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Texas Courts' Consistent Inconsistency on Improper Joinders

Texas Law360
September 19, 2016

By Todd M. Tippett
To read this article in PDF format, please click here.

Throughout the onslaught of the Texas hail litigation epidemic, policyholder lawyers and firms representing insurance carriers continue to battle over whether these cases belong in Texas state court or are more properly venued within federal courts interpreting Texas law. It is a common process in storm litigation. The policyholder attorney files suit in Texas state court against the insurance carrier (the one and only true target), the in-state independent adjuster and the in-state independent adjusting firm. In turn, the law firm representing the insurance carrier removes the case to federal court, arguing the in-state independent adjuster and the in-state independent adjusting firm have been improperly joined to the suit. The policyholder lawyer then files a motion to remand and everyone holds their breath … because the only thing consistent about the various federal courts’ opinions on the issue is their inconsistency.

Insurance carriers are removing these cases based on diversity jurisdiction. When assessing whether diversity jurisdiction exists, a court must disregard the nondiverse citizenship of an improperly joined defendant.[1] However, a defendant contending that a nondiverse party is improperly joined has a “heavy” burden of proof.[2] In fact,

[t]he removing party must prove that there is absolutely no possibility that the plaintiff will be able to establish a cause of action against the in-state defendant in state court, or that there has been outright fraud in the plaintiff’s pleading of jurisdictional facts.[3]

With regard to this “heavy burden,” firms representing each side of the storm litigation docket have argued for years whether the Texas federal courts analyzing this issue should be applying the Texas fair-pleading notice standard or a more stringent federal Rule 12(b)(6) type analysis. Fortunately, the Fifth Circuit recently resolved this issue in favor of the more stringent Rule 12(b)(6) type analysis.[4] Nevertheless, inconsistency still remains.

In August 2016, two Texas federal courts utilizing the more stringent Rule 12(b)(6) type analysis arrived at very different results.[5] Each matter involved a disputed storm loss. Each suit was filed against Metropolitan Lloyds Insurance Company of Texas and the in-state independent adjusting firm, Tailored Adjusting Services Inc. In each case, the lawyers representing Metropolitan removed the case based on the improper joinder of Tailored Adjusting Services Inc. However, the Northern District and the Eastern District courts arrived at complete opposite results.

In Petree v. Metropolitan Lloyds Insurance Co. of Texas et al., Judge Joe Fish of the Northern District remanded the case back to state court. The opinion noted that the court need not decide whether the plaintiff had sufficiently pled each cause of action, but rather, the court must find in favor of remand if the court finds a reasonable basis to predict the plaintiff can potentially recover on any one of the causes of action.[6] Judge Fish determined that the plaintiff had done so against Tailored Adjusting Services Inc. Specifically, the plaintiff pled that Tailored Adjusting Services Inc. violated Texas Insurance Code section 541.060(a)(1) by “misrepresenting…material facts relating to the coverage at issue” when it failed to thoroughly investigate the damages and “focused exclusively on finding a cause of loss that would be readily excluded under the insurance policy.” The plaintiff further pled that Tailored “ignored the moisture that was entering the property via the wind driven rain (a covered cause of loss) and focused exclusively on water that was allegedly entering the property via groundwater (a noncovered cause of loss).

In applying the 12(b)(6) type federal pleading standard, and taking the facts pled as true, Judge Fish determined that there was enough factual content that would allow a court to draw the reasonable inference that the independent adjusting firm could be found liable for the misconduct alleged under the Texas Insurance Code.

Judge Fish also noted that some federal courts in Texas have further applied the heightened pleading standard found under Rule 9(b) to the fraud components. Under this rule, the plaintiff must set forth facts in the complaint to show the “who, what, when, where and how” of any alleged fraud or similar misconduct. And while Judge Fish did not agree the heightened standard under Rule 9(b) applied in the Petree case, he noted that in his opinion, the plaintiff satisfied the requirements of Rule 9(b) by specifically alleging the following disputed facts:

  • The Who — Tailored Adjusting Services Inc.
  • The What — misrepresenting a portion of the damage potentially covered under the policy
  • The When — April 25, 2016, the date of the storm
  • The Where — the plaintiff’s home
  • The How — Tailored ignored the source of the moisture entering the property

Based on the forgoing, the Northern District remanded this case back to Texas state court.

In Elizondo v. Metropolitan Lloyds Insurance Co. of Texas et al., Judge Mazzant of the Eastern District came to the opposite result by denying the plaintiff’s motion to remand.[7] Judge Mazzant agreed with Metropolitan and found that the plaintiff fraudulently and improperly joined Tailored Adjusting Services Inc. to her suit.[8] Predictably, the plaintiff in the Elizondo case alleged that Tailored violated various sections of the Texas Insurance Code. In analyzing the plaintiff’s pleadings for improper joinder, the court noted that for an adjuster to be held individually liable, that person must have committed some specific act that is prohibited by the code. It is not sufficient that the conduct be simply tangential to the denial of the claim.

Admittedly, in the Elizondo case, there were not as many facts pled to show what specific detrimental act occurred. The plaintiff’s underlying petition was less specific and merely included boilerplate allegations that the Tailored representative was “improperly trained and failed to perform a thorough investigation” of the claim, and that Tailored utilized “unfair settlement practices.” In fact, the plaintiff failed to make mention of any single misrepresentation or any alleged misconduct by Tailored in her original petition. The court further noted that in order for the plaintiff to prevail on her motion to remand, she must show that the alleged misrepresentation by Tailored be about the details of the policy, not simply the facts giving rise to the claim for coverage. The plaintiff in this case failed to do either according to Judge Mazzant.

With that said, I personally reviewed the petitions in both the Petree and Elizondo cases. I did not see the stark differences in the actual facts pled as suggested by the two federal court opinions. I found that each petition lacked specificity with regard to the alleged wrongdoing of the in-state independent adjuster, who in all likelihood, was only added to destroy diversity jurisdiction. 

Like any lawsuit, storm litigation belongs in the court that is appropriate given our diversity of jurisdiction law. To accomplish this appropriate result, each petition should be analyzed on a case-by-case basis as to whether removal is justified. Unfortunately, the manner in which the various federal courts are deciding the removal and subsequent motions for remand is inconsistent at best. To make matters worse, despite this inconsistency and lack of clear law to be followed in deciding how to proceed, at least one federal judge recently awarded fees and costs to plaintiffs’ counsel when their motion to remand was granted. As a result, removal to federal court in Texas is not only inconsistent, but now also comes with risk. 

—By Todd M. Tippett, Zelle LLP 

Todd Tippett is a partner at Zelle LLP in the firm’s Dallas office. Zelle LLP is a national law firm representing clients in their most challenging insurance-related disputes, antitrust claims and other complex litigation.

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.

[1] Smallwood v. Ill. Cent. R.R. Co., 385 F.3d 568, 572-73 (5th Cir. 2004).

[2] Great Plains Trust Co. v. Morgan Stanley Dean Witter & Co., 313 F.3d 305, 312 (5th Cir. 2002).

[3] Id.

[4] Inter. Energy Ventures Mgt. LLC v. United Energy Group Ltd., 818 F.3d 193, 200 (5th Cir. 2016).

[5] Compare Petree v. Metropolitan Lloyds Insurance Co. of Texas et al., Civ. No. 3:16-cv-0735-G, 2016 WL 4211764 (N.D. Tex. August 9, 2016) and Elizondo v. Metropolitan Lloyds Insurance Co. of Texas et al., Civ. No. 4:16-cv-306, 2016 WL 4182729 (N.D. Tex. August 8, 2016)

[6] Petree, 2016 WL 4211764 at *2.

[7] Elizondo, 2016 WL 4182729 at *4.

[8] Id.

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