Making a Federal Case Out of It -- AVA Acupuncture v. State Farm, et al.

NO-FAULT – DECLARATORY JUDGMENT ACTION – REMOVAL – MOTION TO REMAND FROM FEDERAL BACK TO STATE COURT
AVA Acupuncture, P.C. v. State Farm Mut. Auto Ins. Co.
(SDNY, decided 12/9/2008)

Coverage Counsel readers will remember this case, first blogged back in June, when I initially agreed to host the 225-page, 789+ paragraph complaint. Since then, I've been watching eCourts for what I thought would be a set of preemptive CPLR 3211 motions to dismiss what started as a New York County Supreme Court action.

While I was waiting, insurer defendant State Farm, and the law firm defendants Melli, Guerin & Wall, and Katten Muchin Rosenman, removed this putative class action to federal court pursuant to the Class Action Fairness Act of 2005 ("CAFA"), and then all plaintiffs except Okslen Acupuncture P.C. voluntarily discontinued their action against all defendants. Okslen then voluntarily dismissed its action against the two removing law firm defendants, leaving State Farm as the sole removing defendant.

Plaintiff then moved to remand this action back to state court, asserting two grounds: (1) that the federal court lacked subject matter jurisdiction because State Farm had failed to meet its burden of demonstrating that the plaintiffs' claims exceed the $5 million amount in controversy requirement under CAFA; and (2) that even if the amount in controversy requirement is met, the court should decline jurisdiction under CAFA's "local controversy" exception. The district court denied plaintiff's motion, which means that the case, in all likelihood, will proceed to conclusion in the federal court system.

On the amount in controversy issue, Southern District of New York United States District Court Judge Shira Scheindlin held:

Pursuant to New York insurance law, absent a valid denial, No-Fault benefits are rendered overdue if not paid within thirty days. By seeking to invalidate "each and every denial of claim form [] issued by State Farm that is based in whole or in part upon information obtained by State Farm's SIU," plaintiffs have made the "object" of the litigation worth at least forty million dollars. If declaratory relief is granted, there is a distinct possibility that as much as forty million dollars of benefit will flow to plaintiffs. As a result, State Farm has easily established that, within a "reasonable probability," the five million dollar amount in controversy requirement is met.

Plaintiff also argued that AutoOne, General Assurance, and the McDonnell & Adels law firm each qualified as a "signficant" local defendant such that the "local controversy" exception to CAFA jurisdiction should apply. Judge Scheindlin disagreed, holding:

[P]laintiffs offer little support for this assertion. For the two insurance company defendants -- AutoOne and General Assurance -- plaintiffs' principal argument is that they have engaged in many of the same practices as State Farm and are also the target of declaratory and injunctive relief. The only indication of AutoOne and General Assurance's relative significance is plaintiffs' assertion that 2,299 complaints, including complaints related to No-Fault denials, have been filed against the two insurance company defendants with the New York State Department of Insurance. No time frame is given for when these complaints were filed, and plaintiffs do not provide a breakdown with respect only to complaints related to No-Fault denials. Nevertheless, even the total number of complaints lodged against AutoOne and General Assurance pale in comparison with the more than sixty-seven thousand denials at issue with State Farm.

Furthermore, even plaintiffs acknowledge that they are alleging additional violations only against State Farm. For instance, plaintiffs note that they are alleging that State Farm "orchestrated . . . with bribes disguised as grants, a large criminal investigation [that] led to arrests and indictments in order to kill claims" and that State Farm "engages in a fraudulent Independent Medical Examination Scheme and Examination Under Oath Scheme." While plaintiffs put much emphasis on allegations unique to AutoOne and General Assurance -- AutoOne's "[maintenance of] inadequate reserves" and the engagement by AutoOne and General Assurance of "schemes" to "wear down claimants in violation of New York State Insurance Laws" -- this alleged misconduct appears to be less significant than or no different from the alleged misconduct against State Farm.

With respect to McDonnell & Adels, P.C., plaintiffs simply argue that the law firm aided State Farm and other insurance companies in their violations of the law and cite the number of claims plaintiffs are alleging against the firm. Plaintiffs do not offer any evidence from which this court can compare the significance of the relief sought from McDonnell & Adels, P.C. against the relief sought from State Farm.

Plaintiffs have therefore failed to meet their burden of establishing that there is a "significant" local defendant. As a result, the local controversy exception does not apply.

It's no secret that no-fault medical provider counsel don't like federal court all that much, so it shouldn't surprise anyone that plaintiff's counsel, who himself commented in that post about having mentioned in the complaint an "Act which says Feds must stay out of State's Insurance [sic]", sought to pull this case back to New York Supreme.

What one had touted as being "smart as hell" by having not sought money damages in the complaint, coupled with its alleged class action representation, actually landed this action in federal court. We'll all be watching to see how long or short its litigated life will be, now that it appears it will stay in that venue.