De Laveaga Service Center, Inc. v. Nationwide Insurance Company

Background

De Laveaga Service Center, Inc. alleged that it had an insurance contract with Nationwide Insurance Company and AMCO Insurance Company providing up to $1 million in coverage for losses involving its auto repair business. After a fire destroyed much of the business on October 21, 2018, the plaintiff sought insurance benefits. The plaintiff alleged that the insurers initially made some payments, later stopped payments after Stephen Rothhammer was assigned to the claim, and eventually paid only part of the benefits.

The plaintiff filed the original lawsuit in Santa Cruz County Superior Court against Nationwide, AMCO, and Rothhammer. The complaint asserted claims for breach of the implied covenant of good faith and fair dealing, intentional infliction of emotional distress, and “malice.” Nationwide and AMCO removed the case to federal court. The plaintiff then moved to remand, meaning to return the case to state court.

The Parties’ Positions

The parties did not dispute that De Laveaga Service Center and Rothhammer were citizens of California, while Nationwide was a citizen of Ohio and AMCO was a citizen of Iowa. The plaintiff argued that Rothhammer’s California citizenship defeated complete diversity, a jurisdictional rule requiring the opposing parties to be citizens of different states. Nationwide and AMCO argued that Rothhammer was fraudulently joined, meaning that the plaintiff had no possible viable claim against him and his citizenship should therefore be disregarded.

Court’s Analysis

The court explained that defendants asserting fraudulent joinder face a heavy burden. They had to show that Rothhammer could not be liable under any theory fairly covered by the complaint and that the plaintiff could not possibly establish a claim against him in state court, including through an allowable amendment. Any disputed factual questions had to be resolved in the plaintiff’s favor.

The court nevertheless concluded that the claims against Rothhammer arose from actions he allegedly took within the scope of his role as an insurance adjuster for Nationwide and AMCO. Under the principal-agent rule discussed by the court, an agent generally is not independently liable to an insured for actions taken within the scope of the agent’s employment.

The plaintiff argued that Rothhammer could be liable under a conspiracy theory. The court rejected that argument for two reasons. First, the complaint did not allege that Rothhammer acted for his own personal advantage or had a personal interest in the insurance payments. Second, the complaint did not allege that the insurers and Rothhammer conspired with a separate third-party entity, which the court identified as relevant to the cited exception involving insurance-related conspiracies.

The court also concluded that amendment could not cure the problem. The complaint expressly alleged that Rothhammer was acting within the course and scope of his agency. The court determined that allegations placing his conduct outside that scope would contradict the earlier pleading and therefore would not be permissible amendments.

Ruling

The court held that Rothhammer was fraudulently joined and that his California citizenship should be disregarded for diversity-jurisdiction purposes. With his citizenship disregarded, the court found complete diversity and determined that removal was proper.

Judge Beth Labson Freeman denied De Laveaga Service Center’s Motion to Remand.