Larry O. Crother, Inc. v. Lexington Insurance Company

Filing 39

ORDER signed by Judge Morrison C. England, Jr. on 6/6/2011. Plaintiff's 32 Motino for Leave to file First Amended Complaint is GRANTED. Plaintiff directed to file it forthwith. Because the Court determines it lacks jurisdiction, Lexington's 24 Motion to Dismiss is DENIED as MOOT. (Marciel, M)

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1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 EASTERN DISTRICT OF CALIFORNIA 10 11 12 LARRY O. CROTHER, INC., a California Company, d.b.a. ABC INSULATION & SUPPLY CO., No. 2:11-cv-00138-MCE-GGH 13 Plaintiff, 14 ORDER v. 15 16 17 18 LEXINGTON INSURANCE COMPANY, a Delaware corporation, and DOES 1 through 25, inclusive, Defendants. 19 ----oo0oo---- 20 21 Through the present action, Plaintiff Larry O. Crother, Inc. 22 d.b.a. ABC Insulation & Supply Co. (“Plaintiff”) seeks to recoup 23 certain insurance premiums it paid its comprehensive general 24 liability carrier, Defendant Lexington Insurance Company 25 (“Lexington”). 26 December 13, 2010 in the Superior Court of the State of 27 California in and for the County of Sacramento. 28 served with the Summons and Complaint on December 16, 2010. Plaintiff’s initial complaint was filed on 1 Lexington was 1 Because Lexington was the only named Defendant, and because 2 Lexington claims to be a corporation incorporated under the laws 3 of the State of Delaware with a principal place of business in 4 the State of Massachusetts, Lexington timely removed Plaintiff’s 5 action to this Court on January 14, 2011, citing diversity of 6 citizenship pursuant to 28 U.S.C. §§ 1441(a) and 1446. 7 Thereafter, on January 28, 2010, Plaintiff filed a First Amended 8 Complaint (“FAC”) purporting to add new, and non-diverse, 9 Defendants; namely, Plaintiff’s insurance broker and agent. That 10 filing prompted Lexington’s Motion to Strike the purported FAC as 11 improperly filed without the requisite leave of court. 12 Plaintiff filed that amended pleading without seeking either a 13 stipulation from Lexington or a court order authorizing it to do 14 so. 15 By Order dated March 18, 2011, that Motion was granted. Now before the Court is Plaintiff’s Motion seeking 16 authorization to refile his FAC. That proposed pleading seeks to 17 add John O. Bronson Co., Inc., an insurance broker, as a 18 defendant along with Kirk Willard, an agent employed by Bronson, 19 on grounds that Bronson and Willard handled Plaintiff’s general 20 liability insurance between October 30, 2003 and January 15, 2008 21 and negligently failed to secure issuance of a policy that 22 excluded retail sales from the determination of Plaintiff’s 23 premium, thereby resulting in overcharges of some $74,094.00. 24 See Proposed FAC, ¶¶ 27-31. 25 /// 26 /// 27 /// 28 /// 2 1 Plaintiff further asserts, as an additional cause of action, that 2 Bronson and Willard’s failure in this regard violated the 3 fiduciary duty owed to Plaintiff, both by neglecting to procure 4 an exclusion and because they failed to adequately demand and/or 5 pursue a refund from Lexington when the purported unearned 6 premiums were discovered. Id. at ¶¶ 32-35. 7 While the FAC now proposed also reduces the amount in 8 controversy from $152,934.27 to $74,094.00, and also purports to 9 add an additional claim for breach of contract against Lexington, 10 and to clarify certain other allegations, the inclusion of 11 Bronson and Willard as additional defendants would add non- 12 diverse parties to the action, since Bronson is alleged to be a 13 California corporation, and Willard is identified as resident of 14 Sacramento County, California. 15 Id. at ¶¶ 3-4. If the Court finds that Bronson and Willard are indeed 16 proper defendants, then, diversity would be destroyed and the 17 sole basis for federal jurisdiction over this matter would be 18 removed. 19 action back to state court where it was originally commenced. 20 See Morris v. Princess Cruises, Inc., 236 F.3d 1061, 1068 (9th 21 Cir. 2001). 22 Willard is dispositive in whether this matter properly remains 23 here. 24 irrelevant any consideration of whether the remainder of 25 Plaintiff’s claimed amendments are warranted. 26 /// 27 /// 28 /// That development would compel the Court to remand the Consequently, the propriety of including Bronson and A determination that they may properly be joined makes 3 1 Moreover, while Defendant Lexington has also filed a Motion to 2 Dismiss Plaintiff’s originally filed Complaint that is 3 concurrently set for hearing with Plaintiff’s Motion for Leave to 4 File its FAC, that Motion to Dismiss also becomes moot if the 5 Court finds that joinder of Bronson and Willard is appropriate. 6 Although Federal Rule of Civil Procedure 15(a)1 directs that 7 the Court “should freely give [leave to amend] when justice so 8 requires”, Rule 15(a) does not apply where, as here, Plaintiff 9 seeks to amend its complaint after removal to add non-diverse 10 parties whose joinder would divest the court of jurisdiction. 11 apply the permissive standard of Rule 15(a) in that situation 12 could “allow a plaintiff to improperly manipulate the forum of an 13 action...” 14 Cal. 1999). 15 directly impact diversity, the provisions of 28 U.S.C. § 1447(e), 16 rather than those contained in Rule 15(a), control. 17 41 F. Supp. 2d at 1086-87; see also Chan v. Bucephalus 18 Alternative Energy Group, LLC, 2009 WL 1108744 at * 3 (N.D. Cal. 19 2009). 20 To Clinco v. Roberts, 41 F. Supp. 2d 1081, 1087 (N.D. Consequently, where the addition of defendants would Clinco, Section 1447(e) provides in pertinent part that “[i]f, after 21 removal the plaintiff seeks to join additional defendants whose 22 joinder would destroy subject matter jurisdiction, the court may 23 deny joinder, or permit joinder and remand the action to state 24 court.” 25 destroying diversity jurisdiction remains in the sound discretion 26 of the Court. The decision as to whether to permit an amendment 27 1 28 All further references to “Rule” or “Rules” are to the Federal Rules of Civil Procedure unless otherwise noted. 4 1 IBC Aviation Servs., Inc v. Compania Mexicana de Aviaction, S.A. 2 de C.V., 125 F. Supp. 2d 1008, 1011 (N.D. Cal. 2000), citing 3 Newcombe v. Adolf Coors Co., 157 F.3d 686, 691 (9th Cir. 1998) 4 In determining whether to allow joinder under Section 1447(e), 5 the following five factors should be considered: 6 (1) whether the party sought to be joined is needed for just adjudication and would be joined under Federal Rule of Civil Procedure 19(a); (2) whether the statute of limitations would prevent the filing of a new action against the new defendant in state court; (3) whether there has been an unexplained delay in seeking to join the new defendant; (4) whether plaintiff seeks to join the new party solely to defeat federal jurisdiction; (5) the strength of the claims against the new defendant. 7 8 9 10 11 12 IBC Aviation; 125 F. Supp. 2d at 1011; see also Boon v. Allstate 13 Ins. Co., 229 F. Supp. 2d 1016, 1020 (C.D. Cal. 2002) (citing 14 Clinco, 41 F. Supp. 2d at 1082). 15 With respect to the first factor, a necessary party under 16 Rule 19(a) is one “having an interest in the controversy, and who 17 ought to be made a party, in order that the court may act on that 18 rule which requires it to decide and finally determine the entire 19 controversy, and do complete justice, by adjusting all the rights 20 involved in it.” 21 (citing CP Nat’l Corp. v. Bonneville Power Admin., 928 F.2d 905, 22 912 (9th Cir. 1991). 23 Rule 19(a) should be considered by the court in determining the 24 propriety of joinder, the standard under Section 1447(e) is less 25 restrictive than that applicable to Rule 19(a). 26 Trotman v. United Parcel Serv., 1996 WL 428333 at *1 (N.D. Cal. 27 1996). 28 /// IBC Aviation, 125 F. Supp. 2d at 1011 Although whether a party is necessary under 5 Id. (citing 1 In accordance with the discretion the Court is accorded in 2 allowing joinder under Section 1447(e), joinder is indicated 3 “when failure to join will lead to separate and redundant 4 actions”, but not when the defendants whose joinder is sought 5 “are only tangentially related to the cause of action or would 6 not prevent complete relief.” 7 Boon, 229 F. Supp. 2d at 1022. In IBC, the plaintiff provided cargo handling services to 8 airlines, and entered into an agreement with Mexicana Airlines to 9 handle its cargo at the Los Angeles International Airport. 10 ultimately sued Mexicana for breach of its Cargo Handling 11 Agreement, along with another company, AeroMexpress, that was 12 responsible for overseeing the cargo services delivered by IBC to 13 Mexicana. 14 Connolly, but after removal of the action to federal court sought 15 to add Connolly as a defendant on grounds that he was the 16 principal person responsible for the acts underlying IBC’s claim 17 against Mexicana and AeroMexpress. 18 was a necessary party under a Rule 19(a) analysis, the IBC court 19 answered that question in the affirmative, reasoning that 20 “disallowing the amendment would hinder IBC from asserting its 21 rights against an employee directly involved in the alleged 22 breach of the [subject] Cargo Handling Agreement and related 23 causes of action.” 24 /// 25 /// 26 /// 27 /// 28 /// IBC IBC did not initially sue AeroMexpress employee Steven In analyzing whether Connolly IBC, 125 F. Supp. 2d at 1012. 6 1 The factual circumstances confronted by the IBC court are 2 factually comparable to this case, where Plaintiff alleges that 3 its insurance broker and agent, Bronson and Willard, were 4 responsible for not procuring the proper scope of insurance for 5 Plaintiff, and for saddling Plaintiff with unnecessary premium 6 costs as a result. 7 conceded the centrality of the broker/agent to Plaintiff’s 8 dispute. 9 dated January 16, 2009, Lexington’s own Associate General 10 Counsel, Barnett Ovrut, indicated that a “specific policy 11 exclusion” could have been written to exclude Plaintiff’s retail 12 sales of insulation from the calculation of Plaintiff’s 13 comprehensive general liability policy. 14 that the broker and/or agent were responsible for failing to 15 exclude “material sales from premium determination.” 16 letter states: 17 Significantly, even Lexington appears to have In a letter to the California Department of Insurance Ovrut appears to opine As the “Review and analysis of the Policy indicates that premium is to be determined on the basis of ABC Insulation’s “sales”. No distinction is made in this respect for sales from insulation contracting and sales of insulation materials. A specific policy exclusion would be required for receipts from material sales to not be included in premium determination. As ABC Insulation was represented by an insurance broker with respect to obtaining the insurance provided under the policy, responsibility for excluding material sales from premium determination had that been ABC Insulation’s intent rested with such broker.” 18 19 20 21 22 23 24 See Ovrut letter, Exhibit 2 to the Declaration of Daniel W. 25 Smith, page 1, paragraph 1. 26 /// 27 /// 28 /// 7 1 In opposition to Plaintiff’s Motion, Lexington does not 2 deny that Bronson and Willard may be necessary parties given the 3 allegations levied by Plaintiff against them. 4 claims that the original agent who placed the policy with 5 Lexington, Glenna Androus (who also happens to be Larry Crother’s 6 mother-in-law), should also have been named as a Defendant. 7 Lexington’s Opp’n, 3:5-14). 8 to add Androus amounts to gamesmanship on the part of Plaintiff 9 that renders “fallacious” Plaintiff’s present attempt to Instead, Lexington (See Lexington argues Plaintiff’s failure 10 selectively add Bronson and Willard as diversity-destroying 11 Defendants. 12 Ms. Androus died in November of 2002, with her business being 13 subsequently sold in 2003. 14 Because the allegations of the proposed FAC make it clear that 15 Plaintiff seeks to sue Bronson and Willard only in their capacity 16 as Plaintiff’s insurance agent and broker for the period between 17 October 30, 2003 and January 15, 2008 (see FAC, ¶ 27), 18 Plaintiff’s failure to add the deceased Ms. Androus appears 19 justifiable, and not an abject attempt to “pick and choose” 20 defendants to destroy diversity that the Court should reject. 21 Plaintiff points out in its reply, however, that Decl. of Cheryl A. Crother, ¶ 2. Bronson and Willard’s potential relationship to Plaintiff’s 22 claims appears to well exceed the requisite “tangential” link. 23 Indeed, as Plaintiff points out, the Ovrut letter makes it likely 24 that Lexington will blame Bronson and Willard at trial, and will 25 point to their empty chairs if they are not joined as defendants. 26 /// 27 /// 28 /// 8 1 Consequently, the Court agrees that the addition of Bronson and 2 Willard is necessary, under a Rule 19(a) analysis, to adjudicate 3 the entire controversy stemming from the placement of Plaintiff’s 4 comprehensive general liability insurance. 5 The Northern District’s decision in Chan v. Bucephalus, 6 supra, is also instructive. The Plaintiff in Chan, after 7 initially suing a company that solicited investment funding, 8 later sought to add the non-diverse former managing partner of 9 that company, alleged that the partner actively participated in 10 the investment scheme wherein she was allegedly victimized. 11 Under those circumstances, which are akin to Plaintiff’s 12 allegation here that Bronson and Willard were the parties 13 directly responsible for negligently procuring the policies 14 issued by Lexington, the Northern District found that the 15 partner’s role was more than tangential and consequently 16 determined that the Rule 19(a) inquiry favored allowing amendment 17 under a Section 1447(e) analysis. 18 This Court similarly concludes that considerations under 19 Rule 19(a) weigh in Plaintiff’s favor in permitting the joinder 20 of Bronson and Willard as additional parties. Chan, 2009 WL 1108744 at * 4. 21 Turning now to the second factor, whether or not the 22 applicable statute of limitations would preclude Plaintiff from 23 asserting his claims in a separate state court action, there is 24 no evidence before the Court that Plaintiff’s potential claims 25 against Bronson or Willard would be subject to the applicable 26 statute of limitations bar any differently now than at the time 27 this lawsuit was initially filed in December of 2010. 28 /// 9 1 Consequently, that factor does not weigh one way or the other in 2 favor of permitting joinder under Section 1447(e). 3 The third factor, whether the amendment was sought in a 4 timely matter, does appear to favor Plaintiff. Plaintiff’s 5 initial attempt to add Bronson and Willard as defendants occurred 6 on January 28, 2011, just six weeks after this matter was first 7 filed in state court and only two weeks after removal, by 8 Lexington, to this Court. 9 District found that an amendment sought some six weeks after the In Clinco, supra, the Northern 10 filing of the original complaint was timely. 11 Clinco, 41 F. Supp. 2d at 1083. 12 Consideration of the final fourth and fifth factors is 13 intertwined, since an assessment as to the strength of the claims 14 against the proposed new defendant (fifth factor) would appear to 15 bear directly on whether joinder is sought solely to defeat 16 diversity and divest this Court of jurisdiction. 17 Plaintiff’s previously filed Motion to Remand, submitted 18 immediately following its ultimately aborted attempt to file a 19 FAC without the requisite leave of court, does suggest a motive 20 to destroy diversity (as does Plaintiff’s reduction of the 21 jurisdictional amount in controversy to below the $75,000.00 22 threshold), as discussed above it appears that even Lexington 23 concedes that Plaintiff may indeed have valid claims against 24 Bronson and Willard. 25 Court’s view, any inference to be drawn in either favoring or 26 disfavoring amendment. 27 /// 28 /// Although That competing interplay nullifies, in the 10 1 On balance, in assessing the factors to be considered in 2 determining whether to permit amendment under Section 1447(e), 3 the Court concludes that Plaintiff should be allowed to submit 4 his proposed FAC despite the fact that the pleading destroys 5 diversity. 6 Complaint (ECF No. 32) is accordingly GRANTED.2 7 directed to file its First Amended Complaint forthwith. 8 that amended pleading adds defendants whose presence in this 9 litigation destroys the diversity on which this Court’s Plaintiff’s Motion for Leave to File First Amended Plaintiff is Because 10 jurisdiction rests, this Court no longer has subject matter 11 jurisdiction under 28 U.S.C. § 1332 and must remand this case to 12 the originating Court, the Superior Court for the State of 13 California in and for the County of Sacramento. 14 accordingly unnecessary to adjudicate the propriety of the other 15 changes contained within the First Amended Complaint, and the 16 Court declines to do so. 17 determines it lacks jurisdiction, Lexington’s Motion to Dismiss 18 (ECF No. 24) is DENIED as moot. 19 20 It is Additionally, because the Court IT IS SO ORDERED. Dated: June 6, 2011 21 22 _____________________________ MORRISON C. ENGLAND, JR. UNITED STATES DISTRICT JUDGE 23 24 25 26 27 28 2 Because oral argument was not of material assistance, the Court ordered this matter submitted on the briefs. E.D. Cal. Local Rule 230(g). 11

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