Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_15-cv-00449/USCOURTS-caed-2_15-cv-00449-6/pdf.json

Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 28:1441 Petition for Removal- Insurance Contract

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UNITED STATES DISTRICT COURT 

EASTERN DISTRICT OF CALIFORNIA 

TRES CRUZES LAND & CATTLE, 

LLC, a California limited liability 

company, 

Plaintiff, 

v. 

SCOTTSDALE INSURANCE 

COMPANY, A SUBSIDIARY OF 

NATIONWIDE INSURANCE 

COMPANY, an Ohio corporation; 

GARY HERD, an individual; NANCY 

HERD, an individual; and DOES 1-30, 

inclusive, 

Defendants. 

_______________________________ 

JOHN W. BUSBY II, TRUSTEE OF 

THE EDWARD PESTANA TRUST, an 

individual, 

 Plaintiff, 

 v. 

SCOTTSDALE INSURANCE 

COMPANY, A SUBSIDIARY OF 

NATIONWIDE INSURANCE 

COMPANY, an Ohio corporation; 

GARY HERD, an individual; NANCY 

HERD, an individual; and DOES 1-30, 

inclusive, 

 Defendants. ______________________________

Case No.: 2:15-cv-00449-MCE-DAD

(As Consolidated) 

Case No.: 2:15-cv-00764-MCE-DAD 

(Associated Case ) 

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On February 5, 2015, Plaintiff Tres Cruzes Land and Cattle LLC (“Tres Cruzes”), 

a California limited liability company, filed a complaint in the Superior Court of the State 

of California, County of San Joaquin, seeking damages from its liability insurance carrier, 

Defendant Scottsdale Insurance Company (“Scottsdale”) for breach of contract and 

breach of the covenant of good faith and fair dealing. According to Tres Cruzes, 

Scottsdale wrongfully failed to provide indemnification under its policy for fire losses to 

property owned by Tres Cruzes in Woodbridge, California. In addition to Scottsdale, 

Plaintiff named Gary Herd and Nancy Herd (“the Herds”), who held the first mortgage on 

the property where the fire occurred, as Defendants but asserted only a single cause of 

action for declaratory relief against the Herds. Although Scottsdale is alleged to be a 

citizen of Ohio and Arizona, the diversity of citizenship which would otherwise exist 

between Scottsdale and Tres Cruzes was arguably defeated by the inclusion of the 

Herds who are California residents. On February 26, 2015, Scottsdale nonetheless 

removed the lawsuit to this Court on diversity grounds, contending that the Herds were 

fraudulently joined and that consequently their citizenship should be disregarded for 

diversity purposes. That case was docketed as Case No. 2:15-cv-00449-MCE-DAD. 

Counsel for Tres Cruzes filed a second action against Scottsdale in state court on 

January 14, 2015, this time on behalf of John W. Busby II, Trustee of the Edward 

Pestana Trust (“Trustee”). The Trustee is listed along with the Herds as a loss payee 

under the Scottsdale policy. His case, commenced in the Superior Court of the State of 

California, County of Alameda, also sought damages on theories of breach of contract 

and breach of the covenant of good faith and fair dealing. Although initially instituted 

against Scottsdale alone, on February 6, 2015, the day after counsel filed its San 

Joaquin County suit on behalf of Tres Cruzes, a First Amended Complaint was filed in 

the Alameda County action which asserted a declaratory relief claim against the Herds. 

Once the Herds were joined as defendants, Scottsdale removed the Trustee’s lawsuit to 

the Northern District of California on February 26, 2015, the same day it removed the 

San Joaquin County action brought by Tres Cruzes to this Court. On April 7, 2015, 

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pursuant to stipulation, the parties agreed to transfer venue of the Trustee’s lawsuit to 

this Court, where it was assigned Case No. 2:15-cv-00764-GEB-DAD. Pursuant to a 

notice that the Trustee’s action was related to the Tres Cruzes action already pending 

before the undersigned, a related case order was signed on May 8, 2015, and the 

Trustee’s action was redenominated as Case No. 2:15-cv-00764-MCE-DAD. Then, by 

Stipulation and Order dated May 19, 2015, both the Tres Cruzes and Trustee lawsuits 

were consolidated for all purposes, including trial, under Case No.2:15-cv-00449-MCEDAD. 

Two motions for remand are now before the Court. The first was filed on behalf of 

Tres Cruzes on March 27, 2015, before the above-enumerated cases were consolidated. 

That motion, scheduled for hearing on May 14, 2015, was submitted in accordance with 

Eastern District Local Rule 230(g) on May 12, 2015. Then, on June 16, 2015, after the 

Trustee’s action was transferred to this District, counsel renoticed a motion to remand 

previously filed in the Northern District for hearing on August 6, 2015. That motion, 

virtually identical to its predecessor in Tres Cruzes, was also submitted on the papers on 

July 31, 2015. For the reasons set forth below, both Motions are DENIED.1

BACKGROUND 

On or about July 30, 2013, Scottsdale issued a commercial property policy of 

insurance covering property owned by Tres Cruzes and located at 18938 East Highway 

88 in Clements, County of San Joaquin, California (the “Covered Property”). The 

Covered Property included apartments, along with a restaurant known as La Strada 88. 

Under the terms of the policy, Scottsdale undertook to insure the Covered Property for 

direct physical loss or damage. 

/// 

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 Having determined that oral argument was not of material assistance, the Court ordered this 

matter submitted on the briefs pursuant to Local Rule 230(g). 

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On September 8, 2014, a fire occurred which resulted in fire, smoke, water and 

other damage to the Covered Property. On or about December 18, 2014, Tres Cruzes 

submitted a sworn statement in proof of partial undisputed loss to the building alone that 

amounted to more than $3,000,000. Tres Cruzes alleges that Scottsdale has failed to 

timely pay in accordance with its policy and claims that Scottsdale’s dilatory conduct 

allowed the subject property to further decay and be exposed to the elements for more 

than six months. In addition, the Trustee claims he made a claim under the Loss 

Payable Provisions Endorsement of the policy in the amount of $454,484.18, which 

Trustee claims represented the outstanding sum under its installment note dated 

October 25, 2012, as secured by a deed of trust on the Covered Property. The Trustee 

also contends that payment for his claim was not timely made by Scottsdale. 

According to Tres Cruzes, in mid-January of 2015, it learned that the Herds, who 

held the first mortgage on the property, had initiated foreclosure proceedings. This 

followed the filing of a lawsuit by Tres Cruzes against the Herds on September 19, 2014, 

less than two weeks after the fire. In that action, filed in San Joaquin County Superior 

Court, Tres Cruzes sought money damages against the Herds for intentional and 

negligent misrepresentation, as well as for injunctive and declaratory relief.2

 Tres 

Cruzes claims that the loan agreement it entered into with the Herds contained usurious 

terms, including charges, fees, interest and other expenses. That lawsuit remains 

pending in state court. 

On January 14, 2015, Tres Cruzes filed its “bad faith” lawsuit against Scottsdale, 

seeking damages for breach of contract and breach of the covenant of good faith and 

fair dealing. Then, less than a month later, the Trustee filed a similar lawsuit. Both 

actions were ultimately removed to this Court on diversity of citizenship grounds despite 

their inclusion of the Herds (who, like Trustee and Tres Cruzes, are California residents) 

 2

 Tres Cruzes requests that the Court take judicial notice of documents filed in that action pursuant 

to Federal Rule of Evidence 201. That request is unopposed and is granted. Additionally, the Court 

further notes that Scottsdale has also asked the Court to judicially notice portions of the insurance policy at 

issue. That request is also unopposed and is granted. 

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as Defendants. Through the motions for remand now before the Court, Scottsdale 

claims that the Herds are sham defendants whose residency should not be considered 

for diversity purposes. Tres Cruzes and the Trustee oppose those motions on grounds 

that the Herds’ inclusion as defendants is proper and therefore defeats diversity. 

STANDARD 

When a case “of which the district courts of the United States have original 

jurisdiction” is initially brought in state court, the defendant may remove it to federal court 

“embracing the place where such action is pending.” 28 U.S.C. § 1441(a). Diversity 

jurisdiction under 28 U.S.C. § 1332 is one of two recognized grounds for such removal. 

A district court has diversity jurisdiction “where the matter in controversy exceeds the 

sum or value of $75,000, . . . and is between citizens of different states, or citizens of a 

State and citizens or subjects of a foreign state . . . .” Id. at § 1332(a)(1)-(2). 

A defendant may remove any civil action from state court to federal district court if 

the district court has original jurisdiction over the matter. 28 U.S.C. § 1441(a). “The 

party invoking the removal statute bears the burden of establishing federal jurisdiction.” 

Ethridge v. Harbor House Rest., 861 F.2d 1389, 1393 (9th Cir. 1988) (citing Williams v. 

Caterpillar Tractor Co., 786 F.2d 928, 940 (9th Cir. 1986)). Courts “strictly construe the 

removal statute against removal jurisdiction.” Gaus v. Miles, Inc., 980 F.2d 564, 566 (9th 

Cir. 1992) (internal citations omitted). “[I]f there is any doubt as to the right of removal in 

the first instance,” the motion for remand must be granted. Id. Therefore, “[i]f at any 

time before final judgment it appears that the district court lacks subject matter 

jurisdiction, the case shall be remanded” to state court. 28 U.S.C. § 1447(c). 

Despite this presumption against the propriety of jurisdiction, courts must 

nonetheless look beyond the labels in the complaint and realign the parties according to 

their real interests. See Scotts Co. LLC v. Seeds, Inc., 688 F.3d 1154, 1157 (9th Cir. 

2012) (a court is not bound by plaintiff’s alignment of the parties; parties are aligned 

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based on whether their interests coincide as to the “primary matter in dispute”); In re 

Digimarc Corp. Derivative Litig., 549 F.3d 1223, 1234 (9th Cir. 2008) (“Although the 

plaintiff is generally the master of his complaint, diversity jurisdiction cannot be conferred 

by the parties’ own determination of who are plaintiffs and who defendants”; instead, a 

court must realign parties in order to safeguard against “artful pleading” and ensure an 

actual “collision of interest” as to the “principal purpose of the suit”); Dolch v. United Cal. 

Bank, 702 F.2d 178, 181 (9th Cir. 1983) (“The courts, not the parties, are responsible for 

aligning the parties according to their interests in the litigation.”). Consequently, “[c]ourts 

may realign parties, according to their ultimate interests, whether the realignment has 

the effect of conferring or denying subject matter jurisdiction on the court.” Smith v. 

Salish Kootenai Coll., 434 F.3d 1127, 1133 (9th Cir. 2006); see also Dolch, 702 F.2d at 

181 (“”If the interests of a party named as a defendant coincide with those of the plaintiff 

in relation to the purpose of the lawsuit, the named defendant must be realigned as a 

plaintiff for jurisdictional purposes . . . Realignment may be required even if a diversity of 

interests exists on other issues.”). 

The court’s ability to realign the parties in this regard means that “a plaintiff may 

not keep a case out of federal court by fraudulently naming a nondiverse defendant.” 

Mississippi ex rel. Hood v. AU Optronics Corp., 134 S. Ct. 736, 745 (2014). Instead, as 

the Ninth Circuit has repeatedly recognized, a defendant may remove a civil action 

against a resident defendant when the plaintiff has no basis for suing that defendant. 

See, e.g., Hamilton Materials Inc. v. Dow Chem. Corp., 494 F.3d 1203, 1206 (9th Cir. 

2007) (a non-diverse defendant may be disregarded for purposes of determining 

complete diversity if that defendant was fraudulently joined). Like the presumption 

against removal jurisdiction in the first instance, the burden of proof for a defendant 

claiming fraudulent joinder is a heavy one. Davis v. Prentiss Properties Ltd., Inc., 66 F. 

Supp. 2d 1112, 1113 (C.D. Cal. 1999). “Fraudulent joinder” is nevertheless a “term of 

art” and has nothing to do with the “mental state” of the plaintiff. Id. at 1114. If the 

plaintiff’s particular lawsuit states no colorable legal claim against the resident defendant, 

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the actual motive for joining the defendant is immaterial. See Albi v. Street & Smith 

Publications, 140 F.2d 310, 312 (9th Cir. 1944). 

With these guiding principles in mind, the Court now turns to the merits’ of the 

parties’ respective arguments as to the propriety of jurisdiction here and whether remand 

back to state court is proper. 

ANALYSIS 

Both Tres Cruzes and the Trustee insist that the Herds are indispensable parties 

in this litigation because there remains an “actual controversy” between the parties. Tres 

Cruzes cites its usury lawsuit against the Herds as support for the proposition that it “has 

interests that are antagonistic to the Herds.” Tres Cruzes Mot., 9:22-23. Similarly, the 

Trustee claims that its interests conflict with the Herds because any foreclosure sale 

instituted by the Herds “would have wiped out TRUSTEE’s security interest altogether.” 

Trustee’s Mot., 9:3-5, 10:4-6. 

The fact that these conflicts exist, however, does not mean that the Herds are 

properly aligned with Scottsdale in this particular litigation. The present lawsuit is 

fundamentally one against Scottsdale for damages occasioned by its delay in paying 

sums due under its policy for losses sustained by the Covered Property. Indeed, 

examination of both the Tres Cruzes and Trustee lawsuits shows that Plaintiffs seek no 

affirmative relief from the Herds in either instance. Tres Cruzes seeks only a “judgment 

of declaratory relief” as to the amount of POLICY proceeds, if any, to which GARY 

HERD and NANCY HERD are entitled...” Tres Cruzes Compl., ECF No. 1, Prayer for 

Relief, ¶ 4. Similarly, the TRUSTEE seeks only a “judgment of declaratory relief that 

SCOTTSDALE must pay TRUSTEE the amounts due under the POLICY...” Trustee 

Compl., Case No. 15-cv-00764-MCE-DAD, ECF No. 1, Prayer for Relief, ¶ 3.3

 

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 In addition, according to the uncontroverted Declaration of Sonia Martin, counsel for Scottsdale, 

attorney Ralph Zappala, who represents both Tres Cruzes and the Trustee in these consolidated 

proceedings, confirmed that his clients’ only claims against the Herds pertain to the apportionment of 

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As the Ninth Circuit made clear in Scotts, courts are not bound by a plaintiff’s 

alignment of the parties, and repositioning in accord with litigants’ real interests is proper 

based on whether such interests “coincide as to the primary matter in dispute.” Scotts 

Co. LLC v. Seeds, Inc., 688 F.3d at 1157. The Circuit has made it equally clear that the 

courts, not the parties, are responsible for realignment as necessary to safeguard 

against “artful pleading” in contravention of the “principal purpose of the suit.” In re 

Digimarc Corp. Derivative LItig., 549 F.3d at 1234; Dolch v. United Cal. Bank, 702 F.2d 

at 181. 

Applying the “principal purpose” test approved by the Ninth Circuit makes it clear 

that the primary dispute in both the Tres Cruzes and Trustee lawsuits is to obtain 

proceeds payable under the Scottsdale policy as well as damages flowing from 

Scottsdale’s failure to pay such damages sooner. The Herds share the same interests in 

that regard since they too are looking to assert their loss payee rights as holders of the 

first mortgage against the Scottsdale proceeds. The fact that the Tres Cruzes and the 

Herds are involved in another lawsuit with respect to the terms of the underlying loan 

does not alter the fact that they share the same interests here in seeking to maximize 

recovery against Scottsdale. Additionally, with regard to the Trustee’s action, whether or 

not the Herd’s intended foreclosure could eliminate the Trustee’s inferior mortgage 

position in its entirety does not alter the fact that as to any recovery against Scottsdale, 

the interests of the Trustee and the Herds coincide as to obtaining damages against 

Scottsdale. 

In U.S. Fidelity and Guar. Co. (“USF&G”) v. A & S Mfg. Co., 48 F.3d 131 (4th Cir. 

1995), the Fourth Circuit applied the same “principal purpose” test adopted by the Ninth 

Circuit in determining whether the realignment of the parties was necessary. Id. at 134. 

In that case, the insured, A & S, submitted demands to three different insurers for 

defense and indemnity in a suit regarding contamination at A & S manufacturing 

 

insurance proceeds under the Scottsdale policy, with no other damages or injunctive relief from the Herds 

being sought. 

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facilities. One of the insurers, USF&G, filed a declaratory relief action against the 

insured and the two other carriers in order to determine the parties’ coverage obligations. 

The Fourth Circuit realigned the parties, reasoning that any dispute between the insurers 

was secondary to the primary issue of their liability to A & S as the insured. Id. 

Consequently, the court realigned all the insurers as plaintiffs in seeking a determination 

of coverage, with the insured on the other side as a defendant. This rationale applies 

equally here, where all the potential beneficiaries of the Scottsdale policy belong in one 

camp, with Scottsdale in opposition. 

At most, any conflict between the Herds, the Trustee and Tres Cruzes revolves 

around how the insurance should be divided. The USF&G court, however, rejected any 

contention that such apportionment questions make the parties adverse. See id. at 134 

(“any disputes existing among the insurers are ancillary to the primary issue of the duty 

to indemnify”); see also Eikel v. States Marine Lines, Inc., 473 F.2d 959, 964-65 (5th Cir. 

1973) (how monies should be divided does not eliminate the primary cause of action for 

such monies in the first place). Under that logic, which this Court finds persuasive, 

Scottsdale properly disregarded the citizenship of Gary Herd and Nancy Herd for 

purposes of determining that complete diversity existed between the plaintiffs in both the 

Tres Cruzes and Trustee actions, and Scottsdale as the responding party in those 

lawsuits. Therefore, the Motions to Remand both fail since the Court finds diversity of 

citizenship to be present. 

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/// 

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CONCLUSION 

For the reasons just stated, the Motions to Remand filed on behalf of Tres Cruzes 

(ECF No. 14) and the Trustee (ECF No. 42) are DENIED. 

IT IS SO ORDERED. 

Dated: November 9, 2015 

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