United States District Court, D. New Mexico
WILLIAM C. (COREY) ELLENBURG, and DIANE M. ELLENBURG, Plaintiffs,
v.
ALLSTATE INSURANCE COMPANY, LEWIS, BRISBOIS, BISGAARD & SMITH LLP, and RYAN T. SAYLOR, ESQUIRE, Defendants.
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 ...