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Gaither v. Beam Partners, LLC

United States District Court, E.D. Kentucky, Central Division

March 31, 2017

JEFF GAITHER, DEPUTY LIQUIDATOR OF KENTUCKY HEALTH COOPERATIVE, INC., Plaintiff,
v.
BEAM PARTNERS, LLC, et al., Defendants.

          MEMORANDUM OPINION & ORDER

          Gregory F.Van Tatenhove United States District Judge

         This removed action arises out of the same factual predicate as Maynard v. CGI Technologies and Solutions, Inc., 3:16-cv-00037-GFVT. Much like the Court's initial jurisdictional ruling in that case, this case presents, as a threshold matter, the Court's power to decide the dispute presented. Unlike Maynard v. CGI Technologies and Solutions, Inc., which was a consolidated action comprised of a removed case and original petition amongst diverse parties, the above styled removed action has not been consolidated with its companion petition action, Jeff Gaither v. Beam Partners, LLC, et al., 3:16-cv-00094-GFVT. The instant action was removed from Franklin Circuit Court but, absent granting the motion to sever or dismissing any fraudulently joined defendants, this court must remand the case as there are multiple nondiverse parties that defeat diversity jurisdiction.

         This matter is before the Court on the Motion to Sever filed by CGI Technologies and Solutions [R. 5] and the Motion to Remand to State Court [R. 20] by Deputy Liquidator Jeff Gaither. For the following reasons, the Motion to Sever [R. 5] is DENIED and the Motion to Remand [R. 20] is GRANTED.

         I

         In October of 2016, the Liquidator filed a lawsuit against CGI Technologies and Solutions, Inc., Beam Partners, LLC, Terry S. Shilling, Janie Miller, Joseph E. Smith, and the Officers and Board of Directors of the Kentucky Health Cooperative, Inc. [R. 1-2 at 4-5.] CGI asserts that this lawsuit is an “attempt to interfere with this Court's jurisdiction over the Removed Action” as this “duplicative state court action” was filed using “unrelated and facially deficient claims against certain non-diverse defendants.” [R. 30 at 1.] The Liquidator states that he did not bring this action to infringe upon the Court's jurisdiction, but rather felt the action was necessary to effectuate liquidation of the KYHC following its insolvency. [See R. 20-1 at 2.]

         This lawsuit was initiated after an alleged breach of the Administrative Services Agreement (ASA) that was made between the Kentucky Health Cooperative, Inc. (KYHC) and CGI Technologies and Solutions, Inc. [See R. 20-1 at 2.] KYHC contracted with CGI to have CGI act as a third-party administrator for the Kentucky Health Cooperative. [Id.] The Liquidator's claims arise from CGI's alleged failure to perform “TPA functions at even a minimum level of competence.” [Id. at 3.] Further, the Liquidator believes that “CGI's failure was so complete that it was a substantial factor in causing KYHC's insolvency.” [Id.]

         In May 2012, KYHC entered into a “Management and Development Agreement with Beam Partners.” [R. 1-2 at ¶ 18.] Beam Partners was responsible for many daily managerial tasks such as training Directors on the KYHC Board, overseeing recruitment and employment efforts for KYHC, implementing the necessary processes to operate KYHC, “execut[ing] administrative services for the operation of KYHC, ” and providing management for the corporation. [Id. at ¶¶19-20.] Terry Shilling was Beam Partner's principal and was “instrumental in forming and managing KYHC from 2011 through at least 2013” including a period of service on the KYHC Board of Directors. [See R. 1-2 at ¶ 9.]

         From September 2012 to June 2015, Ms. Janie Miller was the Chief Executive Officer of the Kentucky Health Cooperative, Inc. [R. 1-2 at 7.] In this role she was also responsible for selecting competitive but financially viable insurance premium rates. Many of the charges against Ms. Miller are also brought against Joseph E. Smith. Mr. Smith served as the Chairman of the Board of Directors of the KYHC throughout this same time period. [See R. 1-2 at ¶¶ 12-14.] As the KYHC's failure and insolvency became more apparent, KYHC initiated written communication with CGI to discuss contract performance issues and to estimate damages due to CGI's actions. [R. 20-1 at 3.] CGI Responded to the August 11, 2015, KYHC letter on September 29, 2015, by denying sole responsibility and arguing that losses were also attributable to “third parties” including improper premium pricing by KYHC. [Id. quoting Exhibit 3.]

         The Franklin Circuit Court “placed KYHC in rehabilitation (later liquidation)” on October 2, 2015. [R. 20-1 at 3.] The Liquidator's initial lawsuit was filed in May, 2016, but that action was only brought against CGI Technologies and Solutions, Inc., and was removed pursuant to this Court's diversity jurisdiction. [Id.] Now, this removed “copycat” action has been brought against CGI and a number of nondiverse defendants.

         II

         A

         The Liquidator challenges the Court's power to decide this case with a motion to remand. [R. 20.] A defendant may remove a civil action brought in state court to federal court only if the action is one over which the federal court could have exercised original jurisdiction. See 28 U.S.C. §§ 1441, 1446. This court has original federal question jurisdiction over civil actions which arise under the “Constitution, laws, or treaties” of the United States, 28 U.S.C. § 1331. This Court also has original “diversity” jurisdiction over all civil actions when “the matter in controversy exceeds the sum or value of $75, 000, exclusive of interest and costs, and the dispute is between” parties who are “citizens of different states.” See 28 U.S.C. § 1332(a).

         Because federal courts are courts of limited jurisdiction, any doubts regarding federal jurisdiction should be construed in favor of remanding the case to state court. Shamrock Oil & Gas Corp. v. Sheets, 313 U.S. 100, 108-109 (1941); Cole v. Great Atlantic & Pacific Tea Co., 728 F.Supp. 1305, 1307 (E.D. Ky. 1990) (citations omitted). In determining the appropriateness of remand, a court must consider whether federal jurisdiction existed at the time the removing party filed the notice of removal. Ahearn v. Charter Twp. of Bloomfield, 100 F.3d 451, 453 (6th Cir. 1996). Furthermore, the removing defendant bears the burden of showing that removal was proper. Gafford v. Gen. Elec. Co., 997 F.2d 150, 158 (6th Cir. 1993), rev'd on other grounds by Hertz Corp. v. Friend, 559 U.S. 77 (2010); Fenger v. Idexx Laboratories, 194 F.Supp.2d 601, 602 (E.D. Ky. 2002) (citations omitted).

         The Liquidator seeks to remand the present action to state court since nondiverse parties are included as Defendants. The Liquidator also claims that the McCarran-Ferguson Act reverse-preempts the removal and diversity jurisdiction statutes through the Kentucky IRLL [R. 20-1 at 4], but this argument has already been considered and denied. See Maynard v. CGI Technologies and Solutions, Inc., 3:16-cv-0037-GFVT Memorandum Opinion & Order [R. 49.] CGI argues that the nondiverse Defendants were fraudulently joined, or alternatively that fraudulent joinder and fraudulent misjoinder allow the Court to Dismiss the “CGI-related claims against Miller and Smith, ” and that Federal Rule of Civil Procedure 21 permits the Court to “sever and remand the claims against the non-diverse Defendants.” [R. 30.]

         B

         To begin, the general rule regarding removal based on diversity of citizenship is that there must be complete diversity “both at the time that the case is commenced and at the time that the notice of removal is filed” in order to properly remove the case to federal court. Jerome-Duncan Inc. v. Auto-By-Tel, LLC, 176 F.3d 904, 907 (6th Cir. 1999) (emphasis added).

         It is clear that federal jurisdiction did not exist at the time the removing party filed the notice of removal. See Ahearn v. Charter Twp. of Bloomfield, 100 F.3d 451, 453 (6th Cir. 1996). The matter in controversy far exceeds $75, 000 but the defendants are not citizens of different States as required by 28 U.S.C. § 1332(a). Defendant CGI “readily admits that, on its face, the Copycat Action does not satisfy the complete diversity requirement of 28 U.S.C. § 1332…” [R. 30 at 10.] The Plaintiff, Jeff Gaither Deputy Liquidator of the KYHC, brings this action on behalf of the KYHC, a Kentucky nonprofit corporation that has its principal place of business in Louisville, Kentucky. [R. 1-2 at 6.] The Defendants are citizens of Kentucky, Georgia, Virginia, and Deleware. Beam Partners, LLC, is a limited liability corporation formed in Georgia that has a principal place of business in Atlanta, Georgia. [R. 1-2 at 6.] Defendant Terry S. Shilling is a Georgia resident and citizen. [Id. at 7.] Defendant Janie Miller, previously the CEO of KYHC from 2012 to 2015, resides in Kentucky. The Plaintiff also brings claims against the Officers and Board of Directors of the Kentucky Health Cooperative, Inc., which was comprised of a “collection of individuals responsible for the operation of KYHC.” [R. 1-2 at 7.] Defendant Joseph E. Smith was the Chairman of the KYHC Board of Directors and is a resident of the Commonwealth of Kentucky. [Id.] The removing Defendant, CGI Technologies and Solutions Inc., is a business incorporated in Delaware with a principal place of business in Virginia. [Id. at 8.]

         There is an exception to this general rule, however, which allows certain cases to be removed even if complete diversity did not exist at the lawsuit's commencement. Where a plaintiff voluntarily dismisses a party whose presence would defeat diversity, the case becomes removable even though diversity did not initially exist. See Hopkins Erecting Co. v. Briarwood Apartments of Lexington, 517 F.Supp. 243, 249 (E.D. Ky. 1981) (“A case nonremovable on the initial pleadings can become removable only pursuant to a voluntary act of the plaintiff.”); see also 32A Am. Jur. 2d Federal Courts § 1482 (Feb. 2016). The exception does not apply in this case because the Deputy Liquidator has, thus far, taken no affirmative action to drop the nondiverse Defendants from the action. Quite the contrary, the Deputy Liquidator argues that the nondiverse parties are properly joined and are essential to the liquidation proceedings. [See R. 20-1 at 5.]

         CGI asserts that the nondiverse Defendants were fraudulently joined and that the citizenship of the fraudulently joined Defendants should be ignored for purposes of determining diversity jurisdiction. [See R. 30 at 10.] Fraudulent joinder is a “judicially created doctrine that provides an exception to the requirement of complete diversity.” Coyne v. Am Tobacco Co., 183 F.3d 488, 493 (6th Cir. 1999) (quoting Triggs v. John Crump Toyota, Inc., 154 F.3d 1284, 1287 (11th Cir. 1998)). This doctrine is used by courts “when the non-removing party joins a party against whom there is no colorable cause of action.” Saginaw Housing Comm'n v. Bannum, Inc., 576 F.3d 620, 624 (6th Cir. 2009) (citing Jerome-Duncan Inc. v. Auto-By-Tel, LLC, 176 F.3d 904, 907 (6th Cir. 1999). This doctrine was created to prevent plaintiffs from asserting claims against nondiverse defendants “for the sole purpose of preventing removal.” McLeod v. Cities Serv. Gas Co., 233 F.2d 242, 246 (10th Cir. 1956). If the Plaintiff's claim has no hope of success, then the “fraudulent joinder of non-diverse defendants will not defeat removal on diversity grounds.” Saginaw Housing Com'n, 579 F.3d at 624 (quoting Coyne v. Am. Tobacco Co., 183 F.3d 488, 493 (6th Cir. 1999)).

         CGI Technologies and Solutions, the removing party, has the burden of proving fraudulent joinder and must present “sufficient evidence that a plaintiff could not have established a cause of action against [the] non-diverse defendants under state law.” Coyne, 183 F.3d at 493. To resolve a claim of fraudulent joinder, the district court may “pierce the pleadings” to consider summary judgment-like evidence, but it should evaluate that evidence like it would a Rule 12(b)(6) motion to dismiss. Walker v. Philip Morris USA, Inc., 43 Fed.Appx. 946, 954 (6th Cir. 2011). Any contested issues of fact should be construed in the non-removing party's favor. Id.

         A fellow district court in the Eastern District of Kentucky has noted that, “[d]espite this ancient maxim that courts may not act without jurisdiction, the fraudulent-joinder inquiry requires them to do just that.” Murriel-Don Coal Co., Inc. v. Aspen Ins. UK Ltd., 970 F.Supp.2d 590, 595 (E.D. Ky. 2011). This Court agrees that it “runs contrary to bedrock principles” to allow a federal court to exercise “a little bit of jurisdiction -enough for a quick peek at the merits of a claim, but no more.” Id. Even more intriguing is that this judicial doctrine “requires courts to examine the merits of claims over which everyone agrees the court lacks jurisdiction.”[1] Id.

         In Murriel-Don Coal Co., Inc. v. Aspen Ins.UK Ltd., 970 F.Supp.2d 590 (E.D. Ky. 2011) the court performed a fraudulent-joinder analysis to determine whether two nondiverse defendants should be “cut loose” so that the action could remain in federal court. Id. at 592. Instead of requiring federal courts to use a “fractured, judicially created doctrine” to maintain jurisdiction over nondiverse defendants, it would, in many circumstances, be more appropriate to allow state courts to decide questions of state law and determine whether the claims are frivolous. See Id. at 596-597 (referencing Tafflin v. Levitt, 493 U.S. 455, 465, 110 S.Ct. 792, which notes that “state courts presumably have greater expertise” at adjudicating “violations of state law.”)

         This Court was particularly persuaded by dicta from Murriel that suggest a more efficient method for handling nondiverse defendants in the fraudulent joinder context. Judge Thapar stated, “[t]he better course is for the court to remand the case and allow the state court to dismiss the claims against the non-diverse defendants if those claims truly present no hope of success. Once the state court dismisses the non-diverse defendants from the case, the remaining diverse defendants” could then remove the action to federal court. Murriel-Don Coal Co., Inc. v. Aspen Ins.UK Ltd., 970 F.Supp.2d 590, 597 (E.D. Ky. 2011). The Murriel-Don Coal Co. decision was issued May 20, 2011, but amendments to the removal statute, 28 U.S.C. § 1446(b), and the statute concerning diversity of citizenship, 28 U.S.C. § 1332, were enacted and made effective December 7, 2011.

         When a state court action is filed and the defendants are citizens of different states, the removal mechanism under the more recent statute operates just as before. See 28 U.S.C. § 1446(b) (allowing for the defendant to file a notice of removal “within 30 days” once the state court case has become removable.) The most significant change between the recently enacted version of 28 U.S.C. § 1446 and its predecessor relates to additional clarifications that are not at issue in this case but that specifically address removal with multiple defendants and when the 30 day time limit on removal begins. See 28 U.S.C. § 1446 (b)(2). Importantly, Judge Thapar considered the possible hurdle for successive removal in Murriel-Don Coal Co., because both versions of the statute include a one-year rule that prevents removal of cases when subject matter jurisdiction is conferred solely by complete diversity of citizenship as defined by 28 U.S.C. § 1332 and the action was filed more than one year ago.[2] See 28 U.S.C. § 1446(c); see also Brierly v. Alusuisse Flexible Packaging, Inc., 184 F.3d 527, 534 (6th Cir. 1999). The Sixth Circuit Court of Appeals directly addressed this issue in Brierly v. Alusuisse Flexible Packaging, Inc., where a state court case was removed to the Eastern District of Kentucky, remanded to state court, then removed to federal court a second time but after the one year time period had elapsed. Id. at 529-531. Brierly held that “the one year-termination on removal of diversity cases applies only to those that were not initially removable” and found that the district court properly considered and denied the second motion for remand. Id. at 535.

         The instant action is one of many interrelated removed and petition actions that are currently before the court.[3] While each motion in these cases is considered independently and in light of its own factual and procedural posture, it seems prudent to note that, “at the heart of fraudulent joinder is an understandable impulse: Plaintiffs should not be able to play games with federal jurisdiction.” Murriel-Don Coal Co., 790 F.Supp.2d at 596. But, “[i]t is well established that the plaintiff is master of [his] complaint and can plead to avoid federal jurisdiction.” Smith v. Nationwide Property and Cas. Ins. Co., 505 F.3d 401 (6th Cir. 2007) (quoting Lowdermilk v. U.S. Bank National Ass'n, 479 F.3d 994, 998-99 (9th Cir. 2007)). In light of these independently valid but dueling principles, the Defendant is urging the Court to adjudicate a case that facially lacks jurisdiction. “Without jurisdiction the court cannot proceed at all in any cause. Jurisdiction is power to declare ...


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