FIFTH CIRCUIT RESOLVES SPLIT IN DEEPLY DIVIDED DISTRICT COURTS; ADOPTS RULE THAT VOLUNTARY-INVOLUNTARY RULE IS INAPPLICABLE IF AGENT IS IMPROPERLY JOINED AT THE TIME OF REMOVAL
The Fifth Circuit Court of Appeals recently resolved the split in authority and adopted the rule that the voluntary-involuntary rule is inapplicable if the agent is improperly joined at the time of removal. In Advanced Indicator and Manufacturing, Inc. v. Acadia Insurance Co., No. 21-20092, 2022 WL 4731473 (5th Cir., Oct. 3, 2022, mem. op.), Advanced Indicator and Manufacturing, Inc. (“Advanced”) claimed its building was damaged by Hurricane Harvey's winds. However, Advanced's insurer, Acadia Insurance Company (“Acadia”), determined that the damage was caused by routine wear and tear, and denied Advanced's claim.
On August 7, 2018, Advanced sued Acadia (an out-of-state resident) and Warren (an in-state resident), the adjuster, in state court, alleging various claims, including breach of contract and common law bad faith. Because Advanced and Warren were both Texas residents, there was not complete diversity at the outset of the suit, and the matter could not be removed to federal court. However, on August 30, 2018, Acadia elected to accept responsibility for Warren under Section 542A.006 of the Texas Insurance Code (which provides that should an insurer accept responsibility for its agent after suit is filed, “the court shall dismiss the action against the agent with prejudice.”), and then removed the case to federal court. In response, Advanced filed a motion to remand the case to state court, arguing that Warren was not improperly joined notwithstanding Acadia's Section 542A.006 election. The district court denied Advanced’s motion to remand, and Advanced subsequently appealed.
On appeal, the Fifth Circuit was faced with a question that has “deeply divided district courts.” That is, whether the voluntary-involuntary rule (i.e., the “judicially created rule dictating that ‘an action nonremovable when commenced may become removable thereafter only by the voluntary act of the plaintiff’”) bars removal to federal court when an insurer makes a Section 542A.006 election after the filing of suit. Some courts have held that the voluntary-involuntary rule bars removal, while other courts have held that the voluntary-involuntary rule is inapplicable if the agent is improperly joined at the time of removal. The Fifth Circuit adopted the latter approach, reasoning that “courts have long recognized an exception to the voluntary-involuntary rule where a claim against a nondiverse or in-state defendant is dismissed on account of fraudulent joinder” and “to determine whether a plaintiff has improperly joined a non-diverse defendant, the district court must examine the plaintiff's possibility of recovery against that defendant at the time of removal.” Because Acadia elected to accept liability for Warren before removal, even though suit had already been filed, Section 542A.006(c) required the court to dismiss the action against Warren with prejudice. Thus, at the time of removal, “there [was] no possibility of recovery by Advanced against an in-state defendant” (i.e., Warren), so Warren was improperly joined at the time of removal and Acadia's removal was proper.