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Larry O. Crother, Inc.,A California v. Lexington Insurance Company

June 6, 2011


The opinion of the court was delivered by: Morrison C. England, Jr. United States District Judge


Through the present action, Plaintiff Larry O. Crother, Inc. d.b.a. ABC Insulation & Supply Co. ("Plaintiff") seeks to recoup certain insurance premiums it paid its comprehensive general liability carrier, Defendant Lexington Insurance Company ("Lexington"). Plaintiff's initial complaint was filed on December 13, 2010 in the Superior Court of the State of California in and for the County of Sacramento. Lexington was served with the Summons and Complaint on December 16, 2010.

Because Lexington was the only named Defendant, and because Lexington claims to be a corporation incorporated under the laws of the State of Delaware with a principal place of business in the State of Massachusetts, Lexington timely removed Plaintiff's action to this Court on January 14, 2011, citing diversity of citizenship pursuant to 28 U.S.C. §§ 1441(a) and 1446. Thereafter, on January 28, 2010, Plaintiff filed a First Amended Complaint ("FAC") purporting to add new, and non-diverse, Defendants; namely, Plaintiff's insurance broker and agent. That filing prompted Lexington's Motion to Strike the purported FAC as improperly filed without the requisite leave of court. Plaintiff filed that amended pleading without seeking either a stipulation from Lexington or a court order authorizing it to do so. By Order dated March 18, 2011, that Motion was granted.

Now before the Court is Plaintiff's Motion seeking authorization to refile his FAC. That proposed pleading seeks to add John O. Bronson Co., Inc., an insurance broker, as a defendant along with Kirk Willard, an agent employed by Bronson, on grounds that Bronson and Willard handled Plaintiff's general liability insurance between October 30, 2003 and January 15, 2008 and negligently failed to secure issuance of a policy that excluded retail sales from the determination of Plaintiff's premium, thereby resulting in overcharges of some $74,094.00. See Proposed FAC, ¶¶ 27-31.

Plaintiff further asserts, as an additional cause of action, that Bronson and Willard's failure in this regard violated the fiduciary duty owed to Plaintiff, both by neglecting to procure an exclusion and because they failed to adequately demand and/or pursue a refund from Lexington when the purported unearned premiums were discovered. Id. at ¶¶ 32-35.

While the FAC now proposed also reduces the amount in controversy from $152,934.27 to $74,094.00, and also purports to add an additional claim for breach of contract against Lexington, and to clarify certain other allegations, the inclusion of Bronson and Willard as additional defendants would add non-diverse parties to the action, since Bronson is alleged to be a California corporation, and Willard is identified as resident of Sacramento County, California. Id. at ¶¶ 3-4.

If the Court finds that Bronson and Willard are indeed proper defendants, then, diversity would be destroyed and the sole basis for federal jurisdiction over this matter would be removed. That development would compel the Court to remand the action back to state court where it was originally commenced. See Morris v. Princess Cruises, Inc., 236 F.3d 1061, 1068 (9th Cir. 2001). Consequently, the propriety of including Bronson and Willard is dispositive in whether this matter properly remains here. A determination that they may properly be joined makes irrelevant any consideration of whether the remainder of Plaintiff's claimed amendments are warranted.

Moreover, while Defendant Lexington has also filed a Motion to Dismiss Plaintiff's originally filed Complaint that is concurrently set for hearing with Plaintiff's Motion for Leave to File its FAC, that Motion to Dismiss also becomes moot if the Court finds that joinder of Bronson and Willard is appropriate.

Although Federal Rule of Civil Procedure 15(a)*fn1 directs that the Court "should freely give [leave to amend] when justice so requires", Rule 15(a) does not apply where, as here, Plaintiff seeks to amend its complaint after removal to add non-diverse parties whose joinder would divest the court of jurisdiction. To apply the permissive standard of Rule 15(a) in that situation could "allow a plaintiff to improperly manipulate the forum of an action..." Clinco v. Roberts, 41 F. Supp. 2d 1081, 1087 (N.D. Cal. 1999). Consequently, where the addition of defendants would directly impact diversity, the provisions of 28 U.S.C. § 1447(e), rather than those contained in Rule 15(a), control. Clinco, 41 F. Supp. 2d at 1086-87; see also Chan v. Bucephalus Alternative Energy Group, LLC, 2009 WL 1108744 at * 3 (N.D. Cal. 2009).

Section 1447(e) provides in pertinent part that "[i]f, after removal the plaintiff seeks to join additional defendants whose joinder would destroy subject matter jurisdiction, the court may deny joinder, or permit joinder and remand the action to state court." The decision as to whether to permit an amendment destroying diversity jurisdiction remains in the sound discretion of the Court.

IBC Aviation Servs., Inc v. Compania Mexicana de Aviaction, S.A. de C.V., 125 F. Supp. 2d 1008, 1011 (N.D. Cal. 2000), citing Newcombe v. Adolf Coors Co., 157 F.3d 686, 691 (9th Cir. 1998) In determining whether to allow joinder under Section 1447(e), the following five factors should be considered:

(1) whether the party sought to be joined is needed for just adjudication and would be joined under Federal Rule of Civil Procedure 19(a); (2) whether the statute of limitations would prevent the filing of a new action against the new defendant in state court; (3) whether there has been an unexplained delay in seeking to join the new defendant; (4) whether plaintiff seeks to join the new party solely to defeat federal jurisdiction;(5) the strength of the claims against the new defendant.

IBC Aviation; 125 F. Supp. 2d at 1011; see also Boon v. Allstate Ins. Co., 229 F. Supp. 2d 1016, 1020 (C.D. Cal. 2002) (citing Clinco, 41 F. Supp. 2d at 1082).

With respect to the first factor, a necessary party under Rule 19(a) is one "having an interest in the controversy, and who ought to be made a party, in order that the court may act on that rule which requires it to decide and finally determine the entire controversy, and do complete justice, by adjusting all the rights involved in it." IBC Aviation, 125 F. Supp. 2d at 1011 (citing CP Nat'l Corp. v. Bonneville Power Admin., 928 F.2d 905, 912 (9th Cir. 1991). Although whether a party is necessary under Rule 19(a) should be considered by the court in determining the propriety of joinder, the standard under ...

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