Split Fifth Circuit Panel Rejects Eleventh Circuit’s “Fraudulent Misjoinder” Doctrine to Rescue Removed Case and Remands to State Court

In Williams v. Homeland Ins. Co., No. 20-30196 (5th Cir. Nov. 30, 2021), the panel split three ways in addressing whether there was full diversity in a removed action, with the majority holding that that no misjoinder doctrine could rescue the case from remand.

The case had proceeded for over a decade in state and federal court, including two prior trips to the Fifth Circuit. “In 2009, Plaintiff George Raymond Williams filed a putative class action in Louisiana state court on behalf of the Class against three Louisiana defendants, including Med-Comp USA. Med-Comp operated a PPO network, which contracted with the proposed class of medical providers for discounted rates. The Class alleged that the PPOs violated the Louisiana Preferred Provider Organization Act (‘PPO Act’) by discounting the Class’s bills without prior notice.”

In 2011, the plaintiff added three non-Louisiana defendants, which petitioned to remove to federal court under “both ordinary diversity jurisdiction under 28 U.S.C. § 1332(a) and jurisdiction under the Class Action Fairness Act’s (‘CAFA’) minimal diversity jurisdiction under 28 U.S.C. § 1332(d)(2).” It was eventually remanded to state court.

The plaintiff dismissed all defendants but Med-Comp. “As part of their settlement agreement, CorVel (Homeland’s insured) assigned to the Class its insurance coverage claims against Homeland.” The Class “amended its still unresolved complaint against Med-Comp in Louisiana state court to assert the bad faith claim” against Homeland, which in turn removed the case to federal court. The district court eventually dismissed the entire action on claim preclusion grounds and the plaintiff appealed.

On appeal, the Fifth Circuit dismisses on jurisdictional grounds. “The district court concluded that it had ordinary diversity jurisdiction under 28 U.S.C. § 1332(a)(1). We have jurisdiction to evaluate whether the district court was correct . . . . The Class asserts that jurisdiction in federal district court was improper because Med-Comp’s presence destroyed complete diversity of the parties and barred removal.”

The panel majority notes that “ordinary diversity jurisdiction requires complete diversity—all of the plaintiffs must be citizens of different states than all of the defendants . . . . If a non-diverse defendant is improperly joined, however, a district court can disregard the citizenship of that defendant for the purposes of evaluating its jurisdiction.” But while the district court applied the improper joinder doctrine to disregard Med-Comp, the majority hold that “its reasoning and conclusions cannot be squared with this circuit’s improper joinder jurisprudence. Rather, the district court functionally applied the fraudulent misjoinder doctrine, which we have never adopted and do not adopt now.”

The panel majority holds that the conventional “improper joinder” doctrine did not apply here. There is improper joinder only where “(1) there was actual fraud in the pleading of jurisdictional facts; or (2) the plaintiff is unable to establish a cause of action against the non-diverse defendant in state court.” The district court relied on the latter ground. “But the district court did not actually assess whether the pleadings or other facts showed that the Class lacked a possibility of recovery on its PPO Act claims against Med-Comp. Instead, it proceeded down a new path of reviewing the Class in two different capacities in the case: (1) the Class-as-the Class, who had the PPO Act claims against Med-Comp; and (2) the Class-as-CorVel, who had the assigned bad faith claim against Homeland.” Such splitting of the party’s capacities, the panel majority holds, have never been allowed to defeat diversity jurisdiction.

The panel majority then addresses the “fraudulent misjoinder” doctrine, which to date has been adopted “only by the Eleventh Circuit . . .  and a number of district courts.” Under this doctrine, “the ‘egregious’ misjoinder of parties ‘constitute[s] fraudulent joinder’ that permits a defendant to remove to federal court.” The panel majority holds that there is no statutory basis for the doctrine. 42 U.S.C. “§ 1441(b)(2) does not provide a textual basis for expanding federal jurisdiction to include fraudulent misjoinder, nor is there any other statutory authority (or case law interpreting statutory authority in this context) that does so.” The panel majority also holds that prior circuit authority, including two en banc opinions, specifically rejected this extension of improper joinder.

“It is also a well-known rule that federal courts are courts of limited jurisdiction. Adopting the fraudulent misjoinder doctrine will dramatically expand federal jurisdiction, putting the federal district courts in this circuit in the position of resolving procedural matters that are more appropriately resolved in state court—all without a clear statutory hook.”

Finally, “[d]eclining to adopt the fraudulent misjoinder doctrine as a basis for exercising diversity jurisdiction and holding that misjoinder issues should be addressed in state court prior to removal also brings greater clarity to the line between removable and non-removable cases. A defendant would have a clear framework for determining the removability of a case involving plausible but potentially misjoined claims between non-diverse parties. The defendant would move to sever those claims on misjoinder grounds before removal, and either the state court grants the motion and the case becomes removable or it denies the motion and the case remains non-removable.”

Concurring, Judge Ho would resolve the matter on a strict reading of the diversity statute. “If a case is completely diverse, and one of the defendants is local but improperly joined, the case can still be removed pursuant to § 1441(b)(2). But if a case is not completely diverse when a notice of removal is filed, then nothing in § 1441(b)(2) authorizes the exercise of federal removal jurisdiction, period. Even if the case might become completely diverse if the federal court were to dismiss an improperly joined defendant, that would not satisfy the terms of § 1441(b)(2), because the case was not ‘otherwise removable’ at the outset of removal.”

Dissenting, Judge Edith Jones would hold that the practical solution of severing improperly-joined defendants at the moment of removal can preserve federal jurisdiction. Using Fed. R. Civ. P. 21 “to sever the improperly joined parties and claims does not extend or create federal jurisdiction, it merely reinforces the statutorily prescribed balance between state and federal courts. This result discourages artful joinder schemes devised around anchor plaintiffs.”

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