Nido v. Nationwide Mutual Insurance Company

Background

Virginia Nido and Rita Romeu owned property in Sonoma County insured under a Nationwide homeowners policy. The policy provided fire coverage, including up to $1 million for repairing or replacing the dwelling through a replacement-cost endorsement. After October 2017 fires destroyed the dwelling and personal property, the plaintiffs submitted a claim to Nationwide. Nationwide assigned Joseph Poyaoan to handle the claim.

The plaintiffs alleged that Poyaoan said Stately Construction’s proposed rebuilding price was reasonable and that there would be “no problem” approving the contract. Relying on those statements, they signed the construction contract and began rebuilding. Nationwide later obtained a consultant’s report stating that the reasonable rebuilding cost was nearly $600,000 less than the previously approved price and refused to issue additional payments. The plaintiffs alleged that they had already paid more than $140,000 themselves and would need to pay more than $600,000 in the future.

The plaintiffs filed suit in California Superior Court, alleging breach of contract, breach of the implied covenant of good faith and fair dealing, and negligent misrepresentation. Nationwide removed the case to federal court based on diversity jurisdiction. The plaintiffs moved to remand the case to state court and requested attorney’s fees and costs. The defendants moved to dismiss the negligent-misrepresentation claim against Poyaoan.

Remand and fraudulent joinder

Federal diversity jurisdiction generally requires complete diversity, meaning that no plaintiff may share state citizenship with any defendant. The defendants acknowledged that Poyaoan was a California citizen but argued that he had been fraudulently joined. A defendant is fraudulently joined when it is obvious under settled state law that the plaintiff cannot state a claim against that defendant. The removing defendants bear a heavy burden and must establish fraudulent joinder by clear and convincing evidence.

The court held that the fraudulent-joinder inquiry was not the same as deciding whether the claim would ultimately survive a motion to dismiss. The court had to consider whether the plaintiffs might possibly recover against Poyaoan and whether any pleading defect could be corrected by amendment.

The defendants argued that Poyaoan could not be personally liable for conduct within his employment, that his statements were too vague, that his statements concerned future conduct, and that the plaintiffs did not satisfy the heightened pleading requirements for claims involving fraud. The court rejected these arguments for purposes of determining fraudulent joinder.

First, the court relied on California authority holding that an insurance claims adjuster can potentially be liable for negligent misrepresentation. That authority meant it was not obvious under settled California law that the plaintiffs could not state such a claim against Poyaoan. Second, the allegations that the contract price was reasonable and that approval would pose “no problem” could be understood as factual assertions that Nationwide would approve the contract and reimburse the plaintiffs. Third, although the defendants’ argument that the statements predicted future conduct had merit, California authority allowed the statements to be interpreted as a representation that Nationwide had approved, or would approve, the nearly finalized contract. Finally, even assuming the complaint failed to meet the heightened pleading standard, the defendants had not shown that amendment would be futile. The court therefore held that Poyaoan was a proper defendant.

Because Poyaoan was a proper defendant, complete diversity was absent. The court consequently held that it lacked subject-matter jurisdiction and granted the plaintiffs’ motion to remand.

Attorney’s fees and costs

The plaintiffs also sought attorney’s fees and costs resulting from the removal. The court declined to award them. Although the defendants’ arguments were unsuccessful, the court found no evidence that the arguments were entirely frivolous and concluded that the plaintiffs had not shown the level of bad faith that would justify an award.

Disposition

The court granted the plaintiffs’ motion to remand and remanded the case to California Superior Court for the County of Santa Clara. It denied the plaintiffs’ request for attorney’s fees and costs. Because the court lacked subject-matter jurisdiction, it denied the defendants’ motion to dismiss the negligent-misrepresentation claim against Poyaoan as moot. The clerk was directed to close the file.