Pinnoak Resources v. Certain Underwriters at Lloyd's

• Decision Date: 13 January 2005
• Docket Number: No. Civ.A.5:04-0192.,Civ.A.5:04-0192.
• Citation: 394 F.Supp.2d 821
• Parties: PINNOAK RESOURCES, LLC and Pinnacle Mining Company, LLC, Plaintiffs, v. CERTAIN UNDERWRITERS AT LLOYD'S, LONDON, Allied World Assurance Company Ltd., XL Insurance (Bermuda) Ltd., Commonwealth Insurance Company, Zurich Specialties London Limited, Axis Specialty Europe, Ltd., and VeriClaim, Inc., Defendants.
• Court: U.S. District Court — Southern District of West Virginia

394 F.Supp.2d 821

PINNOAK RESOURCES, LLC and Pinnacle Mining Company, LLC, Plaintiffs, v. CERTAIN UNDERWRITERS AT LLOYD'S, LONDON, Allied World Assurance Company Ltd., XL Insurance (Bermuda) Ltd., Commonwealth Insurance Company, Zurich Specialties London Limited, Axis Specialty Europe, Ltd., and VeriClaim, Inc., Defendants.

No. Civ.A.5:04-0192.

United States District Court, S.D. West Virginia, Becklet Division.

January 13, 2005.

Ray A. Byrd, D. Kevin Coleman, Schrader, Recht, Byrd, Companion & Gurley, Wheeling, WV, for Plaintiffs.

Jeffrey A. Holmstrand, Wheeling, WV, James A. Varner, Geraldine S. Roberts, Heather M. Thayer, McNeer, Highland McMunn & Varner, Clarksburg, WV, for Defendants.

OPINION ON MOTION TO REMAND

FABER, Chief Judge.

I. Introduction

This civil action was filed originally in the Circuit Court of Wyoming County, West Virginia, on February 6, 2004. The plaintiffs are PinnOak Resources, LLC, a Delaware limited liability company with a principal place of business in Pennsylvania, and Pinnacle Mining Company, LLC, a Delaware limited liability company with a principal place of business in West Virginia. The two plaintiffs are closely related business entities and are referred to collectively hereinafter as "PinnOak." PinnOak owns and operates an underground bituminous coal mine in Wyoming County known as the Pinnacle Mine.

Remaining defendants are Certain Underwriters at Lloyd's, London ("Lloyd's"); Axis Specialty Europe Limited ("Axis"), a foreign corporation organized under the laws of the United Kingdom, with a principal place of business in Ireland; Allied World Assurance Company Limited ("AWAC"), a corporation organized under the laws of Bermuda with its principal place of business there; and VeriClaim, Inc. ("VeriClaim"), a Delaware corporation with a principal place of business in Illinois. Three additional corporations named as original defendants, XL Insurance (Bermuda) Limited ("XL"), Commonwealth Insurance Company, and Zurich Specialties London Limited have settled with the plaintiffs and are no longer parties to this action.

The remaining defendants, except for VeriClaim, are insurers who provided primary and excess "all risks" property and business interruption coverage to PinnOak. VeriClaim acted as an adjuster for the other defendants under the policies.

PinnOak claims that the insurer defendants have failed to compensate PinnOak for covered losses arising from a series of methane explosions at the Pinnacle Mine and that VeriClaim breached duties incident to its role as claims adjuster. The complaint asserts only causes of action under West Virginia law specifically, breach of contract, common law bad faith, and violations of the West Virginia Unfair Trade Practices Act, West Virginia Code, §§ 33-11-3 and 33-11-4(9)(2004).

On March 4, 2004, all of the remaining defendants except AWAC joined in a timely notice removing this case from the Circuit Court of Wyoming County to this Court (the "Lloyd's removal"). On March 10, 2004, AWAC filed a notice, (the "AWAC removal") joining in the Lloyd's removal. The Lloyd's removal asserts that this court has diversity jurisdiction under 28 U.S.C. § 1332(a)(2)(2004) because all defendants except VeriClaim are citizens and residents of states other than the plaintiffs and VeriClaim, whose citizenship is not diverse, has been fraudulently joined to defeat federal jurisdiction. The AWAC removal contends that federal question jurisdiction under 9 U.S.C. § 203 (2004) exists because the All Risks Policy issued to PinnOak by AWAC contains a provision requiring arbitration of disputes in London, England.

AWAC claims a right to enforce the arbitration clause under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of June 10, 1958, commonly referred to as the "New York Convention." Congress approved the New York Convention and provided enforcement machinery at 9 U.S.C. §§ 201-208 (2004). 9 U.S.C. § 203 confers original jurisdiction on the United States District Courts over actions under the Convention regardless of the amount in controversy. 9 U.S.C. § 205 specifies that such actions may be removed from state courts and that "... the ground for removal ... need not appear on the face of the complaint but may be shown in the petition for removal." AWAC is the only remaining defendant insurer with an arbitration clause in its contract of insurance.

On March 16, 2004, PinnOak filed a timely motion to remand. PinnOak makes the following three arguments in support of its motion:

(1) VeriClaim has not been fraudulently joined and, consequently, diversity does not exist since PinnOak and VeriClaim are both citizens of Delaware.

(2) There is no federal question jurisdiction because the New York Convention is "reverse preempted" by West Virginia statutes prohibiting arbitration of insurance disputes.¹

(3) One of the original defendants, XL, did not join in the notice of removal.

For the reasons discussed below, the court rules as follows on the issues presented by PinnOak's motion to remand:

(1) VeriClaim has not been fraudulently joined; consequently, this court lacks diversity jurisdiction under 28 U.S.C. § 1332.

(2) Whether the New York Convention is reverse preempted by West Virginia statutes relating to insurance presents a substantial issue of federal law upon which the reported decisions are in conflict; accordingly, this court has jurisdiction over AWAC's claim to enforce arbitration under 9 U.S.C. §§ 203 and 205.

(3) Since PinnOak's state law claims against the defendants other than AWAC are predominant, the court elects, pursuant to 28 U.S.C. § 1441(c), to remand all such claims to the Circuit Court of Wyoming County, retaining jurisdiction over this case only as it relates to AWAC.

(4) Since the issue of XL's failure to join in the removal is now moot as to all defendants except AWAC, the court reserves ruling on that issue and will consider it only as it relates to AWAC.

II. Analysis

A. Fraudulent Joinder and Diversity Jurisdiction

The practice of joining an agent, employee or accomplice of a defendant corporation is a device often used to defeat federal diversity jurisdiction. Here, the plaintiffs have joined as a defendant VeriClaim, a Delaware corporation which acted as claims adjuster for the defendant insurers. PinnOak charges in its complaint that VeriClaim breached its duty of good faith and fair dealing and violated the West Virginia Unfair Trade Practices Act, W. Va.Code §§ 33-11-3 and 33-11-4(9), in the handling and adjustment of PinnOak's insurance claim. The defendants contend that VeriClaim has been fraudulently joined and should be disregarded for purposes of determining whether complete diversity of citizenship exists. In other words, defendants can establish federal diversity jurisdiction only if VeriClaim, the non-diverse defendant, has been fraudulently joined.²

In establishing the fraudulent joinder of VeriClaim, the defendants have a heavy burden. The United States Supreme Court has held that Congress' clear intention is to restrict removal and resolve all doubts about the propriety of removal in favor of retaining state court jurisdiction. See, American Fire & Casualty Co. v. Finn, 341 U.S. 6, 71 S.Ct. 534, 95 L.Ed. 702 (1951). Ironically, fraudulent joinder requires neither fraud nor joinder. As our court of appeals stated in AIDS Counseling and Testing Centers v. Group W Television, Inc., 903 F.2d 1000,1003 (4th Cir.1990): "`Fraudulent joinder' is a term of art [which] does not reflect on the integrity of plaintiff or counsel, but is merely the rubric applied when a court finds either that no cause of action is stated against [a] nondiverse defendant, or in fact no cause of action exists." See also, Fleming v. United Teachers Associates Ins. Co., 250 F.Supp.2d 658 (S.D.W.Va.2003).

The United States Court of Appeals for the Fourth Circuit stated the general rule binding upon the court as follows in Hartley v. CSX Transportation, Inc., 187 F.3d 422 (4th Cir.1999):

To show fraudulent joinder, the removing party must demonstrate either "outright fraud in the plaintiff's pleading of jurisdictional facts" or that "there is no possibility that the plaintiff would be able to establish a course of action against the in-state defendant in state court."

Id. at 424.

Here, there is no suggestion of outright fraud, so the inquiry becomes whether: Is there any possibility that PinnOak can establish a cause of action against VeriClaim? PinnOak's complaint charges that VeriClaim was hired by the insurer defendants to act as the adjuster for PinnOak's claims against the insurers. PinnOak's complaint sets out several allegations that VeriClaim acted in bad faith and violated provisions of the West Virginia Unfair Trade Practices Act, particularly, West Virginia Code, §§ 33-11-3 and 33-11-4(9). In Taylor v. Nationwide Mutual Ins. Co., 214 W.Va. 324, 589 S.E.2d 55 (2003), the Supreme Court of Appeals of West Virginia held that there is a cause of action under this Act against a claims adjuster who is an employee of a defendant insurance company. Here, VeriClaim acted as an agent for defendants and was not an employee of any of the defendant insurers. However, there appears to be little reason to doubt that, in a proper case, the West Virginia court would extend the rule of the Taylor case to an adjuster who is an independent contractor or agent. The possibility that the rule of the Taylor case would be so extended is all PinnOak needs to escape the fraudulent joinder rule if West Virginia law applies.

Defendants would avoid this problem of West Virginia law by arguing that Pennsylvania law, which does not recognize a bad faith cause of action against an adjuster, applies. Relying on Pen Coal Corp. v. McGee and Co., 903 F.Supp. 980 (S.D.W.Va.1995), PinnOak argues that insurance claims involving damage to property are governed by the law of the place where the property is located, in this case...