Advanced Indicator & Mfg., Inc. v. Acadia Ins. Co.

• Docket Number: 21-20092
• Decision Date: 03 October 2022
• Citation: 50 F.4th 469
• Parties: ADVANCED INDICATOR AND MANUFACTURING, INCORPORATED, Plaintiff—Appellant, v. ACADIA INSURANCE COMPANY; Nicholas Warren, Defendants—Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

50 F.4th 469

ADVANCED INDICATOR AND MANUFACTURING, INCORPORATED, Plaintiff—Appellant,

v.ACADIA INSURANCE COMPANY; Nicholas Warren, Defendants—Appellees.

No. 21-20092

United States Court of Appeals, Fifth Circuit.

FILED October 3, 2022

Matthew Raymond Pearson, Esq., Carrie Davis Holloway, Pearson Legal, P.C., San Antonio, TX, for Plaintiff-Appellant.

Jennifer G. Martin, Tim Delabar, Wilson, Elser, Moskowitz, Edelman & Dicker, L.L.P., Dallas, TX, Marjorie Carmichael Nicol, Cox, P.L.L.C., Houston, TX, for Defendants-Appellees.

Before Jolly, Higginson, and Engelhardt, Circuit Judges.

Per Curiam:

Appellant Advanced Indicator and Manufacturing, Inc. claims its building was damaged by Hurricane Harvey's winds. Advanced's insurer, Acadia Insurance Company, determined that the damage to the building was caused by poor maintenance and routine wear and tear. When Acadia denied Advanced's claim, Advanced sued. From this seemingly commonplace insurance dispute, we are faced with jurisdictional questions that have deeply divided district courts and a question of whether summary judgment was properly granted.

I.

Appellant, Advanced Indicator and Manufacturing, Inc., owned property at 1463 Brittmore Road in Houston. The property was insured by a policy issued by Appellee Acadia Insurance Company. The policy covered wind damage but did not cover damage from wear and tear or lack of maintenance.

Hurricane Harvey struck southern Texas in 2017. After the hurricane, Advanced submitted a claim to Acadia regarding the damage to 1463 Brittmore Road, which it claimed was caused by the hurricane's winds. Acadia acknowledged the claim and sent an adjuster, Nick Warren, as well as an engineer, Jason Watson, to assess the building. After inspecting the building, Watson determined that pre-existing conditions—including ongoing leaks from deterioration and poor workmanship—caused the damage, rather than winds from Hurricane Harvey. Warren adopted these conclusions in his recommendations to Acadia. Acadia then denied Advanced's claim based on Watson's conclusions and Warren's recommendation.

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 § 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 § 542A.006 election. In a management order, the district court denied the motion to remand and ruled without analysis that "Nicholas Warren is struck as improvidently joined."

Acadia later moved for summary judgment, arguing that it did not breach the policy and that Advanced could not segregate any damages caused by the hurricane from pre-existing damage, as required by Texas law. The district court granted Acadia's motion, finding that Acadia's denial of Advanced's claim was based on "extensive consideration of the evidence" and that Advanced failed to carry its burden of showing that covered and non-covered damages could be segregated as required by Texas's concurrent causation doctrine. In doing so, the district court struck the declaration of Peter de la Mora and Art Boudin, two of Advanced's experts. The district court further granted summary judgment on Advanced's extra-contractual claims. Advanced promptly appealed.

II.

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 § 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." TEX. INS. CODE § 542A.006(c). 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 § 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 § 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." Flagg v. Stryker Corp. , 819 F.3d 132, 135 (5th Cir. 2016) (en banc) (citing 28 U.S.C. § 1332(a)(1) ). Federal law provides that federal courts have removal jurisdiction over suits that could have originally been filed in federal court. See 28 U.S.C. § 1441(a). Further, 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. See 28 U.S.C. § 1446(b)(3).

"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." Flagg , 819 F.3d at 136. "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." Id.

We set forth the standard for improper joinder in Smallwood v. Illinois Central Railroad Co. , 385 F.3d 568 (5th Cir. 2004) (en banc).¹ 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." Id. at 573 (quoting Travis v. Irby , 326 F.3d 644, 646–47 (5th Cir. 2003) ) (internal quotation marks omitted). 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." Id. "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." Id. 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." Id. 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. " Flagg , 819 F.3d at 137 (emphasis in original).

Advanced argues that removal of this case based on Acadia's post-suit, pre-removal § 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." Weems v. Louis Dreyfus Corp. , 380 F.2d 545, 547 (5th Cir. 1967). Advanced contends that because the § 542A.006 election was an action of a defendant , rather than the plaintiff, it cannot make the case removable. This question has deeply divided district courts. Some courts have held that the voluntary-involuntary rule bars removal when an insurer makes a § 542A.006 election after the filing of suit. See, e.g., Morgan v. Chubb Lloyds Ins. Co. of Tex. , 541 F. Supp. 3d 754 (N.D. Tex. 2021). Others have held that the voluntary-involuntary rule is inapplicable if the agent is improperly joined at the time of removal. See, e.g., Ramirez v. Allstate Vehicle & Prop. Ins. Co. , 490 F. Supp. 3d 1092 (S.D. Tex. 2020).

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." Crockett v. R.J. Reynolds Tobacco Co. , 436 F.3d 529, 532 (5th Cir. 2006). 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. " Flagg , 819 F.3d at 137 (emphasis in original). In this case, Warren was improperly joined after Acadia's election because § 542A.006 ’s mandate that an agent be dismissed with prejudice dictates that Advanced had no possibility of recovery against him. Taking our holdings in Crockett and Flagg together, the answer to this case becomes clear: because Warren was improperly joined at the time of removal, Acadia's removal was proper.

Our recent decision in Hoyt v. Lane Construction Corp. confirms this analysis. 927 F.3d 287 (5th Cir. 2019). In that case, the Texas plainti...