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The Wild West of Improper Joinder in North Texas

Texas Law360
August 17, 2015

By Jennifer L. Gibbs
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In 1998, the Texas Supreme Court recognized that an insurance claim adjuster can be held personally liable for a breach of the Texas Insurance Code. Based on this precedent, it has become commonplace for claim adjusters to be named as defendants in lawsuits arising from disputed insurance claims. The question, however, is whether the plaintiff has a legitimate expectation of developing a valid theory and obtaining a recovery from this defendant or whether the joinder of this defendant is for the sole purpose of destroying diversity jurisdiction to keep the matter in state court.

Regardless of the plaintiff’s motivation, the issue of whether simply adding a nondiverse claim adjuster to a boilerplate petition will ensure that the case survives removal based upon fraudulent joinder has become a hotly-disputed issue in the Northern District of Texas. At the present time, the District Court judges in the Northern District are split as to the proper standard of review for improper joinder.

For example, Judge John McBryde has issued eight recent opinions considering the “badges of improper joinder” and ruled that a nondiverse adjuster was improperly joined. Conversely, District Court Judges Jane Boyle and Mary Lou Robinson have both found that Judge McBryde’s badges of improper joinder were not relevant to the inquiry of whether the plaintiff can establish a cause of action against a nondiverse defendant in state court. In fact, Judge Robinson went a step further and granted a plaintiff’s petition for attorneys’ fees, finding that the defendant insurer had no objectively reasonable grounds for believing removal was proper — despite recognizing the split within the Northern District and that the insured’s petition bore two of the three badges of improper joinder.

Until the District Court judges in the Northern District reach a consensus regarding the proper standard for review for determining improper joinder, all practitioners need to be aware of these recent rulings and advise their clients accordingly.

Badges of Improper Joinder

As noted by Judge McBryde in Davis v. Metro. Lloyds Insurance Co. of Texas, No. 4:14-CV-957-A, 2 (N.D. Tex. Feb. 3, 2015):

Certain attorneys representing insureds/claimants who are citizens of Texas and who are dissatisfied with the noncitizen insurer's response to the insured's/claimant's policy demand have developed a practice of filing suit in state court against the noncitizen insurer and an insurance adjuster or agent who is a citizen of Texas with the goal of preventing the insurance company from exercising its right to have the case removed to and heard by a federal court.

In response to this recognized tactic for destroying complete diversity, Judge McBryde identified certain “badges of improper joinder” weighing in favor of a decision that claim adjuster had been improperly joined for the purpose of defeating removal. See, e.g., Plascencia v. State Farm, No. 4:14-CV-00524-A (N.D. Tex. Sept. 25, 2014).

The first of the “badges of improper joinder” is the use by the plaintiff of a boilerplate petition developed for use in similar cases, which appears to be purposefully designed to defeat federal court jurisdiction. Id. at page 16. The second badge is the failure of the plaintiff to serve the non-diverse adjuster defendant, indicating that the plaintiff had no intention of pursuing an action against the adjuster. Id. at page 17. The third badge of improper joinder is the absence of any plausible basis for suing the Texas citizen other than to defeat diversity. Id. at page 18.

Since the Plascencia decision, Judge McBryde has issued a series of similar decisions denying remand. See Davis v. Metro. Lloyds Insurance Co. of Texas, No. 4:14-CV-957-A, (N.D. Tex. Feb. 3, 2015); Vann v. Allstate Insurance Co., No. 4:15-CV-277-A, (N.D. Tex. May 12, 2015); SYP–Empire LC v. Travelers Casualty Insurance Co. of America, No. 4:15–CV–213–A, (N.D.Tex. May 12, 2015); Cano v. Allstate Texas Lloyds, No. 4:15–CV–096–A, 2015 U.S. Dist. LEXIS 63477, at *1 (N.D.Tex. May 14, 2015); Gonzalez v. State Farm Lloyds, No. 4:15-CV-305-A, (N.D. Tex. May 27, 2015); Arriaga v. State Farm Lloyds, No. 4:15–CV–308–A (N.D.Tex. May 27, 2015); Hershon v. State Farm Lloyds, No. 4:15–CV–312–A (N.D.Tex. May 27, 2015); Ogden v. State Farm Lloyds, No. 4:15-CV-139-A, (N.D. Tex. May 28, 2015).

Other judges have recognized Judge McBryde’s “badges of improper joinder” in addressing similar motions for remand. See, e.g., Slabaugh v. Allstate, 4:15cv115, (E.D. Tex. June 30, 2015)(applying the “badges of improper joinder” analysis in denying the insured’s motion for remand and finding the individual adjuster improperly joined). Although the tide seemed to have been turning in favor of insurers seeking to remove on the basis of a fraudulently joined Texas resident adjuster, the recent opinions by District Court Judges Boyle and Robinson appear to have muddied the waters.

Rejecting the Badges of Improper Joinder

In Linron Properties v. Wausau Underwriters Insurance Co., et al, No. 3:15-CV-00293-B (N.D. Tex. June 16, 2015), the underlying claim involved storm damage to a commercial property owned by Linron. Apparently dissatisfied with the amount it recovered pursuant to its policy, the insured filed suit against Wausau and insurance adjuster Sara Springman. The plaintiff’s petition asserted that Springman failed to conduct a full, fair, prompt and reasonable investigation of its claimed damages, conducted an outcome-oriented investigation and also hired experts she allegedly knew would underscope the plaintiff’s damages. Linron also claimed that Springman made material representations about policy provisions, coverage and the law in Texas. Wausau removed the case arguing that Springman was improperly joined.

Not unlike other opinions granting remand, U.S. District Court Judge Boyle latched on to the holding that “an individual adjuster may be held individually liable for violating chapter 541 of the Insurance Code.” Liberty Mutual Insurance Co. v. Garrison Contractors, 966 S.W.2d 482 (Tex. 1998). The court recognized that a few courts have recently begun to question the appropriateness of holding an adjuster individually liable for unfair settlement practices under Section 541.060. See Messersmith v. Nationwide Mutual Fire Insurance Co., 10 F.Supp.3d 721, 724 (N.D. Tex. 2014) (Judge J. Solis) and OneWay Investments v. Nationwide Mutual Fire Insurance, (N.D. Tex. Dec. 11, 2014)(Judge S. Fitzwater). And although Judge Boyle recognized the logical appeal of those opinions, she determined that a close examination of the precise language of Section 541.060, which prohibits those engaged in the business of insurance from failing to attempt in good faith to effectuate a prompt, fair and equitable settlement, requires a different result. The court found that because the statute used the word “effectuate,” which means “to cause to come into being” or “to bring about” rather than a word that conveys finality, the statute’s prohibition would extend to all persons who play a role in bringing about a prompt, fair and equitable settlement of a claim. Thus, because an adjuster is primarily responsible for investigating and evaluating insurance claims, the court found that Section 541.060 would potentially apply and the allegations in the petition were sufficient to support an individual claim against Springman. The court then remanded the case.

Notably, however, Judge Boyle recently issued an opinion in Davis v. State Farm, (N.D. Tex. July 21, 2015), finding an insurance agent was fraudulently joined and denied the motion to remand. In that case, the insured sued State Farm and her insurance agent after her home sustained damage during a June 23, 2014, weather event. The insured asserted claims against the agent for negligent misrepresentation, fraud, violations of the Texas Deceptive Trade Practices Act and civil conspiracy to commit illegal acts. State Farm argued that the insured’s petition offered mere conclusory allegations that failed to state a plausible claim for relief against the agent. Judge Boyle agreed and denied the motion to remand. Judge Boyle’s decision to deny remand, however, appears to be based upon the inadequacy of the plaintiff’s petition as compared with Judge McBryde’s criticism of the reason for the joinder of the nondiverse agent or adjuster.

In New Life Assembly of God of the City of Pampa v. Church Mutual Insurance Co., U.S. District Court Judge Robinson failed to find Judge McBryde’s badges of improper joinder relevant to the determination of whether the plaintiff had asserted a viable cause of action against the nondiverse defendant in state court. The court instead found that the defendants had no objectively reasonable grounds for believing removal was proper. As a result, Judge Robinson granted the plaintiff’s request for an award of attorney’s fees. See New Life Assembly of God of the City of Pampa v. Church Mutual Insurance Co., No. 2:15-CV-00051-J (N.D. Tex. May 12, 2015).

Given these conflicting recent opinions out of the same federal district, what are policyholder lawyers and defense counsel to do? On one hand, there may actually be a meritorious claim against an individual agent and/or adjuster which is flushed out through discovery and the failure to name such individuals in the initial petition may miss an opportunity to assert a legitimate claim. On the other hand, experienced defense counsel are very aware that the addition of the individual nondiverse agent and/or adjuster as a defendant is a common litigation tactic to avoid federal court, with the insured having no expectation of ever developing a legitimate theory or obtaining a recovery from the individual defendant. Until the law regarding the standard of review for improper joinder is resolved in the Northern District of Texas, practitioners must be aware that whether the matter remains in federal court will be, in large part if not entirely, dependent on the judge that is assigned to the matter upon removal.

—By Jennifer Gibbs, Zelle Hofmann Voelbel & Mason LLP

Jennifer Gibbs is a senior associate in Zelle Hofmann's Dallas office.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

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