Elite Performance LLC v. Echelon Property & Casualty Insurance Company

Filing 14

REPORT AND RECOMMENDATION: The Magistrate Judge recommends the District Court enter an order DENYING the pending #4 Motion to Remand filed by the plaintiff on 12/23/20. Any party may serve and file written objections within 14 days of being served with a copy of this report and recommendation. If objections are not timely filed, the party's right to de novo review may be waived. The Local Rules permit the filing of a response to an objection. They do not permit the filing of a reply to a response without the permission of the District Court. Signed by Magistrate Judge Leslie A Bowman on 1/7/21.(BAC)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE DISTRICT OF ARIZONA

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Elite Performance LLC, an Arizona limited )
liability company,
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Plaintiff,
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v.
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Echelon Property & Casualty Insurance )
Company, an Illinois corporation
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Defendant.
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______________________________________ )

CV 20-00552-TUC-RM (LAB)

REPORT AND
RECOMMENDATION

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Pending before the court is a motion to remand, filed by the plaintiff, Elite Performance
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(Elite), on December 23, 2020. (Doc. 4) The defendant, Echelon Property and Casualty
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Insurance (Echelon), filed a response on December 30, 2020. (Doc. 7) Elite filed a reply on
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December 31, 2020. (Doc. 10)
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In April of 2019, a small fire damaged property owned by the plaintiff, Elite
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Performance. (Doc. 1-3, p. 3) Elite contracted with AC/DC corporation to fix the damage. Id.
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When AC/DC performed the work negligently, Elite filed suit against it (and its owner) in
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Maricopa County Superior Court. Id., pp. 3-4 AC/DC was insured at the time by the defendant
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in this action, Echelon. Id. AC/DC tendered the state court suit to Echelon, but Echelon refused
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coverage. Id., p. 4 Elite and AC/DC subsequently stipulated to a judgment in favor of Elite in
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the amount of $475,000. Id., pp. 5-6 In addition, AC/DC assigned to Elite the bad faith and
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contract claims it had against Echelon pursuant to Damron v. Sledge, 105 Ariz. 11, 460 P.2d
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997 (1969). Id.
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Elite subsequently filed a bad faith and contract action again Echelon in Pima County

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Superior Court. (Doc. 1-3, pp. 2-10) On December 23, 2020, Echelon removed that action to

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this court alleging diversity jurisdiction. (Doc.1) On the same day, Elite filed the pending

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motion to remand. (Doc. 4) Elite argues that this court lacks diversity jurisdiction because

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there is no diversity of citizenship. Id. Elite maintains that both it and Echelon are citizens of

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Arizona because this is a “direct action” pursuant to 28 U.S.C. § 1332(c)(1), and under that

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provision, Echelon takes on the citizenship of its insured, AC/DC. (Doc. 4, p. 5)

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This case was referred to the Magistrate Judge for a report and recommendation pursuant

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to LRCiv 72.1. (Doc. 13) The Magistrate Judge recommends that the District Court, after its

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independent review, deny the motion to remand. A Damron action for breach of contract and

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bad faith is not a “direct action” for the purposes of 28 U.S.C. § 1332(c)(1). The insurer

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therefore does not assume the citizenship of its insured.

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Discussion

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A civil action filed in state court may be removed if that action could have been filed in

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federal court originally. 28 U.S.C. § 1441. Removal proceeds pursuant to statute, which is

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strictly construed. Gaus v. Miles, Inc., 980 F.2d 564, 566 (9th Cir. 1992). “The strong

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presumption against removal jurisdiction means that the defendant always has the burden of

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establishing that removal is proper.” Id. (punctuation modified)

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“When an action is removed based on diversity, complete diversity must exist at

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removal.” Gould v. Mutual Life Ins. Co. of New York, 790 F.2d 769, 773 (9th Cir. 1986); cert.

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denied, 479 U.S. 987 (1986). “Diversity is generally determined from the face of the

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complaint.” Id. If the complaint fails to establish diversity, the notice of removal must supply

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the missing allegations. Schroeder v. Trans World Airlines, Inc., 702 F.2d 189, 191 (9th

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Cir.1983), overruled on other grounds by Beneficial Nat. Bank v. Anderson, 539 U.S. 1, 9-11,

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123 S.Ct. 2058 (2003). “Absent unusual circumstances, a party seeking to invoke diversity

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jurisdiction should be able to allege affirmatively the actual citizenship of the relevant parties.”

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Kanter v. Warner-Lambert Co., 265 F.3d 853, 857 (9th Cir. 2001).

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In its notice of removal, Echelon asserts that this court has diversity subject matter

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jurisdiction pursuant to 28 U.S.C. s 1332. It maintains that it “is an insurance company,

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incorporated in the state of Illinois with its principal place of business and citizenship in the

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state of Illinois.” (Doc. 1, p. 1) It asserts that the plaintiff, Elite, “is an Arizona limited liability

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company having its principal place of business in Pima County, Arizona” and therefore there

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is diversity of citizenship between the parties. (Doc. 1, p. 2)

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The diversity jurisdiction statute reads in pertinent part as follows:

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(a) The district courts shall have original jurisdiction of all civil actions where the
matter in controversy exceeds the sum or value of $75,000, exclusive of interest
and costs, and is between–

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(1) citizens of different States;

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*

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(c) For the purposes of this section and section 1441 of this title–

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(1) a corporation shall be deemed to be a citizen of every State . . . by which it has
been incorporated and of the State . . . where it has its principal place of business,
except that in any direct action against the insurer of a policy or contract of
liability insurance . . . to which action the insured is not joined as a
party-defendant, such insurer shall be deemed a citizen of–

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(A) every State . . . of which the insured is a citizen;

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(B) every State . . . by which the insurer has been incorporated; and

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(C) the State . . . where the insurer has its principal place of business . . . .

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28 U.S.C. § 1332 (emphasis added) Elite argues in the pending motion to remand that the
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“direct action” provision applies to the pending action and diversity of citizenship is not present.
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Echelon argues the opposite. It is instructive to briefly review the history behind this statutory
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provision.
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The “direct action” provision “was enacted in response to an increase in the caseload
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of federal district courts in Louisiana resulting from that state’s adoption of a ‘direct action’
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statute.” Searles v. Cincinnati Ins. Co., 998 F.2d 728, 729 (9th Cir. 1993). “The statute allowed

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an injured party to sue a tortfeasor’s insurer directly without joining the tortfeasor as a

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defendant, which created diversity jurisdiction in a large number of cases.” Id. The “direct

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action” provision in § 1332(c)(1) was designed to undue the effects of this legislation by

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denying diversity jurisdiction where total diversity would not have existed if the tortfeasor had

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been joined in the first place. Id. In other words, Ҥ 1332(c)(1) applies to those cases in which

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a party suffering injuries or damage for which another is legally responsible is entitled to bring

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suit against the other’s liability insurer without joining the insured or first obtaining a judgment

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against him.” Id. Ordinary, run-of-the-mill actions against an insurance company are not

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“direct actions.” Id. For example, “first party” actions, where an insured files suit against its

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own insurance company for bad faith or breach of contract, are not “direct actions.” Id. at 728-

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729. “[U]nless the action urged against the insurance company is of such a nature that the

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liability could be imposed against the insured, the action is not a direct action.” Id. at 729.

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The pending action is not a “direct action.” If it were, Elite would be claiming, and

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trying to prove, that AC/DC acted negligently and, as a consequence, Echelon is on the hook

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for damages. In fact, AC/DC’s negligence has already been established in a prior action.

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Instead, Elite is claiming in this case that Echelon acted in bad faith and breached its contract

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with its insured, AC/DC. The “action urged against the insurance company,” Echelon, is not

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an action that “could be imposed against the insured.” Searles v. Cincinnati Ins. Co., 998 F.2d

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728, 729 (9th Cir. 1993). It is, in fact, an action that could have been brought by the insured.

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And it might have been except that AC/DC assigned its right to bring this action to Elite.

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Accordingly, this is not a “direct action.” Id.

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In its reply brief, Elite notes that there are many cases in the Ninth Circuit that discuss

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the “direct action” issue as it relates to “first party” actions. (Doc. 10) Those are actions by an

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insured against its own insurance company, and Ninth Circuit case law teaches that “first party”

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actions are not “direct actions.” Id. Elite then argues that this is not a “first party” action

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because Elite is not suing its own insurance company. Id. And because this is not a “first

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party” action, the case law does not compel a finding that this is not a “direct action.” See Id.

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The court is of the opinion that this action is very much like an ordinary “first party”

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action. The defendant insurance company, Echelon, is being sued for breach of contract and

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bad faith as is typical in an ordinary “first party” action. The only difference here is that the

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plaintiff is not the insured; it is the insured’s assignee. Otherwise, this is a run-of-the-mill “first

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party” action. The court, however, need not decide whether this is a “first party” action or not.

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“First party” actions are not “direct actions,” true, but “first party” actions are not the only

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actions that are not “direct actions.” Any action against an insurance company where liability

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could not be imposed against the insured is not a “direct action.” See Searles v. Cincinnati Ins.

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Co., 998 F.2d 728, 729 (9th Cir. 1993). And that is the situation here.

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The “direct action” provision of § 1332(c)(1) does not apply to the pending action.

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Echelon is a citizen of Illinois, not a citizen of Arizona.

Elite is a citizen of Arizona. The

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parties are of diverse citizenship. The matter in controversy exceeds the sum of $75,000. This

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court has jurisdiction pursuant to 28 U.S.C. § 1332. The pending motion to remand should be

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denied. See, e.g., Tilden-Coil Constructors, Inc. v. Landmark Am. Ins. Co., 2009 WL 4730853,

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at *3 (W.D. Wash. 2009) (Where tort victim originally brought an action in Washington state

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court against tortfeasor’s insurance company for a declaratory judgment that the insurance

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company must cover any judgment that might issue in the future against the tortfeasor,

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subsequent motion to remand was denied because the action was “not a ‘direct action’ within

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the meaning of 28 U.S.C. § 1332(c)(1).”).

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Recommendation

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The Magistrate Judge recommends the District Court, after its independent review of the

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record, enter an order DENYING the pending motion to remand filed by the plaintiff on

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December 23, 2020. (Doc. 4)

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Pursuant to 28 U.S.C. §636 (b), any party may serve and file written objections within

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14 days of being served with a copy of this report and recommendation. If objections are not

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timely filed, the party’s right to de novo review may be waived. The Local Rules permit the

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filing of a response to an objection. They do not permit the filing of a reply to a response

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without the permission of the District Court.

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DATED this 7th day of January, 2021.

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