Reported / Citable
Background
Windsor Court Hotel Partners sued its primary and excess insurers in Texas state court over damage that Hurricane Ida allegedly caused to its New Orleans hotel. The alleged losses were between $34 million and $38 million, exceeding the primary policies’ combined $25 million limit and potentially reaching Arch Specialty Insurance Company’s first excess layer.
After Windsor Court settled with the primary insurers and removed them from the case, Arch removed the remaining dispute to federal court based on diversity jurisdiction. Because removal occurred nearly two years after the action began, Windsor Court sought remand under the one-year limit in 28 U.S.C. § 1446(c)(1), along with attorneys’ fees, costs, and Rule 11 sanctions.
The Court’s Holding
The magistrate judge recommended remanding the case because Arch removed it more than one year after its commencement and failed to prove that Windsor Court acted in bad faith to prevent removal. Windsor Court’s original allegations placed losses above the primary coverage limits, and insureds may pursue primary and excess insurers in the same action even before primary coverage is exhausted. The record also showed that Windsor Court actively litigated against Arch rather than merely retaining it as a defendant to manipulate federal jurisdiction.
The magistrate judge nevertheless recommended denying attorneys’ fees, costs, and Rule 11 sanctions. Arch had an objectively reasonable basis to rely on Windsor Court’s repeated allegations that its members were citizens of Texas and Louisiana, and publicly available records did not readily reveal the indirect New Jersey ownership interest that allegedly defeated diversity. Windsor Court’s incomplete citizenship allegations and piecemeal supporting documentation also prolonged the jurisdictional dispute.
Key Takeaways
- A diversity-based removal filed more than one year after an action begins is untimely unless the removing defendant proves that the plaintiff acted in bad faith to prevent removal.
- Asserting claims against an excess insurer before exhaustion of primary coverage did not establish bad faith where the alleged losses reached the excess layer and the insured actively pursued those claims.
- Improper removal does not automatically justify fees or sanctions; Arch’s reliance on Windsor Court’s citizenship allegations was objectively reasonable under the circumstances.
Why It Matters
The recommendation illustrates the demanding proof required to invoke Section 1446(c)(1)’s bad-faith exception. A defendant must show deliberate manipulation intended to prevent removal, not merely that a claim was premature, unsuccessful, or later altered.
It also underscores that parties should disclose an LLC’s citizenship fully and accurately. Incomplete allegations concerning a multilayer ownership structure can complicate removal proceedings and weigh against awarding fees even when remand is warranted.