Opinion ID: 815692
Heading Depth: 3
Heading Rank: 3

Heading: Combining state law and federal law inquiries

Text: Lexington’s core argument for fraudulent joinder was that Sweeney could not be held liable for any of the alleged causes of action because he was acting as an agent for a disclosed principal. Without Sweeney, complete diversity would exist to justify removal. The notice of removal included two citations to support defendants’ position on agency law. First, in Eaton v. Candle Gen. Ins. Co., an Ohio federal district court addressed the liability of the corporate agent of an insurance company, and noted that “[t]he well-settled rule in Ohio is that an agent who contracts with a third party on behalf of a disclosed principal, and as the authorized agent of that principal, is not personally liable on the contract.” 147 F. Supp. 2d 829, 837 (N.D. Ohio 2001), aff'd on other grounds, 59 F. App’x 719 (6th Cir. 2003). Second, in James G. Smith & Assocs., Inc. v. Everett, an Ohio state appeals panel noted that “[a]n agent who acts for a disclosed principal and who acts within the scope of his authority and in the name of the principal is ordinarily not liable on the contracts he makes.” 439 N.E.2d 932, 935 (Ohio Ct. App. 1981). The district court, however, recognized that there was “a gray area in Ohio law surrounding the liability of an agent of a disclosed insurer,” and cited two more recent Ohio federal district courts cases, Technology Strategies Inc. v. Transcontinental Ins. Co., No. 5:03VC2439 (N.D. Ohio Feb. 9, 2004), and Wiseman v. Universal Underwriters Ins. Co., 412 F. Supp. 2d 801 (S.D. Ohio 2005). Both involved removal actions where the defendant alleged fraudulent joinder of agents of disclosed insurer-principals. In Technology Strategies, an unpublished decision, the court denied the motion to remand on the basis that the individual agents did not fit within any exception to the general rule 8 and they had been fraudulently joined. In Wiseman, a decision published a year later, the court engaged in an exhaustive review of Ohio agency and tort law, found “a reasonable basis in Ohio law for concluding that Ohio courts may recognize a claim based on negligence or wanton and reckless conduct on the part of [the insurance agent defendant] as the claims adjuster in this case,” 412 F. Supp. 2d at 805, and granted the motion to remand. In granting the fee award here, the district court recognized that the Supreme Court’s decision in Martin and the “objectively reasonable” standard govern. The court, however, noted that none of the Ohio state law cases cited “compel a certain result” as to Sweeney’s liability. It reasoned: Given the unsettled nature of Ohio law on this issue and the Coyne standard, remand was a foregone conclusion. Moreover, as the Defendants were well aware of the standard for fraudulent joinder—requiring any ambiguity in controlling law to be resolved in favor of the non-removing party— they could not have had an objective basis for removing this matter. In summary, armed with the knowledge that any doubt about the propriety of removal would be resolved in favor of remand, Defendants could not have believe that removal was appropriate. Kent State Univ. Bd. of Trs. v. Lexington Ins. Co., No. 5:10CV2714, 2011 WL 1578505, at  (N.D. Ohio Apr. 26, 2011). Lexington challenges this standard as an incorrect statement of the law. It argues that the “unsettled” nature of the law—the fact that there is “no on-point case to support” Lexington’s position—cannot alone form the basis for a fee award under § 1447(c) and Martin. The district court’s application of the law, Lexington argues, would discourage litigants from seeking to extend existing law for fear of an adverse attorney award—a result in violation of Martin’s admonition that such awards should not discourage the exercise of the right to removal “in all but obvious cases.” 546 U.S. at 140. 9 We agree that the unsettled state of the law cannot, alone, provide the basis for a fee award under Martin. In analyzing the meaning of a new federal statute that controls removal, for example, it must be possible for defendants to develop relevant case law by removing cases in the absence of precedent. See Lussier, 518 F.3d at 1066–67 (affirming denial of fees where removal sought under a “new statute whose meaning had not yet been fleshed out”); Lott, 492 F.3d at 793 (same). In Lussier and Lott, the lack of controlling precedent on the meaning of provisions in the Class Action Fairness Act suggested that removal actions were objectively reasonable, even if remand was ultimately appropriate. Here, however, the precedent governing removal in fraudulent joinder actions is well settled. Coyne requires remand where a plaintiff has stated a “colorable” basis for liability, and all disputed questions of fact and any ambiguities in the governing state law are resolved in favor of the party seeking remand. Accordingly, the determination that Ohio law on agent liability is unsettled is not the end of the inquiry. The nature of state-law precedent must be viewed through the lens of Coyne to determine whether there is a “colorable” claim. Under this standard, the district court correctly observed that the unsettled nature of state-law precedent on the liability of the diverse party is a factor that weighs strongly in favor of a remand.1 1 Lexington submits two published district court cases from this Circuit to support its contention that “courts have consistently not imposed fees following remand where the law was unsettled.” Appellant’s Br. at 14. Both of those cases, however, reflect unsettled federal law—as in Lussiter and Lott—and not, as here, unsettled state law in the context of the (settled) federal fraudulent joinder standard. In Schafer Oil Co. v. Anna Petroleum, LLC, the defendant removed the action based on an argument that equitable tolling should apply to the limitations period in the federal removal statute, 28 U.S.C. § 1446(b). 767 F. Supp. 2d 856, 859 (S.D. Ohio 2010). The argument was supported by precedent from the Fifth Circuit, but not the Sixth. In Geffen v. General Elec. Co., the defendant alleged removal was proper under the fraudulent misjoinder doctrine—a theory regarding the severability of factually distinct claims. 575 F. Supp. 2d 865, 868–69 (N.D. Ohio 2008). Unlike the fraudulent joinder doctrine, governed by Coyne, the Sixth Circuit had not 10 We do not mean to suggest that attorney fees will always be appropriate in fraudulent joinder cases. There are cases where it is obvious, according to settled state-law precedent, that a particular defendant is not liable, and no fees are appropriate in that case because the remand action itself should be denied. On the other hand, there are cases where according to state-law precedent it is obvious that the defendant may be liable, and in that case a fraudulent joinder claim would be frivolous. In between there is a spectrum of cases. See 14C Charles Alan Wright & Arthur R. Miller, et al., Federal Practice and Procedure § 3739 (4th ed. 2009) (noting that, interpreting Martin, many district courts consider “where the removal seemed to fall on a spectrum running from reasonable to frivolous.”). And, Martin cautions, removal in some—but not all—of these inbetween cases must be considered objectively reasonable. It is undoubtedly reasonable to remove a case where a plaintiff can provide no precedent at all supporting a theory of liability. It is also reasonable to remove a case where a plaintiff provides such weak authority that it is a “close question” as to whether the plaintiff’s failure to state a claim is “obvious according to the settled rules” of the forum state. Gardner v. UICI, 508 F.3d 559, 562 (9th Cir. 2007). In a case like Gardner, state-law precedent may be so lopsided that, though not “controlling,” the weight of authority renders a removal action objectively reasonable and fees inappropriate even though the case is ultimately remanded.2 adopted the fraudulent misjoinder doctrine. Id. In both cases, the district courts declined to adopt and apply unsettled theories of removal power under federal law and declined to grant fees. Neither case, however, suggests that fees are inappropriate in fraudulent joinder cases where state law is unsettled and the court must consider whether a claim is “colorable” under the Coyne standard. 2 It may also be reasonable to remove a case where state law is unsettled, but the evidence in the record does not support liability of the nondiverse defendant. See Casias, 695 F.3d at 433–34 (resolving ambiguities in state law and upholding removal based on defendant’s “limited involvement” in the alleged tortious actions). That does not appear to be the case here, though. 11 At some location on the spectrum, however, the relevant case law available to a plaintiff rises to the level at which the state-law question is no longer lopsided. At some point, a plaintiff’s claim becomes so plainly “colorable” that, once viewed through the lens of the demanding fraudulent joinder standard, remand is no longer a close question. In that situation, it is no longer objectively reasonable for the defendant to attempt removal in the first place. Determining when and where this point is reached is the judgment call that a district court must make when presented with a request for fees pursuant to § 1447(c). We have no quarrel with the district court’s decision in this case. The court supported its conclusion with reference to Wiseman, the recent published opinion from another court in this Circuit. Wiseman included a robust survey of Ohio case law, concluded that a claim similar to Kent State’s was not necessarily foreclosed under Ohio law, and determined that remand was appropriate under the Coyne standard. 412 F. Supp. 2d 801. Wiseman noted the Ohio Supreme Court’s holding that a “breach of the duty to act in good faith will give rise to a cause of action in tort against the insurer irrespective of any liability arising from breach of contract.” Id. at 804 (citing Staff Builders, Inc. v. Armstrong, 525 N.E.2d 783 (Ohio 1998)). And Wiseman cited seven different Ohio state court cases from the last three decades stating that individual insurance agents may be held personally liable for various types of tortious conduct related to their occupations. Id. at 805–06. It is true that Lexington was also able to cite relevant case law—highlighting limits on the liability of agents for disclosed principals. Thus, there is no question it would be “objectively reasonable” for it to argue in Ohio state court against the claim Kent State raised as to Sweeney’s While Lexington’s core claim of factual insufficiency is that Sweeney was not in privity of contract with the plaintiffs, Kent State’s claims are not limited to breach of contract. 12 liability. But the propriety of removal presents a different reasonableness inquiry. Measured against the authority in Wiseman, Lexington’s cases do not approach the point on the spectrum representing a lopsided presentation of legal authority for its position. Viewed through the lens of the Coyne fraudulent joinder standard—the standard Lexington knew would be applied by the district court in this case—removal based on the clearly unsettled nature of Ohio state law was not “fairly supportable” or “objectively reasonable.”