Sid Richardson Carbon & Gasoline Co. v. Interenergy Resources, Ltd.

• Decision Date: 15 November 1996
• Docket Number: Nos. 95-11149,96-10076,s. 95-11149
• Citation: 99 F.3d 746
• Parties: SID RICHARDSON CARBON & GASOLINE CO., Plaintiff-Appellant, v. INTERENERGY RESOURCES, LTD., Defendant, Wagner & Brown II, Cyril Wagner, Jr., and Jack E. Brown, Defendants-Appellees. SID RICHARDSON CARBON & GASOLINE CO., Plaintiff-Appellant, v. INTERENERGY RESOURCES, LTD., Defendant-Appellee, Wagner & Brown II, Cyril Wagner, Jr., and Jack E. Brown, Defendants.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 746

99 F.3d 746

SID RICHARDSON CARBON & GASOLINE CO., Plaintiff-Appellant, v. INTERENERGY RESOURCES, LTD., Defendant,

Wagner & Brown II, Cyril Wagner, Jr., and Jack E. Brown,

Defendants-Appellees.

SID RICHARDSON CARBON & GASOLINE CO., Plaintiff-Appellant, v. INTERENERGY RESOURCES, LTD., Defendant-Appellee, Wagner & Brown II, Cyril Wagner, Jr., and Jack E. Brown, Defendants.

Nos. 95-11149, 96-10076.

United States Court of Appeals Fifth Circuit.

Nov. 15, 1996.

Robert C. Grable, Dee J. Kelly, Sr., Roger C. Diseker, Dee J. Kelly, Jr., Kelly, Hart & Hallman, Fort Worth, TX, for plaintiff-appellant.

G. Irvin Terrell, Baker & Botts, Houston, TX, for defendants-appellees.

Appeals from the United States District Court for the Northern District of Texas.

Before SMITH and PARKER, Circuit Judges, and JUSTICE, District Judge. ^*

JERRY E. SMITH, Circuit Judge:

In this consolidated matter, Sid Richardson Carbon & Gasoline Company ("Sid Richardson") appeals the denial of its motion to remand these proceedings to state court and appeals the subsequent entry of final judgments in favor of Wagner & Brown II, Cyril Wagner, Jr., and Jack E. Brown (collectively "Wagner & Brown") and Interenergy Resources, Ltd. ("Interenergy"). Because we hold that the district court erred in finding that the Wagner & Brown defendants were fraudulently joined, we conclude that complete diversity does not exist among the parties, so there is no subject matter jurisdiction. We reverse, vacate and remand the judgment with instructions to remand to state court.

I.

In 1979, Wagner & Brown II, a general partnership engaged in the production of natural gas, entered into negotiations with Sid Richardson Carbon & Gasoline Company concerning the conveyance of processing rights to Wagner & Brown's natural gas production. Cyril Wagner, Jr., and Jack E. Brown, Wagner & Brown's general partners, represented the partnership in the negotiations.

The transaction ultimately was structured to accommodate Wagner's and Brown's respective estate planning goals. Under the terms of the contract, Wagner & Brown II would make a charitable contribution of ten percent of the processing rights to the Dallas Community Chest; both Wagner & Brown II and the Dallas Community Chest then would convey their interests in the gas processing rights to Interenergy, a Cayman Islands corporation, in return for cash and an interest-bearing note in the amount of $8.4 million. Interenergy, in turn, would assign the processing rights to Sid Richardson in return for payments prescribed under the contract. None of the Wagner & Brown defendants signed the contract by which Interenergy assigned the processing rights to Sid Richardson.

During the negotiations, Interenergy warranted that there was no obligation for Sid Richardson to withhold federal income taxes on its payments to Interenergy. Article 11.4 of the contract provided that Interenergy would be responsible for the payment of such taxes, and Interenergy furnished a separate letter of indemnity to Sid Richardson, promising to "indemnify and hold Richardson harmless from any liability or expense it may incur because of Richardson's failure to withhold any portion of the payments due to Interenergy." The indemnity letter was signed only by Interenergy, not by the Wagner & Brown defendants.

Soon after this transaction, the gas market collapsed. Within two years after consummation of the agreement, Sid Richardson sued to rescind or reform the contract, citing changed market conditions that had rendered the agreement economically infeasible. In 1984, this lawsuit was settled by an agreement granting Sid Richardson, inter alia, the right to terminate the contract and all related agreements if it incurred losses of $10 million as a consequence of the contract. In March 1985, Sid Richardson gave notice of its intention to exercise this "stop-loss" provision.

After Interenergy and the Wagner & Brown defendants demanded arbitration of the dispute, Sid Richardson filed a second lawsuit, seeking interpretation of the settlement agreement and enforcement of the "stop-loss" provision. This second lawsuit was resolved by a second settlement agreement, effective June 1, 1988, which forms the basis of the instant case. The settlement agreement contained both a termination provision, terminating all agreements between the parties, and a release provision, releasing all claims between the parties. The Wagner & Brown defendants contend that these provisions extinguished the indemnity rights of Sid Richardson, whereas Sid Richardson argues that its right to indemnity survived the settlement agreement.

Meanwhile, in 1985 the Internal Revenue Service ("IRS") had initiated a preliminary inquiry into the original transaction, specifically concerning whether Sid Richardson was obligated to withhold taxes on the payments made to Interenergy under the contract and to remit those funds to the IRS. In 1986, the IRS proposed an assessment of $7.7 million against Sid Richardson, offering to stay the proceedings while Sid Richardson sought indemnity from Interenergy pursuant to the letter of indemnity.

All parties agree that Sid Richardson notified Wagner & Brown II of the investigation and offered to let Wagner & Brown assume responsibility for the defense; the parties vehemently disagree, however, concerning whether this communication constituted a demand by Sid Richardson upon Wagner & Brown and an invocation of the indemnity provision, or merely a courtesy call. In any event, Wagner & Brown refused to assume responsibility for the defense, and apparently the matter was dropped when the IRS failed actively to pursue the investigation against Sid Richardson, turning its attention instead to Interenergy.

Failing in its efforts to collect the delinquent taxes from Interenergy, the IRS renewed its investigation of Sid Richardson and in 1995 issued a statutory notice of deficiency against Sid Richardson in the amount of $38,651,368.19. ¹ In the interim, however, Sid Richardson had entered into the settlement agreement with Interenergy and the Wagner & Brown defendants, terminating all prior agreements and releasing all claims between the parties. Predictably, the parties vehemently disagree as to whether this settlement extinguished Sid Richardson's indemnity rights. Consequently, all parties have denied responsibility for the IRS assessment.

Sid Richardson initiated this lawsuit in Texas state court, suing Interenergy and the Wagner & Brown defendants for breach of contract and seeking a declaratory judgment enforcing the terms of the indemnity letter to guarantee Sid Richardson indemnification against potential tax liability. The defendants removed to federal court, invoking diversity jurisdiction.

Although complete diversity existed only between Sid Richardson, a Texas corporation, and Interenergy, a Cayman Islands corporation, the defendants argued that the Wagner & Brown defendants had been fraudulently joined. The district court agreed and dismissed all claims against the Wagner & Brown defendants with prejudice, exercising its diversity jurisdiction over the remaining parties. The district court severed all claims against the Wagner & Brown defendants, entering final judgment for the defendants pursuant to FED.R.CIV.P. 54(b), and Sid Richardson appealed.

While that appeal, No. 95-11149, was pending, the lawsuit against Interenergy proceeded in the district court, which, on January 5, 1996, entered summary judgment for Interenergy on all claims. Sid Richardson appealed, in No. 96-10076, and the two cases were consolidated for appeal.

II.

We review a denial of remand to state court de novo. Burden v. General Dynamics Corp., 60 F.3d 213, 216 (5th Cir.1995). A party invoking the removal jurisdiction of the federal courts bears a heavy burden. Id. at 217; see also Carriere v. Sears, Roebuck & Co., 893 F.2d 98, 100 (5th Cir.), cert. denied, 498 U.S. 817, 111 S.Ct. 60, 112 L.Ed.2d 35 (1990) (observing that the removing party bears the burden of proving fraudulent joinder). In order successfully to prove that non-diverse defendants have been fraudulently joined in order to defeat diversity, the removing party must demonstrate "that there is absolutely no possibility that the plaintiff will be able to establish a cause of action against the in-state defendant in state court." ²

In reviewing a claim of fraudulent joinder, the district court must evaluate all factual allegations and ambiguities in the controlling state law in favor of the plaintiff. Burden, 60 F.3d at 216; B, Inc., 663 F.2d at 549. If there is any possibility that the plaintiff has stated a cause of action against any non-diverse defendant, the federal court must conclude that joinder is proper, thereby defeating complete diversity, and the case must be remanded. Burden, 60 F.3d at 216; B, Inc., 663 F.2d at 550.

We have consistently held that claims of fraudulent joinder should be resolved by a summary judgment-like procedure whenever possible. Although the district court may "pierce the pleadings" to examine affidavits and other evidentiary material, it should not conduct a full evidentiary hearing on questions of fact, but rather should make a summary determination by resolving all disputed facts in favor of the plaintiff. Burden, 60 F.3d at 217; Cavallini, 44 F.3d at 263; see also B, Inc., 663 F.2d at 551 (holding that the preliminary question of subject matter jurisdiction should be resolved by a summary determination). Insofar as Sid Richardson objects to the summary judgment-like procedure employed by the district court, therefore, the objection is meritless. See Carriere, 893 F.2d at 100.

Our evaluation of fraudulent joinder claims does not anticipate a judgment on the merits, but merely considers whether there is any possibility that the plaintiff might prevail. "We do not determine whether the plaintiff will actually or even probably prevail on the merits of the claim,...