Snap removal in Texas practice

Last year, the Fifth Circuit became the latest circuit court to endorse snap removal, making it the third circuit court in the country to allow the practice. See Tex. Brine Co. v. AAA, 955 F.3d 482 (5th Cir. 2020);  Gibbons v. Bristol-Myers Squibb Co.,  919 F.3d. 699 (2d Circ. 2019), Encompass Ins.Co. v. Stone Mansion Rest., Inc. 902 F.3d 147 (3d Cir. 2018). Snap removal is the practice of removing an action to federal court based on diversity jurisdiction after the complaint has been filed but before a forum defendant is served. The Texas Brine Court, like the other circuits, based its holding on a plain reading of the removal statute, 28 USC § 1441(b)(2), which prohibits removal by a forum defendant that has been “properly joined and served.” As the court explained, there is a narrow window of opportunity to exercise this option.

Texas Brine involved claims against the AAA and two arbitrators after the arbitration stalled amidst allegations of undisclosed arbitrator conflicts of interest and other improprieties. The parties to the arbitration were Texas Brine Company, LLC (“Texas Brine”) and Occidental Chemical Corporation (“Oxy”). Four years after the parties selected the three arbitrators for the arbitration panel, Texas Brine discovered that two of the arbitrators had potential conflicts that had not been disclosed. Texas Brine moved to remove the two arbitrators, but the AAA denied the request. A few weeks later, however, the AAA removed one of the arbitrators due to an offensive comment he reportedly made to Texas Brine’s attorney. At that point, the two remaining arbitrators resigned, disbanding the arbitration panel. The Louisiana state court ultimately vacated all of the arbitration panel’s rulings on contested issues.

While the AAA evaluated candidate options for a replacement arbitration panel, Texas Brine brought suit in Louisiana state court against the AAA, a New York corporation, and the two arbitrators Texas Brine sought to remove, both Louisiana residents. When the AAA received service of process, the AAA immediately removed the case from Louisiana state court to federal court on the basis of federal diversity jurisdiction. Neither arbitrator had been served. Texas Brine moved to remand the case to Louisiana state court pursuant to the “forum-defendant” rule in 28 U.S.C. § 1441(b)(2), which disallows removal on the basis of diversity jurisdiction when any of the parties in interest “properly joined and served as defendants” is a citizen of the state in which the action was filed. There was no question the parties were completely diverse for the purposes of diversity jurisdiction, but because the arbitrators were Louisiana citizens, Texas Brine challenged the propriety of removing the case from the Louisiana state court.

The federal district court denied Texas Brine’s motion to remand. On appeal to the Fifth Circuit, Texas Brine argued that the concept of snap removal defeats congressional intent underlying the forum-defendant rule. The Fifth Circuit declined Texas Brine’s invitation to speculate on congressional intent. Looking at the language of 28 U.S.C. § 1441(b)(2), the Fifth Circuit reasoned that the words “properly joined and served” have a rational and plain meaning. The right to removal is determined based on a snapshot of the parties and pleadings at the moment removal is sought. The arbitrators were unserved when the AAA removed the case, which under the Fifth Circuit’s strict construction of the forum-defendant rule, meant 28 U.S.C. § 1441(b)(2) did not apply.

In concluding snap removal does not contradict the federal removal scheme, the Fifth Circuit echoed the approach taken in the Second and Third Circuits. See Gibbons, F.3d 699 (2d Cir. 2019) and Encompass, 902 F.3d 147 (3d Cir. 2018). The Sixth Circuit has also indicated in a footnote that it similarly interprets the forum-defendant rule. See McCall v. Scott, 239 F.3d 808, 813 n.2 (6th Cir. 2001).

Comment

As a practical matter, insurance companies facing litigation in state courts in snap removal jurisdictions may consider immediate removal before service is effectuated on the forum state defendant. Snap removal can be a useful counterstrategy to the common tactic employed by some plaintiffs’ lawyers in insurance litigation of intentionally naming in-state parties, such as local adjusters or agents, for the sole purpose of defeating federal diversity jurisdiction. The decision relating to removal must be expedient, however, because once service is effectuated on the in-state defendant, the right to removal vanishes.