Fraudulent Joinder to Defeat Diversity Jurisdiction?

8.30.10    By Bob Mendes    Tags ,

A Tennessee homeowner sued a Tennessee construction contractor and its Michigan insurer in Bradley County Chancery Court after a retaining wall fell and caused more than $80,000 in damage to the home and surrounding property. The Michigan insurance company removed the action to U.S. District Court and asserted that the court had diversity jurisdiction. Anticipating the argument that there was not complete diversity because the homeowner and contractor were both in Tennessee, the insurance company alleged that the contractor had been fraudulently joined as a defendant in order to defeat diversity jurisdiction. The district court disagreed and remanded the matter to state court.

The basis of the claim that the contractor had been fraudulently joined was the fact that the contractor had previously filed a Chapter 7 bankruptcy case and received a discharge. The Michigan insurer pointed out that the standard discharge injunction received by the contractor made it impossible for the plaintiff to recover any judgment against the contractor. Thus, according to the insurer, there was no reason to add the contractor as a party except to defeat diversity.

In response, the court held that, while the bankruptcy extinguished the builder’s potential liability, the homeowner could still “proceed against a debtor in order to determine the liability for the purposes of collecting from a third party.” Because the plaintiff was pursuing the contractor solely to establish the insurance company’s liability, there was no violation of the bankruptcy discharge injunction. In turn, there was no fraudulent joinder in order to defeat diversity jurisdiction. For this reason, the case was remanded to state court to be resolved.

The full decision is Stewart v. Jennings, et al., 2010 WL 3009536 (E.D. Tenn. July 28, 2010).


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