Fraudulent Joinder Won’t Defeat Diversity

A common strategy for plaintiffs wishing to avoid federal court is to ensure at least one of the defendants is non-diverse. In theory at least, this would preclude the defendants from removing a case based on state-law claims from Virginia circuit court to federal court. In a ruling issued earlier this month, Judge Kiser of the Western District of Virginia clarified that this strategy will not always be effective: if the joinder of the non-diverse defendant is found to be fraudulent, the citizenship of that party will be disregarded for the purpose of analyzing whether subject-matter jurisdiction exists.

Federal courts have subject-matter jurisdiction primarily in two situations: where a federal question is raised, and where “complete diversity” exists. Complete diversity refers to a situation where no plaintiff resides in the same state as any defendant, and the amount in controversy exceeds $75,000. (See 28 U.S.C. ยง 1332(a)). If any defendant resides in the same state as any plaintiff, complete diversity is lacking and the court would lack jurisdiction to decide the case. So if Company A wants to sue Company B for breach of contract (a claim that does not involve a federal question) in state court, but the two companies are citizens of different states and the amount in dispute exceeds $75,000, Company A might be tempted to add a second defendant (such as an employee of Company B) who resides in the same state as Company A, simply for the purpose of destroying any basis for federal-court jurisdiction.

Yielding to this temptation is generally regarded as fraudulent joinder. Note that the word “fraudulent” in this context doesn’t mean that joining a defendant for the purpose of destroying diversity will give rise to a claim against you for fraud – “fraudulent joinder” is simply a term of art used to describe this practice and does not necessarily reflect any nefarious intent. (See AIDS Counseling & Testing Ctrs. v. Group W Television, Inc., 903 F.2d 1000, 1003 (4th Cir. 1990)).

If a plaintiff fraudulently joins a defendant to defeat federal jurisdiction, a federal court can retain the case despite the absence of complete diversity. This is what happened in Trustees of Hackberry Baptist Church v. Rhonda Womack and Nationwide Mutual Insurance Company.

Hackberry purchased a Nationwide insurance policy from Ms. Womack, an insurance agent in Danville. According to the allegations of the complaint, Hackberry’s church building sustained severe wind damage during a storm in June 2012. After Hackberry filed a claim under the policy, Nationwide commissioned an engineer to investigate the damage, who found that the damage to the church building was not caused by wind. Nationwide therefore denied coverage. Hackberry sued in state court danvillecourthouse.jpgfor breach of contract and fraud, naming as defendants both Nationwide (based in Ohio) and Ms. Womack (a resident of Virginia).

The defendants removed the case to federal court, arguing in their Notice of Removal that Ms. Womack was fraudulently joined and that her citizenship could therefore be disregarded. Hackberry moved to remand the case back to circuit court. The court found that joinder of Ms. Womack was fraudulent and that it therefore had jurisdiction to accept the case.

Relying on Fourth Circuit precedent, the court held that a federal court may retain jurisdiction over a non-diverse case on the basis of fraudulent joinder if (and only if) there was “outright fraud in the plaintiff’s pleading of jurisdictional facts” or if “there is no possibility that the plaintiff would be able to establish a cause of action against the in-state defendant in state court.” Even considering the defendants’ heavy burden of persuasion, the court found that Hackberry did not have a “glimmer of hope” of recovering against Ms. Womack. She was not a party to the contract, and the complaint was devoid of any allegation that she made any misrepresentation of fact. Because the defendants effectively negated all possibility of recovery against Ms. Womack, the court disregarded her citizenship for purposes of the diversity-jurisdiction analysis, and held that it could retain the case.

The court then dismissed her from the action and dismissed the fraud claim against Nationwide, allowing only the contract claim to go forward.

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