Fraudulent Joinder Does Not Defeat Removal to Federal Court

Bad Faith Suit Can’t Be Joined with Injury Suit in Federal Court

Bad faith law suits deal with the actions of an insurer to prevent a person to receive the benefits of an insurance policy and is distinct from claims for bodily injury against a tortfeasor. A possible, if not probable, reason to include an insurer in a suit against a tortfeasor is to convince the jury that there is plenty of money to pay the damages claimed by the plaintiff.

In Sahar Jallad v. Felix Madera; Progressive Advanced Insurance Company, No. 18-2038, United States Court of Appeals for the Third Circuit (August 8, 2019) Sahar Jallad attempted to include both the insurer and the tortfeasor in her case for injuries. Progressive removed the case to federal court that eventually dismissed the case against the tortfeasor, Madera.

FACTS

Jallad sued Madera in Pennsylvania state court for negligence. She filed a separate lawsuit against Progressive in the same court, alleging breach of contract and bad faith in its handling of her insurance claim related to the accident. Progressive removed the action to federal court on the basis of diversity jurisdiction, since Jallad.

Jallad moved to join Madera and have the case remanded to state court, arguing that joinder of Madera, a citizen of Pennsylvania, would destroy diversity jurisdiction. In response, Progressive argued, among other things, that Jallad’s negligence claim against Madera could not be properly joined with her insurance claims against Progressive under Pennsylvania law. The District Court concluded that her negligence claims against Mr. Madera may not be joined in the bad faith claim against Progressive.

ANALYSIS

Although Madera’s presence as a forum defendant would prevent removal, his citizenship could be disregarded for jurisdictional purposes because he was fraudulently misjoined.

The District Court first noted that, although complete diversity between the parties existed, the forum defendant rule would normally block removal because Madera is a citizen of Pennsylvania. The District Court recognized that the doctrine of fraudulent joinder allows removal of an action despite the existence of forum-state or non-diverse defendants if those parties were fraudulently named as defendants with the sole purpose of defeating federal jurisdiction. It also stated that a finding of fraudulent joinder allows a district court to disregard the citizenship of any fraudulently joined defendants for jurisdictional purposes and dismiss those defendants to retain jurisdiction over the remainder of the case.

Because Progressive, the remaining defendant, was diverse from both Jallad and the forum, the District Court denied Jallad’s motion to remand and denied Progressive’s motion to sever Madera as moot.

The District Court dismissed Jallad’s bad faith claim. Jallad’s breach of contract claim proceeded to a jury trial. After the close of evidence, the case was submitted to the jury. The jury ultimately returned a verdict for Progressive.

Jallad raised four issues on appeal:

  • whether the District Court erred in denying her motion to remand and dismissing Madera from the lawsuit on the basis that he was fraudulently joined;
  • whether the District Court abused its discretion by denying her leave to file an amended complaint;
  • whether the District Court abused its discretion by denying the admission of Dr. Lipton’s records and notes into evidence; and
  • whether the District Court abused its discretion in its response to the jury’s question.

In her motion to remand, Jallad claimed that diversity jurisdiction did not exist because Madera is not a diverse party. However, she did not substantiate that claim with any assertions or showings that he shares citizenship with her. Although she correctly asserted that Madera is a forum defendant, 28 U.S.C. § 1441(b)(2) is a non-jurisdictional provision, and an argument that it applies to a particular case can be waived. Therefore, the Thrid Circuit affirmed the District Court’s denial of her motion to remand because she did not allege a colorable basis for granting it.

The Third Circuit, however, concluded that the District Court’s dismissal of Madera was in error.  The concept of fraudulent joinder allows a court to assume jurisdiction over the case notwithstanding the presence of a nondiverse defendant and then dismiss that defendant. As noted above, Madera is a diverse party. Therefore, even if he had been fraudulently joined, his presence would not have destroyed jurisdiction, and he should not have been dismissed pursuant to that doctrine. As a result the Third Circuit vacated the District Court’s dismissal of Madera from the suit.

Once remanded to the District Court, the case against Madera should proceed. Madera’s absence from the trial against Progressive does not require the court to disturb the verdict in favor of Progressive. Jallad’s claims against Progressive were distinct from her claims against Madera, there were no cross claims pled, and there is no basis on which they had to be tried together.

For the foregoing reasons, the Third Circuit affirmed the District Court’s denial of Jallad’s motions for remand and for leave to amend her complaint, its denial of admission of Dr. Lipton’s records and notes into evidence, and its statement in response to the jury’s question. The Third Circuit vacated its dismissal of Madera and remand for further proceedings.

ZALMA OPINION

Jallad attempted to avoid the separation of the tort action from the bad faith issue. She tried the case against the insurer and lost. The Third Circuit allowed he to go forward with the case against the tortfeasor.  She will get whatever damages she is entitled to if she can convince the jury that Madera’s negligence was the reason for her injuries without prejudicing the jury by including the insurer in the law suit as a co-defendant with its insured.


© 2019 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Over the last 51 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Excellence in Claims Handling Courses From Experfy.com

The Excellence In Claims Handling program provides everything a person or entity presenting a claim needs to effectively present the claim and provides the insurance claims person with everything he or she needs to properly represent the insurer.

The insured, risk manager, or corporate counsel will be able to present a first party property claim – whether a fire, theft, or windstorm or some other insured against cause – with little difficulty and professionalism and present a sworn proof of loss acceptable to an insurer.

The insurance claims person completing the course will be able conduct a thorough investigation of the policy and claim. The insurance claims person will also be able to assist an insured to fulfill all of the promises made by the insured to the insurer and the insurer to provide the indemnity promised by the insurance policy.

The series of courses was designed so that the student can obtain the needed information easily while he or she sits down in the morning for a first cup of coffee or any other time in the day in short, easy to consume lessons. For instance “Insurance and Claims” is made up of three modules and 27 lectures while “Investigating the Property Claim” is made up of four modules and 65 lectures. You can review each course, each module and each lecture at the links below.

Each person completing the course will be able to claim that he or she is a professional first party property claims person ready to provide excellence in claims handling and be ready to resolve any claims problem that arises for the benefit of the insurer and the policy holder.

Insurance and Claims: https://www.experfy.com/training/courses/insurance-and-claims

Investigating the Property Claims: https://www.experfy.com/training/courses/investigating-the-property-claim

Insurance Law: https://www.experfy.com/training/courses/insurance-law

Solving Claims Problems: https://www.experfy.com/training/courses/solving-claims-problems

 

 

About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
This entry was posted in Zalma on Insurance. Bookmark the permalink.