Weather events in recent years have led to a surge of lawsuits seeking coverage for property damage. Often, in an effort to defeat diversity jurisdiction, a Texas resident will sue both a foreign insurance company and a fellow Texas resident (usually a local insurance adjuster) in state court. By including the Texas resident as a defendant, a federal district court in Texas would presumably not have jurisdiction over the dispute due to the lack of complete diversity of citizenship between the parties.[1]

Nonetheless, defendants are responding by removing the lawsuit to federal court and contending that the nondiverse defendant was “improperly joined” solely to defeat the federal court’s jurisdiction. The defendants will argue that the plaintiff has not set forth a viable cause of action against the Texas defendant, meaning the Texas defendant’s citizenship should be disregarded for purposes of diversity jurisdiction. Removal is typically followed by the plaintiff’s motion for remand to state court, in which the plaintiff alleges that it has stated a valid cause of action against the Texas defendant.

Countervailing Views Previously Held by Federal District Courts

At the crux of the improper-joinder inquiry is the federal district court’s review of the plaintiff’s petition. The district court will analyze the factual pleadings set forth in the petition to determine whether the Texas plaintiff has demonstrated any possibility of recovery against the Texas defendant. If so, the Texas defendant is properly joined and there is not complete diversity of citizenship among the parties. Consequently, the federal court must send the lawsuit back to state court. To make this determination, the federal district court must ultimately “conduct a [Federal] Rule 12(b)(6)-type analysis.”[2]

In reviewing the pleadings, district courts must choose whether to apply the liberal “fair notice” Texas pleading standard or the more stringent federal pleading standard. The Texas pleading standard only requires that the petition contain sufficient allegations to allow the defendant(s) to ascertain the nature and basic issues of a dispute.[3] However, the federal pleading standard requires that the plaintiff state “enough facts to state a claim to relief that is plausible on its face.”[4] Thus, the federal standard requires more than bare legal conclusions or mere recitations of a cause of action’s elements.

In a prior guest article co-authored by my colleague Brad Brewer and myself, we discussed the inconsistent approaches taken by federal district courts in Texas regarding the applicable pleading standard used in the improper-joinder analysis.[5]

In that article, we noted some courts concluded that a petition should be evaluated under the fair notice pleading standard used in Texas. In part, these courts reasoned that “fundamental fairness” should not require plaintiffs in state court to anticipate that their lawsuits will be removed, and thereafter scrutinized under the more stringent pleading standard.[6] Conversely, other courts concluded that the federal pleading standard applied because the Texas legislature introduced Texas Rule of Civil Procedure 91a — a motion to dismiss vehicle that parallels Federal Rule of Civil Procedure 12(b)(6) — and, therefore, “the Texas pleading standard has, essentially, been brought into line with the federal standard.”[7]

There is logic to both of these views, but the inevitable result was inconsistency among the district courts in Texas. Hence, in our prior article we ultimately concluded that the Fifth Circuit needed to weigh in on the competing approaches.

Fifth Circuit: Federal Pleading Standard Applies

As fate would have it, in International Energy Ventures Management LLC v. United Energy Group Ltd., the Fifth Circuit recently cleared up the confusion.[8] The Fifth Circuit unequivocally held that the federal pleading standard applies to the improper-joinder analysis.

In International Energy, a Texas consultant sued both a Chinese oil company and a Texas broker for unpaid fees in connection with the oil company’s acquisition of another company. Thus, on its face, this lawsuit was not suitable for federal court due to the shared citizenship of the Texas plaintiff and the Texas broker-defendant. The defendants removed the action to federal court, alleging that the Texas broker was improperly joined to defeat the federal district court’s jurisdiction. The plaintiff’s motion to remand was denied by the district court.

In reviewing the plaintiff’s motion to remand, the Fifth Circuit began by restating the general standard that applies to an improper-joinder remand analysis, which incorporates a FRCP 12(b)(6)-type analysis as follows:

[Defendants] must demonstrate that "there is no possibility of recovery against [a nondiverse] 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 [a nondiverse] defendant."

The court then explained the appropriate pleading standard to be used while examining the plaintiff’s petition. After noting that several of the Fifth Circuit’s prior unpublished opinions “inadvertently confused, or perhaps overlooked” the correct pleading standard, the Fifth Circuit held that the federal pleading controlled:

It is well-established of course, that the Rule 12(b)(6) analysis necessarily incorporates the federal pleading standard ... At bottom, the improper-joinder analysis in the context of removal and remand is solely about determining the federal court’s jurisdiction. That is it ... When determining the scope of its own jurisdiction, a federal court does so without reference to state law, much less state law governing pleadings.[10]

Thereafter, the Fifth Circuit applied the federal pleading standard and affirmed that the plaintiff’s petition failed to state a claim against the Texas broker.

Clarity Moving Forward

After the Fifth Circuit’s opinion in International Energy, federal district courts in Texas are now uniformly recognizing the clear direction from the Fifth Circuit. The “uncertainty” as to the pleading standard used in the improper-joinder analysis has faded away in the most recent district court opinions in Texas.[11]

The practical effect of International Energy is that litigants should expect greater consistency in improper-joinder remand proceedings. Specifically, federal courts will enjoy the benefit of applying their own, familiar pleading standard. As stated by the Fifth Circuit:

[I]dentifying and applying the appropriate state pleading standard is not something that federal courts are accustomed to doing. At best, it is incredibly time consuming; at worst, there is good reason to think that federal courts might get it wrong (or apply it in name only, while actually applying the federal standard with which we’re familiar. Significantly, by uniformly applying the federal pleading standard, we ensure that the scope of federal subject matter jurisdiction does not differ serendipitously from state to state and district to district, because nothing more an than accident of geography.[12]

The process of analyzing a plaintiff’s petition will always be an inexact science to some extent. But at a minimum, the Fifth Circuit has addressed a prior trend of inconsistency among the federal district courts in Texas.

[2] See Patel v. Acceptance Indemnity Insurance Co., (N.D. Tex. Jan. 28, 2016).

[3] Roark v. Allen, 633 S.W.2d 804, 809-10 (Tex. 1982) (stating that the objective of fair-notice standard is to provide opposing party and counsel with sufficient information to prepare defense).

[4] Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007).

[5] See Brad E. Brewer and Tyler J. McGuire, The Uncertainty of Remand in Texas.

[6] See, e.g., Roach v. Vehicle, (N.D. Tex. Feb. 29, 2016).

[7] See, e.g., Patel.

[8] See generally International Energy Ventures Management LLC v. United Energy Group Ltd, 818 F.3d 193 (5th Cir. 2016).

[9] Id. at 200 (quoting Smallwood v. Illinois Cent. R. Co., 385 F.3d 568, 573 (5th Cir. 2004)).

[10] Id. at 200-02 (original emphasis).

[11] See, e.g., Petree v. Metro. Lloyds Insurance Co. of Texas, (N.D. Tex. June 2, 2016) (“Although there has been some uncertainty ... federal courts should use the federal court pleading standard when conducting the Rule 12(b)(6)-type analysis of an improper-joinder claim in a motion to remand”); Sam v. Wells Fargo Bank N.A., (S.D. Tex. May 20, 2016) (“In conducting this [improper joinder] analysis, a federal court must apply the federal pleading standard).

[12] Int’l Energy Ventures, 818 F.3d 193 at 208.