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Central Bank v. Jerrolds

United States District Court, W.D. Tennessee, Eastern Division

March 31, 2015

CENTRAL BANK, Plaintiff,


J. DANIEL BREEN, Chief District Judge.

Before the Court are a motion to remand filed by Plaintiff, Central Bank ("Central"), (Docket Entry ("D.E.") 11), and a motion to sever by Defendant, Berkshire Hathaway Homestate Insurance Company d/b/a The Kansas Bankers Surety Company ("Kansas Bankers"), (D.E. 12). The issues having been fully briefed, these motions are now ripe for disposition.

I. Background

On June 19, 2014, Central, a Tennessee-chartered bank, filed suit in the Hardin County, Tennessee, Circuit Court against, Chris Jerrolds, a Tennessee resident and Central's former President and Chief Executive Officer, and Kansas Bankers, an entity that neither is organized under Tennessee law nor has its principal place of business in Tennessee. (D.E. 1-1 ¶¶ 1-4.) Central alleges that Jerrolds, fraudulently and without authority, issued various letters of credit on account of Charles Smith to Wayne County Bank; Wilburn Quarries, LLC; First Metro Bank; and Glen Gray between 2010 and 2012. ( Id. ¶¶ 14-32.) The complaint also states that Jerrold breached other various fiduciary duties he owed to Central by receiving payments on loans made to Smith, made fraudulent loans to an entity owned by Smith, participated in a series of transactions that harmed Central and benefitted Smith and other parties, conspired to commit fraud in certain real estate transaction for Jerrold's own benefit, and provided improper benefits to third parties. ( Id. ¶¶ 33-34.) Central brought a breach of contract claim against Kansas Bankers, averring that it issued various insurance policies to Central covering losses related to Jerrolds's conduct but wrongfully failed to pay Central's claim. ( Id. ¶¶ 10-12, 35-44, 53-57.) Kansas Bankers filed a notice of removal in this Court on July 17, 2014, claiming that diversity jurisdiction exists in the Court under a fraudulent misjoinder theory. (D.E. 1.)

II. Analysis

A. Removal in General

As a baseline principle, "[f]ederal courts are tribunals of limited subject matter jurisdiction." United States v. Field, 756 F.3d 911, 914 (6th Cir. 2014) (citing Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994)). Accordingly, this Court "possess[es] only that power authorized by Constitution and statute." Kokkonen, 511 U.S. at 377. "[T]he party requesting a federal forum... bears the burden of establishing federal jurisdiction." Siding & Insulation Co. v. Acuity Mut. Ins. Co., 754 F.3d 367, 369 (6th Cir. 2014) (citations omitted).

Cases originating in state court can, in some circumstances, be removed to federal court. Title 28, section 1441(a) of the United States Code provides that

[e]xcept as otherwise expressly provided by Act of Congress, any civil action brought in a State court of which the district courts of the United States have original jurisdiction, may be removed by the defendant or the defendants, to the district court of the United States for the district and division embracing the place where such action is pending. Kansas Bankers only claims that original federal jurisdiction exists because of diversity of citizenship, as provided for in 28 U.S.C. § 1332. ( See D.E. 1 ¶¶ 5-6; D.E. 19 at 1-2.) In relevant part, § 1332 grants federal district courts jurisdiction over "all civil actions where the matter in controversy exceeds the sum or value of $75, 000, exclusive of interest and costs, and is between... citizens of different States...." Courts have long interpreted § 1332 to require "complete diversity such that no plaintiff is a citizen of the same state as any defendant." V & M Star, LP v. Centimark Corp., 596 F.3d 354, 355 (6th Cir. 2010) (citing Lincoln Prop. Co. v. Roche, 546 U.S. 81, 89 (2005)). Removal based on diversity is also improper "if any of the parties in interest properly joined and served as defendants is a citizen of the State in which such action is brought." 28 U.S.C. § 1441(b)(2). The parties do not dispute that the amount in controversy was met in this case, and they appear to agree that only Jerrolds's presence in the lawsuit prevents complete diversity. Kansas Bankers argues, however, that Jerrolds's citizenship should not be considered because he was not properly joined as a party to the action.

B. Fraudulent Misjoinder

Kansas Bankers primarily relies on a fraudulent misjoinder theory. Fraudulent mis joinder, also called procedural misjoinder, is related to the familiar fraudulent joinder doctrine, which generally provides that a party's citizenship may be ignored for diversity purposes where no colorable cause of action exists against it. See Saginaw Hous. Comm'n v. Bannum, Inc., 576 F.3d 620, 624 (6th Cir. 2009). The Eleventh Circuit established the fraudulent misjoinder doctrine in Tapscott v. MS Dealer Serv. Corp., 77 F.3d 1353 (11th Cir. 1996), abrogated on other grounds by Cohen v. Office Depot, Inc., 204 F.3d 1069 (11th Cir. 2000). It held that diversity jurisdiction was proper where certain non-diverse parties were improperly joined under Rule 20 of the Federal Rules of Civil Procedure. Id. at 1360. The Tapscott court reasoned that "[m]isjoinder may be just as fraudulent as the joinder of a resident defendant against whom a plaintiff has no possibility of a cause of action." Id. When non-diverse "defendants have no real connection with the controversy, " under the court's reasoning, diversity jurisdiction may exist-even though a plaintiff "may have colorable claims against" them. Id. The court also specified that it "d[id] not hold that mere misjoinder is fraudulent joinder, " but it found that the attempt to join the specific parties was "so egregious as to constitute fraudulent joinder." Id. Though "the Sixth Circuit ha[s] not adopted the fraudulent misjoinder doctrine, " Kent State Univ. Bd. of Trustees v. Lexington Ins. Co., 512 F.Appx. 485, 491 n.1 (6th Cir. 2013), it has not expressly rejected it either. Because no relevant controlling precedent exists, this Court must decide whether to apply the doctrine.

Courts considering fraudulent misjoinder arguments after Tapscott have split over whether to recognize the doctrine. Several courts have adopted fraudulent misjoinder in some form or cited Tapscott with approval. See, e.g., In re Benjamin Moore & Co., 309 F.3d 296, 298 (5th Cir.) (per curiam) ("[I]t might be concluded that misjoinder of plaintiffs should not be allowed to defeat diversity jurisdiction.... The district court no doubt inadvertently overlooked that this point was timely raised.... Because we are confident that the able district court did not intend to overlook a feature critical to jurisdictional analysis, there is no reason to grant mandamus relief at this time." (citing Tapscott, 77 F.3d at 1360)), subsequent mandamus proceeding, 318 F.3d 626 (5th Cir. 2002); Stephens v. Kaiser Found. Health Plan of the Mid-Atl. States, Inc., 807 F.Supp.2d 375, 380-81 (D. Md. 2011) (recognizing fraudulent misjoinder but declining to "impose an egregiousness requirement"); Sutton v. Davol, Inc., 251 F.R.D. 500, 504-05 (E.D. Cal. 2008) (holding that Tapscott 's rationale "is compelling, especially in the context of [m]ulti[d]istrict [l]itigation, " and finding that removal was proper under fraudulent misjoinder principals); Fed. Ins. Co. v. Tyco Int'l Ltd., 422 F.Supp.2d 357, 379-80 (S.D.N.Y. 2006) (recognizing the doctrine but finding that "no fraudulent misjoinder" occurred). On the other hand, many courts have rejected the doctrine. See, e.g., Stone-Jusas v. Wal-Mart Stores, Inc., No. 2:14-CV-00669-JCM-NJ, 2014 WL 5341686, at *3-4 (D. Nev. Oct. 20, 2014) (" Tapscott has come under intense scrutiny by courts in this and other Circuits, as well as by prominent commentators. The criticism of Tapscott has focused largely on the fact that its fraudulent misjoinder doctrine runs afoul of the well-settled rule that federal jurisdiction is to be narrowly construed, that the fraudulent misjoinder doctrine creates an unpredictable and complex rule, and that questions of joinder under state law do not implicate federal subject matter jurisdiction"); In re Plavix Prod. Liab. & Mktg. Litig., No. 3:13-CV-2418-FLW, 2014 WL 4544089, at *7 (D.N.J. Sept. 12, 2014) ("Conducting fraudulent misjoinder analysis in this case necessarily requires the Court to wade into a thorny thicket of unsettled law; indeed, disagreements exist as to numerous questions about the doctrine, and the last thing the federal courts need is more procedural complexity.... Absent Third Circuit directives, this Court declines to adopt fraudulent misjoinder." (citation omitted) (internal quotation marks omitted)); Halliburton v. Johnson & Johnson, 983 F.Supp.2d 1355, 1359-60 (W.D. Okla. 2013) ("[T]he court declines to adopt the procedural misjoinder doctrine and to extend it to the plaintiffs' claims at issue in these actions."), aff'd sub nom. Parson v. Johnson & Johnson, 749 F.3d 879 (10th Cir. 2014).

Notably, circuit courts other than the Fifth and Eleventh Circuits have expressed ambivalence regarding fraudulent misjoinder. The Eighth Circuit has "decline[d] to either adopt or reject" the doctrine, finding instead that, even if it adopted it, the egregiousness requirement had not been met under the case's particular set of facts. In re Prempro Products Liab. Litig., 591 F.3d 613, 622 (8th Cir. 2010). Other circuits have reached similar results or have declined to address the issue. See Parson, 749 F.3d at 893 (declining to reach fraudulent misjoinder issue); Kent State, 512 F.Appx. at 491 n.1 (noting only that the Sixth Circuit has not adopted fraudulent misjoinder); Lafalier v. State Farm Fire & Cas. Co., 391 F.Appx. 732, 739 (10th Cir. 2010) (declining to adopt fraudulent misjoinder because it would not affect the outcome of the case); Anderson v. Bayer Corp., 610 F.3d 390, 394 (7th Cir. 2010) (holding that the court lacked jurisdiction to consider fraudulent misjoinder); Evans v. Walter Indus., Inc., 449 F.3d 1159, 1161 (11th Cir. 2006) (declining to reach fraudulent misjoinder issue); California Dump Truck Owners Ass'n v. Cummins Engine Co., 24 F.Appx. 727, 729 (9th Cir. 2001) (memorandum opinion) (assuming without deciding that fraudulent misjoinder was a valid doctrine but finding that it did not apply).

The decisions of district courts in this circuit also weigh against approving the theory. One opinion has recognized it. See Asher v. Minnesota Mining & Mfg. Co., No. CIV.A. 04CV522KKC, 2005 WL 1593941, at *7 (E.D. Ky. June 30, 2005) ("The Court agrees with the Eleventh Circuit's holding in Tapscott that, just as this Court may find diversity jurisdiction exists where a plaintiff has no possible cause of action against a nondiverse defendant, this Court may also find diversity jurisdiction where diversity is destroyed only through misjoinder of parties."). Other courts to consider the issue, however, have roundly rejected the doctrine. See, e.g., Murriel-Don Coal Co. v. Aspen Ins. UK Ltd., 790 F.Supp.2d 590, 600 (E.D. Ky. 2011) ("[I]n light of the questionable basis of the Court's authority to conduct fraudulent-misjoinder analysis and the numerous unsettled doctrinal questions, the Court agrees with the other district courts that have left the whole enterprise to the state courts."); Geffen v. Gen. Elec. Co., 575 F.Supp.2d 865, 872 (N.D. Ohio 2008) ("[T]he ...

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