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7th Circuit orders Indiana case sent back to Ohio

May 23, 2013

A federal judge in the Southern District of Indiana erred when she determined that a claims adjuster from Ohio was fraudulently joined to a case that was transferred out of federal court in Ohio to Indiana, the 7th Circuit Court of Appeals ruled. The case also presented two issues of first impression for the Circuit.

In Tommy L. Morris, personal representative of the estate of Thomas Lynn Morris v. Salvatore Nuzzo, 12-3220, the estate of Thomas Lynn Morris filed a lawsuit in Ohio state court against Mid-Century and Salvatore Nuzzo, alleging tortious bad faith failure to pay an insurance claim and breach of contract. Mid-Century was the insurer of the car driven by Daemon Sampson in Brown County, Ind., which was involved in an accident that killed passenger Morris. Nuzzo, a resident of Ohio, was the claims adjustor assigned to handle the estate’s claims. Mid-Century was based out of California.

The lawsuit was removed to federal court in Ohio, which then granted Mid-Century and Nuzzo’s request to transfer the case to federal court in Indiana. There, Judge Sarah Evans Barker ruled that Nuzzo had been fraudulently joined and should be dismissed because under Indiana law, the claims against him were not cognizable and stood no chance of success. Those claims are potentially viable under Ohio law.

“The question before us is whether the district court erred in applying the fraudulent joinder doctrine to Nuzzo, whose presence triggers the forum defendant rule but does not compromise the parties’ complete diversity,” wrote Judge James Zagel, of the U.S. District Court for the Northern District of Illinois, Eastern Division, sitting by designation. “In other words, we are asked to determine whether the fraudulent joinder doctrine creates an exception to the forum defendant rule. It does not appear that any court of appeals has answered this question.”

The 7th Circuit determined that the costs of expanding the doctrine could far outweigh the benefits of policing against what appears to be an exceptionally rare abusive pleading tactic.

“Ultimately, we think it a very close question whether the fraudulent joinder doctrine ought to extend to diverse resident defendants, and we are reluctant to rule definitively on the issue today absent a more thorough and more able presentation of the relevant balance of interests described above. In any event, we are convinced that Nuzzo was not fraudulently joined,” he wrote.

Another issue of first impression arose: whether, or to what extent, a federal court can make choice of law determinations in conducting a fraudulent joinder analysis. The appeals court held that these determinations can be made as part of the fraudulent joinder analysis where the choice of law decision is dispositive to the outcome, and where the removing defendant bears the same “heavy burden” to make the choice of law showing.

“We believe that there was more than a reasonable possibility that the Ohio state court would have decided against Nuzzo and applied Ohio law to the Estate’s bad faith failure to settle claim. Thus, regardless of what law the Ohio state court would have ultimately applied to the breach of contract claim, Nuzzo was not fraudulently joined and his presence prevented removal under 28 U.S.C. § 1441(b)(2). Because the Estate timely objected to this procedural defect in removal, it has a right to remand,” Zagel wrote.
 

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