Friday, July 21, 2006

Fifth Circuit Explains Fraudulent Joinder Doctrine, Rules that Rule 21 Does not Contemplate Substitution of Parties to Create Jurisdiction

Per Salazar v. Allstate Texas Lloyd's, Inc., 2006 WL 1881850 (5th Cir. July 10, 2006):

The central question is whether a district court can appropriately assert removal jurisdiction by dismissing a nondiverse in-state defendant and replacing it with a diverse foreign defendant, where the nondiverse in-state defendant was the only named defendant in the action when the suit was removed. So, we must decide whether a district court can create removal jurisdiction based on diversity by substituting parties. It cannot.

The district court premised its swap, and concomitant assertion of jurisdiction, on rules 17(a), 19, and 21…. The district court explained its reliance on rule 17(a) by stating that Allstate Illinois, and not Allstate Texas, is the "real party in interest." By its terms, however, rule 17(a) applies only to plaintiffs: "Every action shall be prosecuted in the name of the real party in interest ..." (emphasis added). Because the rule does not provide a mechanism for ensuring that a defendant is a real party in interest, it cannot support the district court's action.

We must next consider whether rules 19 and 21, and our related jurisprudence regarding fraudulent joinder, authorize the substitution of parties to create diversity jurisdiction….

[U]nder the fraudulent joinder doctrine, federal removal jurisdiction premised on diversity cannot be defeated by the presence of an improperly-joined nondiverse and/or in-state defendant. See, e.g., Smallwood v. Ill. Cent. R.R., 385 F.3d 568 (5th Cir.2004) (en banc), cert. denied, 544 U.S. 992. "[T]he test for fraudulent joinder is whether the defendant has demonstrated that there is no possibility of recovery by the plaintiff against an in-state [or nondiverse] defendant, which stated differently means that there is no reasonable basis for the district court to predict that the plaintiff might be able to recover against an in-state [or nondiverse] defendant." Id. at 573.

… The fundamental flaw in Allstate Texas's argument . . . , however, is that because there has never been more than one defendant in this suit, this is not a typical fraudulent joinder case. In the paradigmatic fraudulent joinder case, a plaintiff sues a nominal nondiverse/in-state defendant along with a diverse foreign defendant in an effort to make sure that its claims against the diverse defendant stay in state court. At the time of removal, the diverse defendant is already a party, and the only question is whether the court can disregard the nondiverse/in-state defendant for purposes of assessing jurisdiction. Indeed, all the cases cited by Allstate Texas on this issue fall into this pattern.

Salazar, however, did not hail Allstate Illinois into state court and attempt to force the association to stay there by joining a nominal nondiverse/in-state defendant. Allstate Illinois was not a party at the time of removal, and accordingly our fraudulent joinder jurisprudence offers no guidance on the validity of the district court's action.


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