Improper joinder and its discontents

The able Rory Ryan of Baylor’s law school has Tweeted in detail about a recent district-court opinion on a thorny, and persistent, removal-jurisdiction issue. The case, which arose under a Texas Insurance Code provision with a specific procedure about claims against insurance agents, presented these facts:

Plaintiffs sued their insurer, Chubb (who is diverse), and agent, Smith (who is non-diverse), in state court. Chubb then elected to accept whatever liability Smith might have, and the state court dismissed Smith. Chubb then removed the case under diversity jurisdiction.

Leading to this issue: “[I]n determining diversity jurisdiction, does the Court consider Smith’s citizenship?”

After an extensive review of the relevant statutes and cases, the Court concluded:

Without binding authority, the Court must rely on the policy and rationale supporting the improper-joinder rule. The improper-joinder rule holds that the non-diverse defendant never should have been a party.  As the Fifth Circuit has said: “If no reasonable basis of recovery exists, a conclusion can be drawn that the plaintiff’s decision to join the local defendant was indeed fraudulent …,” and therefore improper.  As shown above, this rationale explains the improper-joinder rule’s past application.

 

But the rationale does not support an improper-joinder finding when the plaintiff’s claims against the non-diverse defendant were initially valid. In this situation, it is false to say an improper-joinder finding amounts to a determination that the non-diverse defendant was never properly before the court. It was.

(citations omitted, emphasis in original). The case was thus remanded to state court.