Northwood Children's Home Society, Inc. v. Travelers Companies, Inc., The

Background

Northwood brought the case against insurance companies, seeking a declaration that one or more defendants must provide coverage for a settlement. The settlement resolved a lawsuit by a former resident who alleged that a Northwood employee sexually abused him in the 1960s. The former resident filed that lawsuit after the Minnesota Legislature extended the statute of limitations for otherwise time-barred sexual-abuse claims. Northwood no longer had copies of its decades-old insurance policies.

The defendants removed the case to federal court, invoking diversity jurisdiction. They acknowledged that Travelers was a Minnesota resident for diversity purposes but argued that Northwood had fraudulently joined Travelers to defeat federal jurisdiction. Northwood disputed that argument and moved to remand the case to state court.

Fraudulent-joinder analysis

A defendant is fraudulently joined when there is no reasonable basis to predict that state law might impose liability on that defendant under the alleged facts. The defendants carried the heavy burden of establishing fraudulent joinder, and doubts about federal jurisdiction were resolved in favor of remand.

Under Minnesota law, a corporation that purchases or receives another corporation’s assets generally is not liable for the other corporation’s debts and liabilities. Minnesota law recognizes exceptions, including when the purchaser agrees to assume the debts, the transaction is a merger or consolidation, the purchaser is merely a continuation of the selling corporation, or the transaction was fraudulent and intended to avoid liability.

Northwood alleged that, because of mergers and acquisitions, Travelers was liable for obligations insured before those transactions by Travelers, St. Paul, USF&G, and other current or former Travelers subsidiaries. The defendants submitted more than 200 pages of contracts and described their corporate relationships to argue that Travelers had not assumed the relevant liabilities.

The court declined to rely on those materials for this fraudulent-joinder determination. It explained that the issue was generally resolved from the complaint’s allegations and that successor liability under the Minnesota exceptions was a fact-intensive question unsuitable for resolution at this stage. The court concluded that Northwood plausibly alleged that Travelers could be responsible for the other defendants’ liabilities and that the defendants had not established fraudulent joinder.

Disposition

Judge Paul A. Magnuson granted Plaintiff’s Motion to Remand and remanded the matter to the St. Louis County District Court. The order addressed federal jurisdiction and remand; it did not decide whether the insurers must provide coverage for Northwood’s settlement.