Mattingly et al v. Chartis Claims, Inc. et al
MEMORANDUM OPINION AND ORDER MINUTE ENTRY for oral argument held on 9/15/2011 before Judge William O. Bertelsman: It is ordered 1) Plaintiff's 22 Motion to Remand be and hereby is GRANTED. This matter is REMANDED TO THE MASON CIRCUIT COURT; a nd 2) Defendant's 5 Motion to Dismiss be and is hereby DENIED. (Court Reporter Joan Averdick.). Signed by Judge William O. Bertelsman on 9/20/2011. (TED)cc: COR, certified copy of Order and Docket Sheet sent to Mason Circuit Court Clerk, Mason County Justice Center, 100 W. Third Street, Maysville, KY 41056
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF KENTUCKY
CIVIL ACTION NO. 2011-48 (WOB-CJS)
J. BASIL MATTINGLY, ET AL.
OPINION AND ORDER
CHARTIS CLAIMS, INC.,
This matter is before the court on defendants’ motion
to dismiss (Doc. 5) and plaintiffs’ motion to remand (Doc.
The court heard oral argument on these motions on
Thursday, September 15, 2011.
David Johanson represented
the plaintiffs, and Scott Brown and Michael Nitardy
represented the defendants.
Official court reporter Joan
Averdick recorded the proceedings.
Directech Holding Co., Inc. (“Directech”), a Delaware
corporation, maintained certain employee benefit plans for
Plaintiff J. Basil Mattingly (“Mattingly”)
was a fiduciary of some of these plans.
Mattingly also is
a principal in Bas Mattingly Master, LLC (“the LLC”) and
the grantor of the J. Basil Mattingly Family Trust (“the
Directech purchased four separate employee benefit
plan and ERISA fiduciary liability insurance policies from
defendant National Union Fire Ins. Co. of Pittsburgh, PA
(“National Union”) covering the period from July 15, 2005
to December 31, 2009.
The named insured on the policies is
“Directech Holding Co., Inc.”
Defendant Chartis Claims, Inc. (“Chartis”) is a claims
adjuster for National Union.
(Compl. ¶ 8)
nature of the relationship between Chartis and National
Union is unclear on the present record.
In March 2009, the Department of Labor (“DOL”)
notified Mattingly of an investigation by the agency into
certain stock transactions between the Directech employee
benefit plans and entities in which Mattingly and other
plan fiduciaries held interests.
The DOL alleged that
these transactions violated ERISA in numerous respects.
Plaintiffs notified defendants of this investigation
and demanded that defendants provide a complete defense and
In April 2009, defendants sent a letter to
Mattingly identifying Stoll Keenon Ogden, PLLC as counsel
appointed by the insurer.
Plaintiffs allege that
defendants refused to allow plaintiffs to employ
independent counsel of their choosing.
On December 4, 2009, the Secretary of Labor filed suit
under ERISA in this court against Mattingly, the LLC, the
Trust, and other defendants.
Civil Case No. 09-CV-207.
Solis v. Mattingly, Cov.
The case was subsequently
On February 4, 2011, plaintiffs filed suit against
defendants in the Mason County Circuit Court.
alleged, inter alia, that defendants breached plaintiff J.
Basil Mattingly’s insurance contract with National Union by
allegedly failing to allow plaintiff to employ counsel of
plaintiffs’ choosing in the Solis matter and by failing to
provide a complete defense and indemnification.
alleged claims for (1) breach of contract; (2) common law
and institutional bad faith; (3) violation of the Kentucky
Unfair Claims Settlement Practices Act; (4) Independent
Counsel; and (5) Declaration of Rights.
Defendants removed this case on March 11, 2011, on the
basis of diversity jurisdiction.
that Chartis, the trustee of plaintiff Mattingly Family
Dynasty Trust, and Bas Mattingly Master LLC are all
Delaware citizens, defendants asserted that Chartis was
fraudulently joined and that its citizenship thus should
not be considered.
Shortly thereafter, defendants filed a motion to
dismiss Chartis from the case.
That motion also
seeks to dismiss the LLC and the Trust as plaintiffs on the
grounds that they are not insureds under the insurance
policy in question.
Plaintiffs then filed a motion to
remand, arguing that Chartis was not fraudulently joined
and that diversity is thus lacking.
For the reasons that follow, the court concludes that
this matter must be remanded to state court.
To determine whether Chartis was fraudulently joined,
the court must ascertain whether plaintiffs have a
colorable cause of action against Chartis.
Comm’n v. Bannum, Inc., 576 F.3d 620, 624 (6th Cir. 2009)
(citation omitted); Coyne v. Am. Tobacco Co., 183 F.3d 488,
493 (6th Cir. 1999).
If the removing party does not
demonstrate fraudulent joinder, the district court must
remand back to state court based on the lack of subject
Bannum, 576 F.3d at 624.
In determining whether the plaintiff has stated a
colorable cause of action against the non-diverse
defendant, any disputed questions of facts and ambiguities
in the controlling state law should be resolved in favor of
the nonremoving party.
Coyne, 183 F.3d at 493.
Plaintiffs assert bad faith claims against Chartis
under both the common law and KRS 304.12-230, the Unfair
Claims Settlement Practices Act (“UCSPA”).
As a sister
court noted recently, courts in this district “have come
down on both sides of the debate” about whether an insured
can assert bad faith claims such as these against claims
adjusters with whom they have no privity of contract.
North Am. Specialty Ins. Co. v. Pucek, No. 5:09cv49-JMH,
2009 WL 3711261, at *3 (E.D. Ky. Nov. 4, 2009).
there held that such “ambiguity in Kentucky’s bad faith
law” must be resolved in favor of the non-removing party,
stating that while the claim “may not ultimately prove
successful, it is at least colorable.”
Another court in this district conducted an extensive
analysis of this issue in Gibson, supra.
discussion, the court stated:
Kentucky law is ambiguous as to whether such [bad
faith] claims can be asserted against individual
claims adjusters . . . Both sides of the debate can
point to authority in support of their position.
Such ambiguity clearly calls for remand because
ambiguities in the applicable state law are to be
resolved in favor of the non-removing party. . . .
Stated differently, the ambiguities in Kentucky law
provide the plaintiffs with an arguably reasonable
basis for predicting that they could prevail on their
bad faith claims against Clevinger and Stanley.
Therefore, these claims are colorable, and the
joinder of Clevinger and Stanley was not fraudulent.
Gibson, 2008 WL 4602747, at *6 (citation omitted).
As noted in Gibson, federal courts in Kentucky have
reached different results on this question, and no Kentucky
appellate court appears to have addressed whether claim
adjusters can be held liable for bad faith claims.
The Gibson court noted, however, that at least one
Kentucky Circuit Court has indicated that such claims are
Moreover, another sister court also recently noted
that a different Kentucky Circuit Court held that a claims
adjuster could be held liable for bad faith under the
See Elliott v. Liberty Mut. Fire Ins. Co., No. 09-
178-GFVT, 2010 WL 3294417, at *1 n. 1 (E.D. Ky. Aug. 19,
2010) (citing a 2009 case from Pulaski County Circuit
The law is well-established that the burden of
establishing fraudulent joinder is indeed a heavy one.
Thus the leading treatise on the subject of federal
“To demonstrate fraudulent joinder . .
., a party must demonstrate . . . the absence of any
possibility that the opposing party has stated a claim
under state law against the party alleged to have been
16 James Wm. Moore, Moore’s Federal
Practice § 107.14[c][iv][A] (3d ed. 2011) (emphasis
A claim of fraudulent joinder must be pleaded with
particularity and supported by clear and convincing
As noted in Moore’s Federal Practice:
When a party seeking removal alleges fraudulent
joinder, the removing party bears the burden of
proving the alleged fraud. The burden of persuasion
placed on the party alleging fraudulent joinder is
substantial. . . .
The standard requiring that the removing party show
that the plaintiff cannot establish a claim against
the allegedly fraudulently joined party, even after
resolving all issues of law and fact in the
plaintiff’s favor, is even more favorable to the
plaintiff than the standard for ruling on a motion to
dismiss. However, the scope of the inquiry is
different for Rule 12(b)(6) motions, where a court
may consider only the allegations in the complaint
and attachments. In ruling on fraudulent joinder a
court may pierce the pleadings.
. . . [T]he sole concern is whether, as a matter of
law, the plaintiff has alleged a valid state law
cause of action against the nondiverse defendant.
Stated differently, the court must determine whether
there is any reasonable basis for predicting that the
plaintiff might be able to establish the nondiverse
defendant’s liability on the pleaded claims in state
court. Thus, in a fraudulent joinder inquiry,
federal courts do not weigh the merits of the
plaintiff’s claim beyond determining whether the
claim is arguable under state law. Further, the
motive of the plaintiff in joining the challenged
party is immaterial to the determination of whether
the plaintiff has a state law cause of action against
It is important that courts impose a heavy burden on
defendants who remove on the basis of fraudulent
joinder because the practice of routinely removing
cases to federal court by making borderline arguments
of fraudulent joinder imposes tremendous costs on
plaintiffs and the court system.
Id. § 107.149[c][iv][B] (emphasis added).
In the present case, the plaintiffs in effect allege
a conspiracy or joint effort between the defendants to
defeat coverage under the policy, including denying
plaintiffs the right to employ independent counsel and
otherwise acting in bad faith.
This court cannot say,
based on the above authorities, that there is no
possibility that under such facts, if proven, plaintiffs
could not recover against both defendants.
defendants cannot meet their burden of demonstrating
Finally, for the reasons stated on the record at the
hearing, defendants cannot demonstrate at this stage of the
proceedings that the Trust and LLC are not proper
plaintiffs, and thus their citizenship remains relevant.
Because they are Delaware citizens, as is Chartis, remand
Therefore, having heard the parties, and the court
being otherwise sufficiently advised,
IT IS ORDERED that:
Plaintiffs’ motion to remand (Doc. 22) be,
and is hereby, GRANTED.
This matter is
REMANDED TO THE MASON CIRCUIT COURT; and
Defendants’ motion to dismiss (Doc. 5) be,
and is hereby, DENIED.
This 20th day of September, 2011.
TIC: 34 min.
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