Commercial Litigation and Arbitration

Removal — Fraudulent Joinder — Fifth Circuit Test and Procedure

From Moore v. Goodyear Tire & Rubber Co., 2010 U.S. Dist. LEXIS 80703 (N.D. Tex. Aug. 10, 2010):

"[T]he burden on the removing party is to prove that the joinder of the in-state parties was improper- -that is, to show that sham defendants were added to defeat jurisdiction." Smallwood v. I11. Cent. R.R. Co., 385 F.3d 568, 575 (5th Cir. 2004) (en banc). One of the methods of establishing improper joinder is to show "inability of the plaintiff to establish a cause of action against the non-diverse party in state court." Id. at 573. In Smallwood, the Fifth Circuit adopted the following phrasing of the required proof of improper joinder, rejecting all others:

[T]he test for fraudulent joinder is whether the defendant has demonstrated that there is no possibility of recovery by the plaintiff against an in-state defendant, which stated differently means that there is no reasonable basis for the district court to predict that the plaintiff might be able to recover against an in-state defendant.

Id. A mere theoretical possibility that the plaintiff might be able to recover against an in-state defendant will not preclude a finding of improper joinder. Id. at 573 n.9. See also Campbell v. Stone Ins., Inc., 509 F.3d 665, 669 (5th Cir. 2007) ("[T]here must be a reasonable possibility of recovery, not merely a theoretical one." (emphasis added)).

Even if the plaintiff has alleged a cause of action against the non-diverse defendant, improper joinder may be established by "pierc[ing] the pleadings and conduct[ing] a summary inquiry." Smallwood, 385 F.3d at 573. The removing party may bring to the court's attention and the court may "consider summary judgment-type evidence to determine whether the plaintiff has a basis in fact for the claim." Campbell, 509 F.3d at 669. Such an inquiry is appropriate "to identify the presence of discrete and undisputed facts that would preclude plaintiff's recovery against the in-state defendant." Smallwood, 385 F.3d at 573-74.

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