Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-5_04-cv-03615/USCOURTS-cand-5_04-cv-03615-0/pdf.json

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

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ORDER GRANTING MOTION TO REMAND CASE TO STATE COURT, DENYING MOTION TO SEVER, AND DENYING

MOTION FOR ATTORNEY'S FEES—C-04-03615 RMW

DOH

E-FILED on 7/25/05

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

SAN JOSE DIVISION

HVAC SALES, INC., ADVANCED

MICROTHERM, INC. AND JOHN

KARAMANOS,

Plaintiffs,

v.

ZURICH AMERICAN INSURANCE GROUP,

MARYLAND CASUALTY COMPANY,

ZURICH AMERICAN INSURANCE

COMPANY, LAWSON-HAWKS

INSURANCE ASSOCIATION, CRAIG

PAPPAS, AND DOES 1 through 50, inclusive,

Defendants.

No. C-04-03615 RMW

ORDER GRANTING MOTION TO REMAND

CASE TO STATE COURT, DENYING

MOTION TO SEVER, AND DENYING

MOTION FOR ATTORNEY'S FEES

[Re Docket Nos. 21, 23, 24, 29]

JOHN KARAMANOS,

Cross-Complainant,

v.

AMCO INSURANCE COMPANY,

AMERICAN ECONOMY INSURANCE

COMPANY, and DOES 51 through 100,

inclusive,

Counterdefendants.

Case 5:04-cv-03615-RMW Document 49 Filed 07/25/05 Page 1 of 14
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1 Zurich and Maryland style their motion as one to "remand and dismiss." Zurich and

Maryland apparently believe that the court must dismiss the action after remanding it. Yet the court could

not do so: after remanding the case, the court would have nothing to dismiss. See, e.g., Seedman v. U.S.

Dist. Court for Cent. D. of Cal., 837 F.2d 413, 414 (9th Cir. 1988) ("[o]nce a district court certifies a

remand order to state court it is divested of jurisdiction and can take no further action on the case"); Mirto

v. Amerian Intern. Group, Inc., 2005 WL 827093, *3 (N.D. Cal. 2005) (distinguishing between remand

and dismissal). 

2 The case has since been removed to federal court.

3 Price did not name AMT as a cross-defendant. 

ORDER GRANTING MOTION TO REMAND CASE TO STATE COURT, DENYING MOTION TO SEVER, AND DENYING

MOTION FOR ATTORNEY'S FEES—C-04-03615 RMW

DOH

2

HVAC Sales, Inc. ("HVAC"), Advanced Microtherm, Inc. ("AMT"), and John Karamanos

("Karamanos") (collectively "plaintiffs") seek to remand a lawsuit and obtain attorney's fees. Defendants

Zurich American Insurance Group and Zurich American Insurance Company ("Zurich"), Maryland Casualty

Company ("Maryland"), Lawson-Hawks Insurance Assocation ("Lawson-Hawks"), and Craig Pappas

("Pappas") (collectively "Zurich and Maryland") also move to remand.1 Cross-defendants AMCO

Insurance Company ("AMCO") and American Economy Insurance Company ("SAFECO") seek to sever

one cross-claim and then remand the rest of the lawsuit. The court has read the moving and responding

papers and considered the arguments of counsel. For the reasons set forth below, the court (1) grants

plaintiffs' and Zurich and Maryland's motion to remand, (2) denies AMCO and SAFECO's motions to

sever, and (3) denies plaintiffs' motion for attorney's fees. 

I. BACKGROUND

In April 2002 AMT and HVAC brought a lawsuit in the Superior Court for the County of San

Francisco alleging that various defendants engaged in illegal conduct related to public works projects ("the

underlying public works case").2 Three defendants—Price Industries, Inc. ("Price"), Norman Wright

Mechanical Equipment Company ("NSW"), and Ove Arup and Partners California Limited ("Ove

Arup")—then cross-complained against plaintiffs for defamation ("the defamation case").3 Borovsky Decl.

Supp. Mot. Sev. ("Borovsky Decl.") Exs. C-E. Plaintiffs tendered the cross-complaints to Zurich and

Maryland. Pappas, who had initially obtained plaintiffs' insurance policies on behalf of Lawson-Hawks,

received the tenders. Plaintiffs allege that Pappas incorrectly informed them that he had immediately

forwarded the Price and NSW cross-complaints to the carriers. Plaintiffs claim that it was not until August

2003 that they finally received two reservation of rights letters from Zurich. The letters purportedly

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ORDER GRANTING MOTION TO REMAND CASE TO STATE COURT, DENYING MOTION TO SEVER, AND DENYING

MOTION FOR ATTORNEY'S FEES—C-04-03615 RMW

DOH

3

admitted that the defamation and abuse of process causes of action in the defamation case implicated

insurance defense coverage as to HVAC and Karamanos but denied that AMT was covered by the policy. 

 Plaintiffs thus sued Zurich, Maryland, Pappas, and Lawson-Hawks in Superior Court for the County of

Santa Clara for, inter alia, breach of contract, bad faith, and failure to pay for independent counsel ("the

bad faith case").

In July 2003 Zurich, Maryland, Pappas, and Lawson-Hawks cross-complained against HVAC,

AMT, Karamanos, NSW, and Ove Arup for declaratory relief and reimbursement ("the Zurich and

Maryland cross-complaint"). Borovsky Decl. Ex. F. The Zurich and Maryland cross-complaint seeks

reimbursement for all defense expenses paid in excess of which it is found to owe plaintiffs in the bad faith

case. 

On July 8, 2004 Karamanos filed a cross-complaint against AMCO and SAFECO ("the

Karamanos cross-complaint"). Borovsky Decl. Ex. G. Karamanos alleges that AMCO and SAFECO

have a duty to defend or indemnify him based on insurance policies carried by his previous employer,

Microtherm Systems, Inc. ("MSI"). Karmanaos claims that he tendered notice of the NSW crosscomplaint to AMCO and SAFECO in September 2003 and that both carriers refused to defend or

indemnify him. Karamanos seeks indemnity from AMCO and SAFECO in the event that the Zurich and

Maryland cross-complaint succeeds. 

On August 26, 2004 AMCO and SAFECO attempted to remove the Karamanos cross-complaint

to federal court. However, the Superior Court removed the entire state court action, including the

Karamanos cross-complaint, the Zurich and Maryland cross-complaint, and the bad faith case ("the entire

dispute"). Plaintiffs move this court to (1) remand the entire dispute and (2) award them attorney's fees

incurred while litigating remand issues. Likewise, Maryland and Zurich move to dismiss the entire dispute

and remand it to state court. SAFECO and AMCO move to (1) sever the Karamanos cross-complaint

and keep it in federal court and (2) remand the bad faith case and the Zurich and Maryland cross-complaint

to state court. 

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4

"The 'strong presumption' against removal jurisdiction means that the defendant always has

the burden of establishing that removal is proper." Gaus v. Miles, Inc., 980 F.2d 564, 566 (9th Cir.

1992).

5 Of course, "[f]or a case to qualify for federal jurisdiction under 28 U.S.C. § 1332(a), there

must be complete diversity of citizenship between the parties opposed in interest." Kuntz v. Lamar Corp.,

385 F.3d 1177, 1181 (9th Cir. 2004) (citing Strawbridge v. Curtiss, 7 U.S. (3 Cranch) 267, 267

(1806)). The bad faith claim does not enjoy complete diversity because Karamanos, HVAC, AMT,

Pappas, and Lawson-Hawks are all California residents.

6 As noted in footnote 4, the case involves California residents on both sides and thus lacks

complete diversity. 

7 AMCO is an Iowa corporation with its principal place of business in Iowa, SAFECO is an

Indiana corporation with its principal place of business in Washington, Karamanos is a California resident,

and the amount in controversy allegedly exceeds $75,000. 

ORDER GRANTING MOTION TO REMAND CASE TO STATE COURT, DENYING MOTION TO SEVER, AND DENYING

MOTION FOR ATTORNEY'S FEES—C-04-03615 RMW

DOH

4

II. ANALYSIS

A. Legal Standard

28 U.S.C. § 1441(a) entitles "defendants" to remove cases to federal court:

Except as otherwise expressly provided by Act of Congress, any civil action brought in a

State court ofwhichthe district courts of the United States have original jurisdiction, may

be removed by the defendant or the defendants, to the district court of the United States

for the district and division embracing the place where such action is pending.

However, 28 U.S.C. § 1447(c) provides that, after removal, "if at any time before final judgment it appears

that the district court lacks subject matter jurisdiction, the case shall be remanded."4 Of course, there are

two means by which a litigant can invoke federal subject matter jurisdiction. The first is federal question

jurisdiction. See 28 U.S.C. § 1331 ("[t]he district courts shall have original jurisdiction of all civil actions

arising under the Constitution, laws, or treaties of the United States"). It is undisputed that this case does

not involve an issue of federal substantive law. The second is diversity jurisdiction. See 28 U.S.C. § 1332

("[t]he district courts shall have original jurisdiction of all civil actions where the matter in controversy

exceeds the sum or value of $75,000 . . . and is between . . . citizens of different States"). It is also

undisputed that (1) the bad faith case does not qualify for diversity jurisdiction,5 (2) the entire dispute does

not qualify for diversity jurisdiction,6 but (3) the Karamanos cross-complaint, standing alone, would qualify

for diversity jurisdiction.7

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ORDER GRANTING MOTION TO REMAND CASE TO STATE COURT, DENYING MOTION TO SEVER, AND DENYING

MOTION FOR ATTORNEY'S FEES—C-04-03615 RMW

DOH

5

B. Motions to Remand and Sever

Plaintiffs and Zurich and Maryland move to remand the entire dispute to state court on the grounds

that (1) cross-defendants such as AMCO and SAFECO cannot remove a case to federal court and (2) the

lack of diversity in either the bad faith case or the entire dispute deprives this court of subject matter

jurisdiction. AMCO and SAFECO argue that this court should sever the Karamanos cross-complaint from

the bad faith case and the Zurich and Maryland cross-complaint under Federal Rule of Civil Procedure 21. 

That provision states that "[m]isjoinder of parties is not ground for dismissal of an action" and empowers

district courts (1) to drop or add parties "on such terms as are just" and (2) to sever "[a]ny claim against a

party." Fed. R. Civ. P. 21. 

1. Whether Removal Was Proper

The Ninth Circuit has declined to rule on "the interesting question whether third-party defendants

are defendants for purposes of the removal statute." O'Halloran v. University of Washington, 856 F.2d

1375, 1381 (9th Cir. 1988). However, "the majority view is that the determination of who is a defendant is

determined by the original complaint, not subsequent third or fourth-party complaints." Schmidt v.

Association of Apartment Owners of Marco Polo Condominium, 780 F.Supp. 699, 702 (D. Haw.

1991). Schmidt reasoned that Congress could easily have chosen to include third-party defendants in

section 1441, but did not: 

We believe that the reference inthe generalremovalstatute,[section] 1441, is only to [the]

plaintiff's defendants and does not include such defendants as third-party defendants,

cross-claim defendants, and other parties that are not defending a claim asserted against

themby the plaintiff. . . . If the plaintiff and the plaintiff's defendants must, or have chosen

to, adjudicate their suit in a state forum, we fail to find any statutory right clearly given to

other type defendants, by the general removal [statute], to choose a federal forum. 

Id. (quoting 1A Moore's Federal Practice ¶¶ 0.157[7] (1989)) (alterations supplied by Schmidt). 

Numerous courts in the Northern District have agreed with Schmidt. See, e.g., Ciolino v. Ryan, 2003

WL 21556959 *3 (N.D. Cal. 2003) ("[a]s there is no reason to diverge from this well-established

approach, the [c]ourt finds that . . . a third-party defendan[t] cannot remove this case under section

1441(a)); Gartec v. Joseph Enterprises, Inc., 2002 U.S. Dist. LEXIS 21110, *3 (N.D. Cal. 2002) ("a

third party defendant . . . lacks the power of removal"); Saeilo Machinery (USA), Inc. v. Hirdes Freight,

Ltd., 2000 WL 1205338, *2 (C.D. Cal. 2000) ("the court adopts the majority view that cross-defendants

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8 At the time Motor Vehicle Casualty was decided, section 1441(c) permitted defendants

to remove "separate and independent" claims on the grounds of both federal question and diversity

jurisdiction:

Whenever a separate and independent claim or cause of action, which would be

removable ifsued upon alone, isjoined withone or more otherwise non-removable claims

or causes of action, the entire case may be removed and the district court maydetermine

all issues therein, or, in its discretion, may remand all matters not otherwise within its

original jurisdiction.

Id. at 492 n.12. However, in 1990, Congress limited removal under section 1441(c) to claims that invoked

federal question jurisdiction:

 Whenever a separate and independent claim or cause of action within the jurisdiction

conferred by section 1331 of this title is joined with one or more otherwise

non-removable claims or causes of action, the entire case maybe removed and the district

court may determine all issues therein, or, in its discretion, may remand all matters in

which State law predominates.

28 U.S.C. § 1441(c) (emphasis added). 

ORDER GRANTING MOTION TO REMAND CASE TO STATE COURT, DENYING MOTION TO SEVER, AND DENYING

MOTION FOR ATTORNEY'S FEES—C-04-03615 RMW

DOH

6

are not allowed to remove a case"); Cross v. Kaiser Foundation Hospitals, 1998 WL 737998 *1 (N.D.

Cal. 1998) ("cross-defendants and third-party defendants are not allowed to remove"); Orosco v. Royal

Roofing Co., Inc., 1997 WL 724456 *1 (N.D. Cal. 1997) (finding third-party defendant's "petition for

removal pursuant to section 1441(a) . . . improper").

AMCO and SAFECO argue that Motor Vehicle Cas. Co. v. Russian River County Sanitation

Dist., 538 F. Supp. 488, 491 (C.D. Cal. 1981), holds otherwise. Motor Vehicle Casualty held that "the

right of removal under 28 U.S.C. [section] 1441(c) should not depend on the procedural accident that a

defendant was brought in as a third-party under a particular state's procedural law." Id. at 491. Central to

the court's conclusion was its perception that "[t]he reasons advanced in favor of restricting a defendant

from removing are based more on an unarticulated bias against the 'expansion' of removal jurisdiction than

they are grounded in logic and commonsense." Id. at 492. In 1990, Congress explicitly articulated this

"bias," limiting removal under section 1441(c) to "separate and independent" claims that invoked federal

question jurisdiction. See Pub. L. 101-650, § 312.8 Because Congress overruled one of Motor Vehicle

Casualty's key premises, the case has dubious precedential value. Indeed, other Northern District courts

have disagreed with it. See Ciolino, 2003 WL 21556959 *4 ("the abstract position for which Motor

Vehicle Casualty arguably stands has largely been abandoned"); Saeilo, 2000 WL 1205338 *3 (citing

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9 SAFECO argues that, under 28 U.S.C. § 1447(c), a motion to remand must be made

within 30 days of the removal notice if its asserts a procedural, as opposed to a jurisdictional, defect. 

Because it is undisputed that more than 30 days passed between the motion to remand and the removal

notice, SAFECO claims that plaintiffs and Zurich and Maryland waived their right to contest removal on the

grounds that AMCO and SAFECO are not "defendants" under section 1441. However, SAFECO cites

no case that holds that remanding without the authority to do so is a procedural defect. In any event,

because the court ultimately holds that it lacks diversity jurisdiction, SAFECO's claim does not affect the

outcome here.

10 Courts sometimes refer to the "sham defendant" situation as "fraudulent joinder." See, e.g.,

Emrich v. Touche Rosse & Co., 846 F.2d 1190, 1193 n.1 (9th Cir. 1988). Due to the similarity of the

terms "fraudulent joinder" and "fraudulent misjoinder," the court will use the phrase "sham defendant" to

describe the former scenario.

ORDER GRANTING MOTION TO REMAND CASE TO STATE COURT, DENYING MOTION TO SEVER, AND DENYING

MOTION FOR ATTORNEY'S FEES—C-04-03615 RMW

DOH

7

Motor Vehicle Casualty and "declin[ing] to adopt this minority view"). No court has ever cited it

favorably. Accordingly, AMCO and SAFECO could not have properly removed the entire dispute or the

Karamanos cross-complaint.9

2. Whether the Court Should Nevertheless Sever the Karamanos CrossComplaint

 However, AMCO and SAFECO argue that this case is sufficiently analogous to the "sham

defendant" doctrine to warrant considering the merits of their motion to sever. Alternatively, AMCO and

SAFECO urge this court to apply the "fraudulent misjoinder" doctrine recognized by the Eleventh Circuit in

Tapscott v. MS Dealer Service Corp., 77 F.3d 1353 (11th Cir. 1996).10 Courts apply the sham

defendant doctrine when a plaintiff brings a wholly un-meritorious cause of action against a resident

defendant in order to destroy diversity jurisdiction. "Joinder of a non-diverse defendant is deemed

fraudulent, and the defendant's presence in the lawsuit is ignored for purposes of determining diversity, '[i]f

the plaintiff fails to state a cause of action against a resident defendant, and the failure is obvious according

to the settled rules of the state.'" Morris v. Princess Cruises, Inc., 236 F.3d 1061, 1067 (9th Cir. 2001)

(quoting McCabe v. General Foods Corp., 811 F.2d 1336, 1339 (9th Cir. 1987)). 

The fraudulent misjoinder doctrine is essentially an application of the sham defendant doctrine. In

Tapscott, plaintiffs joined two "classes" of defendants under Federal Rule 20—those involved with "the

sale of 'service contracts' on automobiles" ["the automobile class"] and those involved with "'service

contracts' in connection with the sale of retail products" ["the merchant class"]—in a single putative class

action in state court. Tapscott, 77 F.3d at 1355. One defendant filed a notice of removal on the basis of

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11 See also Brazina v. Paul Revere Life Ins. Co., 271 F. Supp. 2d 1163, 1172 (N.D. Cal.

2003 (declining to rule on Tapscott's applicability but noting that "no other circuit has adopted its

rationale").

ORDER GRANTING MOTION TO REMAND CASE TO STATE COURT, DENYING MOTION TO SEVER, AND DENYING

MOTION FOR ATTORNEY'S FEES—C-04-03615 RMW

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8

diversity. Id. The district court granted the motion, holding that "there was an 'improper and fraudulent

joinder, bordering on a sham.'" Id. at 1360. The Eleventh Circuit affirmed, reasoning that plaintiffs made

no attempt to justify the propriety of the joinder, thus elucidating that their conduct was fraudulent: 

Misjoinder maybe just as fraudulent as the joinder of a resident defendant against whom

a plaintiff has no possibilityof a cause of action. A defendant's 'right of removal cannot be

defeated by a fraudulent joinder of a resident defendant having no realconnectionwiththe

controversy.' Although certain putative class representatives may have colorable claims

against resident defendants in the putative 'automobile' class, these resident defendants

have no real connection with the controversy involving . . . the putative 'merchant' class

action. We hold that the district court did not errin finding an attempt to defeat diversity

jurisdiction by fraudulent joinder. We do not hold that mere misjoinder is fraudulent

joinder, but we do agree with the district court that[plaintiffs'] attempt to join these parties

is so egregious as to constitute fraudulent joinder.

Id. (citations omitted). The Fifth Circuit has also adopted the fraudulent misjoinder doctrine, albeit in a

cursory one-paragraph opinion. See In re Benjamin Moore & Co., 309 F.3d 296, 298 (5th Cir. 2002). 

However, the one California case to address the issue, Osborn v. Metropolitan Life Ins. Co, 341

F. Supp. 2d 1123 (E.D. Ca. 2004), refused to recognize the fraudulent misjoinder doctrine.11 In Osborn,

two California residents sued a California insurance company ("First American"), and a non-California

insurance company ("Met Life") in California state court. After Met Life removed the action to federal

court, plaintiffs filed a motion to remand. Met Life opposed the motion, citing Tapscott for the proposition

that plaintiffs "fraudulently misjoined" the two insurance companies to destroy diversity jurisdiction. 

Reasoning that "the last thing the federal courts need is more procedural complexity," the court held that

"the better rule [is to] require Met Life to resolve the claimed misjoinder in state court, and then, if that

court severed the case and diversity then existed, it could seek removal of the cause to federal court." Id.

at 1127. In a footnote, the court explained that this could be accomplished without prejudice to Met Life's

ability to seek removal later:

[T]he time limit for removal would not affect a defendant's ability to have the misjoinder

issue resolved in state court first. 'Removal is not possible until the misjoined party that

destroys removal jurisdiction is dropped from the action, the thirty-day time limit for

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12 Of course, applying Tapscott here would not only necessitate recognizing the doctrine, but

extending it. This case involves the issue of whether Karamanos properly brought cross-complaints

against AMCO and SAFECO, not whether he purposefully joined additional defendants to destroy

diversity jurisdiction.

ORDER GRANTING MOTION TO REMAND CASE TO STATE COURT, DENYING MOTION TO SEVER, AND DENYING

MOTION FOR ATTORNEY'S FEES—C-04-03615 RMW

DOH

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removal(but not the overall one-year limit for diversity cases) would not begin to run until

that had occurred and thus a requirement that misjoinder be addressed in the state court

would not impair the ability of an individual to remove an action following the elimination

of the improperly joined party.' 

Id. at 1127 n.10 (quoting Wright, Miller & Cooper, Jurisdiction 3d § 3723 at 656).

AMCO and SAFECO argue that Osborn should not apply to this case because it "is based on the

faulty premise that the thirty-day period for removal will not begin to run until all issues concerning

misjoinder are resolved in state court." AMCO Rep. Mot. Sev. at 4:3-4 (emphasis omitted). AMCO and

SAFECO posit that, contrary to Osborn, if they had challenged the validity of the Karamanos crosscomplaint in state court, the thirty-day limit would have lapsed. The court disagrees. The removal statute

carves out an exception for cases where the possibility of removal arises later in the lawsuit: 

If the case stated bythe initialpleading is not removable, a notice of removal may be filed

within thirty days after receipt by the defendant, through service or otherwise, of a copy

of an amended pleading, motion, order or other paper from which it may first be

ascertained that the case is one whichis or has become removable, except that a case may

not be removed on the basis of [diversity] jurisdiction . . . more than 1 year after

commencement of the action.

28 U.S.C.A. § 1446(b) ("section 1446(b)"). Here, "the case stated by the initial pleading"—whether

construed as the entire dispute or the Karamanos cross-complaint—was "not removable." Indeed, the

point of AMCO and SAFECO's motion to sever is to make the Karamanos cross-complaint removable. 

Thus, if AMCO and SAFECO successfully challenge the propriety of the Karamanos cross-complaint in

state court, they will receive an "order . . . from which it may first be ascertained that the case . . . has

become removable." Only then would the thirty-day clock begin to run on their ability to remove the

Karamanos cross-complaint. 

In any event, even if this court were to adopt Tapscott, it would not apply the fraudulent misjoinder

doctrine here.12 The court reads Tapscott to apply in the rare circumstance where the egregiousness of

plaintiffs' misjoinder is readily apparent. Indeed, the Eleventh Circuit made clear that fraudulent misjoinder

requires more than "mere misjoinder," and applied the doctrine to a case where plaintiffs did not even

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13 The court agrees with Osborn that state procedural law should apply, as the question is

whether AMCO and SAFECO were properly joined in the first place. See Osborn, 341 F. Supp. at 1128

("most courts looking at this issue have applied the state rule"). 

ORDER GRANTING MOTION TO REMAND CASE TO STATE COURT, DENYING MOTION TO SEVER, AND DENYING

MOTION FOR ATTORNEY'S FEES—C-04-03615 RMW

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attempt to justify their conglomeration of various unrelated defendants. Tapscott, 77 F.3d at 1360. 

Conversely, Karamanos has at least a colorable claim that his cross-complaint against AMCO and

SAFECO was proper. California Code of Civil Procedure section 428.1013 permits cross-complaints

against a wide range of individuals:

A party against whom a cause of action has been asserted in a complaint or crosscomplaint may file a cross-complaint setting forth either or both of the following:

. . . 

(b) Any cause of actionhe has against a personalleged to be liable thereon, whether or not

suchpersonis alreadya partyto the action, if the cause of action(1) arises out ofthe same

transaction, occurrence, or series of transactions or occurrences as the cause brought

against him or (2) asserts a claim, right, or interest inthe property or controversy which is

the subject of the cause brought against him.

 Because Karamanos' cross-complaint against AMCO and SAFECO arguably "asserts a claim, right or

interest" in the Maryland and Zurich cross-complaint—the right to indemnity and subrogation—it is

nowhere near as blatantly merit-less as plaintiffs' joinder efforts in Tapscott. 

AMCO and SAFECO vigorously contend otherwise. First, AMCO and SAFECO cite Pena v.

McArthur, 889 F. Supp. 403 (E.D. Cal. 1994) for the proposition that actions against insurance

companies for breach of contract or bad faith often bear only a tenuous connection to their underlying

claims. In that case, Pena was involved in a car accident with an uninsured motorist, McArthur. State

Farm insured Pena. Pena filed a complaint in state court against McArthur for negligence and State Farm

for bad faith handling of her insurance claim. Defendants removed the case and filed a motion to sever the

two causes of action under Federal Rule of Civil Procedure 21. The court granted the motion, reasoning

that the negligence claim and the bad faith claim only superficially involved the same "transaction,

occurrence, or series of transactions or occurrences":

[T]here were two occurrences or transactions—the automobile accident betweenplaintiff

and McArthur and the alleged breachoffiduciarydutybyState Farminhandling plaintiff's

claim. These are two distinct torts(negligence and bad faithclaim) committed bydifferent

defendants at different times, and they resulted in the invasion of separate legal interests .

. . . Here, plaintiff argues that proof of the bad faith claim will require analysis of the

underlying negligence claim. However, 'analysis' of the underlying claim in the bad faith

action is not identical to the underlying negligence claim itself. 

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Id. at 405-06. 

However, Pena considered the propriety of joinder under Federal Rule of Civil Procedure 20,

which is significantly narrower than its state-law counterparts. Compare Fed. R. Civ. P. 20(a) ("[a]ll

persons . . . may be joined in one action as defendants if there is asserted against them . . . any right to relief

in respect of or arising out of the same transaction, occurrence, or series of transactions or occurrences and

if any question of law or fact common to all defendants will arise in the action) with Cal. Code Civ. P. §

428.10 (permitting cross-complaints that either "aris[e] out of the same transaction, occurrence, or series of

transactions or occurrences" or involve "a claim, right, or interest in . . . property" in the underlying claims);

and Cal. Code Civ. P. § 379 (permitting joinder of defendants "if there is asserted against them: (1) [a]ny

right to relief jointly, severally or in the alternative, in respect of or arising out of the same transaction,

occurrence, or series of transactions or occurrences . . . or (2) [a] claim, right, or interest adverse to them

in the property or controversy which is the subject of the action"). State law recognizes both the potential

for cross-claims and joinder in situations where federal law does not: where "a claim, right, or interest" links

the new party with the existing lawsuit. Pena is thus inapposite.

Next, AMCO and SAFECO argue that the Karamanos cross-complaint was improper because it

has no relationship with either the with the bad faith case or the Zurich and Maryland cross-complaint. 

AMCO and SAFECO contend that they only insure MSI and Karamanos in his capacity as an officer and

director of MSI. AMCO and SAFECO also claim that neither the bad faith case nor the Zurich and

Maryland cross-complaint involve MSI or Karamanos in his official capacity. Instead, they assert, the bad

faith case and the Zurich and Maryland cross-complaint involve HVAC, AMT, and Karamanos as an

officer and director of those companies. Thus, according to AMCO and SAFECO, "the two disputes

involve distinct torts, committed by different defendants at different times, allegedly resulting in the invasion

of separate legal interests." AMCO Mot. Sev. at 14:15-18. 

This argument is unconvincing. For one, AMT apparently ceased its business operations and sold

its assets to MSI in June 2000. Negrych Decl. Supp. Rep. Mot. Rem. ¶¶ 2-5. At that time, Karamanos

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14 AMCO and SAFECO challenge the admissibility of Dean C. Burnich's declaration in

support of Zurich and Maryland's motion, apparently under the mistaken belief that striking it will cast doubt

on the relationship between MSI, Karamanos, and AMT. However, Karamanos and his counsel also

submitted declarations providing these facts. 

15 AMCO and SAFECO also argue that this court enjoys broad discretion to sever the

Karamanos cross-complaint. However, they cite no authority for the proposition that a federal court may

bootstrap the exercise of its own jurisdiction from a nunc pro tunc severance order.

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served as MSI's president. Karamanos Decl. Supp. Rep. Mot. Rem. ¶¶ 1-5.14 The NSW crosscomplaint alleges that Karamanos engaged in wrongdoing "in 2001," when he ostensibly was acting as

MSI's president. Borovsky Decl. Ex. B, at ¶ 8. SAFECO's policy with MSI ended on September 1,

2001, while AMCO's policy ended on February 20, 2002. Goettsch Decl. Ex. A. Thus, because

Karamanos may have been insured by AMCO and SAFECO when he allegedly broke the law, he has a

non-frivolous claim that the Zurich and Maryland cross-complaint triggers his policy with AMCO and

SAFECO. Borovsky Decl. Ex. G at ¶¶ 86, 87, 90, 91. Moreover, even if AMCO and SAFECO are

correct that they were brought into the lawsuit incorrectly, that alone is not sufficient under Tapscott to

invest this court with jurisdiction where otherwise it would have none.15 

C. Motion for Attorney's Fees

Plaintiffs move for an award of attorney's fees in connection with the improper removal. Under 28

U.S.C. § 1447(c), district courts may "require payment of just costs and any actual expenses, including

attorney fees, incurred as a result of the removal." The court declines to do so. Although this court

concludes that removal was improper, AMCO and SAFECO asserted tenable legal positions. See

Schmidt, 780 F.Supp. at 704 (rejecting a fee request because "[t]he minority position regarding third-party

removal is a plausible legal and factual basis for asserting removal jurisdiction"). Most courts that have

awarded fees have done so when a defendant should have been aware that removal was improper. See

Ciolino, 2003 WL 21556959 at *8-*9 (awarding fees when defendant did not file timely notice of removal

or proof of service). That is not the case here.

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III. ORDER

For the foregoing reasons, the court grants and denies the motions as follows:

1. The court denies AMCO and SAFECO's motions to sever the Karamanos cross-complaint

without prejudice to their ability to renew the motion in state court.

2. The court grants plaintiffs' and Zurich and Maryland's motion to remand the entire dispute.

3. The court denies plaintiffs' motion for attorney's fees.

DATED: 7/25/05 /s/ Ronald M. Whyte

RONALD M. WHYTE

United States District Judge

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ORDER GRANTING MOTION TO REMAND CASE TO STATE COURT, DENYING MOTION TO SEVER, AND DENYING

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Notice of this document has been electronically sent to:

Counsel for Plaintiffs:

Zane D. Negrych zanenegrych@sbcglobal.net 

 

Counsel for Zurich and Maryland:

Robert Lee Sallander rsallander@gpsllp.com 

Dean C. Burnick dburnick@gpsllp.com 

Counsel for AMCO and SAFECO:

David P. Borovsky dborovsky@longlevit.com 

Karen L. Uno kuno@longlevit.com 

Raymond H. Goettsch goe@darlaw.com 

Counsel for NSW

Lisa D. Wright lwright@alr-law.com 

Counsel are responsible for distributing copies of this document to co-counsel that have not registered for

e-filing under the court's CM/ECF program.

Dated: 7/25/05 DOH

Chambers of Judge Whyte

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