Court Opinion

ID: 9890041
Source: CourtListenerOpinion
Date Created: 2023-10-12 00:00:32.506542+00
Date Added: 2024-06-11T12:48:55.406110
License: Public Domain

Case: 22-20573         Document: 00516928294             Page: 1      Date Filed: 10/11/2023

              United States Court of Appeals
                   for the Fifth Circuit                                        United States Court of Appeals
                                                                                         Fifth Circuit

                                      ____________                                     FILED
                                                                                October 11, 2023
                                       No. 22-20573                               Lyle W. Cayce
                                      ____________                                     Clerk

   LNY 5003, L.L.C.; Fertitta Entertainment,
   Incorporated; Fertitta Hospitality, L.L.C.,

                                                                   Plaintiffs—Appellants,

                                             versus

   Zurich American Insurance Company,

                                                Defendant—Appellee.
                      ______________________________

                      Appeal from the United States District Court
                          for the Southern District of Texas
                               USDC No. 4:20-CV-2992
                      ______________________________

   Before Wiener, Graves, and Douglas, Circuit Judges.
   Per Curiam: *
          Following the onset of the COVID-19 pandemic, Zurich American
   Insurance Company (“Zurich”) denied coverage to seventeen covered
   restaurants owned by subsidiaries of Fertitta Entertainment, Inc. and Fertitta
   Hospitality, LLC (the “Fertitta Entities”), both Texas entities. Shortly
   after, the Fertitta Entities attempted to assign all “claims and causes of

          _____________________
          *
              This opinion is not designated for publication. See 5th Cir. R. 47.5.
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   action” to LNY 5003, an entity that shared Illinois citizenship with Zurich,
   to bring claims of breach of contract and violations of the Texas Insurance
   Code in Texas state court. Zurich removed the case to federal court in Texas,
   and the district court subsequently denied a motion to remand and granted a
   motion to dismiss all claims.
           Finding the assignment invalid, we hold that diversity jurisdiction
   exists between the Fertitta Entities and Zurich, as citizens of Texas and
   Illinois. We therefore AFFIRM the district court’s finding that it retained
   subject matter jurisdiction over the dispute in denying the motion to remand.
           As to the merits, despite the Fertitta Entities’ best attempts, they
   needed to plausibly plead that the COVID-19 virus caused direct physical
   damage to their property.       They cannot do so.        Accordingly, we also
   AFFIRM the district court’s decision to grant Zurich’s motion to dismiss.
                                        I.
                                        A.
           In 2019, Zurich issued a commercial insurance policy (the “Policy”)
   to two insureds, the Fertitta Entities, to cover 17 international restaurants
   owned by subsidiaries of the Fertitta Entities. The majority of those 17
   restaurants are owned by a subsidiary, Morton’s of Chicago, Inc.
   (“Morton’s”), and are located throughout Asia and North America.
   Relevant to this appeal, Zurich is a New York corporation with a principal
   place of business in Illinois. The Fertitta Entities are citizens of Texas.
   Morton’s is an Illinois corporation with a principal place of business in
   Illinois.
           The Policy incorporates coverages for various losses between May 31,
   2019 to May 31, 2020. In 2020, the onset of the COVID-19 pandemic
   resulted in significant business losses to the 17 covered restaurants.

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   According to the operative complaint, these losses were due to the presence
   of COVID-19 on the premises, the ensuing public panic, and related local
   government lockdown orders. The Fertitta Entities specifically alleged that
   “[t]he presence of individuals infected with COVID-19 led to the covered
   properties becoming contaminated with the virus, rendered the premises,
   including property located at the premises unsafe, and resulting [sic] in direct
   physical loss of and damage to the covered properties.”
          In April 2020, the Fertitta Entities submitted a notice of loss to
   Zurich. Zurich indicated that it would deny all COVID-19 related claims
   under the Policy. Shortly after Zurich’s denial, in July 2020, for the nominal
   price of $10, the Fertitta Entities assigned “all right, title, and interest” they
   had “in any and all claims” against Zurich under the Policy to LNY 5003,
   LLC (“LNY”), a Texas LLC formed in early 2020.
          The Policy, however, includes an “anti-assignment clause” that
   expressly precluded the Fertitta Entities from making assignments without
   Zurich’s consent. It states: “Your rights and duties under this policy may
   not be transferred without our written consent except in the case of death of
   an individual Named Insured.” In making the assignment, the Fertitta
   Entities retained “no interest in the Assigned Claims whatsoever,” and any
   recovery from the assigned claims belonged to LNY.              However, LNY
   confirmed before the district court that the Fertitta Entities retained a
   financial interest in LNY.
          Despite being formed in Texas by Texan entities, LNY’s sole member
   is Morton’s, a corporation with Illinois citizenship, as noted. Morton’s is
   both the sole member of LNY and a direct subsidiary of Fertitta
   Entertainment, Inc. The creation and assignment of claims to LNY was an
   attempt to destroy complete diversity between the parties because of its
   common citizenship with Zurich.

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                                            B.
          Eighteen days after the assignment, LNY sued Zurich in Harris
   County state court, asserting claims for breach of contract and violations of
   the Texas Insurance Code. LNY filed the action without pleading its
   relationship to Fertitta or alleging the existence of the assignment, instead
   bringing the action as though it were the insured under the Policy. Zurich
   filed an answer and removed the case to federal court, asserting diversity
   jurisdiction. Zurich claimed that LNY’s Illinois citizenship (through its sole
   member, Morton’s) should be disregarded because LNY was not an insured.
   Because the insured Fertitta Entities were citizens of Texas, Zurich argued,
   there was complete diversity.
          LNY sought remand under the United States Supreme Court’s
   decision in Provident Savings Life Assurance Society of New York v. Ford, 114
   U.S. 635 (1885) and its progeny. Zurich countered that LNY’s assignment
   was not complete or valid and should be disregarded. The parties also
   disagreed regarding whether the anti-assignment provision in the Policy
   prohibited the transfer of the insureds’ “rights or duties under this policy”
   without Zurich’s written consent. After briefing and a hearing, the district
   court denied LNY’s motion to remand. In response to this ruling, the
   Fertitta Entities—the insured and assignors—were added as plaintiffs.
          Zurich then moved to dismiss the claims under Federal Rule of Civil
   Procedure 12(b)(6) and 12(b)(1). The district court granted the motion to
   dismiss on both grounds. This appeal of both the order denying the motion
   to remand and granting the motion to dismiss for failure to state a claim
   followed. 1

          _____________________
          1
              Appellants do not challenge the dismissal of LNY for lack of subject matter
   jurisdiction under Fed. R. Civ. P. 12(b)(1).

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                                         II.
          We review both issues presented in this appeal de novo. Gilmore v.
   Miss., 905 F.3d 781, 784 (5th Cir. 2018) (denial of motion to remand is
   reviewed de novo); Calogero v. Shows, Cali & Walsh, LLP, 970 F.3d 576, 580
   (5th Cir. 2020) (grant of motion to dismiss is reviewed de novo). In
   considering the motion to dismiss, we accept all well-pleaded facts as true
   and view them in the light most favorable to the plaintiff. See Guidry v. Am.
   Pub. Life Ins. Co., 512 F.3d 177, 180 (5th Cir. 2007).
                                        III.
                           A. Motion to Remand
          Beginning first with jurisdiction, 28 U.S.C. § 1332(a)(1) establishes
   diversity jurisdiction over controversies between citizens of different states
   with an amount in controversy exceeding $75,000. Section 1441(a) permits
   a defendant to remove an action from state court to federal court if diversity
   jurisdiction exists. 28 U.S.C. § 1441(a). But the action must be remanded
   under 28 U.S.C. § 1447(c) if “at any time before final judgment it appears
   that the district court lacks subject matter jurisdiction.”
          The removing party bears the burden of proving by a preponderance
   of the evidence that subject matter jurisdiction exists. New Orleans & Gulf
   Coast Ry. Co. v. Barrois, 533 F.3d 321, 327 (5th Cir. 2008) (citations omitted).
   The existence of subject matter jurisdiction is determined at the time of
   removal. Manguno v. Prudential Prop. & Cas. Ins., 276 F.3d 720, 723 (5th Cir.
   2002). This includes consideration of “the claims in the state court petition
   as they existed at the time of removal.” Id. (citation omitted).
          The Supreme Court has held that “the citizens upon whose diversity
   a plaintiff grounds jurisdiction must be real and substantial parties to the
   controversy.” Navarro Sav. Assoc. v. Lee, 446 U.S. 458, 460 (1980) (internal

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   marks and citation omitted). Federal courts “must disregard nominal or
   formal parties and rest jurisdiction only upon the citizenship of real parties to
   the controversy.” Id. at 461 (citation omitted). Further, federal courts “may
   and should take such action as will defeat attempts to wrongfully deprive
   parties entitled to sue in the Federal courts of the protection of their rights in
   those tribunals.” Ala. Great S. Ry. Co. v. Thompson, 200 U.S. 206, 218 (1906).
          In determining that it retained subject matter jurisdiction over the
   parties, the district court made six findings: (1) the at-issue assignment was
   invalid under the plain terms of the Policy, (2) the Fertitta Entities and
   Zurich are the “real parties” to this controversy, (3) complete diversity exists
   among the parties, (4) Zurich met its burden of proving subject matter exists,
   (5) LNY’s motion to remand must be denied, and (6) LNY cannot proceed
   further in this action as plaintiff.
          Before us, the Fertitta Entities argue that federal courts should not
   look behind a complete assignment of claims that eliminates diversity, relying
   on and claiming their “complete assignment of claims” fits squarely within
   the Supreme Court’s decision in Provident, 114 U.S. 635. Zurich counters
   that reliance on Provident is unavailing when an assignment is invalid or
   incomplete, and that the assignment at issue was invalid under Texas law
   because it violated the anti-assignment provision in the Policy.
          We first turn to Provident. There, an individual judgment creditor (a
   resident of Ohio) assigned his entire interest in a judgment against Provident
   (a New York corporation) to the plaintiff (a resident of New York). The
   assignee then sought to collect the judgment in New York state court,
   diversity being destroyed. 114 U.S. 635, 636-37. Provident removed the
   matter, arguing that diversity jurisdiction existed because the assignment was
   fraudulent, and the assignor was the real party in interest. Id. at 637, 640.
   The Supreme Court disagreed, acknowledging the fraudulent assignment but

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   rejecting removal. “The plain answer to this position is that the action was
   nevertheless [the assignee’s], and as against him there was no right of
   removal. If he was a mere tool of [the assignor], and if the latter was the
   person really interested in the cause, the action could not have been
   sustained” because state law would provide adequate protections. Id. at 640.
   Instead, the Court was satisfied that a fraudulent assignment may “be a good
   defense to an action in a state court” but “not a ground of removing that
   cause into the federal court.” Id. at 641.
          Our court is no stranger to Provident, having grappled with it
   previously in Grassi v. Ciba-Geigy, Ltd., 894 F.2d 181 (5th Cir. 1990). In
   Grassi, which involved a partial assignment, we stated that Provident and its
   progeny stand for two propositions: (1) “federal courts lack the power to look
   beyond the pleadings in determining the existence of diversity jurisdiction”
   absent specific statutory authorization and (2) “state law and the state court
   systems will adequately defend a defendant’s right to removal jurisdiction
   against devices designed to defeat it.” Id. at 183. But “[t]hese propositions
   have not fared well since 1887.” Id.
          The first proposition has been “largely abandoned” in subsequent
   decisions “recogniz[ing] that federal courts do possess some inherent
   authority to look beyond the pleadings in order to protect a litigant’s right to
   diversity jurisdiction.” Id. We went on to quote Wecker v. Nat’l Enamelling
   & Stamping Co., 204 U.S. 176 (1907), in which the Court held that diversity
   jurisdiction was not defeated by joinder of a nondiverse defendant who could
   not conceivably be liable and declaring that federal courts “should not
   sanction devices intended to prevent a removal to a Federal court where one
   has the right, and should be equally vigilant to protect the right to proceed in
   the Federal court as to permit the state courts, in proper cases, to retain their
   own jurisdiction.” Id. (quoting Wecker, 204 U.S. at 185-86). Similarly, in In
   the Matter of the State of Neb., 209 U.S. 436 (1908), the Supreme Court upheld

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   a circuit court’s refusal to remand a case solely because Nebraska was listed
   as a plaintiff, holding that it was the duty of the federal court to determine
   whether Nebraska was an actual party plaintiff. Grassi, 894 F.3d at 183.
          The second proposition under Provident and its progeny “has proved
   untrue in practice.” Id. We found that “[r]eliance upon state law for the
   determination of federal court jurisdiction was ultimately rejected by the
   Supreme Court in Kramer.” Id. at 184. In Kramer v. Caribbean Mills, Inc.,
   also involving a partial assignment, the Supreme Court rejected the argument
   that because the assignment was valid under state law, federal courts were
   bound to respect it. 394 U.S. 823, 824-25 (1969). “The existence of federal
   jurisdiction is a matter of federal, not state law.” Id. at 829. Finding the
   assignment collusive, the Supreme Court disregarded the assignment for
   determining jurisdiction. Id. at 828-29. Noting our own holdings that
   recognize the authority of federal courts to protect their own jurisdiction,
   Grassi held that “federal district courts have both the authority and the
   responsibility, under 28 U.S.C. §§ 1332 and 1441, to examine the motives
   underlying a partial assignment which destroys diversity and to disregard the
   assignment in determining jurisdiction if it be found to have been made
   principally to defeat removal.” Id. at 185.
          Provident remains binding law, despite it not being revisited by the
   Supreme Court in almost 150 years. “Although the basic propositions for
   which Provident and its progeny stand have been abandoned, the Supreme
   Court has not had formal occasion to reexamine the ruling since 1887.”
   Grassi, 894 F.2d at 184. In Grassi, we opted not to extend Provident’s holding
   to cases involving partial assignments, empowering federal courts to examine
   the motives underlying a partial assignment. See id. at 185.
          Here, again, we decline to extend Provident’s holding to cases where
   the claims at issue derive from a contractual relationship that specifically

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   includes an anti-assignment clause. When an anti-assignment clause renders
   an assignment invalid, federal courts have the authority and responsibility to
   examine the validity of those assignments for purposes of diversity
   jurisdiction.
          Provident and its progeny control “where assignments of a complete
   cause are concerned.” Grassi, 894 F.2d 181, 183 (5th Cir. 1990). More
   precisely, as the district court noted, Provident applies “where what’s before
   the court is indisputably a complete assignment,” as this was the precise
   scenario presented in Provident. Here, the claims at issue derive from a
   contractual relationship that expressly forbid assignments without Zurich’s
   written consent. Whether the assignment is complete depends on whether
   the assignment itself is valid under the contract. As aptly stated by the
   district court, “if invalid, the assignment didn’t actually happen at all—much
   less in the sense of being complete.”
          Here, the Fertitta Entities’ attempted assignment to LNY was invalid.
   This conclusion is supported by both Texas law and our own. “Texas law
   permits the enforcement of no-assignment clauses in insurance policies.”
   Conoco, Inc. v. Republic Ins. Co., 819 F.2d 120, 124 (5th Cir. 1987). Moreover,
   violations of the Texas Insurance Code are not assignable under Texas law.
   PPG Indus., Inc. v. JMB/Houston Ctrs. Partners Ltd., 146 S.W.3d 79, 87 (Tex.
   2004). Accordingly, Texas law supports the validity of the anti-assignment
   clause, and specifically rejects the assignment of the exact claims at issue in
   the instant matter.
          This holding also tracks our prior decision in Keller Found., Inc. v.
   Wausau Underwriters Ins. Co., 626 F.3d 871 (5th Cir. 2010). There, a
   purchase agreement transferred nearly all assets of an insured to the plaintiff.
   Id. at 872-73. An anti-assignment clause in the insurance policy barred the
   transfer of “rights and duties” of the insured. Id. at 873. The plaintiff was

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   later sued for harm arising from work done by the insured prior to the
   purchase and transfer. Id. The insurance company refused to provide
   coverage and the plaintiff brought an action alleging breach of contract,
   violations of the Texas Insurance Code, and breach of the duty of good faith
   and fair dealing. Id. We first noted that Texas courts “enforce non-
   assignment clauses even for assignments made post-loss.” Id. at 874. We
   then held that the assignment was barred by the policy’s anti-assignment
   clause because the plaintiff was trying to obtain coverage under the policy.
   Id. at 875. We specifically stated that the plaintiffs could not “circumvent
   the non-assignment clause by casting the transfer of the insurance coverage
   as the transfer of a chose in action.” Id. (internal marks omitted).
          The Fertitta Entities attempt to differentiate “rights and duties” from
   “claims and causes of actions” is unavailing. Our court has categorized such
   distinctions as “specious.” See Conoco, 819 F.2d at 124 (rejecting plaintiff’s
   argument that it was not assigned a “claim or demand” but “proceeds”). As
   in Keller, plaintiffs here are attempting to obtain coverage under the Policy.
   They may not “circumvent the non-assignment clause” by arguing that its
   prohibition on the assignment of “rights and duties” does not preclude an
   assignment of “claims or cause of action.” This is especially true when their
   own state court petition makes clear that LNY is pursuing its own claims as if
   it were itself insured under the Policy.
          Because the assignment was invalid, diversity jurisdiction exists
   between the Fertitta Entities and Zurich, as citizens of Texas and Illinois
   respectively. We therefore affirm the district court’s holding that it retained
   subject matter jurisdiction over the dispute in denying the motion to remand.
                           B. Motion to Dismiss
          Turning to the motion to dismiss, in the complaint, the Fertitta
   Entities alleged that they suffered “direct physical loss of and damage to the

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   seventeen covered restaurants as a result of the COVID-19 pandemic, the
   public’s fear of the coronavirus, and the resulting civil unrest and
   government lockdown orders.” Specifically, “[t]he presence of individuals
   infected with COVID-19 led to the covered properties becoming
   contaminated with the virus, rendered the premises, including property
   located at the premises unsafe, and resulting in direct physical loss of and
   damage to the covered properties.” Further, the “presence of COVID-19
   physically altered the covered properties” by “rendering those properties
   unsafe, and thereby depriving Plaintiffs of their possession and use of the
   covered properties.” Because the pandemic required the restaurants “to
   suspend operations and customers were not permitted to dine inside,”
   Fertitta alleged its restaurants could not generate revenue.
          The Fertitta Entities now argue that the district court erred in
   granting Zurich’s motion to dismiss after finding that the presence of
   COVID-19 could not cause a physical loss or damage to property. Zurich
   counters that the district court properly dismissed the complaint because
   Fertitta failed to plead direct physical loss of or damage to property as
   required under the Policy. The limited coverages for “microorganisms” do
   not alter the meaning of “direct physical loss of or damage to” property.
   Instead,   the   microorganism     exclusion     bars   coverage   because    it
   unambiguously excludes losses directly or indirectly caused by the virus.
          Texas law governs our interpretation of the insurance policy. “Texas
   law provides that insurance policies are construed according to common
   principles governing the construction of contracts, and the interpretation of
   an insurance policy is a question of law for a court to determine.” Am. Intern.
   Specialty Lines Ins. Co., 620 F.3d at 562 (citing New York Life Ins. Co. v.
   Travelers Ins. Co., 92 F.3d 336, 338 (5th Cir. 1996)). We limit our inquiry to
   the four corners of the underlying complaint and the four corners of the
   Policy, and “interpret the contract to discern the intention of the parties from

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   the language expressed in the policy.” Id. All the provisions must be
   considered with reference to the whole instrument. Id. (citing Coker v. Coker,
   650 S.W.2d 391, 393 (Tex. 1983)). “The policy’s terms are given their
   ordinary and generally-accepted meaning unless the policy shows the words
   were meant in a technical or different sense.” Gilbert Tex. Const., LP v.
   Underwriters at Lloyd’s London, 327 S.W.3d 118, 126 (Tex. 2010).
          If a policy is subject to more than one reasonable interpretation, it is
   ambiguous. See Nat’l Union Fire Ins. Co. of Pittsburgh v. CBI Indus. Inc., 907
   S.W.2d 517, 520 (Tex. 1995). “Only where a contract is first determined to
   be ambiguous may the courts consider the parties’ interpretation.” Id.
   (citation omitted). When an insurance policy is ambiguous, and the parties
   offer conflicting reasonable interpretations of the policy, Texas law favors
   adopting the interpretation in favor of the insured. RSUI Indem. Co. v. The
   Lynd Co., 466 S.W.3d 113, 118 (Tex. 2015). But a policy is only ambiguous
   “if, after applying the rules of construction, it remains subject to two or more
   reasonable interpretations.” Id. at 119 (internal quotation marks and citation
   omitted).
          Here, we find no ambiguity in the Policy, and our caselaw firmly
   forecloses the arguments offered by the Fertitta Entities. The six coverages
   at issue in this appeal require “direct physical loss of or damage to” covered
   property. We have held that under Texas law, “direct physical loss of
   property” means “a tangible alteration or deprivation of property.” Terry
   Black’s Barbecue v. State Auto. Mut. Ins. Co., 22 F.4th 450, 458 (5th Cir.
   2022). And a restaurant does not suffer a “direct physical loss of property”
   when it must suspend dine-in services because of local, state, or national
   COVID-19 regulations. See id. at 455. That would seemingly end the
   argument as to these six coverage provisions.

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           Fertitta appears to argue that this case is different from the several we
   have already considered and rejected because the virus itself, rather than the
   closure orders, tangibly altered the properties, and that the Policy expressly
   contemplates that microorganisms, including viruses, can physically damage
   property. 2 This is akin to the argument made in Am. Liberty Hosp., Inc. v.
   Cont’l Cas. Co., 2022 WL 2669465 (S.D. Tex. July 11, 2022), when the
   plaintiff argued that COVID-19 “became affixed to the Covered Properties
   after infected persons were present,” thereby “damag[ing] the insured
   properties” and “render[ing] them unusable and dangerous to the public.”
   Id. at *2.     To the extent Appellants contend that its properties were
   “physically contaminated,” this distinction is unavailing. As the district
   court noted in Am. Liberty Hosp., “contamination of objects or properties”
   by COVID-19 “is transient and does not physically alter them.” Id.
           Our court has spoken to variations of this argument numerous times
   and each time flatly rejected it. In PS Bus. Mgmt., LLC v. Fireman’s Fund Ins.
   Co., No. 21-30723, 2022 WL 2462065 (5th Cir. July 6, 2022) (unpublished),
   we stated that “COVID-19 is a virus that injures people, not property.” Id.
   at *3 (internal marks and citation omitted). In Ferrer & Poirot, GP v.
   Cincinnati Ins. Co., 36 F.4th 656, 658 (5th Cir. 2022), we stated that COVID-
   19 did not cause “physical loss or damage to insured property” because
   “[w]hile COVID-19 has wrought great physical harm to people, it does not
   physically damage property within the plain meaning of ‘physical.’”

           _____________________
           2
              This provision is not superfluous simply because it is inapplicable to the
   coronavirus. Zurich provides an example of when a virus might cause direct physical loss
   or damage by pointing to living things like livestock, which can be a type of property. See
   also Curtis O. Griess & Sons, Inc. v. Farm Bureau Ins. Co., 528 N.W.2d 329, 331 (Neb. 1995)
   (pseudorabies virus carried by windstorm infected and killed swine). It also notes that
   “some microorganisms can cause direct physical loss or damage when they tangibly alter
   property, such as if mold infiltrated a property’s walls after a water pipe bursts.”

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   (citations omitted). Significantly, Fertitta “was not deprived of its property
   nor was there a tangible alteration to its property,” so there was no direct loss
   to trigger coverage. Id. In Aggie Invs. LLC v. Cont’l Cas. Co., 2022 WL
   257439 (5th Cir. 2022), we discussed in detail why physical loss of property
   cannot reasonably be interpreted to mean loss of use. Id. at *2. First, we
   noted that by including the term “physical,” the policy necessarily
   contemplated a loss that is nonphysical and thus excluded. Id. Further, as
   here, the policy provides for a “period of restoration” which contemplated
   that the loss suffered requires a period for repair. Id. We found no ambiguity
   in the “direct physical loss of property” language. Id. at *3. As stated in
   Terry Black’s Barbecue, this conclusion is consistent with every other circuit
   court to interpret this language in the context of losses caused by civil
   authority orders closing nonessential businesses during the COVID-19
   pandemic. See 22 F.4th at 457 (collecting cases).
          Despite Fertitta’s best attempts, it needed to plausibly plead that the
   COVID-19 virus caused physical damage to its property. It cannot do so.
   When the plaintiff seeks insurance coverage, if the insurance policy
   “precludes recovery under its very terms, dismissal is proper.” IberiaBank
   Corp. v. Ill. Union Ins. Co., 953 F.3d 339, 345 (5th Cir. 2020) (citation
   omitted).     The district court correctly dismissed these claims, as the
   arguments raised by the Fertitta Entities are solidly foreclosed by precedent.
          AFFIRMED.

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