LNY 5003, LLC v. Zurich Am. Ins. Co.
| Docket Number | 22-20573 |
| Decision Date | 11 October 2023 |
| Parties | LNY 5003, L.L.C.; Fertitta Entertainment, Incorporated; Fertitta Hospitality, L.L.C., Plaintiffs-Appellants, v. Zurich American Insurance Company, Defendant-Appellee |
| Court | United States Courts of Appeals. United States Court of Appeals (5th Circuit) |
Appeal from the United States District Court for the Southern District of Texas USDC No. 4:20-CV-2992
Before WIENER, GRAVES, and DOUGLAS, Circuit Judges.
Following the onset of the COVID-19 pandemic, Zurich American Insurance Company ("Zurich") denied coverage to seventeen covered restaurants owned by subsidiaries of Fertitta Entertainment, Inc. and Fertitta Hospitality, LLC (the "Fertitta Entities"), both Texas entities. Shortly after, the Fertitta Entities attempted to assign all "claims and causes of action" to LNY 5003, an entity that shared Illinois citizenship with Zurich, to bring claims of breach of contract and violations of the Texas Insurance Code in Texas state court. Zurich removed the case to federal court in Texas, and the district court subsequently denied a motion to remand and granted a motion to dismiss all claims.
Finding the assignment invalid, we hold that diversity jurisdiction exists between the Fertitta Entities and Zurich, as citizens of Texas and Illinois. We therefore AFFIRM the district court's finding that it retained subject matter jurisdiction over the dispute in denying the motion to remand.
As to the merits, despite the Fertitta Entities' best attempts they needed to plausibly plead that the COVID-19 virus caused direct physical damage to their property. They cannot do so. Accordingly, we also AFFIRM the district court's decision to grant Zurich's motion to dismiss.
In 2019, Zurich issued a commercial insurance policy (the "Policy") to two insureds, the Fertitta Entities to cover 17 international restaurants owned by subsidiaries of the Fertitta Entities. The majority of those 17 restaurants are owned by a subsidiary, Morton's of Chicago, Inc. ("Morton's"), and are located throughout Asia and North America. Relevant to this appeal, Zurich is a New York corporation with a principal place of business in Illinois. The Fertitta Entities are citizens of Texas. Morton's is an Illinois corporation with a principal place of business in Illinois.
The Policy incorporates coverages for various losses between May 31, 2019 to May 31, 2020. In 2020, the onset of the COVID-19 pandemic resulted in significant business losses to the 17 covered restaurants.
According to the operative complaint, these losses were due to the presence of COVID-19 on the premises, the ensuing public panic, and related local government lockdown orders. The Fertitta Entities specifically alleged that "[t]he presence of individuals infected with COVID-19 led to the covered properties becoming contaminated with the virus, rendered the premises, including property located at the premises unsafe, and resulting [sic] in direct physical loss of and damage to the covered properties."
In April 2020, the Fertitta Entities submitted a notice of loss to Zurich. Zurich indicated that it would deny all COVID-19 related claims under the Policy. Shortly after Zurich's denial, in July 2020, for the nominal price of $10, the Fertitta Entities assigned "all right, title, and interest" they had "in any and all claims" against Zurich under the Policy to LNY 5003, LLC ("LNY"), a Texas LLC formed in early 2020.
The Policy, however, includes an "anti-assignment clause" that expressly precluded the Fertitta Entities from making assignments without Zurich's consent. It states: "Your rights and duties under this policy may not be transferred without our written consent except in the case of death of an individual Named Insured." In making the assignment, the Fertitta Entities retained "no interest in the Assigned Claims whatsoever," and any recovery from the assigned claims belonged to LNY. However, LNY confirmed before the district court that the Fertitta Entities retained a financial interest in LNY.
Despite being formed in Texas by Texan entities, LNY's sole member is Morton's, a corporation with Illinois citizenship, as noted. Morton's is both the sole member of LNY and a direct subsidiary of Fertitta Entertainment, Inc. The creation and assignment of claims to LNY was an attempt to destroy complete diversity between the parties because of its common citizenship with Zurich.
Eighteen days after the assignment, LNY sued Zurich in Harris County state court, asserting claims for breach of contract and violations of the Texas Insurance Code. LNY filed the action without pleading its relationship to Fertitta or alleging the existence of the assignment, instead bringing the action as though it were the insured under the Policy. Zurich filed an answer and removed the case to federal court, asserting diversity jurisdiction. Zurich claimed that LNY's Illinois citizenship (through its sole member, Morton's) should be disregarded because LNY was not an insured. Because the insured Fertitta Entities were citizens of Texas, Zurich argued, there was complete diversity.
LNY sought remand under the United States Supreme Court's decision in Provident Savings Life Assurance Society of New York v. Ford, 114 U.S. 635 (1885) and its progeny. Zurich countered that LNY's assignment was not complete or valid and should be disregarded. The parties also disagreed regarding whether the anti-assignment provision in the Policy prohibited the transfer of the insureds' "rights or duties under this policy" without Zurich's written consent. After briefing and a hearing, the district court denied LNY's motion to remand. In response to this ruling, the Fertitta Entities-the insured and assignors-were added as plaintiffs.
Zurich then moved to dismiss the claims under Federal Rule of Civil Procedure 12(b)(6) and 12(b)(1). The district court granted the motion to dismiss on both grounds. This appeal of both the order denying the motion to remand and granting the motion to dismiss for failure to state a claim followed.[1]
We review both issues presented in this appeal de novo. Gilmore v. Miss., 905 F.3d 781, 784 (5th Cir. 2018) (denial of motion to remand is reviewed de novo); Calogero v. Shows, Cali &Walsh, LLP, 970 F.3d 576, 580 (5th Cir. 2020) (). In considering the motion to dismiss, we accept all well-pleaded facts as true and view them in the light most favorable to the plaintiff. See Guidry v. Am. Pub. Life Ins. Co., 512 F.3d 177, 180 (5th Cir. 2007).
Beginning first with jurisdiction, 28 U.S.C. § 1332(a)(1) establishes diversity jurisdiction over controversies between citizens of different states with an amount in controversy exceeding $75,000. Section 1441(a) permits a defendant to remove an action from state court to federal court if diversity jurisdiction exists. 28 U.S.C. § 1441(a). But the action must be remanded under 28 U.S.C. § 1447(c) if "at any time before final judgment it appears that the district court lacks subject matter jurisdiction."
The removing party bears the burden of proving by a preponderance of the evidence that subject matter jurisdiction exists. New Orleans &Gulf Coast Ry. Co. v. Barrois, 533 F.3d 321, 327 (5th Cir. 2008) (citations omitted). The existence of subject matter jurisdiction is determined at the time of removal. Manguno v. Prudential Prop. &Cas. Ins., 276 F.3d 720, 723 (5th Cir. 2002). This includes consideration of "the claims in the state court petition as they existed at the time of removal." Id. (citation omitted).
The Supreme Court has held that "the citizens upon whose diversity a plaintiff grounds jurisdiction must be real and substantial parties to the controversy." Navarro Sav. Assoc. v. Lee, 446 U.S. 458, 460 (1980) (internal marks and citation omitted). Federal courts "must disregard nominal or formal parties and rest jurisdiction only upon the citizenship of real parties to the controversy." Id. at 461 (citation omitted). Further, federal courts "may and should take such action as will defeat attempts to wrongfully deprive parties entitled to sue in the Federal courts of the protection of their rights in those tribunals." Ala. Great S. Ry. Co. v. Thompson, 200 U.S. 206, 218 (1906).
In determining that it retained subject matter jurisdiction over the parties, the district court made six findings: (1) the at-issue assignment was invalid under the plain terms of the Policy, (2) the Fertitta Entities and Zurich are the "real parties" to this controversy, (3) complete diversity exists among the parties, (4) Zurich met its burden of proving subject matter exists, (5) LNY's motion to remand must be denied, and (6) LNY cannot proceed further in this action as plaintiff.
Before us, the Fertitta Entities argue that federal courts should not look behind a complete assignment of claims that eliminates diversity, relying on and claiming their "complete assignment of claims" fits squarely within the Supreme Court's decision in Provident, 114 U.S. 635. Zurich counters that reliance on Provident is unavailing when an assignment is invalid or incomplete, and that the assignment at issue was invalid under Texas law because it violated the anti-assignment provision in the Policy.
We first turn to Provident. There, an individual judgment creditor (a resident of Ohio) assigned his entire interest in a judgment against Provident (a New York corporation) to the plaintiff (a resident of New York). The assignee then sought to collect the judgment in New York state court, diversity being destroyed. 114 U.S. 635, 636-37. Provident removed the matter, arguing that diversity jurisdiction existed because the assignment was fraudulent and the assignor was the real party in...
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