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SPRING-FORD AREA SCH. DIST. v. GENESIS INS. CO.

May 16, 2001

SPRING-FORD AREA SCHOOL DISTRICT ET AL., PLAINTIFFS,
V.
GENESIS INS. CO. ET AL., DEFENDANTS.



The opinion of the court was delivered by: Yohn, J.

  Memorandum and Order

This is an action to determine the obligations of parties to an insurance policy. The plaintiffs, Spring-Ford Area School District ["SFASD"] and six of its employees,*fn1 brought this lawsuit in the Court of Common Pleas of Montgomery County, Pennsylvania against Genesis Insurance Company ["Genesis"], Genesis's claims adjuster, Kempes, Inc. ["Kempes"], special education student Kimberly Hoffman, and her parents, Stephen and Claire Hoffman [collectively "Hoffmans"].*fn2 Genesis and Kempes removed the case, claiming that complete diversity of citizenship existed between the plaintiffs and the defendants. See Notice of Removal (Doc. No. 1); Joinder by Def. Genesis Ins. Co. in Notice of Removal (Doc. No. 2). Pending before the court is the plaintiffs' motion to remand the case due to the notice of removal's failure to establish complete diversity of citizenship. See Mot. to Remand (Doc. No. 6). Because the nondiverse defendants, the Hoffmans, were fraudulently joined, as that phrase has been defined, the court will deny the plaintiffs' motion to remand.

FACTUAL AND PROCEDURAL BACKGROUND

On July 13, 2000, the plaintiffs filed a declaratory judgment complaint in the Court of Common Pleas of Montgomery County, Pennsylvania. See State Court Compl. (Doc. No. 1, Ex. A). According to the complaint, Genesis issued SFASD a legal liability insurance policy for the period between July 1, 1999 and July 1, 2000. See id. ¶ 25. On January 4, 2000, SFASD and six of its employees were sued by the Hoffmans for failing to provide Kimberly Hoffman with a free appropriate public education. See id. ¶¶ 14-15. On March 2, 2000, SFASD notified Genesis about the Hoffmans' claims. See id. ¶ 17. Genesis failed to respond to the written notice or to provide a defense before SFASD had to respond to the Hoffmans' complaint. See id. ¶ 19. On June 29, 2000, Kempes notified SFASD that Genesis would not provide SFASD or its employees with a defense or indemnity against the Hoffmans' claims. See id. ¶ 23.

The plaintiffs' state court complaint includes three counts. In Count I, SFASD asks for a judgment declaring that Genesis and Kempes owe SFASD attorneys' fees and costs for a defense against the Hoffmans' federal lawsuit. See id. ¶¶ 35-45. In Count II, the individual plaintiffs ask for a judgment declaring that Genesis and Kempes owe the individual plaintiffs attorneys' fees and costs for a defense against the Hoffmans' federal action. See id. ¶¶ 46-52. Finally, in Count III, the plaintiffs claim that Genesis and Kempes acted in bad faith when they denied coverage and, pursuant to 42 Pa. C.S. 8371, the plaintiffs ask for an award of interest, punitive damages, costs, and attorneys' fees. See id. ¶¶ 53-61.

On September 25, 2000, Kempes submitted a notice of removal. See Notice of Removal. Kempes claims that this court has subject matter jurisdiction based on diversity of citizenship. See id. ¶ 13. Kempes acknowledges that the Hoffmans, like the plaintiffs, are citizens of Pennsylvania but Kempes claims that the Hoffmans' joinder was fraudulent because "the Hoffmans have no interest in the outcome of the present case and the plaintiffs have asserted no claim for relief against them." See id. ¶ 12. In the alternative, Kempes claims that, even if the Hoffmans do have an interest in this lawsuit, that interest is more closely aligned with those of the plaintiffs, and, therefore, the Hoffmans should be realigned as plaintiffs. See id. On September 27, 2000, Genesis filed a joinder in notice of removal. See Joinder by Def. Genesis Ins. Co. in Notice of Removal.

STANDARD OF REVIEW

Removal of a case from state court to federal court is governed by 28 U.S.C. § 1441-1452. Pursuant to 28 U.S.C. § 1441, a case may be removed if the diversity of citizenship and amount in controversy requirements of 28 U.S.C. § 1332 are met. The burden of establishing removal jurisdiction is borne by the defendant, and failure to meet this burden results in remand of the removed case. See McNutt v. General Motors Acceptance Corp. of Indiana, 298 U.S. 178, 189 (1936); Dukes v. U.S. Healthcare, Inc., 57 F.3d 350, 359 (3d Cir. 1995); Abels v. State Farm Fire & Cas. Co., 770 F.2d 26, 29 (3d Cir. 1985). The defendant must demonstrate that removal is proper based on the allegations in the complaint and the notice of removal. See, e.g., Kerstetter v. Ohio Cas. Ins. Co., 496 F. Supp. 1305, 1306-07 (E.D.Pa. 1980). In determining whether a defendant has established removal jurisdiction, the Third Circuit has cautioned that "the removal statutes are to be strictly construed against removal and all doubts should be resolved in favor of remand." Steel Valley Auth. v. Union Switch & Signal Div., 809 F.2d 1006, 1010 (3d Cir. 1987).

The existence of a fraudulently joined party may be disregarded for purposes of determining diversity jurisdiction. See id. A party has been fraudulently joined "`when there is no reasonable basis in fact or colorable ground supporting the claim against the joined [non-diverse] defendant, or no real intention in good faith to prosecute the action against the defendant.'" Abels, 770 F.2d at 32 (quoting Goldberg v. CPC Int'l, Inc., 495 F. Supp. 233, 239 (N.D.Cal. 1980)). Although "federal law applies to the question of fraudulent joinder, the ultimate question is whether there is arguably a reasonable basis for predicting that state law might impose liability on the facts involved." 16 James Wm. Moore et al., Moore's Federal Practice ¶ 107.14[2][c][iv][C] (3d ed. 1997). In particular, "joinder may be considered fraudulent if the plaintiff has failed to state a cause of action against the nondiverse defendant." Selvaggi v. Prudential Prop. and Cas. Ins. Co., 871 F. Supp. 815, 818 (E.D.Pa. 1995) (citing Boyer v. Snap-on Tools Corp., 913 F.2d 108, 111-12 (3d Cir. 1990), cert. denied, 498 U.S. 1085 (1991)). However, the removing party bears a "heavy burden of persuasion" in demonstrating that a party has been fraudulently joined. Batoff v. State Farm Ins. Co., 977 F.2d 848, 851 (3d Cir. 1992).

In determining whether a nondiverse defendant has been fraudulently joined, all contested facts and all uncertainties as to the current state of the applicable substantive law must be resolved in the plaintiff's favor. See id. at 851-52. Furthermore, "if there is even a possibility that a state court would find that the complaint states a cause of action against any one of the [non-diverse] defendants, the federal court must find that joinder was proper and remand the case to state court." Boyer, 913 F.2d at 111. Thus, in evaluating a claim of fraudulent joinder, the court must (1) "focus on the plaintiff's complaint at the time the petition for removal was filed"; (2) "assume as true all factual allegations of the complaint"; and (3) "resolve any uncertainties as to the current state of controlling substantive law in favor of the plaintiff." Batoff, 977 F.2d at 851-52 (quotations omitted).

If the court finds that the nondiverse party was not fraudulently joined, diversity jurisdiction may still exist if the nondiverse party should be realigned. In order to determine whether parties should be realigned, the Third Circuit employs a "principal purpose" or "primary issue" test. See Ackerman v. Hook, 183 F.2d 11, 14-15 (3d Cir. 1950). Under the "principal purpose" or "primary issue" test, "a court must first identify the primary issue in controversy and then determine whether there is a real dispute by opposing parties over that issue." Diloreto v. CNA Ins. Co., No. CIV. A. 98-3488, 1998 WL 962024, at *2 (E.D.Pa. Dec. 18, 1998) (citing Ackerman, 183 F.2d at 14-15).

DISCUSSION

In their motion to remand, the plaintiffs contend that the non-diverse defendants, the Hoffmans, were not fraudulently joined and that, instead, they are indispensable parties to the action under both the Pennsylvania Declaratory Judgment Act, 42 Pa. C.S. ยง 7540(a), and Fed.R.Civ.P. 19. See Mem. of Law in Support of Pls.' Mot. to Remand at 3-4 (Doc. No. 6); Reply Mem. of Law in Support of Pls.' Mot. to Remand at 3-4 (Doc. No. 11). Furthermore, the plaintiffs maintain that the Hoffmans should not be realigned as plaintiffs because the Hoffmans' interests are adverse to those of the plaintiffs. See Mem. of Law in Support of Pls.' Mot. to Remand at 4-7. Therefore, the plaintiffs claim that this case should be ...


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