Recently, in Mallek v. Allstate Indem. Co. No. 17-CV-5949-KAM-SJB, 2018 U.S. Dist. LEXIS 42171 (E.D.N.Y. Mar. 12, 2018) [insert link], a federal magistrate in New York recommended that the Court deny a plaintiff’s motion to remand and suggested that removal was proper where the plaintiff “fraudulently” joined an insurance agent. Oftentimes, coverage actions involve a plaintiff suing a national insurance company, where neither are citizens of the same state, and therefore, the case may be eligible for removal under 28 U.S.C. § 1332. However, some plaintiffs have included local agents of the insurance company—like a claims professional who handled their claim—as named-defendants, along with the insurer, in an attempt to defeat complete diversity between a local plaintiff and a national insurance carrier.
Courts have recognized that “[i]t is well settled that ‘[a] plaintiff may not defeat a federal court’s diversity jurisdiction and a defendant’s right of removal by merely joining as defendants parties with no real connection to the controversy.’” CMGRP, Inc. v. Agency for the Performing Arts, Inc., 2017 U.S. App. LEXIS 7323, at *2–3 (2d Cir. Apr. 26, 2017) (Summary Order). Accordingly, the doctrine of fraudulent joinder may, in some circumstances, still allow an out-of-state insurer to remove a case where a local agent is joined as a named defendant, because, under the doctrine, the court may ignore the presence of a non-diverse party for determining if complete diversity exists. In order to do so, the insurer must show that there is “no possibility” that plaintiff could recover against the fraudulently joined defendant.
In Mallek, the plaintiff purchased a homeowner’s insurance policy and sought coverage after there was a fire at the insured premises. The insurer denied coverage, and eventually, the insured filed an action in state court against the insurer, an insurance agent, and a John and Jane Doe. Plaintiff’s claims sounded in breach of contract, gross negligence, and defamation. Plaintiff claimed in excess of $358,000 as damages. As is relevant here, plaintiff and the agent were citizens of New York, while the insurer was incorporated, and had its principal place of business in, Illinois.
Thereafter, based on complete diversity of the parties and the amount at issue, the insurer removed the action to the Eastern District of New York. In turn, plaintiff moved to remand the case to state court and for sanctions, alleging that the removal was undertaken in bad faith.
In his March 21, 2018 Report and Recommendation, Magistrate Judge Sanket J. Bulsara first addressed the fraudulent joinder issue. He methodically analyzed each of the plaintiff’s stated—or otherwise plausible—causes of action against the insurance agent and found that they failed as a matter of law. For example, the breach of contract claim failed because New York law generally did not allow an agent to be held liable for its principal’s contractual obligations. Likewise, New York law did not allow a tort claim to be premised on a breach of contract where the latter can, and is, pled. Here, the failure of the aforementioned breach of contract claim, and, inter alia, the lack of an otherwise enforceable duty in the agent’s personal capacity, defeated the premise that he could be personally liable for plaintiff’s claims.
As a result, the Court found that the insurance agent was fraudulently joined, and it ignored his citizenship in determining whether diversity of citizenship existed. However, the Court paused to consider whether, under § 1441(b)(2), the agent’s status as a citizen of New York nonetheless barred removal under § 1332. Under § 1441(b)(2), an otherwise removable matter under § 1332 “may not be removed if any of the parties in interest properly joined and served as defendants is a citizen of the State in which such action is brought.”
The Court then queried whether the fraudulent joinder doctrine had any application in the context of construing the removal statutes. It noted that § 1441(b)(2) specifically refers to a party that is “properly joined,” which is not present in the fraudulent joinder context. Moreover, Judge Bulsara stated that “[t]o not apply the fraudulent joinder doctrine in determining whether the forum defendant rule applies creates a profound logical inconsistency.” After acknowledging that the Seventh Circuit Court of Appeals implied without ruling that the doctrine may not apply in the removal context, the Court reasoned that the “statutory language, logic, and other district courts” well-reasoned decisions all militated in favor of applying the doctrine, and it found that the forum defendant rule has no application where a defendant has been fraudulently joined. Accordingly, the Court ultimately recommended retaining jurisdiction.
Given that the insurer’s removal was proper, it was also recommended that the plaintiff’s motion for sanctions be denied. Magistrate Judge Bulsara’s Report and Recommendation is subject to objection by the parties. The fraudulent joinder rule, and its application to the removal statutes, helps maintain insurers’ right to removal in many circumstances.
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