SBI Builders, Inc. v. Liberty Mutual Insurance Company

Background

Livermore Multifamily Owner, LLC entered into a project to construct a multi-residential building. After the original contractor failed to complete the project, Liberty Mutual Insurance Company, acting as a surety and under a takeover agreement with Livermore, sought a replacement contractor. In February 2022, Liberty Mutual and SBI Builders, Inc. entered into a completion agreement. SBI agreed to complete the project and repair defective work resulting from the first contractor.

SBI alleged that it submitted change orders for repair work and additional work requested by Liberty Mutual, but Liberty Mutual ultimately refused to approve the change orders or pay SBI in full. SBI recorded a mechanics lien for $9,016,225.33 against Liberty Mutual and Livermore. Livermore and Ohio Casualty Insurance Company later posted a bond to release the lien.

SBI sued Liberty Mutual, Livermore, and Ohio Casualty in California Superior Court. Its claims were for breach of contract and common counts against Liberty Mutual, quantum meruit against Liberty Mutual and Livermore, and foreclosure of the mechanics-lien release bond against Ohio Casualty. Quantum meruit is a claim seeking the reasonable value of services provided when necessary to prevent unjust enrichment, generally where there is no contract with the defendant.

Liberty Mutual, joined by Ohio Casualty and Livermore, removed the case to federal court based on diversity jurisdiction. The defendants acknowledged that Livermore had members domiciled in California and that SBI was incorporated and had its principal place of business in California. They argued that Livermore’s citizenship should be disregarded because Livermore had been fraudulently joined. Livermore separately moved to dismiss SBI’s quantum meruit claim against it.

Remand Decision

Federal diversity jurisdiction generally requires every plaintiff to have different citizenship from every defendant. A court may disregard a non-diverse defendant’s citizenship if that defendant was fraudulently joined. The party asserting fraudulent joinder bears a heavy burden and must show either actual fraud in the jurisdictional allegations or that the plaintiff cannot possibly establish a claim against the non-diverse defendant under settled state-law rules.

The court held that Livermore was not fraudulently joined. At the remand stage, the question was not whether SBI had already proved its claim or met the ordinary federal pleading standard. The question was whether a California state court could possibly find that SBI stated a claim against Livermore. The court concluded that possibility existed because SBI performed construction work that arguably benefited Livermore, the originator of the construction project. The court also explained that any pleading deficiency could possibly be corrected if the state court allowed SBI to amend its complaint.

Because Livermore was not fraudulently joined, the court considered Livermore’s California citizenship. Livermore had members domiciled in California, and SBI was also a California citizen. The court therefore concluded that complete diversity was absent and that it lacked subject-matter jurisdiction over the removed case.

Ruling

The court granted SBI’s motion to remand. It remanded the action to the Superior Court of the State of California, County of Alameda. The court denied Livermore’s motion to dismiss as moot, so it did not decide that motion after determining that the case had to return to state court.