Gasch v. Hartford Acidnt Inde

REVISED September 5, 2007

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
F I L E D
No. 06-20498
June 28, 2007

Charles R. Fulbruge III
JENNIFER GASCH and TAMMY GASCH, Clerk
as next friend to Z.G., a minor,

Plaintiffs - Appellants
v.

HARTFORD ACCIDENT & INDEMNITY
COMPANY and KAREN FRAZIER,

Defendants - Appellees

Appeal from the United States District Court
for the Southern District of Texas

Before HIGGINBOTHAM, DAVIS, and WIENER, Circuit Judges.

Wiener, Circuit Judge:

Plaintiffs-Appellants Jennifer Gasch and Tammy Gasch, as next friend to

Z.G., a minor, (together, “the Gasches”) brought an action (the “Gasch claim”)

against Defendants-Appellees Hartford Accident & Indemnity Co. (“Hartford”)

and its adjuster Karen Frazier, like the Gasches, a citizen of Texas, alleging that

Hartford improperly denied the Gasch claim for workers’ compensation survivor

death benefits, in violation of Texas law. Hartford removed the action to the
district court based on diversity jurisdiction, asserting that the sole non-diverse

defendant, Frazier, had been improperly joined. The Gasches did not file a

motion to remand, and the district court never dismissed Frazier as improperly

joined. Rather, the district court eventually granted summary judgment in favor

both of Hartford and Frazier. The Gasches appeal that decision. Addressing

federal jurisdiction sua sponte, as we must, we conclude that Frazier was not

improperly joined, so the federal courts do not have subject matter jurisdiction

over this case. We therefore vacate the decision of the district court and remand

to that court with instructions that it remand to state court.

I. FACTS AND PROCEEDINGS

In 1999, Linnie Gasch (“Linnie”) sustained a work-related injury that left

him paralyzed from the waist down. Hartford accepted liability under the Texas

Workers’ Compensation Act.

In 2003, Linnie died. A claim for survivor death benefits was filed on

behalf of Linnie’s wife and minor child, asserting that Linnie had died of a

myocardial infarction related to his compensable injury. Hartford, through

Frazier, initially denied the claim, determining that the myocardial infarction

was not related to his paraplegia. Hartford later accepted liability and paid

death benefits after determining that the cause of Linnie’s death was not an

nrelated infarction but a pulmonary embolism related to his paraplegia.

2
 The Gasches brought an action in state court, alleging that Hartford and

Frazier violated (1) the Texas common law duty of good faith and fair dealing,

(2) the Texas Deceptive Trade Practices Act (“DTPA”),1 and (3) Article 21.21 of

the Texas Insurance Code.2 Specifically, the Gasches asserted that Hartford,

through Frazier, denied their death benefits claim even though Hartford’s

liability was reasonably clear or, alternatively, that Hartford, through Frazier,

failed to investigate the claim reasonably, in violation of Texas law.

Hartford removed to federal court on the basis of diversity jurisdiction,

contending that Frazier had been improperly joined. Hartford asserted that the

Gasches had “failed to allege any valid state law cause of action and [that the

Gasches would] . . . not be able to demonstrate that Karen Frazier individually

violated any statutory provision.” The Gasches did not seek to remand; in fact,

1
Section 17.50(a)(4) of the Texas Business and Commerce
Code provides that a consumer may maintain an action for damages
resulting from “the use or employment by any person of an act or
practice in violation of Chapter 541, Insurance Code.” TEX BUS. &
COM. CODE § 17.50(a)(4).
2
“Section 3 of Article 21.21 prohibits any person from
engaging in deceptive trade practices in the insurance business,
and section 16 provides a private cause of action against a
person that engages in an act or practice declared in section 4
of the article to be unfair or deceptive.” Liberty Mut. Ins. Co.
v. Garrison Contractors, Inc., 966 S.W.2d 482, 484 (Tex. 1988).
Article 21.21 has been repealed and the relevant portions of
section 16 are now codified at section 541.060 of the Texas
Insurance Code. As the codification occurred after the filing of
this case and the legal standards have not changed, we reference
Article 21.21, as do the parties.

3
they purported to stipulate that diversity jurisdiction existed.

The defendants moved for summary judgment, contending that (1) the

Gasches did not have standing under the Insurance Code or the DTPA, (2) they

had not presented sufficient evidence to raise a material issue of fact, and (3)

Frazier was not a proper defendant, because, the defendants contended, an

insurer’s employee may not be individually liable for violations of the Texas

Insurance Code.

The district court held that the Gasches had standing to bring the claims.

It also concluded that Frazier was a proper defendant, noting that the Texas

Supreme Court has held that insurance company employees can be individually

liable for violations of Article 21.21. This holding is inconsistent with the

defendants’ grounds for removal to the federal courts —— improper joinder ——

yet the district court never explained the basis for its retaining jurisdiction in

light of this holding.

The district court dismissed the Gasch claim against both Frazier and

Hartford by granting summary judgment. The Court concluded, as to both

Hartford and Frazier, that a reasonable jury could not find that Hartford,

through Frazier, had failed to investigate or that Hartford’s liability was clear

at the time that Hartford, through Frazier, denied the claim.

The Gasches appealed the dismissal of their action on summary judgment,

4
but neither they nor the defendants addressed the jurisdictional quandary

presented by this case. We asked for and received supplemental briefing on

whether Frazier was improperly joined.

II. ANALYSIS

A. Standard of Review

All issues of subject matter jurisdiction, including whether a party is

improperly joined, are questions of law reviewed de novo.3 We may consider

subject matter sua sponte, as “subject-matter delineations must be policed by the

courts on their own initiative.”4

B. Removal

Under 28 U.S.C. § 1441(a), any state court civil action over which the

federal courts would have original jurisdiction may be removed from state to

federal court. When original federal jurisdiction is based on diversity, however,

a defendant may remove only “if none of the parties in interest properly joined

and served as defendants is a citizen of the State in which such action is

brought.”5 In this case, the Gasches and the individual defendant, Frazier, are

3
Crockett v. R.J. Reynolds Tobacco Co., 436 F.3d 529, 532
(5th Cir. 2006); McDonal v. Abbott Labs., 408 F.3d 177, 182 (5th
Cir. 2005).
4
See Ruhrgas AG v. Marathon Oil Co., 526 U.S. 574, 583
(1999).
5
28 U.S.C. § 1441(b).

5
citizens of the same state. When the defendant removed the Gasch claim, they

contended that removal was nonetheless proper, insisting that Frazier was

improperly joined. To demonstrate improper joinder of resident defendants,

the removing defendants must demonstrate either: “(1) actual fraud in the

pleading of jurisdictional facts, or (2) inability of the plaintiff to establish a cause

of action against the non-diverse party in state court.”6 As the defendants rely

on the second prong in this case, the threshold question for us is whether “there

is no reasonable basis for the district court to predict that the plaintiff might be

able to recover against an in-state defendant.”7 The burden of proof is on

the removing party.8 In deciding whether a party was improperly joined, we

resolve all contested factual issues and ambiguities of state law in favor of the

plaintiff.9 As “the effect of removal is to deprive the state court of an action

properly before it, removal raises significant federalism concerns.”10 The

removal statute is therefore to be strictly construed, and any doubt about the

6
Crockett, 436 F.3d at 532.
7
Smallwood v. Ill. Cent. R.R. Co., 385 F.3d 568, 573 (5th
Cir. 2004) (en banc), cert. denied, 566 U.S. 992 (2005).
8
Guillory v. PPG Indus., Inc., 434 F.3d 303, 308 (5th Cir.
2005).
9
Id.
10
Carpenter v. Wichita Falls Indep. Sch. Dist., 44 F.3d
362, 365-66 (5th Cir. 1995) (citations omitted).

6
propriety of removal must be resolved in favor of remand.11

C. Was Frazier Properly Joined?

The defendants contend that the Gasches did not present a colorable claim

against Frazier, because, they assert, (1) Frazier, as an adjuster, cannot be held

individually liable under Texas law, and (2) even if she could be held liable

individually, the Gasches have offered no evidence to support a viable claim

against Frazier. Both prongs of the defendants’ argument fails.

First, even if we assume that the Gasches cannot maintain their Texas

common law and DTPA claims against Frazier, Texas law clearly authorizes

Article 21.21 actions against insurance adjusters in their individual capacities.

In Liberty Mutual Insurance Co. v. Garrison Contractors, Inc.,12 the Texas

Supreme Court held that an insurer’s employee who “engage[s] in the business

of insurance” is a “person” for purposes of Article 21.21 and thus may be held

liable individually for a violation of that article.13 The Garrison court clarified

that an “employee who has no responsibility for the sale or servicing of insurance

policies and no special insurance expertise, such as a clerical worker or janitor,

11
Id. at 366; Acuna v. Brown & Root Inc., 200 F.3d 335, 339
(5th Cir. 2000).
12
966 S.W.2d 482 (Tex. 1988).
13
Id. at 484-86.

7
does not engage in the insurance business.”14 Frazier, as a claims adjuster

responsible for the servicing of insurance policies for Hartford, “engage[d] in the

business of insurance.”15 Contrary to the defendants’ argument, then, Frazier

and others in her position very well may be held individually liable for a

violation of Article 21.21.

In their supplemental brief on improper joinder, the defendants cite

Natividad v. Alexsis, Inc.16 for the proposition that a claims “adjuster cannot be

held liable to the claimant for a breach of the duty of good faith and fair dealing,”

as “[t]he duty of the insurer is non-delegable.” The Natividad defendants had

made this same assertion in their notice of removal, arguing that the “statutory

standards [of Article 21.21] were held [in Natividad] to belong uniquely to the

insurance carrier and non-delegable to adjustors.” They are flat wrong:

Natividad does not insulate Frazier from personal liability for a violation of

Article 21.21.

First, the defendants overstate Natividad’s holding, as the Texas Supreme

Court’s opinion in that case does not preclude absolutely recovery from every

employee of an insurance company. In Natividad, the workers’ compensation

14
Id.
15
Id. at 486. The defendants do not argue that Frazier was
not involved the business of insurance. Indeed, the defendants
ignore Garrison.
16
875 S.W.2d 695 (Tex. 1994).

8
insurance carrier, National Union Fire Insurance Co., had contracted with AIG

Risk Management (“AIG”) to provide all services under the policy. AIG, in turn,

contracted with Alexsis, Inc., to provide all claims-adjusting services under the

contract.17 On appeal, the court held that Alexsis and its adjuster, “because they

were not parties to a contract with Natividad giving rise to a ‘special

relationship,’ owed Natividad no duty of good faith and fair dealing.”18 Thus,

Natividad held that subcontracting companies (and their agents) do not owe

claimants a duty of good faith and fair dealing; it did not address the potential

liability of the contracting carrier’s agents.

In addition, Natividad’s holding was limited to common law claims

alleging a violation of the duty of the good faith and fair dealing. As the

claimant’s Article 21.21 claim had already been dismissed, the court never

addressed whether the duty under Article 21.21 was delegable.19 Thus, even if

we assume that the Gasches’ common law claim were to fail under Natividad,

that case’s holding still does not bar their Article 21.21 claim against Frazier

—— and Garrison explicitly authorizes it.20

17
Id. at 696.
18
Id. at 698.
19
Id. at 696 n.2.
20
The defendants note that “the standards under . . .
Article 21.21 section 16 and the common law duty of good faith
and fair dealing have been specifically held to be identical.”

9
 Citing Hornbuckle v. State Farm Lloyds,21 the defendants next contend

that there is no evidence of a viable claim against Frazier. In Hornbuckle, we

concluded that

[f]or removal purposes, a local defendant is deemed fraudulently
joined not only when there is no arguably reasonable basis for
predicting that the local law would recognize the cause of action
pled against that defendant, but also when, as shown by piercing
the pleadings in a summary judgment type procedure, there is no
arguably reasonable basis for predicting that the plaintiff would
produce sufficient evidence to sustain a finding necessary to recover
against that defendant.22

Even assuming arguendo that there is no reasonable basis for predicting that

the Gasches would produce sufficient evidence to sustain their claims against

Frazier, informed by our en banc holding in Smallwood v. Illinois Central

Railroad Co.,23 we conclude that joinder was proper in this case.

In Smallwood, we explained that “[w]hen the only proffered justification

for improper joinder is that there is no reasonable basis for predicting recovery

against the in-state defendant, and that showing is equally dispositive of all

Although this might provide some support for extending
Natividad’s holding to Article 21.21 claims in the absence of the
court’s holding in Garrison, such an extension is clearly
precluded by Garrison.
21
385 F.3d 538, 543 (5th Cir. 2004).
22
Id. at 545.
23
385 F.3d 568 (5th Cir. 2004) (en banc), cert. denied, 566
U.S. 992 (2005)

10
defendants rather than to the in-state defendants alone,”24 there is no improper

joinder. Rather, in such a case, “there is only a lawsuit lacking merit.”25 “In

other words, there is no improper joinder if a defense compels the same result

for the resident and nonresident defendants, because this would simply mean

that ‘the plaintiff's case [is] ill founded as to all the defendants.’”26

Here, a finding that there is no reasonable basis for predicting that the

Gasches would produce sufficient evidence to sustain their claims against

Frazier would compel dismissal of the suit in its entirety. The evidence

demonstrates that Hartford was acting through Frazier when it denied the

Gasches’ claim for benefits.27 Indeed, as the defendants themselves note, “[t]he

allegations against Frazier were joined with and identical to the allegations

against Hartford.” As such, the defendants’ assertion that the Gasches could not

produce evidence to support their claim against Frazier “is more properly an

attack on the merits of the claim, rather than an inquiry into the propriety of the

24
Id. at 575 (emphasis added).
25
Id. at 574.
26
McDonal v. Abbott Labs., 408 F.3d 177, 183 (5th Cir.
2005) (quoting Smallwood, 385 F.3d at 574) (internal quotation
marks and citation omitted, alteration in original).
27
We may pierce the pleadings and consider summary judgment
evidence. See, e.g., Smallwood, 385 F.3d at 574; Hornbuckle, 385
F.3d at 545.

11
joinder of the local party.”28

Regardless of any doubts that we might have about the merits of the

Gasches’ claim against Frazier (or their claim against Hartford, for that matter),

a meritless claim against an in-state defendant is not the equivalent of improper

joinder.29 As a finding that the Gasches could not have produced evidence

against Frazier would apply uniformly to both Hartford and Frazier and would

require dismissal of the suit in its entirety, Frazier “w[as] no more improperly

joined than the non-resident defendant[],” Hartford.30

Finally, the defendants would make much of the fact that counsel for the

Gasches stipulated agreement with the defendants’ assertion of “Diversity

Jurisdiction under 28 U.S.C. § 1332 and 28 U.S.C. § 1441 (removal jurisdiction),

including the allegation of fraudulent joinder.” Yet the defendants do not cite

any specific factual stipulations by the Gasches that support a finding of

improper joinder. More importantly, of course, is the truism that subject matter

jurisdiction “cannot be conferred by consent, agreement, or other conduct of the

28
McDonal, 408 F.3d at 183.
29
Smallwood, 385 F.3d at 573 (“[T]he focus of the inquiry
must be on the joinder, not on the merits of the plaintiff’s
case.”)
30
Id.

12
parties.”31 As subject matter is non-waivable,32 this argument would fail even

if its factual underpinnings were present.

III. CONCLUSION

As Frazier was not improperly joined, the federal courts lack jurisdiction

over this case. We therefore VACATE the judgment of the district court and

REMAND this case to that court with instructions for it to remand the case to

state court.

31
In re Tex. Consumer Fin. Corp., 480 F.2d 1261, 1266 (5th
Cir. 1973).
32
McDonal, 408 F.3d at 182.

13