U.S. DISTRICT COURT ADDRESSES SPLIT IN TEXAS COURTS ON ISSUE OF IMPROPER JOINDER

Last week, the United States District Court for the Eastern District of Texas concluded that an insurer's Section 542.006 election to accept claims adjusters’ liability after a lawsuit has commenced against the adjuster does not by itself establish improper joinder. In Scout 5 Properties, LLC v. Acadia Ins. Co., No. 2:21-CV-00231-JRG-RSP, 2021 WL 5051564 (E.D. Texas, [Marshall Division] October 31, 2021, mem. op.), Scout 5 Properties (“Scout”) experienced a storm that resulted in damage to its property, which was covered by its policy with Acadia Insurance Company (“Acadia”). Mr. Miller adjusted Scout’s claim.  Unsatisfied with Miller’s submission, Scout filed suit against Acadia and Miller in state court, alleging violations of the Texas Insurance Code (“TIC”).  Subsequently, Acadia elected to accept whatever liability Miller may have had pursuant to Section 542A.006 of the TIC, and filed a motion to dismiss, which the court granted. Then, Acadia removed the lawsuit to federal court, contending that the dismissal of Miller meant that he was improperly joined and, consequently, complete diversity existed to establish federal jurisdiction.  In response, Scout filed a motion to remand, which the U.S. District Court granted. 

The U.S. District Court began its analysis by noting the split in the decisions of Texas district courts:  

One line of decisions concludes that a § 542.006 election made after a lawsuit commences but before removal renders the in state adjuster improperly joined because the election, which requires that the adjuster be dismissed with prejudice, precludes any recovery against the adjuster. The other line of decisions concludes that the touchstone of the improper joinder inquiry is whether parties were improperly joined at the time of joinder, and thus that an insurer's § 542.006 election after a lawsuit has commenced does not by itself establish improper joinder.

The U.S. District Court adopted the latter approach. “The focus must remain on whether the nondiverse party was properly joined when joined.”  “Simply put, if an insurer elects to accept full responsibility of an agent/adjuster after the insured commences action in state court, the insurer must prove that the non-diverse adjuster is improperly joined for reasons independent of the election made under Section 542A.006 of the Texas Insurance Code.” “Therefore, the voluntary-involuntary doctrine [i.e., the voluntary dismissal or nonsuit by the plaintiff can convert a nonremovable case into a removable one] demands the case be remanded since neither [Acadia’s] § 542.006 election nor the state court's order dismissing Mr. Miller were voluntary acts of [Scout].”

Notably, the U.S. District Court rejected Acadia’s argument that “when a state court order creates diversity jurisdiction and that order cannot be reversed on appeal, our precedent treats the voluntary-involuntary rule as inapplicable” – a phrase taken directly from Hoyt v. Lane Constr. Corp., 927 F.3d 287, 297 (5th Cir. 2019).  The U.S. District Court interpreted the Fifth Circuit’s phrase as one discussing “misjoinder, not removal analysis more broadly.” “The Fifth Circuit was making the point that when a misjoinder determination is unappealed (or unappealable) that the diversity of the misjoined defendant is not considered for purposes of the voluntary-involuntary rule.”