Young Scholars Child Development Center, Inc. v. Colony Insurance Company
MEMORANDUM RULING re 9 MOTION to Remand. Signed by Magistrate Judge Patrick J Hanna on 3/1/2010. (crt,Keifer, K)
U N IT E D STATES DISTRICT COURT W E S T E R N DISTRICT OF LOUISIANA L A F A Y E T T E -O P E L O U S A S DIVISION Y O U N G SCHOLARS CHILD D E V E L O P M E N T CENTER, INC. VERSUS C O L O N Y INSURANCE COMPANY CIVIL ACTION NO. 09-1924
J U D G E DOHERTY M A G I S T R A T E JUDGE HANNA
M E M O R A N D U M RULING ON MOTION TO REMAND (R e c . Doc. 9) B e f o re the undersigned is plaintiff's Motion to Remand. The motion is opposed. Oral argument was held on February 24, 2010. B a c k g ro u n d and Argument T h is matter was removed from a Louisiana state court on the basis of diversity ju ris d ic tio n , 28 U.S.C. §1332. Following removal, but prior to the filing of responsive p l e a d in g s by defendant, plaintiff amended its petition to add three non-diverse d e f e n d a n ts, Young Scholars, LLC, Katherine Moran, and Eber J. Beadle. 1 The motion to re m a n d followed. The litigation, as explained in plaintiff's motion and excerpted from p la in tif f 's allegations, is as follows. According to plaintiff, in 2003, a credit sale was entered into between Young S c h o lar s Child Development Center, Inc. (YSCDC) and Young Scholars, LLC (YS), in w h ic h YSCDC sold to YS land, buildings, furniture, fixtures and equipment for
First Supplemental and Amended Complaint (Rec. Doc. 4). 1
$ 2 9 9 ,9 0 0 .0 0 . Some of the sale price was paid in cash, and the remainder was financed by Y S C D C , in whose favor a seller's lien and privilege and a special mortgage was granted. YS agreed to keep the property insured against loss or damage in an amount of at least $ 3 0 0 ,0 0 0 , with the proceeds payable to YSCDC. YS obtained a policy of insurance from C o lo n y. However, plaintiff alleges the property was not adequately insured, and YSCDC w a s not made a loss payee on the policy. The property was severely damaged during Hurricane Gustav, and YS made a claim under the insurance policy for damage to the property. Before any proceeds were a c tu a lly paid by Colony, YSCDC filed a lawsuit in state court against YS seeking to e n jo in it from utilizing any insurance proceeds for anything other than repair of the d a m a g e d property out of concern the money received from Colony might not be used to r e p a ir the property damage. YSCDC also alleges it put Colony on notice of its status as a m o rtg a g e e and loss payee. Finally, on November 12, 2008, a Consent Injunction was e n te re d into in which YS and its employees, representatives and agents were enjoined f ro m using any insurance proceeds for anything other than repair to the property. Despite these measures, Colony allegedly made payment of $137, 512.64, to YS a n d not to YSCDC in violation of La.R.S. 9:5686 and it is under this statute YSDC seeks re lief against Colony in the case before this Court. Y S C D C filed a supplemental and amended petition in the state suit against YS
a d d in g as defendants Katherine Moran and Eber J. Beadle, the only two members of YS.2 In the supplemental petition, plaintiff alleged despite being given notice of the Consent I n ju n c tio n , Moran or Beadle had YS write checks to Moran or Beadle totaling at least $ 7 4 ,1 0 0 , which came from insurance proceeds, in direct violation of the injunction, and u p o n information and belief, used the proceeds for their personal use.3 For this, plaintiff s e e k s to hold Moran, Beadle and/or YS in contempt of the 15 th Judicial District In ju n c tio n . Plaintiff also alleged Moran and Beadle were personally liable for the c o n tra c tu a l and other obligations owed by YS to YSCDC, as they commingled YS and th e ir personal funds, failed to provide separate bank accounts, credit cards and b o o k k e e p in g records, and failed to hold regular member and management meetings for Y S ' s affairs.4 Plaintiff seeks the same relief against these defendants in its amended c o m p lain t in this Court. O n May 28, 2009, YS filed bankruptcy.5 On October 6, 2009, the U.S. B a n k ru p tcy Court granted YS's motion to dismiss the bankruptcy proceedings, subject to p a ym e n t by YS of the trustee's fees within 30 days. And on October 20, 2009, the b a n k ru p tc y proceeding was dismissed.6
Motion to Remand, Exhibit 5 (Rec. Doc. 9-5). Ibid. Ibid. Motion to Remand, Exhibit 6 (Rec. Doc. 9-7). Ibid., p. 7, referencing Exhibit 10 (Rec. Doc. 9-11). 3
M e a n w h ile , on October 8, 2009, YSCDC filed suit in state court against Colony. In its motion to remand, YS explains it made its claims against Colony in a separate suit b e c a u s e the original suit against YS was still stayed due to the bankruptcy proceedings, a n d YSCDC's claims against Colony could prescribe on October 9, 2009, one year from C o lo n y's wrongful payment to YS. YSCDC explains it "intended to consolidate the two S tate Court cases once the Bankruptcy proceeding was dismissed and the original State C o u rt suit was no longer stayed." 7 However, before it could consolidate the two lawsuits C o lo n y removed the case against it to federal court on November 13, 2009. In its motion to remand, YS argues its addition of Moran and Beadle was proper as a matter of right under Fed. R. Civ. P. Rule 15(a), as no responsive pleading had yet been f ile d and under Fed. R. Civ. P. Rule 20(a), as the right to relief asserted against Moran an d Beadle arises out of the same transaction and occurrence as Colony, and there are q u e s tio n s of law or fact common to all defendants. Plaintiff argues "YSCDC's status as a lo s s payee, the amount of insurance procured by Young Scholars, Colony's wrongful p a ym e n t of insurance proceeds to Young Scholars, and the misappropriation of these in s u r a n c e proceeds by Young Scholars, Moran and Beadle" all involve common facts, a n d seek the same remedy - "payment for the damage done to the property in which Y S C D C possesses a security interest." 8
Ibid. (Rec. Doc. 9-1), p. 6. Motion to Remand (Rec. Doc. 9-1), p. 8 - 9. 4
In opposition to remand, Colony argues plaintiff did not seek permission of the c o u rt to file the amended and supplemental complaint, in violation of Local Rule 7.4.1W, w h ic h prevented Colony from being heard on its opposition thereto. Moreover, Colony a rg u e s, even if Rule 7.4.1W did not require plaintiffs to seek leave of court prior to a m e n d in g because no responsive pleadings had been filed, courts have recognized when s u c h an amendment destroys diversity leave of court is required and should be analyzed u n d er the factors of Hensgens v. Deere & Co., 833 F.2d 1179 (5 th Cir. 1987).9 C o lo n y argues the factors of Hengsens favor denying leave to amend. Specifically, C o lo n y argues the sole purpose of the amendment is to destroy diversity, as "Colony has n e v e r been named a party defendant in the State Court suit brought by plaintiff in 2008, b u t the same non-Colony defendants sought to be added by amendment in this case have lon g been defendants in that State Court suit as to the same claims that plaintiff's a m e n d m e n t now seeks to bring again in this Court." 1 0 Colony argues plaintiff was d ilatory, as it never added Colony as a defendant in the 2008 state court suit. Moreover, C o lo n y argues, the suit against the non-diverse defendants is still pending in state court,
See Colony Insurance Company's Memorandum in Opposition to Plaintiff's Motion to Remand (Rec. Doc. 15), p. 8, 9, citing Whitworth v. TNT Bestway Transp. Inc., 914 F.Supp. 1434, 1435 (E.D.Tex. 1996); Horton v. Scripto-Tokai, 878 F.Supp. 902 (S.D. Miss. 1995); Borne v. Siemens Energy & Automation, Inc., 1995 WL 15354 (E.D.La. 1995); Bevels v. American States Ins. Co., 100 F.Supp.2d 1309, 1312-3 (M.D. Ala. 2000); Ascension Enterprises, Inc. v. Allied Signal, Inc., 969 F.Supp. 359, 360-1 (M.D.La. 1997); 6 Wright, Miller & Kane, Federal Practice and Procedure: Civil §1447 at 562 (2nd ed. 1990).
Ibid., p. 6. 5
a n d "no prejudice will befall plaintiff if it is not granted leave to amend in this case." 1 1 F in a lly, defendant argues, there is no risk of inconsistent results between this case and the sta te case, as the legal and factual issues in this case are not in any way related to those in th e state court case.1 2 In reply, YSCDC argues it may amend of right under Fed. R. Civ. P. Rule 15(a), as n o responsive pleading had been served at the time it filed its amended petition. M o re o v e r, Fed. R. Civ. P. Rule 20 supports the amendment as "it allows joinder of d e f e n d a n ts in situations where a right to relief is asserted against the defendants jointly, s e v e ra lly, or in the alternative, with respect to and arising out of the same transactions or o c c u rre n c es , and when there is also a question of law or fact." 1 3 YSCDC argues the right to relief is pled against all defendants jointly, severally or in the alternative, and all of the c la im s arise out of the same transaction or occurrence. YSCDC also argues the Hensgen's factors all favor amendment and remand. First, Y S C D C argues the amendment was not dilatory, as it was filed less than two weeks after re m o v a l. Moreover, it was not filed simply to defeat diversity. The state court lawsuit a g a in s t the non-diverse defendants was stayed due to bankruptcy proceedings by YS, and
Colony Insurance Company's Memorandum in Opposition to Plaintiff's Motion to Remand (Rec. Doc. 15), p. 6. Reply Memorandum on Behalf of Young Scholars Child Development Center, Inc. (Rec. Doc. 16), p. 2. 6
Y S C D C had to file its suit against Colony separately to avoid prescription on its claims a g a in s t Colony. YSCDC intended to consolidate the two suits, but Colony removed the s u it against it prior to consolidation. YSCDC argues it will be significantly injured if the a m e n d m e n t is denied and the case is not remanded, as the claims will be litigated in s e p a ra te proceedings in separate forums, and inconsistent verdicts could be rendered. At oral argument, counsel for plaintiff clarified he and his client had no knowledge Y S had received any insurance funds from Colony until YS filed bankruptcy proceedings. W h e n YSCDC received a copy of the schedules in the bankruptcy, the funds from Colony w e r e listed as received by YS. As a result, YS did not know it even had a claim against C o lo n y until sometime in 2009 while the bankruptcy, and concomitant stay under 11 U .S .C . §362, was pending. Once that was discovered, YSCDC filed the suit against C o lo n y in state court to avoid a prescription defense. Although plaintiff concedes that the relief sought in its prayer against Colony u n d e r La.R.S. 9:5686 cannot be recovered from YS and/or its principals, nor can the r e lie f sought from YS and its principals be recovered from Colony, there will nevertheless b e prejudice to the plaintiff in the form of inconsistent verdicts if the defendants are not jo i n e d and the cases remained in different forums. Plaintiff explained its recovery against C o lo n y in the federal suit will require it to establish YSCDC was a loss payee on the in s u ra n c e policy and was entitled to the proceeds by preference and priority over YS. Likewise, in the state court litigation, YS, Moran and Beadle will almost certainly
c o n ten d , as a defense to their breach of contract claim, that YSCDC was not required to b e a loss payee and/or was not otherwise entitled to the proceeds of the insurance p a ym e n t made by Colony. Therefore, it is possible plaintiff could be found to be a loss p a ye e and/or otherwise not entitled to the proceeds from Colony in one suit, and have the e x a c t opposite result in another. Applicable Law and Discussion R u le 15(a) allows a party to file an amended complaint, without leave of court, p rio r to a responsive pleading being filed. No responsive pleading had been filed in this m a tte r at the time of the amendment, and therefore plaintiff was not required to seek leave o f court to file same. However, several courts have held, as does the undersigned, that w h e n an amendment destroys diversity, leave of court is required even though the a m e n d m e n t is filed prior to the filing of responsive pleadings.1 4 T h e re f o re , the undersigned must determine whether YSCDC should be given leave
See Ascension Enterprises, Inc. v. Allied Signal, Inc., 969 F.Supp. 359 (M.D.La. 1997), citing Whitworth v. TNT Bestway Transp., 914 F.Supp. 1434, 1435 (E.D.Tx.1996); see also Horton v. Scripto-Tokai Corp., 878 F.Supp. 902, 908 (S.D.Miss.1995); Borne v. Siemens Energy & Automation, 1995 WL 15354 (E.D.La. Jan.17, 1995); 6 Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice & Procedure: Civil, § 1477 at 562 (2d Ed.1990): In assessing the apparent conflict between § 1447(e) and Rule 15(a), courts have held that "[w]hen an amendment will destroy diversity, leave of court is required even though the existing defendant ... ha[s] not yet filed responsive pleadings." In other words, "a party may not employ Rule 15(a) to interpose an amendment that would deprive the district court of jurisdiction over a removed action." Thus, § 1447(e) trumps Rule 15(a). Ascension Enterprises, Inc., 969 F.Supp. at 360.
to file its First Supplemental and Amended Complaint. Under Hensgens v. Deere & C o m p a n y, 833 F.2d 1179, 1182 (5 th Cir. 1987), "when faced with an amended pleading n a m in g a new nondiverse defendant in a removed case, [the district court] should s c ru tin iz e that amendment more closely than an ordinary amendment. " The factors to be c o n sid e re d are 1) whether the purpose of the amendment is to defeat federal jurisdiction; 2 ) whether plaintiff has been dilatory in asking for the amendment; 3) whether plaintiff w ill be significantly injured if amendment is not allowed; and 4) any other factor bearing o n the equities. Hensgens, 833 F.2d at 1182. T h e undersigned finds the Hensgen's factors militate in favor of allowing the a m e n d m e n t. First, the purpose of the amendment is not to destroy diversity jurisdiction, a lth o u g h that is a consequence. As plaintiff explained, it was not even aware insurance p ro c e e d s had been paid by Colony until after YS declared bankruptcy, and filed suit a g a in s t Colony alone, before the prescription period ran, because the case against YS was s ta ye d due to the bankruptcy. Secondly, plaintiff was not dilatory in filing the a m e n d m e n t. Plaintiff explained the action against the state court defendants was stayed d u e to YS's bankruptcy, and thus suit had to be brought against Colony alone prior to the s ta y being lifted. Plaintiff intended to consolidate the two actions when the stay was lifte d , but prior to doing so, Colony removed this action to this court. Plaintiff quickly f ile d the amendment adding the non-diverse defendants less than one month after the re m o v a l. Thirdly, plaintiff may be significantly injured if the amendment is not allowed,
d u e to the possibility of inconsistent finding regarding its status as a loss payee, and an a tte n d a n t risk of inconsistent verdicts. Therefore, the undersigned finds an analysis of the Hensgens factors favors a llo w in g the amendment to add the non-diverse defendants. Conclusion T h e amendment adding non-diverse parties YS, Beadle and Moran is granted, and th e addition of these parties destroys diversity subject matter jurisdiction under 28 U.S.C. § 1 3 3 2 . There being no other basis of subject matter jurisdiction alleged, the undersigned f in d s remand to the Fifteenth Judicial District Court for the Parish of Lafayette, State of L o u is ia n a , appropriate. L a f aye tte , Louisiana, this 1 st day of March, 2010.
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