Grand China Buffett & Grill, Inc. et al v. State Auto Property and Casualty Co. et al

Filing 24

MEMORANDUM OPINION AND ORDER DENYING MOTION TO REMAND 6 AND GRANTING MOTION TO REALIGN 10 : The Court DENIES the plaintiffs motion to remand 6 , and GRANTS State Autos motion to realign Ullom as a plaintiff 10 . Given thesejurisdictional rulin gs, the Court, for good cause, BIFURCATES the parties dispute regarding insurance coverage from the plaintiffs bad faith claims in this case and schedules the following briefing deadlines: November 8, 2016 for Filing of Dispositive Motions; January 6, 2017for Response to Dispositive Motions; January 20, 2017 for Reply to Dispositive Motions. Signed by District Judge Irene M. Keeley on 10/17/16. (jss)

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF WEST VIRGINIA
GRAND CHINA BUFFETT & GRILL, INC., and
QI FENG CHEN,
Plaintiffs,
v.

//

CIVIL ACTION NO. 1:16CV159
(Judge Keeley)

STATE AUTO PROPERTY AND
CASUALTY COMPANY and SCOTT ULLOM,
Defendants.
MEMORANDUM OPINION AND ORDER
DENYING MOTION TO REMAND [DKT. NO. 6]
AND GRANTING MOTION TO REALIGN [DKT. NO. 10]
During a scheduling conference on September 29, 2016, the
Court DENIED the plaintiffs’ motion to remand (Dkt. No. 6), GRANTED
State Auto Property and Casualty Company’s (“State Auto”) motion to
realign the purported defendant, Scott Ullom (“Ullom”), as a
plaintiff

(Dkt.

No.

10),

bifurcated

the

case,

and

scheduled

deadlines for dispositive motions on the coverage issues raised in
the case.

This Memorandum Opinion discusses the reasons for those

rulings.
BACKGROUND
On July 21, 2015, Ullom filed an action in the Circuit Court
of Harrison County, West Virginia (“the underlying complaint”),
seeking

to

hold

Qi

Feng

Chen

(“Chen”),

in

his

capacity

as

“Director, Incorporator, and President” of Grand China Buffet &
Grill, Inc. (“Grand China”), liable for violations of the West

GRAND CHINA, ET AL. v. STATE AUTO, ET AL.

1:16CV159

MEMORANDUM OPINION AND ORDER
DENYING MOTION TO REMAND [DKT. NO. 6]
AND GRANTING MOTION TO REALIGN [DKT. NO. 10]
Virginia Human Rights Act (“WVHRA”) (Dkt. No. 1-1 at 7). The
complaint alleges that Ullom and his friend were evicted from Grand
China, a place of public accommodation, by an “oriental looking”
individual. Id.
manager,

would

at 7-8. That individual, presumed to be the
not

allow

Ullom

to

bring

his

dog

into

the

restaurant, even after Ullom advised him that it was his service
dog. Id.
The underlying complaint seeks “a significant amount” of
damages under the WVHRA, both to accommodate Ullom and to punish
the defendants. Id. at 25. It also seeks damages for emotional
distress, embarrassment, humiliation, and compensation. Id. When
Chen notified State Auto, Grand China’s insurance company, of the
lawsuit, the carrier initially provided a defense under reservation
of its rights to further investigate the claim. See id. at 8. After
deposing Ullom, however, State Auto decided that he had not
incurred a “bodily injury” covered under Grand China’s policy (“the
Subject Policy”), and declined to further defend Grand China and
Chen. Id. at 9.

2

GRAND CHINA, ET AL. v. STATE AUTO, ET AL.

1:16CV159

MEMORANDUM OPINION AND ORDER
DENYING MOTION TO REMAND [DKT. NO. 6]
AND GRANTING MOTION TO REALIGN [DKT. NO. 10]
As a result of State Auto’s decision not to defend, Grand
China and Chen1 filed the instant action against State Auto and
Ullom in the Circuit Court of Harrison County on June 17, 2016. See
id.

at

6.

Among

others,

the

complaint

seeks

the

following

declarations: 1) “that the Subject Policy does provide them with
bodily injury liability coverage for some or all” of Ullom’s claims
in the underlying complaint; 2) “that the Subject Policy does
provide

them

with

personal

and

advertising

injury

liability

coverage for some or all” of Ullom’s claims in the underlying
complaint; and 3) that State Auto’s reservation of rights was
improperly and untimely issued and that State Auto is barred by
waiver

and

estoppel

from

avoiding

coverage

obligations,

or

alternatively, that the reservation of rights is the sole statement
of basis for coverage avoidance, and estoppel and waiver prevent
State Auto from asserting any other bases for coverage avoidance.
Id. at 12-14. In addition to the declaratory claims, the complaint
seeks damages for breach of contract, common law bad faith, a
Hayseeds claim, and violations of the West Virginia Unfair Trade
Practices Act. Id. at 15-21.

1

In the remainder of this order, plaintiffs Grand China and
Chen will be referred to collectively as “Grand China.”
3

GRAND CHINA, ET AL. v. STATE AUTO, ET AL.

1:16CV159

MEMORANDUM OPINION AND ORDER
DENYING MOTION TO REMAND [DKT. NO. 6]
AND GRANTING MOTION TO REALIGN [DKT. NO. 10]
When State Auto removed the case to this Court on July 22,
2016 (Dkt. No. 1), it acknowledged that Ullom was a non-diverse
defendant, but asserted he had been fraudulently joined as a
defendant in order to defeat diversity. Id. at 2. State Auto now
argues that, to the extent Ullom has an interest in Grand China’s
claims,

specifically

the

declaratory

counts,

those

interests

completely align with those of Grand China; thus, Ullom ought to be
realigned to reflect this reality. Id.
On July 29, 2016, State Auto answered the complaint, and filed
a counterclaim and cross claim for declaratory relief against Grand
China and Ullom respectively (Dkt. No. 4). State Auto seeks
declarations that Ullom’s claims in the underlying complaint are
not covered by the Subject Policy, and that it has no duty to
defend or indemnify Grand China against the underlying complaint.
Id. at 18.
On August 22, 2016, Grand China moved to remand the case to
the Circuit Court of Harrison County (Dkt. No. 7).

It argues that

“[r]emand is appropriate because there is not complete diversity,
the

removal

is

not

permitted

under

the

removal

statutes,

realignment is not available in a removed action, and even if it
were,

the

parties

should

not
4

be

realigned.”

Id.

at

1.

GRAND CHINA, ET AL. v. STATE AUTO, ET AL.

1:16CV159

MEMORANDUM OPINION AND ORDER
DENYING MOTION TO REMAND [DKT. NO. 6]
AND GRANTING MOTION TO REALIGN [DKT. NO. 10]
Alternatively, Grand China urges the Court to defer to the state
court under the doctrine of abstention. Id.
STANDARD OF REVIEW
“The district courts 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 citizens
of different states . . . .” 28 U.S.C. § 1332(a). This provision
has been consistently interpreted “to require complete diversity of
citizenship of each plaintiff from each defendant.” Rosmer v.
Pfizer Inc., 263 F.3d 110 (4th Cir. 2001) (citing Strawbridge v.
Curtiss, 7 U.S. (3 Cranch) 267 (1806)). In addition, defendants may
remove certain other actions to federal court, that is, “any civil
action brought in a state court of which the district courts of the
United States have original jurisdiction, may be removed by the
defendant or the defendants.” 28 U.S.C. § 1441.
Federalism concerns counsel that removal jurisdiction should
be strictly construed. Palisades Collections LLC v. Shorts, 552
F.3d 327, 334 (4th Cir. 2008) (citing Md. Stadium Auth. v. Ellerbe
Becket Inc., 407 F.3d 255, 260 (4th Cir. 2005)). “The burden of
establishing federal jurisdiction is placed upon the party seeking
the removal.” Mulcahey v. Columbia Organic Chems., Inc., 29 F.3d
5

GRAND CHINA, ET AL. v. STATE AUTO, ET AL.

1:16CV159

MEMORANDUM OPINION AND ORDER
DENYING MOTION TO REMAND [DKT. NO. 6]
AND GRANTING MOTION TO REALIGN [DKT. NO. 10]
148, 151 (4th Cir. 1994). As this Court has previously observed,
“[a]ll doubts about the propriety of removal should be resolved in
favor of retaining state court jurisdiction.” Vitatoe v. Mylan
Pharmaceuticals, Inc., No. 1:08cv85, 2008 WL 3540462, at *2 (N.D.W.
Va. Aug. 13, 2008) (citing Hartley v. CSX Transp., Inc., 187 F.3d
422, 425 (4th Cir. 1999)). The Court, however, may look past the
pleadings to determine whether jurisdiction is proper. Ryan Envtl.,
Inc. v. Hess Oil Co., Inc., 718 F. Supp. 2d 719, 722 (N.D.W. Va.
2010); see also City of Indianapolis v. Chase Nat’l Bank of City of
N.Y., 314 U.S. 63, 69 (1941) (“It is our duty, as it is that of the
lower federal courts, to look beyond the pleadings, and arrange the
parties

according

to

their

sides

in

the

dispute.”

(internal

quotation omitted)).
LEGAL ANALYSIS
As discussed below, there is no fraudulent joinder in this
case. Nevertheless, the Court concludes that Ullom should be
realigned as a plaintiff, and that abstention is not warranted
under the facts of this case.

6

GRAND CHINA, ET AL. v. STATE AUTO, ET AL.

1:16CV159

MEMORANDUM OPINION AND ORDER
DENYING MOTION TO REMAND [DKT. NO. 6]
AND GRANTING MOTION TO REALIGN [DKT. NO. 10]
I.

Fraudulent Joinder
Although State Auto’s notice of removal asserted that Ullom

had been fraudulently joined as a defendant in this case (Dkt. No.
1), it did not argue this issue in its briefing. Moreover, during
oral argument, counsel for State Auto conceded that any allegations
of fraudulent joinder applied only to claims of Grand China
unrelated to declaratory relief.2
Under the doctrine of fraudulent joinder, a district court may
“disregard, for jurisdictional purposes, the citizenship of certain
nondiverse defendants, assume jurisdiction over a case, dismiss the
nondiverse defendants, and thereby retain jurisdiction.” Mayes v.
Rapoport,

198

F.3d

457,

461

(4th

Cir.

1999).

In

order

to

substantiate an allegation of fraudulent joinder, “the removing
party must establish either: [t]hat there is no possibility that
the plaintiff would be able to establish a cause of action against
the in-state defendant in state court; or [t]hat there has been
outright

fraud

in

the

plaintiff’s

2

pleading

of

jurisdictional

Indeed, as the plaintiffs point out, State Auto frequently
files declaratory judgment actions that name both the insured and
the tort claimant as defendants (Dkt. No. 7 at 7).
7

GRAND CHINA, ET AL. v. STATE AUTO, ET AL.

1:16CV159

MEMORANDUM OPINION AND ORDER
DENYING MOTION TO REMAND [DKT. NO. 6]
AND GRANTING MOTION TO REALIGN [DKT. NO. 10]
facts.” Id. at 464 (quoting Marshall v. Manville Sales Corp., 6
F.3d 229, 232-33 (4th Cir. 1993)).
Here, the West Virginia Declaratory Judgment Act requires that
“all persons shall be made parties who have or claim any interest
which would be affected” when declaratory relief is sought. W. Va.
Code § 55-13-11.3 The amount of money Ullom may be able to recover
should he obtain a judgment on his underlying complaint depends in
part on a determination that his alleged injuries are covered by
State Auto. Therefore, Ullom was properly joined in this action,
and no avenue exists under West Virginia law by which Grand China
could have forced him in as a plaintiff. See id. Because Ullom’s
joinder

is

not

“clearly

improper”

in

this

case,

the

Court

“accept[ed] the parties joined on the face of the complaint.”
Hartley, 187 F.3d at 425.
II.

Realignment
In the absence of fraudulent joinder, the question becomes

whether the Court should realign the parties, as State Auto urges,
and retain jurisdiction based on the resulting diversity of the
parties. Grand China, however, strongly contends that realignment
3

The language of this provision has remained unchanged since

1941.
8

GRAND CHINA, ET AL. v. STATE AUTO, ET AL.

1:16CV159

MEMORANDUM OPINION AND ORDER
DENYING MOTION TO REMAND [DKT. NO. 6]
AND GRANTING MOTION TO REALIGN [DKT. NO. 10]
should not be used as a method of conferring removal jurisdiction.
Alternatively, it argues that Ullom’s interests do not necessarily
align with its own.
A.
According to Grand China, because Ullom is a properly joined
defendant, removal is improper under the plain language of §
1441(b)(2), commonly known as the forum defendant rule (Dkt. No. 7
at 8). In addition, it points out that Ullom never consented to
removal, and argues that the removal statute “does not contain any
exception

that

would

permit

realignment

to

occur

before

a

determination of whether consent is necessary.” Id. at 9-16. These
arguments support Grand China’s main contention that realignment is
improper before assessing diversity jurisdiction on removal. These
arguments, however, contradict cases decided both in the Fourth
Circuit and this district.4
The case on which Grand China principally relies, Andalusia
Enterprises, Inc. v. Evanston Insurance Co., 487 F. Supp. 2d 1290
4

For instance, “parties that are aligned in interest with the
plaintiff are not required to join or consent to the removal.”
Herbalife Intern., Inc. v. St. Paul Fire & Marine Ins. Co., No.
5:05cv41, 2006 WL 839515 (N.D.W. Va. Mar. 30, 2006) (not reported)
(citing Smilgin v. N.Y. Life Ins. Co., 854 F. Supp. 464 (S.D. Tex.
1994)).
9

GRAND CHINA, ET AL. v. STATE AUTO, ET AL.

1:16CV159

MEMORANDUM OPINION AND ORDER
DENYING MOTION TO REMAND [DKT. NO. 6]
AND GRANTING MOTION TO REALIGN [DKT. NO. 10]
(N.D. Ala. 2007), was decided by the Northern District of Alabama.
In Andalusia, the plaintiffs (both citizens of Alabama) sought a
declaratory judgment in state court against their non-Alabama
insurance companies and another Alabama citizen (“Lane”), who was
the tort claimant in an underlying state action. Id. at 1292-93.
The district court concluded that Lane had been properly joined as
a defendant pursuant to Alabama’s Declaratory Judgment Act, despite
the fact that the plaintiffs were seeking no relief from him. Id.
The defendant insurance companies moved to realign the parties
after removal, but the district court rejected that argument,
finding

that

the

notice

realignment was being
In

so

doing,

of

removal

contained

no

hint

that

sought.5 Id. at 1295.

the

court

reasoned

that

it

“must

decline

jurisdiction when no jurisdictional basis is affirmatively shown in
the removal papers”; regarding Lane’s necessary joinder, moreover,
it noted that the plain language of § 1441(b) allows removal “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.” Id. Finally, the court “expressed reservations about
5

The present case is distinguishable from Andalusia in that
the notice of removal did contain a request for realignment.
10

GRAND CHINA, ET AL. v. STATE AUTO, ET AL.

1:16CV159

MEMORANDUM OPINION AND ORDER
DENYING MOTION TO REMAND [DKT. NO. 6]
AND GRANTING MOTION TO REALIGN [DKT. NO. 10]
reshuffling the lineup as an avenue to removal jurisdiction,” and
did

not

view

the

interests

of

the

plaintiffs

and

Lane

as

necessarily aligned. Id. at 1297 (“[Lane] may only be angling for
a favorable settlement of the contract claims against him . . . or
he may strategically decide that [the plaintiffs] have deep enough
pockets for him.”).6
According to Grand China, Andalusia is part of an “increasing
trend,” borne out of respect for the limited nature of removal
jurisdiction,

to

avoid

using

realignment

to

confer

diversity

jurisdiction where it would otherwise be lacking (Dkt. No. 7 at
11). In this Court’s view, however, that “increasing trend” is more
accurately

characterized

as

“an

ongoing

debate

among

federal

courts.” Interlachen Props., LLC v. State Auto Ins. Co., 136 F.

6

This case was later relied upon in Wakefield v. Crinnian, 44
F. Supp. 3d 1195 (N.D. Ala. 2014), where the court also was
hesitant to overstep its bounds by realigning parties to create
diversity jurisdiction. However, in light of the Eleventh Circuit’s
holding in City of Vestavia Hills v. General Fidelity Insurance
Co., 676 F.3d 1310 (11th Cir. 2012), it is not apparent that
Andalusia can bear the weight placed upon it by the plaintiffs,
even as persuasive authority. In City of Vestavia Hills, the court
affirmed a district court’s realignment of a removed action at the
defendant’s request, partially in light of the fact that
“realignment would have been available to [the plaintiff] if it had
sought to bring the action in federal court in the first instance.”
Id. at 1314.
11

GRAND CHINA, ET AL. v. STATE AUTO, ET AL.

1:16CV159

MEMORANDUM OPINION AND ORDER
DENYING MOTION TO REMAND [DKT. NO. 6]
AND GRANTING MOTION TO REALIGN [DKT. NO. 10]
Supp. 3d 1061 (D. Minn. 2015). “[T]here is authority supporting
both the proposition that realignment may be used to satisfy
diversity jurisdiction in removed actions and the proposition that
realignment is not appropriate . . . when diversity was not present
when the action was removed.” Hunstman Corp. v. Int’l Risk Ins.
Co., No. 08-1542, 2008 WL 4453170, at *6 (S.D. Tex. Sept. 26,
2008).
Grant China is correct that some courts have held that
fraudulent joinder is the only avenue by which a removing party can
establish diversity jurisdiction; that is, a district court may not
realign parties prior to determining whether it has jurisdiction.7
The reasoning in those cases, however, is grounded in the fact that
“[i]f a defendant can remove, on diversity grounds, a case properly
filed in state court without-at the same time–shouldering (what the
case law describes as) the heavy burden of showing fraudulent

7

See, e.g., Roblez v. Ramos, No. 01-366, 2001 WL 896942 (N.D.
Tex. Aug. 1, 2001) (rejecting the defendant’s request for
realignment in the absence of fraudulent joinder and noting that
fraudulent joinder is the only method by which a defendant can
overrule the plaintiff’s “mostly unlimited” right to choose his
forum); Schwartz v. Liberty Mut. Ins. Co., No. 012049, 2001 WL
1622209 (E.D. Pa. Dec. 18, 2001) (noting that “the proper test when
the plaintiff sues non-diverse defendants is fraudulent joinder,”
not realignment).
12

GRAND CHINA, ET AL. v. STATE AUTO, ET AL.

1:16CV159

MEMORANDUM OPINION AND ORDER
DENYING MOTION TO REMAND [DKT. NO. 6]
AND GRANTING MOTION TO REALIGN [DKT. NO. 10]
joinder,” the balance set by the removal statute will be upset.
Roblez, 2001 WL 896942, at *3.
Other courts have held to the contrary. For instance, in
Interlachen, State Auto undertook the same course of action as it
has here - removing and requesting realignment of the parties to
achieve diversity. Much like the plaintiff in Andalusia, the
plaintiff argued that the court could reach the question of
realignment only if it found that a party had been fraudulently
joined. Interlachen, 136 F. Supp. 3d at 1067-68. After surveying
the disagreement among courts on this issue, the district court
determined that it was not improper to realign parties before
addressing fraudulent joinder and remand. Id. at 1071 (collecting
cases).8

8

The Third, Sixth, and Eleventh Circuits are in agreement
with this approach. City of Vestavia Hills v. Gen. Fidelity Ins.
Co., 676 F.3d 1310, 1314 (11th Cir. 2012) (“[T]he district court
did not err in realigning Cameron as a plaintiff and in refusing to
remand this matter to state court.”); Cleveland Housing Renewal
Project v. Deutsche Bank Trust Co., 621 F.3d 554 (6th Cir. 2010)
(“[W]e hold that the district court properly realigned the City as
a plaintiff and properly held there is complete diversity between
the parties for the purposes of subject matter jurisdiction.”); In
re Tex. E. Transmission Corp. PCB Contamination Ins. Coverage
Litigation, 15 F.3d 1230, 1241 (3d Cir. 1994) (“[W]here party
designations have jurisdictional consequences under the relevant
federal jurisdiction statute . . . or their related removal
provisions, the principle of ‘alignment’ obliges the court to
13

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1:16CV159

MEMORANDUM OPINION AND ORDER
DENYING MOTION TO REMAND [DKT. NO. 6]
AND GRANTING MOTION TO REALIGN [DKT. NO. 10]
District courts around the country, thus, approach this issue
in a way that is far from uniform, and the trend, at least in the
district courts of the Fourth Circuit, is to permit the use of
realignment prior to determining if diversity jurisdiction exists.
In Lott v. Scottsdale Insurance Co., a case from the Eastern
District

of

Virginia,

for

example,

the

plaintiffs

sought

a

declaration that the defendant insured was covered by the defendant
insurer. 811 F. Supp. 2d 1220 (E.D. Va. 2011). The court noted that
“settled authority in this circuit and elsewhere” is that a
defendant may remove a nondiverse case and seek realignment in
order to confer diversity jurisdiction on the district court. Id.
at 1223. In support, it cited a number of cases where courts had
realigned parties after removal to determine whether diversity
jurisdiction existed. Id. n.4 (collecting cases).
In Lott, the district court also noted that, in General
Technology Applications, Inc. v. Exro Ltda., 388 F.3d 114, 120-21
(4th Cir. 2004), the Fourth Circuit had considered and rejected
various party alignments before deciding that the case should be

penetrate the nominal party alignment and to consider the parties’
actual adversity of interest for purposes of determining whether
there is a statutory basis for jurisdiction.”).
14

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1:16CV159

MEMORANDUM OPINION AND ORDER
DENYING MOTION TO REMAND [DKT. NO. 6]
AND GRANTING MOTION TO REALIGN [DKT. NO. 10]
remanded to state court for lack of diversity jurisdiction. 811 F.
Supp. 2d at 1223 n.4. Ultimately, the court retained jurisdiction
after

realigning

the

parties,

reasoning

that

the

defendant

insured’s interest was most closely aligned with the plaintiff’s
interest to obtain a declaration that the insurer has a duty to
defend and indemnify the insured, who may not otherwise have
sufficient funds to cover a judgment. Id. at 1224.
In this district, in Slusarek v. John Riley Co., LLC, Judge
Stamp considered a question similar to the one presented here. No.
5:13cv148, 2014 WL 3824036 (N.D.W. Va. Aug. 4, 2014). There, the
plaintiff tort claimant had filed a declaratory action in the
Circuit Court of Brook County, West Virginia, seeking a declaration
that the alleged tortfeasor was a covered insured under a policy
issued to the tortfeasor’s employer by State Auto. State Auto had
removed the case and sought to realign the alleged tortfeasor as a
plaintiff because of his similar interest in the coverage question.
Id. at *1. Judge Stamp considered the question of realignment
before determining whether jurisdiction existed, and agreed that,
at least for purposes of declaratory relief on the coverage
question, the tortfeasor’s interests were more closely aligned with
those of the plaintiff. Id. at *2; see also Herbalife Intern.,
15

GRAND CHINA, ET AL. v. STATE AUTO, ET AL.

1:16CV159

MEMORANDUM OPINION AND ORDER
DENYING MOTION TO REMAND [DKT. NO. 6]
AND GRANTING MOTION TO REALIGN [DKT. NO. 10]
Inc., 2006 WL 839515 (citing Glenmede Trust Co. v. Dow Chemical
Co., 384 F. Supp. 423, 427 (E.D. Pa. 1974)) (unreported decision
stating that “[w]hen determining whether diversity exists in a
civil action removed from state court, the district court has
discretion

to

realign

the

parties

according

to

their

real

interests”); Oh. Cas. Ins. Co. v. RLI Ins. Co., No. 1:04cv483, 2005
WL 2574150 (M.D.N.C. Oct. 12, 2005) (concluding that the proper
joinder

of

Judgment

a

Act

defendant
did

not

under

the

preclude

North

Carolina

realignment

Declaratory

before

assessing

jurisdiction under § 1441(b)).
This Court also has previously suggested that such an approach
may be appropriate. In Ryan Environmental, Inc. v. Hess Oil Co.,
Inc., after finding no fraudulent joinder, it remanded the case,
but

only

after

determining

that,

under

the

facts

presented,

realignment of the non-diverse forum defendant would be improper.
718 F. Supp. 2d 719 (N.D.W. Va. 2010) (noting that, in addition to
assessing nominal parties, fraudulent joinder, and misjoinder, the
court can realign parties to determine if diversity exists).
Grand China’s contention that realignment in this case is
inconsistent with the forum defendant rule is incorrect. That rule
states only that “[a] civil action otherwise removable solely on
16

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1:16CV159

MEMORANDUM OPINION AND ORDER
DENYING MOTION TO REMAND [DKT. NO. 6]
AND GRANTING MOTION TO REALIGN [DKT. NO. 10]
the basis of the jurisdiction under section 1332(a) of this title
may not be removed if any of the parties in interest properly
joined and served as defendants is a citizen of the State in which
such action is brought.” 28 U.S.C. § 1441(b)(2). Section 1441(a)
provides

removal

jurisdiction

over

any

action

“of

which

the

district courts of the United States have original jurisdiction.”
Id.

§

1441(a).

If

the

Court

may

realign

the

parties

before

assessing diversity under § 1441(a), it makes little sense to
impose a mechanical restriction to that practice based on §
1441(b)(2).
Indeed, “[t]he underlying purpose of diversity of citizenship
legislation . . . is to provide a separate forum for out-of-state
citizens against the prejudices of local courts and local juries by
making available to them the benefits and safeguards of the federal
courts.”

S.

Rep.

No.

85-1830

(1958),

as

reprinted

in

1958

U.S.C.C.A.N. 3099, 3102. Section 1441(b)(2) is consistent with this
policy; if a defendant does not require the protections of a
federal forum against an unfriendly state court, then he need not
seek them.
In the case at bar, however, State Auto has sought such a
forum, relying on the argument that Ullom should not be considered
17

GRAND CHINA, ET AL. v. STATE AUTO, ET AL.

1:16CV159

MEMORANDUM OPINION AND ORDER
DENYING MOTION TO REMAND [DKT. NO. 6]
AND GRANTING MOTION TO REALIGN [DKT. NO. 10]
a defendant. If State Auto, a non-resident, is the only party
“defending” this suit against the interests of two residents, and
the residents’ interests are aligned, § 1441(b)(2) should not bar
State Auto from exercising its privilege to remove, regardless of
whether

West

Virginia

law

permits

Ullom

to

be

joined

as

a

defendant. See Lott, 811 F. Supp. 2d 1220 (realigning parties where
§ 1441(b)(2) would have prevented removal absent realignment);
Slusarik, No. 5:13cv148, 2014 WL 3824036 (same). Indeed, to hold
otherwise would permit state legislatures to craft laws that limit
federal jurisdiction.
B.
When determining whether to realign parties, a court may
consider

two

possible

tests.

These

tests,

the

“substantial

controversy” test and the “principal purpose” test, are both drawn
from the decision of the Supreme Court of the United States in
Indianapolis v. Chase National Bank, 314 U.S. 63 (1941). In U.S.
Fidelity & Guaranty Co. v. A&S Manufacturing Co. Inc., the Fourth
Circuit adopted the “principal purpose” test. 48 F.3d 131 (4th Cir.
1995) (realigning parties so that insurers and insured were on
opposite

sides);

see

also

Builders

Mut.

Ins.

Co.

v.

Dragas

Management Corp., 497 Fed. App’x 313 (4th Cir. 2012) (same). In
18

GRAND CHINA, ET AL. v. STATE AUTO, ET AL.

1:16CV159

MEMORANDUM OPINION AND ORDER
DENYING MOTION TO REMAND [DKT. NO. 6]
AND GRANTING MOTION TO REALIGN [DKT. NO. 10]
fact,

the

Fourth

Circuit

expressly

rejected

the

“substantial

controversy” test, finding it irreconcilable with most of the
opinion in Chase National Bank.9
In

U.S.

Fidelity,

our

circuit

court

observed

that

the

“principal purpose” test is comprised of the following two steps:
First, the court must determine the primary issue in the
controversy. Next, the court should align the parties
according to their positions with respect to the primary
issue. If the alignment differs from that in the
complaint, the court must determine whether complete
diversity continues to exist.

9

Grand China argues that the Court should nonetheless apply
the “substantial controversy” test because U.S. Fidelity did not
distinguish between realignment in cases originally filed in state
court and those originally filed in federal court (Dkt. No. 7 at
17-19). It points out that, in U.S. Fidelity, the realignment
resulted in the dismissal of the case for lack of diversity, which
is consistent with the desire to limit the federal courts’
jurisdiction over removed cases. Id. at 18.
Given the Fourth Circuit’s criticism of the substantial
controversy test in U.S. Fidelity, however, this argument is
unconvincing. According to the court there, “[t]he substantial
controversy test allows parties to easily manipulate diversity
jurisdiction,” thus allowing “diversity jurisdiction in a broad
range of cases, limited only by the creative pleading of the
plaintiff,” while “[t]he principal purpose standard . . . allows
parties to engage a federal forum in a narrower range of
situations.” U.S. Fidelity, 48 F.3d at 133. Although it may operate
to confer jurisdiction in cases such as this case, the Fourth
Circuit has determined that the “principal purpose” test will
properly limit the Court’s jurisdiction as a whole. Notably, this
Court previously applied the “principal purpose” test in Ryan
Envtl., Inc., 718 F. Supp. 2d at 727 (granting motion to remand).
19

GRAND CHINA, ET AL. v. STATE AUTO, ET AL.

1:16CV159

MEMORANDUM OPINION AND ORDER
DENYING MOTION TO REMAND [DKT. NO. 6]
AND GRANTING MOTION TO REALIGN [DKT. NO. 10]
Id. at 133. “The determination of the ‘primary and controlling
matter in dispute’ . . . is to be determined by plaintiff’s
principal purpose in filing the suit.” Palisades, 552 F.3d at 337.
Typically, the interests of the insured and the tort claimant are
aligned when seeking a declaratory judgment regarding coverage. See
Am. Cas. Co. of Reading, Pa. v. Howard, 173 F.2d 924, 926 (4th Cir.
1949). This principle has long been followed by the district courts
in this circuit. See, e.g., Lott, 811 F. Supp. 2d 1220 (collecting
cases); Slusarek, No. 5:13cv148, 2014 WL 3824036.
Here, Grand China argues that realignment is not proper under
the “principal purpose” test because Ullom’s interests are not
necessarily aligned with its own (Dkt. No. 7 at 19-21). It suggests
that, ultimately, it may not need insurance coverage in order to
pay a judgment, or that Ullom, perhaps, may not care about coverage
but simply wish to punish Grand China by making it pay.10 Id. at 2021. These arguments are disingenuous given the representations of
Ullom’s counsel during oral argument, and, for that matter, Ullom’s

10

In support, the plaintiffs cite authority from other
jurisdictions. See Agrella v. Great Am. Ins. Co., No. 99-c-5309,
1999 WL 1101319 (N.D. Ill. Nov. 29, 1999) (declining to realign the
claimants with the insureds in a declaratory judgment action absent
“some showing that [the insureds] were judgment-proof”).
20

GRAND CHINA, ET AL. v. STATE AUTO, ET AL.

1:16CV159

MEMORANDUM OPINION AND ORDER
DENYING MOTION TO REMAND [DKT. NO. 6]
AND GRANTING MOTION TO REALIGN [DKT. NO. 10]
answer to the complaint (Dkt. No. 15), that, in fact, coverage was
appropriate. Even absent such representations, however, the Court
is unconvinced by Grand China’s argument that Ullom’s interests do
not align with its own.
As the cases discussed above note, the interest of insured
parties typically aligns most closely with declaratory plaintiffs
seeking a coverage determination regarding a defendant insurer.
Here, plainly Grand China’s “principal purpose in filing the suit”
is to obtain a declaration that it is covered under the Subject
Policy. It seeks no relief from Ullom, whose monetary interests
only

stand

to

benefit

from

such

a

declaration.

Therefore,

realigning Ullom with the plaintiffs because their interests are
aligned is reasonable and appropriate.
III. Abstention
Grand China further argues that, if the Court finds that
realignment is proper, it should exercise its discretion and remand
the case to state court under the doctrine of abstention (Dkt. No.
7 at 21-23). This argument is unpersuasive.
Under the federal Declaratory Judgment Act, district courts
have discretion to decide whether to hear declaratory judgment
actions. 28 U.S.C. § 2201. Courts should ask two questions when
21

GRAND CHINA, ET AL. v. STATE AUTO, ET AL.

1:16CV159

MEMORANDUM OPINION AND ORDER
DENYING MOTION TO REMAND [DKT. NO. 6]
AND GRANTING MOTION TO REALIGN [DKT. NO. 10]
deciding how to exercise that discretion: “(1) whether the judgment
will ‘serve a useful purpose in clarifying the legal relations in
issue’; or (2) whether the judgment will ‘terminate and afford
relief from the uncertainty, insecurity, and controversy giving
rise to the proceeding.’” White v. Nat’l Union Fire Ins. Co., 913
F.2d 165, 168 (4th Cir. 1990).
Federalism,

efficiency,

and

comity

should

also

inform

a

district court’s decision when related state court proceedings are
pending that “involve[] the same parties and present[] opportunity
for ventilation of the same state law issues.” Penn-America Ins.
Co. v. Coffey, 368 F.3d 409, 412 (4th Cir. 2004). In Coffey, when
determining “whether to proceed with a federal declaratory judgment
action when a parallel state action is pending,” the Fourth Circuit
focused on four factors:
(1) whether the state has a strong interest in having the
issues decided in its courts; (2) whether the state
courts could resolve the issues more efficiently than the
federal courts; (3) whether the presence of “overlapping
issues of fact or law” might create unnecessary
“entanglement” between the state and federal courts; and
(4) whether the federal action is mere “procedural
fencing,” in the sense that the action is merely the
product of forum shopping.
Id.

22

GRAND CHINA, ET AL. v. STATE AUTO, ET AL.

1:16CV159

MEMORANDUM OPINION AND ORDER
DENYING MOTION TO REMAND [DKT. NO. 6]
AND GRANTING MOTION TO REALIGN [DKT. NO. 10]
Grand China argues that courts in West Virginia have a strong
interest in addressing insurance coverage issues (Dkt. No. 7 at
23). They first hypothesize that, if this action is remanded, it
will be consolidated with the underlying state claim because
similar factual issues exist there, and contend this counsels
against the Court becoming entangled with the state court by
hearing “overlapping issues of fact.” Id.

Grand China further

contends that State Auto is clearly engaged in procedural fencing
by trying to have the declaratory action heard in federal court.
Id.
It is well established that a federal court may properly
exercise its discretion to issue a declaratory judgment when it is
apparent that, by doing so, the court will terminate a controversy
such as the one here concerning whether Grand China is covered
under the Subject Policy, and whether State Auto has a duty to
defend Grand China. See White, 913 F.2d at 168. Notably, Ullom also
will be impacted by such a declaration, given that knowledge about
whether insurance is available to pay any judgment surely will
inform his trial strategy. Id.
In

addition,

the

factors

in

Nautilus

Insurance

Co.

v.

Winchester Homes, Inc. counsel against abstention based on the
23

GRAND CHINA, ET AL. v. STATE AUTO, ET AL.

1:16CV159

MEMORANDUM OPINION AND ORDER
DENYING MOTION TO REMAND [DKT. NO. 6]
AND GRANTING MOTION TO REALIGN [DKT. NO. 10]
state proceedings in the underlying complaint. 15 F.3d 371, 377
(4th Cir. 1994).11 First, the mere fact that West Virginia insurance
law applies does not provide a “reason for declining to exercise
federal jurisdiction.” Id. at 378. The issues of insurance law
raised in this case are not “difficult, complex, or unsettled,” as
required for other types of abstention. See id. at 378.
Second, because State Auto is not a party to the state action,
questions related to policy coverage will not be addressed in the
underlying

action.

It

thus

is

not

apparent

that

retaining

jurisdiction will be any less efficient or will cause entanglement
because of “overlapping issues of fact or law.” See Slusarek, 2014
WL 3824036, *4. “[T]he efficiency concern is not present when ‘the
contractual coverage issue will not be decided by the state . . .
case.’” Coffey, 368 F.3d at 414.

11

After the Supreme Court’s decision in Wilton v. Seven Falls
Co., 515 U.S. 277 (1995), “the factors articulated” in Nautilus
“which guide the district court’s exercise of discretion in a
declaratory judgment action remain applicable.” Minn. Lawyers Mut.
Ins. Co. v. Antonelli, Terry, Stout & Kraus, LLP, 355 Fed. App’x
698, 699 n.1 (4th Cir. 2009).
24

GRAND CHINA, ET AL. v. STATE AUTO, ET AL.

1:16CV159

MEMORANDUM OPINION AND ORDER
DENYING MOTION TO REMAND [DKT. NO. 6]
AND GRANTING MOTION TO REALIGN [DKT. NO. 10]
Moreover, this Court’s coverage determination under West
Virginia insurance law will not address factual questions.12 The
Court can consider whether the Subject Policy requires State Auto
to defend and cover Grand China against the allegations in the
underlying complaint based solely on the language of the policy.
Finally, procedural fencing is not in play here. Although
State Auto has sought a federal forum, as is its right under §
1441, this action was removed from state court rather than filed as
a parallel action in a “race for res judicata.” Nautilus, 15 F.3d
at 377. Thus, should the Court retain jurisdiction, “the federal
court proceeding [would] not [be] duplicative; the state court is

12

“[I]ncluded in the consideration of whether [an] insurer has
a duty to defend is whether the allegations in the complaint . . .
are reasonably susceptible of an interpretation that the claim may
be covered by the terms of the insurance polic[y].” Syl. Pt. 3,
Tackett v. Am. Motorists Ins. Co., 584 S.E.2d 158 (W. Va. 2003).
“[A]n insurer has a duty to defend an action against its insured
only if the claim stated in the underlying complaint could, without
amendment, impose liability for risks the policy covers.” State
Auto. Mut. Ins. Co. v. Alpha Eng’g Serv., Inc., 542 S.E.2d 876, 879
(W. Va. 2000) (referred to as the “four corners” rule in W. Va.
Fire & Cas. Co. v. Stanley, 602 S.E.2d 483 (W. Va. 2004)).
“Determination of the proper coverage of an insurance contract
where the facts are not in dispute is a question of law.” Syl. Pt.
4, Moore v. CNA Ins. Co., 599 S.E.2d 709 (W. Va. 2004). “[I]f part
of the claims against an insured fall within the coverage of a
liability insurance policy and part do not, the insurer must defend
all of the claims.” State ex rel. Nationwide Mut. Ins. Co. v.
Wilson, 778 S.E.2d 677 (W. Va. 2015).
25

GRAND CHINA, ET AL. v. STATE AUTO, ET AL.

1:16CV159

MEMORANDUM OPINION AND ORDER
DENYING MOTION TO REMAND [DKT. NO. 6]
AND GRANTING MOTION TO REALIGN [DKT. NO. 10]
addressing only the tort issues and is not addressing insurance
coverage issues.” White, 913 F.2d at 168.
CONCLUSION
For the reasons stated on the record during the scheduling
conference,

and

as

discussed

above,

the

Court

DENIES

the

plaintiffs’ motion to remand (Dkt. No. 6), and GRANTS State Auto’s
motion to realign Ullom as a plaintiff (Dkt. No. 10). Given these
jurisdictional rulings, the Court, for good cause, BIFURCATES the
parties’ dispute regarding insurance coverage from the plaintiff’s
bad faith claims in this case and schedules the following briefing
deadlines:
•

November 8, 2016:

Filing of Dispositive Motions

•

January 6, 2017:

Response to Dispositive Motions

•

January 20, 2017:

Reply to Dispositive Motions

It is so ORDERED.
The Court directs the Clerk to transmit copies of this Order
to counsel of record.
DATED: October 17, 2016.
/s/ Irene M. Keeley
IRENE M. KEELEY
UNITED STATES DISTRICT JUDGE

26