FEDERAL JUDGE IN HOUSTON ENFORCES ANTI-ASSIGNMENT CLAUSE, RETAINS JURISDICTION

Recently, a federal judge in Houston demonstrated some federal courts will carefully examine the totality of the circumstances when considering their jurisdiction, and will not be swayed by manipulative corporate shell games sometimes intended to deprive them of jurisdiction.  LNY 5003, LLC v. Zurich Am. Ins. Co., No. 4:20-cv-02992, 2021 WL 4026292 (S.D. Tex. Sep. 3, 2021) involved a claim for COVID-19 shutdown-related losses by the Houston-based restaurant empire Fertitta Entertainment, Inc.  Although Fertitta has global operations, including restaurants in Asia which were affected by COVID-19 well before most American business were, it is based in Texas.  Its insurer, Zurich, is a New York corporation with its principal place of business in Illinois.

In February 2020, apparently anticipating the effect of COVID-19 on its restaurant business, Fertitta formed a new LLC titled LNY 5003, with members in both Texas and Illinois.  Fertitta then assigned its rights in the Zurich insurance policy to LNY, and LNY promptly sued Zurich in Texas state court.  When Zurich removed the case to federal court, LNY argued the federal courts did not have diversity jurisdiction because both it and Zurich were citizens of Illinois.

The court first rejected LNY’s argument that the court did not even have power to consider whether the assignment was genuine, and then carefully examined the formation of LNY, Fertitta’s assignment of rights to it, and the policy’s anti-assignment clause.  The court observed the assignment did not appear to be an arms-length transaction, but involved entities that were wholly owned by Fertitta and individuals who were officers, directors, or shareholders of those Fertitta-owned entities.  And in addition to the apparently sham nature of the assignment, it directly violated the policy’s anti-assignment clause. 

LNY argued it had been assigned claims, and assignment of those claims was not barred by the contractual anti-assignment clause.  Rejecting this argument, the court concluded LNY’s contractual claims were in fact barred by the contractual anti-assignment clause, and its claims for common-law bad faith and Texas Insurance Code violations were non-assignable as a matter of Texas law.

The court ultimately concluded Fertitta, not LNY, was the real party in interest, diversity jurisdiction existed, LNY’s motion to remand must be denied, and LNY could not proceed any further as plaintiff.