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Awad v. Liberty Mutual Fire Insurance Co.

July 1, 2008

ASIA AWAD, PLAINTIFF,
v.
LIBERTY MUTUAL FIRE INSURANCE CO.; RAAD KHALAF; AND DOES 1 - 30, INCLUSIVE, DEFENDANTS.



The opinion of the court was delivered by: Hon. Jeffrey T. Miller United States District Judge

ORDER DENYING MOTION TO DISMISS RAAD KHALAF AS A SHAM DEFENDANT; REMANDING ACTION TO STATE COURT

Defendant Liberty Mutual Fire Insurance Co. ("LMFIC") moves to drop defendant Raad Khalaf as a sham defendant pursuant to Federal Rule of Civil Procedure 21 on the ground that Plaintiff fraudulently joined defendant Khalaf to avoid the court's subject matter jurisdiction. Defendant Khalaf further moves to dismiss the negligence claim against him pursuant to Federal Rule of Civil Procedure 12(b)(6). Plaintiff opposes the motions and separately moves to remand this action to state court on the ground that complete diversity is lacking and, therefore, the court lacks subject matter jurisdiction to entertain this action. Pursuant to Local Rule 7.1(d)(1), this matter is appropriate for decision without oral argument. For the reasons set forth below, the court denies the motion to drop defendant Khalaf as a sham defendant, grants Plaintiff's motion to remand, and declines to entertain defendant Khalaf's 12(b)(6) motion.

I. BACKGROUND

On April 16, 2008, LMFIC removed this action based upon diversity jurisdiction, asserting that defendant Khalaf is a sham defendant whose citizenship should not be considered in determining whether diversity jurisdiction exists. Plaintiff's complaint, filed in San Diego Superior Court on March 12, 2008, contains the following claims: (1) LMFIC breached its duty of good faith and fair dealing; (2) LMFIC breached its contract; and (3) defendant Khalaf was negligent as Plaintiff's insurance agent.

Plaintiff's complaint contains the following allegations: On November 14, 2005, Plaintiff, a California resident, sought to obtain additional LMFIC insurance protection for a substantial amount of jewelry she kept at home. (Compl. ¶ 17). LMFIC is a Wisconsin corporation with its principal place of business in Massachusetts. Defendant Khalaf, a California insurance agent, agreed to represent and assist Plaintiff with her insurance needs and coverages and act as her agent. (Compl. ¶ 16). He advised Plaintiff to endorse her jewelry to the LMFIC homeowner's policy. (Compl. ¶ 17). During her application for coverage, unbeknownst to Plaintiff, defendant Khalaf represented to LMFIC that Plaintiff did not have any of the jewelry she was insuring and that the jewelry had been previously stolen. (Compl. ¶ 18). Defendant Khalaf did not advise Plaintiff of his concerns. When Plaintiff reported the loss of jewelry on November 12, 2006, LMFIC denied her claim based on defendant Khalaf's representations. (Compl. ¶ 19).

Plaintiff brings a negligence claim against defendant Khalaf for failing to advise, counsel, and protect Plaintiff's interests, thereby breaching his fiduciary duty as Plaintiff's own agent. (Compl. ¶ 20). LMFIC now seeks to drop defendant Khalaf as a sham defendant and remove this action based upon diversity jurisdiction; defendant Khalaf now moves to dismiss the negligence claim against him. Plaintiff opposes all motions and moves to remand this action to state court.

II. DISCUSSION

A. Legal Standards

1. Fraudulent Joinder

"Parties may be dropped or added by order of the court on motion of any party or of its own initiative at any stage of the action and on such terms as are just." Fed. R. Civ. P. 21. The district court has jurisdiction to determine if a defendant who destroys diversity is fraudulently joined as a sham defendant and ignore that defendant's citizenship in the lawsuit when determining diversity. McCabe v. Gen. Whole Foods Corp.,811 F.2d 1336, 1339 (9th Cir. 1987). The joinder of a defendant is deemed fraudulent if the plaintiff fails to state a cause of action against a non-diverse defendant, and the failure is obvious under settled state rules. Id.

To determine whether the joinder is fraudulent, the court may look beyond the pleadings and consider any declarations. Id. The defendant need not show that the joinder of the non-diverse party was to prevent removal; the defendant need only demonstrate that there is no possibility that the plaintiff will be able to establish a cause of action against the non-diverse defendant in state court. Good v. Prudential Ins. Co. of America, 5 F. Supp. 2d 804, 807 (N.D. Cal. 1998) (citing Dodson v. Spiliada Mar. Corp., 951 F.2d 40, 42 (5th Cir. 1992)). The party seeking removal has the burden of demonstrating that federal jurisdiction exists. See Gaus v. Miles, Inc., 980 F.2d 564, 566 (9th Cir. 1992); B., Inc. v. Miller Brewing Co., 663 F.2d 545 (5th Cir. 1981). Any doubts regarding removal jurisdiction are construed against removal and in favor of remand to state court. See Gaus, 980 F.2d at 566.

2. Motion to Dismiss

A motion to dismiss is granted when the plaintiff fails to state a claim upon which relief can be granted. Fed. R. Civ. P. 12(b)(6). To survive a 12(b)(6) motion, a complaint's factual allegations must be "enough to raise a right to relief above the speculative level" assuming that all of the allegations are true even if doubtful in fact. Bell Atl. Corp. v. Twombly, 127 S.Ct. 1955, 1965 (2007). The court should grant 12(b)(6) relief only where the complaint lacks either a "cognizable legal theory" ...


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