Insurance lawyers in the Dallas and Fort Worth, plus other parts of the state, need to read this 2022, United States 5th Circuit opinion. It is styled, Advanced Indicator And Manufacturing, Incorporated v. Acadia Insurance Company; Nicolas Warren.
Advanced asserts it suffered damage to the roof of its building as the result of the storm, Hurricane Harvey. Advanced submitted a claim to Acadia and Acadia assigned Warren to adjust the claim. Warren inspected the building and determined that the damage was pre-existing and leaks resulted from deterioration and poor workmanship. Based on Warren’s report, Acadia denied the claim.
On August 7, 2018, Advanced sued Acadia and Warren in state court, alleging various claims, including breach of contract, common law bad faith, and violations of the Texas Prompt Payment of Claims Act. On August 30, 2018, Acadia elected to accept responsibility for Warren under Section 542A.006 of the Texas Insurance Code, which provides that an insurer may accept liability for its agents. The next day, Acadia removed the case to federal court. One week later, Warren filed a motion to dismiss, arguing in part that Advanced could no longer state a claim against him. Advanced filed a motion to remand the case to state court, arguing that Warren was not improperly joined notwithstanding Acadia’s Section 542A.006 election. The remand was denied without reason by the District Court except to say that Warren was improperly joined.
We begin by considering whether the district court erred in denying Advanced’s motion to remand. The parties agree that when Advanced filed suit against Acadia (an out-of-state resident) and Warren (an in-state resident), Advanced had valid claims against both defendants. Because Advanced and Warren are both Texas residents, there was not complete diversity at the outset of the suit, and the matter could not be removed. Acadia then elected to accept liability for Warren pursuant to Texas Insurance Code Section 542A.006, which provides that should an insurer accept responsibility for its agent after suit is filed, “the court shall dismiss the action against the agent with prejudice.” Acadia filed a notice of removal the next day on the grounds that Advanced could no longer state a claim against Warren. We must determine whether Acadia’s Section 542A.006 election made this matter removable.
Advanced offers two arguments for why remand was proper. First, it contends Acadia’s removal in this case violates the involuntary-voluntary rule, which states that a case may only be made removable by a voluntary act of a plaintiff. Second, it argues that Warren was properly joined under the specific language of Section 542A.006 because Acadia only elected to accept liability for him after suit was filed. We address each argument in turn.
The federal courts may exercise diversity jurisdiction over a civil action between citizens of different States if the amount in controversy exceeds $75,000. Federal law provides purusant to 28 U.S.C. 1441(a) that federal courts have removal jurisdiction over suits that could have originally been filed in federal court. Further, pursuant to 28 U.S.C. 1446(b)(3),if it later becomes clear that diversity jurisdiction exists even when it was not clear from the face of the initial pleading, the case can often be removed to federal court.
Ordinarily, diversity jurisdiction requires complete diversity—if any plaintiff is a citizen of the same State as any defendant, then diversity jurisdiction does not exist. However, if the plaintiff improperly joins a non-diverse defendant, then the court may disregard the citizenship of that defendant, dismiss the non-diverse defendant from the case, and exercise subject matter jurisdiction over the remaining diverse defendant.
A defendant may establish improper joinder 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. Only the second method of proving improper joinder is at issue here. To show that a plaintiff cannot establish a cause of action against the non-diverse party in state court, a defendant must show that there is no possibility of recovery by the plaintiff against an in-state defendant, which stated differently means that there is no reasonable basis for the district court to predict that the plaintiff might be able to recover against an in-state defendant. The court may 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. But when a plaintiff has misstated or omitted discrete facts that would determine the propriety of joinder then the district court may, in its discretion, pierce the pleadings and conduct a summary inquiry. Importantly, to determine whether a plaintiff has improperly joined a non-diverse defendant, the district court must examine the plaintiff’s possibility of recovery against that defendant at the time of removal.
Advanced argues that removal of this case based on Acadia’s post-suit, pre-removal Section 542A.006 election violates the voluntary-involuntary rule. This judicially created rule dictates that an action nonremovable when commenced may become removable thereafter only by the voluntary act of the plaintiff. Advanced contends that because the Section 542A.006 election was an action of a defendant, rather than the plaintiff, it cannot make the case removable.
Today we adopt the latter approach, which is a natural extension of our precedent. Indeed, courts have long recognized an exception to the voluntary-involuntary rule where a claim against a nondiverse or in-state defendant is dismissed on account of fraudulent joinder. Moreover, our en banc court stressed that to determine whether a plaintiff has improperly joined a non-diverse defendant, the district court must examine the plaintiff’s possibility of recovery against that defendant at the time of removal.
Advanced makes a second, and related, argument based on the language of Section 542A.006. The statute provides that when an insurer elects to accept responsibility for an agent before an action is filed, no cause of action exists against the agent related to the claimant’s claim, and, if the claimant files an action against the agent, the court shall dismiss that action with prejudice. But when an insurer elects to accept responsibility for an agent after an action is filed, the statute provides that “the court shall dismiss the action against the agent with prejudice.” Advanced argues that because Acadia elected to accept responsibility for Warren after suit was filed, Warren was properly joined as Section 542A.006(c), rather than Section 542A.006(b), applies, and Section 542A.006(c) excludes the language “no cause of action exists against the agent related to the claimant’s claim.”
We hold that Advanced’s argument is unavailing because it fails to consider that the district court must examine the plaintiff’s possibility of recovery against that defendant at the time of removal. Because Acadia elected to accept liability for Warren before removal, even though suit had already been filed, the statute required that the court shall dismiss the action against the agent with prejudice. At the time of removal, then, it would have been proper for the district court to find that there is no possibility of recovery by Advanced against an in-state defendant—here, Warren. Accordingly, the differences between Sections 542A.006(b) and 542.006(c) are not material as long as the insurer elects to accept liability for the agent before removal.