2386 Hempstead, Inc. v. WFG National Title Insurance Company

Background

2386 Hempstead, Inc. loaned a nonparty $1.4 million in 2015 and an additional $300,000 in 2016, receiving mortgages on the nonparty’s property. WFG National Title Insurance Company issued a title-insurance policy in connection with the consolidated loan, and Charter Land Services and General Abstract Services, LLC conducted a title search.

The borrower later defaulted and filed for bankruptcy. A bankruptcy trustee discovered that the borrower’s corporate form had been dissolved before the loans were made and began proceedings asserting that the loans were unsecured. According to the amended complaint, 2386 Hempstead ultimately received $2.1 million in settlement proceeds, less than it claims it would have received if the mortgages had been valid. It sued WFG in New York state court for declaratory relief and breach of contract based on the alleged title defect.

WFG removed the case to federal court based on diversity jurisdiction. 2386 Hempstead then filed an amended complaint adding the two title agents, which the opinion states are New York citizens and therefore nondiverse to 2386 Hempstead. 2386 Hempstead moved to remand under 28 U.S.C. § 1447(e), the statute governing a plaintiff’s addition after removal of defendants whose joinder would eliminate federal subject-matter jurisdiction.

Parties’ Positions

The parties agreed that the original removal was proper: 2386 Hempstead and WFG were completely diverse, and the amount in controversy exceeded $75,000. They disagreed about whether the post-removal joinder of the title agents should be permitted.

2386 Hempstead argued that the title agents were at least partly responsible for the alleged defective title search and for delay in notifying WFG about the title problem. WFG argued that the joinder was fraudulent because 2386 Hempstead waited until after removal to add the title agents, the claims against them were frivolous, and no possible contract claim could be stated against them.

Legal Standard

The court explained that post-removal joinder of nondiverse defendants is governed by Section 1447(e), rather than directly by the fraudulent-joinder doctrine. The court first considered whether joinder was permissible under Federal Rule of Civil Procedure 20(a)(2). That rule allows multiple defendants to be joined when the claims arise from the same transaction or series of transactions and involve common questions of law or fact.

If Rule 20 permits joinder, the court then weighs fairness, including delay, prejudice to the existing defendant, the possibility of multiple lawsuits, and the plaintiff’s motivation. A defendant asserting fraudulent joinder must show by clear and convincing evidence that there is no possibility, based on the pleadings, that the plaintiff could state a claim against the nondiverse defendant under state law. The court emphasized that this is less demanding than deciding whether the complaint would survive a motion to dismiss.

Analysis

The court found that the claims against the title agents and WFG arose at least partly from the same title-insurance policy and the same factual circumstances, including the alleged defective title search and the alleged delay in responding to the policy claim. The court therefore found joinder permissible under Rule 20(a)(2).

The court found no meaningful delay because 2386 Hempstead filed the amended complaint nine days after removal and moved to remand four days later. It also found no meaningful prejudice to WFG because the case was still at an early stage, with no discovery or motion practice other than the remand motion. The court further concluded that denying joinder could lead to parallel state and federal lawsuits.

The court considered the timing of the amendment suspicious because 2386 Hempstead appeared to have known about the title agents’ possible involvement before filing the original state-court complaint. But the court determined that WFG had not met its burden of proving that no possible claim could be brought against the title agents.

Regarding the alleged negligent title search, the court stated that New York law generally does not allow a negligence claim based on a title search under a title-insurance policy. However, the record did not definitively establish whether a separate certificate-of-title agreement existed or whether such a certificate had merged into the policy. The court therefore could not rule out the possibility of a claim against the title agents based on a separate contractual relationship or certificate of title.

Regarding the alleged failure to notify WFG, the court observed that the policy primarily described rights and obligations between 2386 Hempstead and WFG and did not clearly impose liability on the title agents. Still, the court could not definitively determine that the title agents had not assumed contractual obligations, acted as WFG’s agents, or modified or waived relevant policy provisions through their conduct. The court therefore concluded that WFG had not shown that the notice-related claim was legally or factually impossible.

Disposition

The court concluded that, although the timing of the amendment raised concerns, the other fairness factors favored joinder and remand, and the record did not show that 2386 Hempstead added the title agents solely to defeat diversity jurisdiction. Judge Katherine Polk Failla granted 2386 Hempstead’s motion to remand and directed the Clerk of Court to remand the case to the New York State Supreme Court, New York County. The opinion did not decide the underlying title-insurance or breach-of-contract claims.