Opinion
1-23-CV-760-ADA
01-18-2024
HK CAPITAL LLC dba ASHFORD COSTA ESMERALDA and ASHFORD CREEKWOOD LP, Plaintiffs, v. THIRD COAST INSURANCE COMPANY and STRATA CLAIMS MANAGEMENT, Defendants.
ORDER AND REPORT AND RECOMMENDATION OF THE UNITED STATES MAGISTRATE JUDGE
MARK LANE, UNITED STATES MAGISTRATE JUDGE
TO THE HONORABLE ALAN D. ALBRIGHT, UNITED STATES DISTRICT JUDGE:
Before the court are Plaintiffs' Motion to Remand (Dkt. 6), Plaintiffs' Motion to Strike (Dkt. 8), and all related briefing. Having considered the pleadings, the relevant case law, and the entire case file, and having determined a hearing is not necessary, the undersigned issues the following order and submits the following Report and Recommendation to the District Court.
The motions were referred by United States District Judge Robert Pitman to the undersigned for a Report and Recommendation as to the merits or disposition, as appropriate, pursuant to 28 U.S.C. § 636(b), Rule 72 of the Federal Rules of Civil Procedure, and Rule 1(d) of Appendix C of the Local Rules of the United States District Court for the Western District of Texas. Text Orders dated Sept. 9, 2023.
I. Background
Plaintiffs originally filed this insurance dispute in the 261st District Court of Travis County. Dkt. 1-6 (Compl.). Plaintiffs pleaded that just a month after they secured an insurance policy (the “Policy”) from Third Coast Insurance Co. (“Third Coast”), the insured Property suffered a fire. Compl. ¶¶ 9-10. Plaintiffs notified Third Coast of the loss. Id. ¶ 11. The Policy mandated that Strata Claims Management (“Strata”) would serve as the designated loss adjuster. Dkt. 6 at 3, Exh. A at 16. Accordingly, Third Coast notified Strata of the claim. Compl. ¶ 11.
Third Coast and Strata retained Young & Associates to evaluate the damage and recommended Belfor, a disaster-recovery contractor, to perform the work. Id. Young & Associates issued an artificially low estimate for the damage. Id. ¶ 12. Belfor's estimate to perform the work was higher than Young & Associates' estimate, but less than what it would actually cost to repair the Property. Id.
Due to city backlog, Plaintiffs were delayed in receiving necessary permits to repair the Property. Id. ¶¶ 15-16. Strata and Third Coast claimed that because Plaintiffs had not timely repaired the Property, they would be unable to recover any depreciation on the property. Id. ¶ 22. Strata also acknowledged that Young & Associates' initial inspection had undervalued the damage and increased the damage value by 30%. Id.
Plaintiffs allege Defendants failed to properly respond to their insurance claim as to Plaintiffs' damaged Property. “Specifically, Third Coast is withholding funds for the following categories: (i) depreciation that Third Coast claims [Plaintiffs] cannot recover due to the time of [Plaintiff's] repairs; (ii) improperly valued and time-limited business interruption; and (iii) improperly valued repair and damages costs.” Id. ¶ 8. Plaintiffs assert claims against “Defendants” for violations of the Texas Insurance Code, breach of contract, breach of the duty of good faith and fair dealing, and violations of the Texas DTPA.
Third Coast removed the case to this court under diversity jurisdiction, contending that instate defendant Strata was improperly joined. Dkt. 1. Plaintiffs have moved to remand, arguing they have viable claims against Strata, and have moved to strike Defendants' response to their motion.
II. Standard of Review
A case may be removed to federal court if the action is one over which the federal court possesses subject matter jurisdiction. 28 U.S.C. § 1441(a). When considering a motion to remand, “[t]he removing party bears the burden of showing that federal jurisdiction exists and that removal was proper.” Manguno v. Prudential Prop. & Cas. Ins. Co., 276 F.3d 720, 723 (5th Cir. 2002); accord DaimlerChrysler Corp. v. Cuno, 547 U.S. 332, 342 n.3 (2006). To determine whether jurisdiction is present for removal, the court considers the claims in the state court petition as they existed at the time of removal and any ambiguities are construed against removal as “the removal statute should be strictly construed in favor of remand.” Id.
Generally, a federal court has jurisdiction over a case in two circumstances. The first, known as federal question jurisdiction, exists if a case “arises under the Constitution, treaties or laws of the United States.” 28 U.S.C. § 1331; see Christianson v. Colt Indus. Operating Corp., 486 U.S. 800, 808-09 (1988).
The second circumstance in which a federal court has jurisdiction is frequently termed diversity jurisdiction. See generally 28 U.S.C. § 1332 (setting out the elements required for jurisdiction based on “diversity of citizenship”). “Diversity jurisdiction under 28 U.S.C. § 1332 only exists where the parties are citizens of different states and the amount in controversy exceeds $ 75,000.” White v. FCI USA, Inc., 319 F.3d 672, 674-675 (5th Cir. 2003). Furthermore, removal is appropriate “only if none of the parties properly joined and served as defendants is a citizen of the state in which the action was brought.” Gasch v. Hartford Accident & Indem. Co., 491 F.3d 278, 281 (5th Cir. 2007) (citing 28 U.S.C. § 1441(b)(2)). If the asserted basis of federal jurisdiction is the diversity of the parties, 28 U.S.C. § 1332, the party seeking to invoke federal diversity jurisdiction bears the burden of establishing both that the parties are diverse and that the amount in controversy exceeds $75,000. Manguno v. Prudential Prop. & Cas. Ins. Co., 276 F.3d 720, 723 (5th Cir. 2002). These necessary elements must exist “both at the time of filing in state court and at the time of removal to federal court.” Coury v. Prot, 85 F.3d 244, 249 (5th Cir. 1996)).
For purposes of establishing complete diversity of citizenship, a removing defendant may allege that defendant parties from the plaintiff's home state are improperly joined and should not impact the jurisdictional analysis. Mumfrey v. CVS Pharmacy, Inc., 719 F.3d 392, 401 (5th Cir. 2013). Improper joinder “‘can be established in two ways: (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.'” Id. (quoting McKee v. Kansas City S. Ry. Co., 358 F.3d 329, 333 (5th Cir. 2004)). Where there is no allegation of actual fraud in the pleadings, the test for improper joinder is “whether the defendant has demonstrated that there is no possibility of recovery by the plaintiff against an in-state defendant.” Mumfrey, 719 F.3d at 401 (quoting In re 1994 Exxon Chem. Fire, 558 F.3d 378, 385 (5th Cir. 2009)) (emphasis in Mumfrey).
The procedure for determining improper joiner under this standard was set out in Smallwood v. Illinois Central Railroad Company. Mumfrey, 719 F.3d at 401 (citing Smallwood, 385 F.3d 569, 573 (5th Cir. 2004)). “Ordinarily, if a plaintiff can survive a Rule 12(b)(6) challenge, there is no improper joinder.” Smallwood, 385 F.3d at 573. The federal pleading standard applies to this analysis. Int'l Energy Mgmt., L.L.C. v. United Energy Group, Ltd., 818 F.3d 193, 208 (5th Cir. 2016). A court must determine whether the plaintiff “pleaded ‘enough facts to state a claim to relief that is plausible on its face.'” Id. (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). Courts addressing motions pursuant to Rule 12(b)(6) must “accept as true all well pleaded facts in the complaint, and the complaint is to be liberally construed in favor of the plaintiff.” Kaiser Aluminum & Chem. Sales, Inc. v. Avondale Shipyards, Inc., 677 F.2d 1045, 1050 (5th Cir. 1982).
To succeed on a motion to remand and defeat a defendant's claim of improper joinder, the plaintiff must only plead facts sufficient to show that at least one of its claims asserted against the non-diverse defendant is plausible on its face. Mary v. Allstate Texas Lloyd's, No. 3:16-CV-3383-L, 2017 WL 7735066, at *6 (N.D. Tex. Oct. 5, 2017), report and recommendation adopted, No. 3:16-CV-3383-L-BN, 2017 WL 6462009 (N.D. Tex. Dec. 19, 2017). “[E]ven a single valid cause of action against [an] in-state defendant[] . . . requires remand of the entire case to state court.” Gray ex rel. Rudd v. Beverly Enterprises-Mississippi, Inc., 390 F.3d 400, 412 (5th Cir. 2004).
III. Motion to Strike
Because it affects the motion to remand, the court will first address the motion to strike. Plaintiffs move to strike Defendants' response to their motion to remand because it improperly relies on facts outside of the pleadings. Notably, Plaintiffs' motion to remand also relies on facts outside of the pleadings. Courts typically conduct a Rule 12(b)(6) analysis to determine whether a plaintiff can possibly recover against the in-state defendant. Smallwood, 385 F.3d at 573. However, where the plaintiff has misstated or omitted discrete facts that would determine the propriety of joinder, the court may pierce the pleadings and conduct a summary inquiry. Id. Accordingly, the court will deny the motion and apply the appropriate law.
The court already granted Defendants' motion to consider the response timely filed. See Text Order date Sept. 9, 2023.
IV. Motion to Remand
Defendants argue that Plaintiffs failed to adequately plead an insurance claim against Strata because Plaintiffs' Complaint “fails to distinguish allegations against Third Coast and Strata [], as evidenced by their defining of Strata [] ‘collectively with Third Coast' as ‘Defendants' and, in turn, jointly and inextricably alleging identical causes of action, supporting facts, legal authorities, and damages against both Defendants.” Dkt. 7 ¶ 18 (citing Compl. ¶¶ 23-57). Plaintiffs rely on the following pleaded facts to support their claims against Strata:
In the Notice of Removal, Defendants argues Strata, as an adjuster, could not be liable under Section 541 or 542 of the Insurance Code. In their response to Plaintiffs' motion, Defendants argue that Plaintiffs failed to plead facts that would give rise to Strata's liability under Section 541 and no longer argue that Strata cannot be liable at all under Section 541.
Strata's retention of Young & Associates to evaluate the damage and recommend a disaster-recovery contractor. Young & Associates issued an artificially low estimate for the damage. Petition ¶¶ 11, 12.
Strata's incorrect contention that repairs should have been completed two weeks after Plaintiff first received payment. Petition ¶ 17.
On July 25, 2022, Strata indicated that Third Coast was investigating the claim, leaving Plaintiffs with the impression the claim could be entirely denied. Petition ¶ 20.
In early 2023, Strata informed the Plaintiff that Young & Associates had reassessed its artificially low estimate but told Plaintiff that it was now too late to recover the depreciation. Petition ¶ 22.Dkt. 6 at 7. However, Plaintiffs misstated what they pleaded. They pleaded that “Third Coast and Strata retained Young & Associates,” Compl. ¶ 11 (emphasis added); “Third Coast and Strata claim that [Plaintiffs] should have completed the permitting process by February 11, 2022,” id. ¶ 17 (emphasis added); “Strata and Third Coast claimed that [Plaintiffs] failed to repair the Property in a timely manner, so [Plaintiffs] would be unable to recover any depreciation on the Property,” id. ¶ 22 (emphasis added).
Plaintiffs' pleading is no different than if Plaintiffs had simply pleaded “Defendants” throughout their Complaint's Factual Background section, as they did in asserting their claims. Courts routinely dismiss claims against the non-diverse adjuster in cases where an insured sues the insurer and the adjuster, but only describe actions taken by “defendants.” “One theme that emerges from reading the decisions [determining if the adjuster has been improperly joined] is that for claims against an adjuster to suffice for these purposes they should be distinct from those lodged against the insurance company; it is not enough for a plaintiff merely to generically allege misconduct under Section 541.060 and baldly charge the insurance company and adjuster with having committed it.” Morales v. Allstate Fire & Cas. Ins. Co., No. 5-18-CV-00483-FB-RBF, 2018 WL 6599616, at *3 (W.D. Tex. Dec. 17, 2018), report and recommendation adopted, No. CV SA-18-CA-483-FB, 2019 WL 413571 (W.D. Tex. Jan. 7, 2019). Plaintiffs' allegations fail to state a claim for relief against Strata because the Complaint fails to allege distinct conduct by Strata that reflect a viable Insurance Code claim against Strata. See id. Plaintiffs have failed to plead any specific facts as to Strata that would enable Plaintiffs' claims against Strata to survive a Rule 12(b)(6) analysis. Tellingly, where Plaintiffs describe their injuries from Defendants' action, they only specifically identify injury from Third Coast. Compl. ¶ 8 (“Specifically, Third Coast is withholding funds for the following categories: (i) depreciation that Third Coast claims [Plaintiffs] cannot recover due to the time of [Plaintiff's] repairs; (ii) improperly valued and time-limited business interruption; and (iii) improperly valued repair and damages costs.”) (emphasis added).
Plaintiffs argue that notice pleading is all that is required, but in conducting an improper-joinder analysis, federal courts apply the federal pleading standard, not Texas's “fair notice” standard. See id. (citing Int'l Energy Mgmt., L.L.C., 818 F.3d at 208).
In their motion to remand, Plaintiffs argue that that “Strata underwrote this policy, Strata's alter ego Southwest Risk brokered the deal, and Strata managed the claim process.” Dkt. 6. But those facts were not pleaded in the Complaint, and the court will not delve into unpleaded alter-ego allegations to determine whether joinder was proper. More importantly, Plaintiffs did not allude to any additional actions taken specifically by Strata in the claim process that violated the Texas Insurance Code.
In response, Defendants argue Plaintiffs are conflating defendant Strata with a separate legal entity, Strata Underwriting Managers.
Accordingly, Plaintiffs have failed to state a claim for violation of the Texas Insurance Code against Strata. Further, Plaintiffs cannot recover against Strata for breach of contract because Plaintiffs did not plead a contractual relationship with Strata. Plaintiffs' remaining claims are all derivative of their Insurance Code claims and thus also fail against Strata. The undersigned will recommend that Plaintiffs' motion be denied and Strata be dismissed without prejudice.
V. Recommendations
The undersigned RECOMMENDS that the District Court DENY Plaintiffs' Motion to Remand (Dkt. 6) and DISMISS WITHOUT PREJUDICE Strata Claims Management.
The undersigned DENIES Plaintiffs' Motion to Strike (Dkt. 8).
VI. Objections
The parties may file objections to this Report and Recommendation. A party filing objections must specifically identify those findings or recommendations to which objections are being made. The District Court need not consider frivolous, conclusive, or general objections. See Battles v. United States Parole Comm'n, 834 F.2d 419, 421 (5th Cir. 1987).
A party's failure to file written objections to the proposed findings and recommendations contained in this Report within fourteen (14) days after the party is served with a copy of the Report shall bar that party from de novo review by the District Court of the proposed findings and recommendations in the Report and, except upon grounds of plain error, shall bar the party from appellate review of unobjected-to proposed factual findings and legal conclusions accepted by the District Court. See 28 U.S.C. § 636(b)(1)(C); Thomas v. Arn, 474 U.S. 140, 150-53 (1985); Douglass v. United Servs. Auto. Ass'n, 79 F.3d 1415 (5th Cir. 1996)(en banc).