Fifth Circuit Opens Door to Removal Following Involuntary Dismissal of Non-Diverse Defendant

Originally published by Philip Dore and Mark Deethardt.

When is a case removable to federal court?  The general rule is that removability is determined at the time a case is filed.  One exception is the so-called “voluntary-involuntary” rule, which permits removal only when the plaintiff’s voluntary action in state court creates federal jurisdiction.  The textbook example is the voluntary dismissal of a non-diverse defendant who settled with the plaintiff.  The textbook counterexample is when the non-diverse defendant is dismissed via contested motion—an involuntary dismissal.   In Hoyt v. The Lane Construction Corporation, 927 F.3d 287 (5th Cir. 2019), the Fifth Circuit blurred the line between these categories and expanded the cases that can be removed to federal court.

The Hoyt Plaintiffs initially blocked removal by suing non-diverse defendants in state court.  Plaintiffs voluntarily dismissed one non-diverse defendant, and the court later dismissed the remaining non-diverse defendant on a contested summary judgment.  After the appeal delays expired, and with all non-diverse defendants gone, the case was removed on diversity grounds.  Plaintiffs moved to remand, claiming the voluntary-involuntary rule prohibited removal.  The district court denied the motion, and the Fifth Circuit affirmed 2-1.

The majority began by noting the voluntary-involuntary rule does not apply when a defendant is improperly joined (f/k/a “fraudulent joinder”).  In the Fifth Circuit, improper joinder “can be established by demonstrating, among other things, the inability of the plaintiff to establish a cause of action against the non-diverse party in state court.”  Citing this rule, the majority held that “[w]hen a state court order creates diversity jurisdiction and that order cannot be reversed on appeal, our precedent treats the voluntary-involuntary rule as inapplicable.”  In Hoyt, since the appeal delays had run, the summary judgment dismissal of the non-diverse defendant could not be reversed on appeal.  Therefore, the majority held, the defendant was improperly joined.

The dissent criticized the majority’s hindsight approach.  In its view, the issue for improper joinder is not whether a party eventually loses on the merits—for example, on summary judgment—but whether the plaintiff’s allegations could “survive a Rule 12(b)(6)-like analysis.”  This approach focuses on the allegations in the petition, not the plaintiff’s ability to later support those allegations with evidence.

Despite recognizing the voluntary-involuntary rule for over 50 years, this is the first time the Fifth Circuit has permitted removal based on a contested merits dismissal.  So how far does this ruling go?  Plaintiff attorneys may argue it applies only to the unique facts in that case.  Defense attorneys may argue it applies to any non-appealable, with-prejudice dismissal.

Another uncertainty is whether the one-year limit on diversity removals (28 U.S.C. § 1446(c)) applies to the voluntary-involuntary rule.  In other words, what happens if over one year has passed when the non-diverse defendant is dismissed and the appeal delays have run?  This is exactly what occurred in Hoyt, but the majority did not address it.[1]  Since the Fifth Circuit recently denied en banc rehearing, we may never know the answer.

Given these uncertainties, what does Hoyt teach us about removal to federal court?  Here are a few ideas:

1. Watch for filings by non-diverse co-defendants seeking with-prejudice dismissals. Consider whether a dismissal would create complete diversity.  If so, closely monitor the status of this filing.
2. If the non-diverse defendant is dismissed, calculate the appeal delays under state law.
3. If the appeal delays expire, and the other requirements for diversity removal are met (such as amount in controversy), the case may be removable under Hoyt.

For more information about this Article or related issues, please contact attorneys Philip Dore (pdore@liskow.com) or Mark Deethardt (mrdeethardt@liskow.com).

[1] Plaintiffs did not argue this point in the lower courts or on appeal.  The 5th Circuit has not addressed it in prior opinions.

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