Ellenburg v. Allstate Insurance Co.

          MEMORANDUM OPINION AND ORDER

          ROBERT C. BRACK JUDGE

         As courts of limited jurisdiction, federal courts cannot adjudicate disputes of state law, except when there is complete diversity of citizenship. Knowing this, plaintiffs who prefer the state forum sometimes join non-diverse defendants, against whom the plaintiffs have no reasonable basis of recovery, in order to defeat federal jurisdiction. To prevent plaintiffs from getting away with this tactical maneuver, federal courts recognize the concept of fraudulent joinder, which allows them to dip into the merits of the plaintiff's claims against non-diverse defendants to see if those claims have any “reasonable basis” of success.

         Defendant Allstate has accused the plaintiffs of fraudulently joining the non-diverse defendants, bringing the jurisdictional issue of fraudulent joinder before the Court. Because the plausibility of the claims against the non-diverse defendants turns on how New Mexico should reconcile its desire to safeguard zealous attorney advocacy with its desire to promote ethical practices in the insurance industry, a problem that requires deep thinking on issues of statewide importance, New Mexico courts should be the ones to decide this case.

         BACKGROUND

         William (Corey) Ellenburg owned a Matco Tool Distributorship, through which he sold Matco tools. (See Doc. 1, Ex. 1 at 2.) Mr. Ellenburg kept his Matco inventory in a van that he leased, and, to protect himself in the event something happened to the van, Mr. Ellenburg purchased coverage through Allstate Insurance Company. (Id.) The insurance coverage protected not only Mr. Ellenburg, but also Diane Ellenburg, who had invested in the Matco distributorship. (Id.)

         Sometime in January 2017, Mr. Ellenburg's Matco van was stolen. (Id. at 3.) It was later discovered in Santa Fe County, New Mexico, burned to the ground. (Id.) The Matco tools and equipment inside were gone. (Id.)

         Mr. Ellenburg promptly reported the loss of the Matco van to Allstate and filed an insurance claim. (Id.) In response to Mr. Ellenburg's claim, Allstate hired Ryan T. Saylor, an attorney at the law firm of Lewis, Brisbois, Bisgaard & Smith LLP (LBBS), to conduct an examination under oath (EUO) with Mr. Ellenburg. (Id. at 4.) During the EUO, Mr. Saylor allegedly engaged in oppressive and intimidating tactics, such as misrepresenting the terms of the policy. (See Id. at 5-6.)

         Believing themselves to be the victims of a profit-maximizing scheme by Allstate designed to coerce Allstate's clients to settle their claims for a fraction of their worth, Mr. and Ms. Ellenburg (together, the “Ellenburgs”) sued Allstate, Mr. Saylor, and LBBS in New Mexico state court for statutory violations-including violations of the Trade Practices and Frauds article (TPFA) of the New Mexico insurance code, N.M. Stat. Ann. §§ 59A-16-1-30-and for common law violations. (See Id. at 18-26.) Relevant to this case, the Ellenburgs sued Mr. Saylor and LBBS for violating the TPFA under the theory that the two acted as Allstate's agents in carrying out Allstate's illegal coercion scheme. (See Id. at 5-6, 24-26.)

         At first blush, the Ellenburgs properly chose the state court forum because there was no issue of federal law, (see id.), nor was there complete diversity of citizenship as the Ellenburgs, Mr. Saylor, and LBBS were all New Mexico citizens, (see Doc. 1 at 4). However, Allstate removed the case to federal court, arguing that New Mexico's case law unequivocally precludes attorneys from being sued under any of the Ellenburgs' theories of liability; and thus, Mr. Saylor and LBBS must have been fraudulently joined in the lawsuit. (See id.) With Mr. Saylor and LBBS out of the lawsuit, there would be complete diversity between plaintiffs and defendants (and thus potential federal diversity jurisdiction) since Allstate is a citizen of Illinois. (See id.)

         The issue before the Court is whether Mr. Saylor and LBBS were indeed fraudulently joined so that Allstate appropriately removed the case to federal court.

         LEGAL STANDARD

         When complete diversity does not exist between plaintiffs and defendants in a lawsuit predicated solely on issues of state law, a federal court normally has no jurisdiction to hear the case. See Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994) (federal courts have jurisdiction only when such jurisdiction is authorized by Constitution and statute). But if the lack of complete diversity is the result of a plaintiff's fraudulent joinder of a non-diverse party, then a federal court has diversity jurisdiction over the case (assuming the amount in controversy requirement is satisfied), and a defendant may properly remove the case to federal court. See Am. Nat. Bank & Tr. Co. of Sapulpa v. Bic Corp., 931 F.2d 1411, 1412 (10th Cir. 1991).

         A defendant who decides to remove a case without complete diversity to federal court on the theory of fraudulent joinder must demonstrate either “(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.” Dutcher v. Matheson, 733 F.3d 980, 988 (10th Cir. 2013) (citation omitted). “The defendant seeking removal bears a heavy burden of proving fraudulent joinder, and all factual and legal issues must be resolved in favor of the plaintiff.” Id. (citations omitted) (emphasis added). This is a more exacting standard than the one used for dismissing a claim under Fed.R.Civ.P. 12(b)(6). See Montano v. Allstate Indem., 211 F.3d 1278, 1278 (10th Cir. 2000).

         As defendants have not alleged actual fraud, the Court turns its attention to the second means of demonstrating fraudulent joinder, which requires the Court to determine whether there is a “reasonable basis” to believe that the plaintiff could recover against the non-diverse defendant in state court. See Cuevas v. BAC Home Loans Servicing, LP, 648 F.3d 242, 249 (5th Cir. 2011); see also Aguayo v. AMCO Ins. Co., 59 F.Supp.3d 1225, 1255 (D.N.M. 2014) (concluding that the Tenth Circuit would likely adopt the Fifth Circuit's analysis here). A plaintiff has a reasonable basis for recovery against a non-diverse defendant if the plaintiff's claim is not wholly insubstantial and frivolous. See Montano, 211 F.3d at 1278 (citing Batoff v. State Farm Ins. Co., 977 F.2d 848, 851-53 (3rd ...