Opinion
DOCKET NO. OO-CV-0180E(M).
November 29, 2000
Attorneys for the Plaintiff: Edward P. Wright, Esq., c/o Wright, Wright Hampton, Jamestown, NY.
Attorneys for the Defendant: Roy A. Mura, Esq., Buffalo, NY.
MEMORANDUM AND ORDER
Plaintiffs David and Beverly Fredlund ("the Fredlunds") purchased two fire insurance policies underwritten by Nationwide Mutual Fire Insurance Company ("Nationwide") from Terri L. Wilcox d/b/a Terri L. Wilcox Insurance ("Wilcox"). Policy No. 66-31-HO-154963 ("Policy 1") covered the Fredlunds' house located adjacent to the South Main Street Extension in the Town of Kiantone, County of Chautauqua, N.Y. Policy No. 66-31-T-734808 ("Policy 2") covered a new house the Fredlunds were constructing adjacent to their current residence at the same address. On March 1, 1998 a fire destroyed the new house under construction and the personal property contained therein, and damaged the Fredlunds' current house and its landscaping. The Fredlunds filed a claim with Nationwide, which paid them $198,562.07 for the house under construction, $20,000 for the loss of personal property, and $6,664.52 for damage to their current house. The Fredlunds believe that Nationwide under-compensated them for their losses by approximately $120,000 and filed suit against Nationwide in the New York State Supreme Court for the County of Chautauqua. The Fredlunds raised three causes of action in their complaint — viz., (1) for breach of contract, (2) for deceptive acts and practices in violation of N.Y. Gen. Bus. Law § 349 and (3) for unfair claim settlement practices in violation of N.Y. Ins. Law.
Nationwide removed the suit to this Court February 28, 2000 pursuant to 28 U.S.C. § 1446(a) under the diversity jurisdiction of 28 U.S.C. § 1332(a). The Fredlunds are residents of New York, Nationwide is both incorporated and has its principal place of business in Ohio and the amount in controversy exceeds $75,000; accordingly this Court has diversity jurisdiction. The Fredlunds have filed a motion to amend their complaint to add Wilcox as a defendant and add a cause at action against her for negligence, and a separate motion to remand this action to the New York Court based on (1) lack of diversity because Nationwide is deemed a citizen of New York under 28 U.S .C. § 1332(c), (2) lack of diversity if Wilcox is joined or (3) abstention under 28 U.S.C. § 1334 (c). Nationwide responded by filing a motion (1) in opposition to the motion to amend the complaint, (2) in opposition to the motion to remand, (3) to dismiss the second and third causes of action under Rule 12(b)(6) of the Federal Rules of Civil Procedure ("FRCvP") and (4) for sanctions under FRCvP 11. The Court scheduled a hearing for April 21, 2000 on the Fredlunds' motions and denied them because the parties failed to appear. On April 26, 2000 the Court dismissed without prejudice Nationwide's motions in light of its earlier denial of the Fredlunds' motions. The parties subsequently filed motions for reconsideration on the ground that they had agreed that all motions be consolidated and heard on May 12, 2000 and that the April 21 hearing be adjourned. They state that they sent a letter requesting an adjournment to the Court and that the reason they failed to appear on April 21 was due to a breakdown in communications with the Court which did not receive their request for an adjournment. Accordingly the motions for reconsideration are granted, and the Court will address the above motions on the merits.
Nationwide filed its Answer March 9, 2000 wherein it raised thirteen affirmative defenses, twelve of which concern provisions in the policies purportedly limiting Nationwide's liability. Based upon Nationwide's Answer, the Fredlunds filed a motion to amend their complaint to add Wilcox as a defendant and to raise a negligence claim against her. The Fredlunds state that they should be allowed to amend their complaint and that Wilcox
"is an indispensable party because of the representations and advice provided by the agent to the plaintiffs concerning the type of policies and the coverage provided by the policies. As a result of the agent's negligence, the limits of liability now argued by Defendant Nationwide were significantly less than the limits of liability for which the agent should have written the subject policy. Further, the allegations against Defendant Wilcox are inextricably interwoven with the allegations against Defendant Nationwide. The amendment should be granted to avoid a multiplicity of litigation and the risk of inconsistent results." Wright Aff. ¶¶ 5-6.
The proposed amended complaint would allege the following: that Wilcox is a resident and citizen of New York (Wright Aff. Ex. A (Proposed Amended Complaint ¶ 3)); that the Fredlunds told Wilcox they were building a house adjacent to their current one and that Wilcox stated she would obtain a Nationwide insurance policy with builder's risk coverage for the house under construction ( id. at ¶¶ 43-44); that Wilcox told the Fredlunds to advise her periodically as to the degree of completion of the new house so that she could assure appropriate coverage limits under that policy ( id. at ¶ 45); and that Wilcox negligently failed to recognize and advise the Fredlunds that the liability coverage on Policy 2 should have been the value of the house upon completion of construction ( id. at ¶ 46). In their Memorandum of Law in support of their motion to amend the complaint, the Fredlunds state that they told Wilcox that they were building a new house and that, although Wilcox told them that she would "insure the property using a policy with builder's risk coverage, she failed to do so properly and, instead, she incorrectly wrote the dwelling under construction insurance resulting in lower coverage limitations." Pl.'s Mem. of Law. in Sup. of Mot. to Remand at 2 (emphasis in original). The Fredlunds assert that not only did Wilcox sell them a dwelling-under-construction insurance policy when they had requested a builder's risk policy, but that she failed to properly write the dwelling-under-construction insurance policy. Id. at 3.
This is in contradiction to Nationwide's assertion that "Wilcox procured the insurance requested by the plaintiffs." Kowalczuk Aff. ¶ 12.
"[A]dditional non-diverse parties need not be indispensable to be joined." Gursky v. Northwestern Mutual Life Ins., Co., 139 F.R.D. 279, 281 (E.D.N.Y. 1991). FRCvP 20(a), which governs the permissive joinder of a new party, states in pertinent part that
"[a]ll persons *** may be joined in one action as defendants if there is asserted against them jointly, severally, or in the alternative, any right to relief in respect of or arising out of the same transaction, occurrence, or series of transactions or occurrences and if any question of law or fact common to all defendants will arise in the action."
The requirements for joinder are clearly satisfied in that the Fredlunds assert that both Nationwide and Wilcox are liable to them based on the insurance contract — or its inadequacy — and consequently there will be common questions both of law and of fact. "If after removal the plaintiff seeks to join additional defendants whose joinder would destroy subject matter jurisdiction, the court may deny joinder, or permit joinder and remand the action to state court." 28 U.S.C. § 1447(e). A plaintiff may amend the complaint after the defendant has answered "only by leave of the court or by written consent of the adverse party;" however, "leave shall be freely given when justice so requires." FRCvP 15(a). Nationwide refuses to consent to Fredlunds' request to amend and in fact has filed a motion in opposition to their motion to amend. Consequently the Fredlunds may amend their complaint to add Wilcox as a defendant only if given leave to do so by the Court. The basis of Nationwide's refusal to consent to the Fredlunds' request to amend their complaint is that (1) the allegations against Wilcox raised in the proposed amended complaint fail to state a cause of action under New York law and (2) that they are a "specious attempt to join a party simply for the sake of breaking diversity." Kowalczuk Aff. ¶¶ 7-11, 17. The court will address both grounds in turn.
While leave to amend a complaint should normally be permitted, futility of the proposed amendment would constitute a valid reason to deny leave to amend. Nerney v. Valente Sons Repair Shop, 66 F.3d 25,28 (2d Cir. 1995). When there is "no merit in the proposed amendments, leave to amend should be denied" — Heath-Chem Corp. v. Baker, 915 F.2d 805, 810 (2d Cir. 1990) — however, when the "underlying facts or circumstances relied upon by a plaintiff may be a proper subject of relief, he ought to be afforded an opportunity to test his claim on the merits." Forman v. Davis, 371 U.S. 178, 182 (1962). Nationwide is in essence attempting to dismiss the proposed allegations against Wilcox for failure to state a claim — before they are even formally made. Notwithstanding the issue of Nationwide's standing vel non to raise this challenge against a proposed claim against another party, this Court will address the issue of whether the proposed amended complaint arguably states a cause of action under New York law, such that the amendment would not be futile. The nature of the objection by Nationwide to the Fredlunds' request to amend their complaint is akin to a motion to dismiss for failure to state a claim under FRCvP 12(b)(6), the standard for which is that in "ruling on a motion to dismiss for failure to state a claim upon which relief may be granted, the court should not dismiss `unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.'" — Oliver Schools, Inc. v. Foley, 930 F.2d 248, 252 (2d Cir. 1991) (quoting Conley v. Gibson, 355 U.S. 41, 45-46 (1957)). However, because the actual issue being addressed is not a motion to dismiss but rather one for leave to amend the complaint, the applicable standard is that, if the "underlying facts or circumstances relied upon by a plaintiff may be a proper subject of relief, he ought to be afforded an opportunity to test his claim on the merits." Forman at 182.
Under New York law, insurance agents have "a common-law duty to obtain requested coverage for their clients within a reasonable time or inform the client of the inability to do so; however, they have no continuing duty to advise, guide or direct a client to obtain additional coverage." Murphy v. Kuhn, 90 N.Y.2d 266, 270 (1997). "Insureds are in a better position to know their personal assets and abilities to protect themselves more so than general insurance agents or brokers, unless the latter are informed and asked to advise and act." Id. at 273. It is possible that an insurance agent could be liable to the insured for negligence in cases such as where there "was some interaction regarding a question of coverage, with the insured relying on the expertise of the agent" although under such "circumstances, the insureds bear the burden of proving the specific undertaking." Id. at 272-273. The Fredlunds allege that Wilcox was told that they were building a house and that its estimated value upon completion would be $500,000, that Wilcox told them that she would provide insurance with builder's risk coverage and that, instead, Wilcox procured for them a dwelling-under-construction insurance policy for which she incorrectly wrote the coverage. The undersigned cannot state that the underlying facts or circumstances relied upon by the Fredlunds to state a cause of action against Wilcox for negligence in their proposed amended complaint are not a proper ground for relief; consequently, they ought to be afforded an opportunity to test their claims on the merits. Accordingly, Nationwide's argument that the Fredlunds should be denied leave to amend their complaint because their proposed claim against Wilcox fails to state a claim under New York law is unavailing.
Nationwide also objects to the motion to amend the complaint on the ground that the Fredlunds are seeking to do such "simply for the sake of breaking diversity." Kowalczuk Aff. ¶ 17. Reasons such as "bad faith or [a] dilatory motive on the part of the movant" are grounds to deny leave to amend the complaint — Forman, at 182 — ; accordingly if the Fredlunds seek to join Wilcox for the purpose of breaching diversity rather than asserting a good faith cause of action against her, leave to amend must be denied. In the proposed amended complaint, it is alleged that Wilcox is a citizen of New York. This case was removed to this Court pursuant to diversity jurisdiction. For a court to have subject matter jurisdiction under diversity of citizenship, there must be complete diversity among the parties; accordingly if a complaint is amended to add a non-diverse party, diversity, and consequently the subject matter jurisdiction of the court, is destroyed, requiring the case to be remanded. Owen Equipment and Erection Co. v. Kroger, 437 U.S. 365, 374 (1978). A plaintiff usually cannot "act to divest the federal court of jurisdiction over a case that has been properly removed." Wilson v. Famatex GmbH, 726 F. Supp. 950, 952 (S.D.N.Y. 1989). A court "faced with an amended pleading naming a new nondiverse defendant in a removed case, should scrutinize that amendment more closely than an ordinary amendment." Hensgens v. Deere Co., 833 F .2d 1179, 1181 (5th Cir. 1987). This closer scrutiny is necessitated because "justice requires that the *** court consider a number of factors to balance the defendant's interests in maintaining the federal forum with the competing interests of not having parallel lawsuits." Ibid. Factors to be considered in balancing the equities to decide whether to allow the amendment are "the extent to which the purpose of the amendment is to defeat federal jurisdiction, whether plaintiff has been dilatory, whether plaintiff will be significantly injured if amendment is not allowed, and any other factors bearing on the equities." Ibid. Several district courts in the Second Circuit have used the Hensgens analysis in applying section 1447(e). DiNardi v. Ethicon, Inc., 145 F.R.D. 294, 297 (N.D.N.Y. 1993); NAB Constr. Corp. v. Design-Cast, Inc., No. CV 90-4124(RR), 1991 WL 87370, *2 (E.D.N.Y. May 16, 1991); Wyatt v. National R.R. Passenger Corp., 881 F. Supp. 919, 923 (S.D.N.Y. 1995). In deciding whether to allow a plaintiff to amend a complaint to join a non-diverse party — thereby requiring the case to be remanded — the court applies a balancing test based on the following factors: "(1) any delay, and its reasons, in moving to amend, (2) any resulting prejudice to the defendants, (3) the likelihood of multiple litigation and (4) the plaintiff's motivation in moving to amend." Gursky v. Northwestern Mutual Life Ins. Co., 139 F.R.D. 279, 282 (E.D.N.Y. 1991).
Internal citations omitted.
All four factors in the balancing test weigh in favor of allowing the Fredlunds to amend their complaint to join Wilcox. First, there was no delay in bringing the motion, it was filed less than two weeks after Nationwide filed its answer. Second, there is no appreciable prejudice to Nationwide insofar as their only loss is their choice of forum because this case has not progressed far Third, multiple litigation will be avoided because the Fredlunds will not be required to pursue separate suits against Nationwide and Wilcox in federal and state courts respectively. Fourth, the Fredlunds "appear to be motivated not solely by a desire to defeat diversity jurisdiction, but rather by a good faith desire to seek recovery from those parties that they contend are liable to them." Wyatt at 923. The Fredlunds' motion for leave to amend is premised upon the affirmative defenses raised in Nationwide's answer, and was not filed until after Nationwide had answered — even though there was over a week between the filing of the notice of removal and the answer. Accordingly it does not appear the Fredlunds seek to amend their complaint solely to destroy diversity and their motion for leave to amend their answer will be granted. Insofar as the Fredlunds' motion for leave to amend their complaint is granted, Nationwide's motion in opposition to such motion will be denied; however, "[n]othing in this opinion should be construed as a decision on the merits as to the sufficiency of the allegations of the amended complaint." Ronzani v. Sanofi S.A., 899 F.2d 195, 199 (2d Cir. 1990).
Courts have even held that there is no appreciable prejudice to a defendant when discovery is almost completed at time of joinder and consequent remand. Wyatt at 923. Also, such amendment would bring into the case a new "culprit" for whose negligence or fault Nationwide could well not be responsible.
Nationwide's motion for sanctions under FRCvP 11 based upon the Fredlunds (1) attempted improper joinder of Wilcox, (2) assertion that 28 U.S.C. § 1332(c) is applicable and (3) refusal to withdraw their second and third causes of action — Kowalczuk Aff. 650 — will be denied. Such motion is procedurally defective. "A motion for sanctions under this rule shall be made separately from other motions or requests***." FRCvP 11(c)(1)(A). Nationwide's motion was brought in conjunction with its cross-motion in opposition to the Fredlunds' motions for leave to amend their complaint and for remand or abstention, and its motion to dismiss the second and third causes action against it. In addition a motion for sanctions
"shall be served as provided in Rule 5, but shall not be filed with or presented to the court unless, within 21 days after service of the motion (or such other period as the court may prescribe), the challenged paper, claim, defense, contention, allegation or denial is not withdrawn or appropriately corrected." FRCvP 11(c)(1)(A).
There is no evidence that Nationwide has complied with this requirement either. The only evidence of any compliance with this requirement is that counsel for Nationwide, Roy A. Mura, Esq., wrote to the Fredlunds' attorneys stating that in his opinion removal was proper because 28 U.S.C. § 1332(c) was inapplicable, citing a case from the Eastern District of Michigan — Def.'s Cross Mot. Ex. F (Mura Letter of March 9, 2000) — and that the second and third causes action fail to state a cause of action under New York law. Id. at Ex. G (Mura Letter of March 14, 2000). Nationwide's cross motion, including its FRCvP 11 request for sanctions to which these letters are attached, was signed April 14, 2000 — the same day it was filed with this Court. Accordingly it appears highly unlikely that this motion was served on the Fredlunds twenty-one days before it was filed with the Court as required by the rule. This Court is granting the Fredlunds leave to amend their complaint to join Wilcox; therefore there is no reason to sanction them for bringing such motion and, because the strictures of FRCvP 11 have not been followed by Nationwide, its motion for sanctions will be denied in its entirety.
In granting the Fredlunds leave to amend their complaint, diversity will be broken, thus requiring remand pursuant to 28 U.S.C. § 1447(e). Insofar as this Court will be divested of subject matter jurisdiction by the joinder of Wilcox as a defendant, "it is more appropriate for the judge who will be managing the case in state court to rule on the motion" by Nationwide to dismiss the second and third causes of action against it — Wilson, at 953 — ; accordingly this Court shall not consider such.
Accordingly it is hereby ORDERED that the Fredlunds' motion for leave to amend their complaint to add Wilcox as a defendant and state a cause of action against her in negligence is granted, that Nationwide's motion for sanctions is denied, that the Fredlunds shall serve and file an amended complaint in this Court within thirty days of the date of this opinion and that, upon the filing of the amended complaint, the Fredlunds may renew their motion to remand and the same will be considered and ruled upon forthwith.
DATED: Buffalo, N.Y. November 29, 2000
JOHN T. ELFVIN S.U.S.D.J.