cir. 1995); Cavallini v. State Farm Mutual Auro Insurance Co., 44 F.3d 256, 258 (5th Cir. 1995). However, the burden of proving fraudulent joinder is extremely heavy. B, Inc. v. Miller Brewing Co., 663 F.2d 545, 549 (5th Cir. 1981). The removing party must show either: (1) outright fraud in the pleading of jurisdictional facts; or (2) the inability of plaintiff to establish a cause of action against the non-diverse defendant. Burden, 60 F.3d at 217; B., Inc., 663 F.2d at 549. The standard of proof is clear and convincing evidence. Grassi v. Ciba-Geigy, Ltd., 894 F.2d 181, 186 (5th Cir. 1990). The Court need not decide whether the plaintiff will actually or even probably prevail on the merits, but only whether there is a possibility that he may do so. Dodson v. Spiliada Maritime Corp., 951 F.2d 40, 42 (5th Cir. 1992). Where such a possibility exists, "the good faith assertion of such an expectancy . . . is not fraudulent in fact or in law." B, Inc., 663 F.2d at 550 (citations omitted). The Court must construe the pleadings and evidence in the light most favorable to plaintiff and resolve all factual disputes in his favor. Dodson, 951 F.2d at 42.
A.
Aetna and NYLCare have filed separate responses to the remand motion. Both argue that TTC improperly joined NYLCare as a defendant in this action to defeat federal removal jurisdiction. Aetna points out that NYLCare was not a party to the Stock Purchase Agreement, did not participate in negotiations for the sale of Ethix stock, and was not directly involved in the preparation or dissemination of financial information to TTC. (Aetna Resp. at 6-7). NYLCare maintains that the mere allegation that it prepared false financial statements does not give rise to a cause of action for common law fraud or statutory fraud under the Texas Securities Act. (NYLCare Resp. at 4-8).
In its state court petition, TTC alleges that it met with Aetna and Ethix representatives in San Antonio, Texas as part of its due diligence investigation into the stock acquisition. Although limited in the information it was allowed to review, TTC was provided with pro forma financial statements regarding the financial condition of Ethix. These statements were allegedly prepared by NYLCare. The petition goes on to state that "NYL Care of the Gulf Coast, Inc. knew that this information was being provided to, and relied upon by, potential purchasers of Ethix Southwest." (Plf. Orig. Pet. at 4, ¶ 11). Alan Scoggins, former Vice-President of Operations for TTC, testified at this deposition that Linda Ash-Jackson of Ethix and Jerry Davis of Aetna told him that the financial information came from NYLCare:
It was when we were doing due diligence work. There was financial information at summary level that was part of the different due diligence visits, and when we asked for the source of it and for additional information supporting it, we were told that this was not prepared by the folks at Ethix, that it was prepared by NYLCare of the Gulf Coast because Ethix was consolidated into a larger financial entity.
(NYLCare Sur-Resp. App., Exh. A-1 at 9-10). Scoggins proceeded to testify about the various ways in which the provider fees and accounts receivable contained in the 1998 Unaudited Financial Statement for Ethix Southwest were overstated. ( Id.., Exh. A-1 at 24-30).
The Court can consider this post-removal evidence in order to clarify or amplify the claims alleged in TTC's state court petition. See Griggs v. Sate Farm Lloyds, 181 F.3d 694, 700 (5th Cir. 1999); McCall v. UNUM Life Insurance Co. of America, 2001 WL 1388013 at *5 (N.D. Tex. Nov. 6, 2001).
Viewing the pleadings and this evidence in the light most favorable to TTC, the Court determines that Aetna and NYLCare have failed to carry their heavy burden of proving fraudulent joinder by clear and convincing evidence. There is at least some possibility that TTC can establish a cause of action against NYLCare for fraud and violations of the Texas Securities Act. Under Texas law, the elements of common law fraud are "a material misrepresentation, which was false, and which was either known to be false when made or was asserted without knowledge of its truth, which was intended to be acted upon, which was relied upon, and which caused injury." Formosa Plastics Corp. USA v. Presidio Engineers and Contractors, Inc., 960 S.W.2d 41, 47 (Tex. 1998), quoting Sears, Roebuck Co. v. Meadows, 877 S.W.2d 281, 282 (Tex. 1994). Statutory fraud under the Texas Securities Act requires proof of the same elements, except that a plaintiff need not prove knowledge or recklessness in order to recover actual damages. See TEX. Bus. COMM. CODE ANN. § 27.01(a) (Vernon 1987); Trinity Industries, Inc. v. Ashland, Inc., 53 S.W.3d 852, 867 (Tex.App.-Austin 2001, pet. denied).
The allegations contained in TTC's state court petition, as clarified by Scoggins at his deposition. suggest that TTC received false and misleading information prepared by NYLCare regarding the true financial condition of Ethix. TTC further alleges that "[NYLCare] knew that this information was being provided to, and relied upon, by potential purchasers of Ethix Southwest." (Plf. Orig. Pet. at 4, ¶ 11). These allegations, if proved, are sufficient to state a claim against NYLCare for common law and statutory fraud. That is all that is required to overcome a charge of fraudulent joinder.
Actna and NYLCare point out that TTC has no knowledge of what NYLCare was told about the need for financial statements or why these documents were requested. Pretrial discovery will undoubtedly flesh out the particulars of any communications between NYLCare, Aetna, and Ethix. For purposes of a fraudulent joinder analysis, it is sufficient for TTC to allege that NYLCare provided false information about the financial condition of Ethix, knowing that such information would be provided to and relied on by potential purchasers of the company.
B.
TTC also seeks reasonable attorney's fees incurred as a result of removal. See 28 U.S.C. § 1447(c). The propriety of removal is central to the determination whether to impose fees. See Miranti v. Lee, 3 F.3d 925, 928 (5th Cir. 1993); Ferguson v. Security Life of Denver Insurance Co., 996 F. Supp. 597, 604 (N.D. Tex.), aff'd, 162 F.3d 1160 (5th Cir. 1998) (Table). Given the rather tenuous nature of the fraud claims alleged against NYLCare, the Court cannot conclude that defendants acted improperly. Consequently, the request for attorney's fees should be denied.RECOMMENDATION
TTC's motion to remand should be granted. This case should be remanded to the 14th Judicial District Court of Dallas County, Texas. TTC's request for attorney's fees should be denied.