The Hoyt Exception: An Exception to the Voluntary-Involuntary Rule

On December 10, 2019, the Northern District of Texas issued a Memorandum Opinion and Order in, Barnes Burk Storage, LLC v. United Fire & Casualty Company,¹ which denied a motion to remand. This opinion applied the recent Hoyt Exception to keep the case in federal court. The Hoyt Exception sprang from the Fifth Circuit’s opinion in Hoyt v. Lane Construction Corp.,² this year and is a narrow exception to the voluntary-involuntary rule. The Hoyt Exception operates when state court orders create diversity jurisdiction—a ticket to federal court—and when such orders cannot be reversed on appeal.

An understanding of the Hoyt exception as an exception to the voluntary-involuntary rule is important because insureds, as plaintiffs, have often successfully argued the application of the rule as grounds for remand to state court. Thus, it is important to realize a potential road block to the voluntary-involuntary rule argument and be prepared. In order to better comprehend the Hoyt Exception, a quick review of the general rules of removal and remand is helpful.

First: A case is proper in federal court in only two situations: (1) when there is “complete diversity” meaning a difference of the state citizenships of the plaintiffs and defendants, and the amount in controversy between them exceeds the sum or value of $75,000,³ and (2) when the controversy involves a federal question or statute.⁴

Second: The general rule of whether a case is removable from state court to federal court—whether it meets either of the above two situations—is determined at the time the case is filed.⁵ If neither situation applies, the case remains in state court. If, however, diversity jurisdiction arises in the state court case after the date of filing but within the one-year limitation frame for removals, it becomes eligible for removal to federal court.

Third: Removals can arise in several ways. One way is by the exercise of the voluntary-involuntary rule which is a judicially-created rule that allows a case that was nonremovable on its initial state court pleadings (at the time of filing) to become removable to federal court but only pursuant to a voluntary act of plaintiff that results in federal jurisdiction.⁶ The text-book example of the voluntary-involuntary rule in Texas is when a plaintiff settles with a non-diverse defendant (a Texas resident) and he/she is dismissed from the suit. More often than not, the parties’ citizenships will become diverse—a Texas plaintiff verses a foreign insurer defendant.

Fourth: Recently, defendant insurers have attempted to create diversity jurisdiction in state court by applying Section 542A.006, the September 1, 2017, amendment to the Texas Insurance Code, which allows defendant insurers to elect to take responsibility/liability for the claim-handling conduct of its non-diverse defendant agents. Because the defendant agents are generally Texas citizens, once an election is made by the diverse defendant insurer, the agents are dismissed from the suit which, in turn, creates diversity jurisdiction. Immediately thereafter, with the dismissal of the non-diverse defendant agent and the creation of diversity jurisdiction, insurers remove the suit to federal court—a more favorable forum for insurers. To return to state court—generally, a more favorable forum for plaintiff policyholders—a plaintiff argues that the removal is improper based on the voluntary-involuntary rule because the defendant insurer’s election of responsibility was not a voluntary act of the plaintiff.

The voluntary-involuntary rule has been around nearly one-hundred years and this argument generally prevailed until the Fifth Circuit’s recent ruling in Hoyt v. Lane Construction Corporation. There, plaintiffs were able to keep their case in state court by suing non-diverse defendants—no diversity jurisdiction. Plaintiffs voluntary dismissed one of the non-diverse defendants two days after the one-year limitation on removal had expired, and the court later dismissed the other non-diverse defendant by way of summary judgment. With all the non-diverse defendant parties gone, and after the time to appeal had expired, defendant removed the case to federal court on diversity grounds. Plaintiffs moved to remand asserting the voluntary-involuntary rule had been violated and remand was in order. The district court, however, denied the plaintiffs’ motion to remand and the Fifth Circuit affirmed.

The Fifth Circuit wrote that the voluntary-involuntary rule does not apply if the non-diverse defendant has been “improperly joined,” which is a judicially-created exception to the judicially-created voluntary-involuntary rule exception—an exception to an exception.⁷ 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.”⁸ In Hoyt, removal was upheld by the Fifth Circuit when diversity was created by the state court’s granting of the non-diverse defendant’s summary judgment motion and the dismissal of that party. The summary judgment could not be reversed on appeal because the plaintiff “apparently abandoned” the right to appeal. The court 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.” The Hoyt Exception was born.

The trial court in Barnes followed Hoyt.

The Facts: The facts in Barnes Bulk Storage, L.L.C. (“Barnes”) are familiar. Plaintiff suffered damage to its storage facility in Wichita County, Texas resulting from a 2017 wind/hail storm. Plaintiff filed a claim with its insurer, United Fire & Casualty Company, (“UFCC”) a foreign corporation.

Plaintiff filed suit on its claim alleging violations of the Texas Insurance Code against UFCC and its Texas resident adjuster.

Under Section 542A.006(3) of the Texas Insurance Code, UFCC elected to accept responsibility/liability of its Texas resident adjuster and a month later, UCCF removed the case to federal court alleging diversity between Plaintiff and UFCC. The case was remanded because the adjuster had not been dismissed from the suit, therefore, there was not complete diversity as required for federal court jurisdiction.

Following remand, the state court dismissed the Texas adjuster.

With the dismissal of the Texas resident adjuster, UFCC again removed the suit to federal court on diversity grounds.

Plaintiff filed a motion to remand.

The Holding: The trial court denied the motion to remand based on the Hoyt Exception and wrote; “[b]ecause the state court order dismissing McCormick [the non-diverse/Texas resident adjuster] created diversity and cannot be reversed on appeal, the voluntary-involuntary rule does not apply, so that this case was removable under 28 U.S.C. §§ 1441 and 1446.”⁹

Note: Lessons from Hoyt and Barnes:

First, with the recent Hoyt Exception, plaintiff policyholders will need to be even more diligent when motions are filed by a non-diverse defendant or when procedures are employed by defendants that effect the status of a non-diverse defendant and especially, if these motions or procedures are seeking or will result in a dismissal with prejudice of the non-diverse party defendant and the creation of diversity jurisdiction.

Second, if the non-diverse defendant is dismissed, and the mechanism by which the defendant was dismissed allows an appeal, then calendar appellate deadlines.

Third, if there is an appellate deadline and it is missed, and the requirement of $75,000 for the amount in controversy exists to support diversity, remember that the case may be removed and remain in federal court under the Hoyt Exception.
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¹ Barnes Burk Storage, LLC v. United Fire & Cas. Co., No. 7:19-CV-00099 (N.D. Tex. Dec. 10, 2019).
² Hoyt v. Lane Construction Corp., 927 F.3d 287 (5th Cir. 2019).
³ See 28 U.S.C. §1332(a)
⁴ See 28 U.S.C. §1331.
⁵ See 28 U.S.C. §1441(a).
⁶ See Weems v. Louis Dreyfus Corp., 380 F.2d 545, 547 (5th Cir. 1967).
⁷ See Hoyt, 927 F.3d at 295; see also, Great Northern Ry. Co. v. Alexander, 246 U.S. 276, 282 (1918) (recognizing the voluntary-involuntary rule applies only “in the absence of a fraudulent purpose to defeat removal”).
⁸ Hoyt, 927 F.3d at 296.
⁹ Barnes, at 3 (emphasis added).