Steinfeld et al v. American Zurich Insurance Company ** DO NOT DOCKET. CASE REMANDED to the 295th Judicial District Court of Harris County, Texas **

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
Jay Steinfeld and Barbara Winthrop, 	§
§
Plaintiffs, 	§
§
v. 	§ 	Civil Action No. 4:25-cv-4989
§
American Zurich Insurance Company, 	§
§
Defendant. 	§
JUDGE PALERMO’S
REPORT AND RECOMMENDATION
This 	is 	an 	insurance 	dispute.1 Defendant 	American 	Zurich 	Insurance
Company (“American Zurich”) removed this case from state court to federal court.
ECF No. 1. Plaintiffs Jay Steinfeld and Barbara Winthrop (“Plaintiffs”) move to
remand to state court. ECF No. 5. American Zurich responded. ECF No. 9. Having
considered the parties’ briefing and the applicable law, the Court recommends
Plaintiffs’ motion be granted.
I. 	BACKGROUND
In 2021, Plaintiffs began building a new home in Houston, Texas. ECF No.
1-2 ¶ 8. To protect their home, Plaintiffs purchased a builder’s risk insurance policy
from American Zurich for the period April 1, 2023, through April 1, 2024. Id. ¶ 9.
During the construction process, Sheet Metal Crafts LLC (“Sheet Metal”) was
1 The district judge to whom this case is assigned referred all pretrial proceedings under 28 U.S.C.
§ 636. Order of Referral, ECF No. 6.
United States District Court
Southern District of Texas
ENTERED
May 26, 2026
Nathan Ochsner, Clerk
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hired as a subcontractor. Id. ¶ 11. On July 25, 2023, while performing “hot work”
on the home’s roof, Sheet Metal “ignited certain roofing materials and portions of
the previously installed roof,” starting a fire that caused substantial damage. Id.
¶¶ 11, 14–15.
After the fire, American Zurich twice inspected the property for damage. On
the first inspection, Plaintiffs claim it “understated the damage . . . and failed to
promptly and fully pay th[e] claim.” Id. ¶ 16. On the second inspection, American
Zurich sent several individuals to assess the damage but, “[t]o date,” has “not
provided any updated estimates or reports from its second inspection.” Id. As a
result, Plaintiffs “have been forced to spend out of pock funds to remediate” some
of the damage, “pay their general contractor, and retain their own team of” damage
experts. Id. ¶ 17. They estimate the damage to exceed $4 million. Id. ¶ 18.
On October 25, 2024, Plaintiffs sued American Zurich and Sheet Metal in
Texas state court. ECF No. 1-2. Against American Zurich, they asserted seven
claims for:
• 	violations 	of 	Texas 	Insurance 	Code 	§§ 541.060(a)(2)(A),
542.055(a)(1), and 542.060, id. ¶¶ 22–38 (counts I–III);
• 	breach of contract, id. ¶¶ 39–40 (count IV);
• 	breach of good faith and fair dealing, id. ¶¶ 41–42 (count V);
• 	punitive damages for bad faith, id. ¶¶ 43–44 (count VI);
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• 	and violations of the Texas Deceptive Trade Practices Act, id. ¶¶ 45–
47 (count VII).
Against Sheet Metal, Plaintiffs asserted one claim for negligence. Id. ¶¶ 48–52
(count VIII).
Almost a year later, in September 2025, American Zurich asked the state court
to sever the “tort cause of action against Sheet Metal . . . (Eighth cause of action)
related solely to its negligence into a separate and independent lawsuit.” ECF No. 5
at 3 (quoting ECF No. 5-3 at 5). As is customary, American Zurich filed with its
motion a proposed order that stated: “It is hereby ORDERED that the Eighth cause
of action against Sheet Metal Crafts, LLC[,] is severed into a separate and
independent lawsuit from the claims asserted by Plaintiffs . . . against American
Zurich.” Id. (emphasis in original) (quoting ECF No. 5-4 at 1). “Plaintiffs opposed
the motion.” Id.
On October 13, 2025, the state court granted American Zurich’s motion—in
part. By crossing out words in some places and inserting words in others, the court
created its own modified order from American Zurich’s proposed order. The
amalgamation reads: “It is hereby ORDERED that the Eighth cause of action2
2 The parties dispute whether the severance order is ambiguous because Plaintiffs’ “Eighth cause
of action” is against Sheet Metal, not American Zurich. ECF No. 1-2 ¶¶ 48–52. After reviewing
the severance order and the accompanying hearing transcript, the Court finds this error to be a
mere 	scrivener’s 	error. 	Though 	inartful, 	the 	order 	states 	severance 	applies 	only 	to 	the
extracontractual claims against American Zurich, leaving the negligence claim against Sheet Metal
and contract claim against Zurich together in the main action.
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against Sheet Metal Crafts, LLC American Zurich is severed into a separate and
independent lawsuit . . . ONLY as to causes of actions involving extra-contractual
matters. The underlying contract cause of action shall be tried in the main case.”
ECF No. 5-5 at 1 (emphasis in original).
American Zurich wasted no time. Seven days after the state court issued the
severance order, it removed the severed extracontractual claims to federal court.
ECF No. 1.
Plaintiffs now move to remand. ECF No. 5.
II. 	REMOVAL AND REMAND
Federal courts have “diversity jurisdiction over a civil action between citizens
of different States if the amount in controversy exceeds $75,000.” Advanced
Indicator & Mfg., Inc. v. Acadia Ins. Co., 50 F.4th 469, 473 (5th Cir. 2022) (quoting
Flagg v. Stryker Corp., 819 F.3d 132, 135 (5th Cir. 2016) (en banc)). Diversity
jurisdiction “requires complete diversity—if any plaintiff is a citizen of the same
State as any defendant, then diversity jurisdiction does not exist.” Id. (quoting Flagg,
819 F.3d at 136).
Normally, a defendant may remove a case from state to federal court if the
suit “could have originally been filed in federal court.” Id. (citing 28 U.S.C.
§ 1441(a)). A defendant may also remove if the case was not originally removable
but later “become[s] removable” by filing a removal notice within 30 days.
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28 U.S.C. § 1446(b)(3). A defendant may not remove a case based on diversity
jurisdiction, however, “more than 1 year after commencement of the [state-court]
action.” Id. § 1446(c)(1).
“The removing party bears the burden of showing that federal jurisdiction
exists and that removal was proper.” Allstate Vehicle & Prop. Ins. Co. v. LG Elecs.
U.S.A., Inc., No. CV H-23-4332, 2024 WL 150733, at *2 (S.D. Tex. Jan. 12, 2024)
(quoting Manguno v. Prudential Prop. & Cas. Ins. Co., 276 F.3d 720, 723 (5th Cir.
2002)). “Because removal jurisdiction raises significant federalism concerns, the
removal statute is strictly construed, ‘and any doubt about the propriety of removal
must be resolved in favor of remand.’” Id. (quoting Gasch v. Hartford Accident &
Indem. Co., 491 F.3d 278, 281–82 (5th Cir. 2007)).
III. 	PLAINTIFF’S MOTION TO REMAND SHOULD BE GRANTED.
As an initial matter, it is undisputed that Plaintiffs’ original state-court suit—
against both American Zurich and Sheet Metal—was not removable because Sheet
Metal is a Texas citizen, same as Plaintiffs. ECF No. 1-2 ¶ 5; ECF No. 9 at 12
(explaining that Sheet Metal was “the only non-diverse party that destroyed diversity
in the original action”). When the state court severed that case, two sprung up in its
place: one with Plaintiffs’ contract claims against American Zurich and their
negligence claim against Sheet Metal, and another with only the extracontractual
claims against American Zurich. The first remains in state court; American Zurich
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removed the second one to this Court.
The parties do not dispute that complete diversity exists between Plaintiffs
and American Zurich. See ECF No. 1-2 ¶¶ 2–3 (alleging Plaintiffs are citizens of
Texas; American Zurich is a foreign company); ECF No. 9 at 17 (explaining that
American Zurich is a “New York corporation with its principal place of business in
Illinois”). Nor do they dispute that the amount in controversy is greater than $75,000.
ECF No. 1-2 ¶ 7 (seeking “monetary relief in an amount over $1,000,000); ECF
No. 9 at 17 (“These claims involve an amount in controversy over $75,000.”). So,
as it stands, the Court has diversity jurisdiction over Plaintiffs’ claims against
American Zurich.
To recap: Plaintiffs’ original case could not have been filed in federal court
because it lacked diversity. A portion of it subsequently became removable because
it was severed, and American Zurich timely removed.3 By all accounts, that should
end the inquiry.
However, Plaintiffs argue the Court should remand for several reasons. One
is persuasive.
A. Plaintiffs Did Not Voluntarily Create Diversity.
Plaintiffs argue that removal was inappropriate because diversity was created
by the state court’s opposed severance order, not voluntarily by Plaintiffs. ECF No. 5
3 American Zurich filed within the 30-day limit under 28 U.S.C. § 1446(b)(3) and the 1-year limit
under § 1446(c)(1). ECF No. 9 at 17.
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at 13–14. This argument “implicates the federal removal statute, a judge-made
exception to the statute, and a judge-made exception to that exception.” Hoyt v. Lane
Constr. Corp., 927 F.3d 287, 295 (5th Cir. 2019) (emphasis in original), as revised
(Aug. 23, 2019). While there is case law dealing with somewhat similar situations,
neither the parties nor the Court were able to find a case quite like this one—where
a state court severed some claims against one defendant, forcing it to proceed in one
case that is still not removable and another case that became removable, both with
overlapping and interrelated claims. Armed with nothing but black-letter law and
general principles, the Court must wade into the dense “doctrinal thicket” to resolve
this unprecedented issue. Id. at 295.
First, the easy part: statutory text provides that a defendant may remove a case
if it was not originally removable but later “become[s] removable.” 28 U.S.C.
§ 1446(b)(3). American Zurich did just that, removing this case after the state court’s
severance made Plaintiffs’ extracontractual claims removable by separating them
from diversity-destroying Sheet Metal.
“But this is an area thick with binding precedent,” and “precedent tells us
removability under §§ 1441 and 1446 is subject to a judge-made exception.” Hoyt,
927 F.3d at 295. That exception is called the voluntary-involuntary rule: “‘Where
the case is not removable because of joinder of defendants,’ only ’the voluntary
dismissal or nonsuit by the plaintiff’ . . . can convert a nonremovable case into a
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removable 	one.” 	Id. 	(original 	alterations 	adopted 	and 	emphasis 	in 	original)
(quoting Great N. Ry. Co. v. Alexander, 246 U.S. 276, 281 (1918)). As the Fifth
Circuit puts it, “an action nonremovable when commenced may become removable
thereafter only by the voluntary act of the plaintiff.” Id. (emphasis added) (quoting
Crockett v. R.J. Reynolds Tobacco Co., 436 F.3d 529, 532 (5th Cir. 2006)).
Here, Plaintiffs’ original action against American Zurich and Sheet Metal was
nonremovable when commenced because it lacked diversity. Diversity only obtained
when the state court severed the extracontractual claims against American Zurich,
which Plaintiffs opposed. ECF No. 5 at 14. Thus, removal was improper under the
voluntary-involuntary removal rule because Plaintiffs took no voluntary action to
make the case removable.
However, the “judicially created voluntary-involuntary rule is itself subject to
a 	judicially 	created 	exception 	for 	improper 	joinder.” 	Hoyt, 	927 F.3d 	at 	295
(emphasis in original). “[T]he voluntary-involuntary rule is inapplicable” when “the
non-diverse defendant was improperly joined.” Id. (quoting Crockett, 436 F.3d at
532). “The removing party may prove improper joinder by demonstrating: (1) actual
fraud in the pleading of jurisdictional facts; or (2) the inability of the plaintiff to
establish a cause of action against the nondiverse defendant in state court.” Singleton
v. Freymann, No. 2:25-CV-00030, 2025 WL 2200742, at *2 (S.D. Tex. July 17,
2025), adopted, No. 2:25-CV-00030, 2025 WL 2197141 (S.D. Tex. Aug. 1, 2025).
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American Zurich does not allege any fraud in the pleadings. Therefore, the
only question is whether Plaintiffs can establish a cause of action against Sheet
Metal, as pled in their original state-court petition. To determine this, the Court
evaluates “the factual allegations in the light most favorable to the [Plaintiffs],
resolving 	all 	contested 	issues 	of 	substantive 	fact 	in 	[their] 	favor.” 	Id.
(quoting Guillory v. PPG Indus., Inc., 434 F.3d 303, 308 (5th Cir. 2005)). Texas
substantive law governs. Id. (explaining that “state substantive law” controls). “The
motion to remand must be granted unless ‘there is absolutely no possibility that the
plaintiff will be able to establish a cause of action against the non-diverse defendant
in state court.’” Id. (quoting Griggs v. State Farm Lloyds, 181 F.3d 694, 699 (5th
Cir. 1999)).
Here, Plaintiffs asserted a negligence claim against Sheet Metal. ECF No. 1-
2 ¶¶ 48–52. To state a negligence claim under Texas law, a plaintiff must establish
“(1) a legal duty; (2) a breach of that duty; and (3) damages proximately resulting
from the breach.” Bandit v. Rowland Truck Lines, Inc., No. 3:23-CV-299, 2024 WL
7035947, at *1 (S.D. Tex. Apr. 3, 2024) (quoting Elephant Ins. Co. v. Kenyon,
644 S.W.3d 137, 144 (Tex. 2022)). In their state-court petition, Plaintiffs allege that
Sheet Metal “had a duty to protect [their] property while working on the roof,” Sheet
Metal “breached that duty when it negligently ignited roofing materials while
performing ‘hot work’ on the . . . roof,” and they suffered damage to their real and
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personal property as a result. ECF No. 1-2 ¶¶ 49–50, 52. American Zurich does not
dispute that Plaintiffs adequately pled a negligence claim against Sheet Metal and
provides no other reason they would be unable to establish a claim against Sheet
Metal. Thus, the Court concludes that Sheet Metal was not improperly joined. The
exception to the voluntary-involuntary rule therefore does not apply. Thus, the rule
applies, and removal was improper because Plaintiffs took no voluntary action to
make their case removable.
American Zurich tries to resist this conclusion, contending that “Plaintiffs’
decision to include Sheet Metal (and their singular negligence claim against [it]) in
the original state court proceeding . . . was an attempt to destroy diversity.” ECF
No. 9 at 27. According to American Zurich, the negligence claim against Sheet
Metal “is entirely unrelated to the duties [it] owed to Plaintiffs under their insurance
contract . . . or [its] post-loss handling of an insurance claim.” Id. The Court
disagrees.
A plaintiff may properly join defendants if “any right to relief is asserted
against them . . . arising out of the same transaction, occurrence, or series of
transactions or occurrences” and “any question of law or fact common to all
defendants will arise in the action.” FED. R. CIV. P. 20(a)(2) (emphasis added). Here,
American Zurich admits that “all of the claims” against it and Sheet Metal “share a
similar factual background—the fire loss.” ECF No. 9 at 27. In other words,
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Plaintiffs’ claims against both Defendants arise out of the same occurrence—the roof
fire—and factual questions surrounding the fire and the resulting damage will play
important roles in those claims. Ergo, Sheet Metal was not improperly joined.
The state court’s severance reinforces this conclusion. In American Zurich’s
own words, “the state court’s ruling makes clear that it found the joinder of the
Plaintiffs’ extracontractual claims against [it] with the negligence and subrogation
claims against Sheet Metal improper.” ECF No. 9 at 27. Importantly, though, the
state court did not conclude that Sheet Metal was improperly joined as a defendant
because it left the negligence claim against Sheet Metal together with the contractual
claim against American Zurich. If the court thought Sheet Metal was improperly
joined, it would have severed (or dismissed) Sheet Metal and left the claims against
American Zurich together. Indeed, that is exactly what American Zurich asked the
state court to do, but it declined—instead devising its own, novel severance scheme.
ECF No. 9 at 28 (explaining that “American Zurich originally requested the
severance of Sheet Metal’s negligence claim into another case”).
As a final defense, American Zurich cites Crockett v. R.J. Reynolds Tobacco
Company, 436 F.3d 529 (5th Cir. 2006). In Crockett, the plaintiff sued a group of
healthcare defendants for medical negligence and malpractice and a group of
tobacco defendants for product liability. Id. at 533. The state court severed the claims
because “the burden of proof to sustain” them was “totally different.” Id. Even
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though the plaintiff opposed the severance initially, he did not appeal it. Id. The Fifth
Circuit found that the state court’s “severance decision was tantamount to a finding
of improper joinder” and held that the voluntary-involuntary rule therefore did not
apply. Id.
American Zurich argues that Crockett controls this case, contending that “the
improper joinder exception can be applied to an order by the state court severing
valid claims against non-diverse defendants when the severance order creating
diversity was not appealed.” ECF No. 9 at 26. But its reliance on Crockett is
misplaced for a few reasons. First, the operative question under Crockett is whether
the state court’s severance was “tantamount to a finding of” improper joinder.
Crockett, 436 F.3d 529, at 533. As explained above, Plaintiffs properly joined Sheet
Metal because their negligence claim arose out of the same occurrence as its claims
against American Zurich. The state court concluded the same thing, which is why it
did not sever Sheet Metal from the main case. The Court cannot conclude that the
severance was “tantamount to a finding of” improper joinder if the state court
permitted Plaintiffs to continue to press their claims against Sheet Metal alongside
their contractual claim against American Zurich.
Second, Crockett dealt with a severance of dissimilar claims. Here, the state
court severed Plaintiffs’ contractual claim from their extracontractual claims. But as
the Fifth Circuit recently observed, “‘breach of contract and bad faith [i.e.,
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extracontractual] claims are largely interwoven’ under Texas law.” Thompson v.
State Farm Lloyds, No. 24-20519, 2026 WL 1419376, at *5 (5th Cir. May 20, 2026)
(cleaned up) (quoting Advanced Indicator, 50 F.4th at 477). As Plaintiffs rightly
point out, “establishing a breach of contract will be a necessary precursor to
establishing extracontractual liability.” ECF No. 5 at 10; USAA Tex. Lloyds Co. v.
Menchaca, 545 S.W.3d 479, 490 (Tex. 2018) (holding that generally “there can be
no claim for bad faith denial of an insured’s claim for policy benefits when an insurer
has promptly denied a claim that is in fact not covered” (cleaned up) (quoting
Republic Ins. Co. v. Stoker, 903 S.W.2d 338, 341 (Tex. 1995))). Given their
similarity and interdependence, it is unclear why the state court severed Plaintiffs’
claims. Regardless, unlike the dissimilar claims at issue in Crockett, the claims
severed here have similar burdens of proof.
Third, the state court in 	Crockett 	severed 	defendants, splitting up the
healthcare and tobacco defendants to “be tried in separate suits.” 436 F.3d at 532–
33. Unlike Crockett, the state court here severed claims, splitting up the contractual
claim against American Zurich from the extracontractual claims. Rather than
American Zurich and Sheet Metal getting their own separate suits—like the
healthcare and tobacco defendants did in Crockett and like American Zurich asked
for in its motion to sever—American Zurich remains in both suits, just defending
slightly different (albeit closely related) claims. If the “chief consideration” of the
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voluntary-involuntary rule “is judicial economy” and avoiding parallel proceedings,
Flores v. Nat’l Van Lines, Inc., No. EP-17-CV-00003-KC, 2017 WL 10765311,
at *3 (W.D. Tex. May 12, 2017), even more reason to apply it here and avoid
duplicative rulings on the breach of contract issue, which “remains in state court”
and presents “a necessary factor in establishing” Plaintiffs’ extracontractual claims.
ECF No. 5 at 11.
Fourth, the plaintiff in 	Crockett 	“elected not to appeal” the state-court
severance order. 436 F.3d 529, at 533. As the Fifth Circuit later explained, “[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.” Hoyt,
927 F.3d at 297. Here, American Zurich argues that “Plaintiffs have yet to appeal
the state court’s” severance. ECF No. 9 at 19. It claims they could seek a writ of
mandamus to reverse the severance, but they “have not sought any such relief” and
“have arguably waived their right to appeal the severance order” unless they can
justify the delay. Id. at 20.
American Zurich forgets that, as the removing party, it “bears the burden of
showing that . . . removal was proper.” Allstate Vehicle, 2024 WL 150733, at *2
(quoting Manguno, 276 F.3d at 723). It provides no evidence or argument that
Plaintiffs cannot justify any delay in appealing the state court’s order. In fact, it
admits there is no “deadline for a party to appeal a severance order through a writ of
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mandamus.” ECF No. 9 at 20. It also cites no case law explaining whether Plaintiffs
must challenge the severance through mandamus or whether they can challenge it
later through the normal state-court appeal process. Put simply, American Zurich
has not met its burden to show that the state court’s severance “cannot be reversed
on appeal.” Hoyt, 927 F.3d at 297 (emphasis added).
To the extent there exists any doubt about how Crockett applies to this case,
it “must be resolved in favor of remand” to respect the fundamental concerns of
federalism. Allstate Vehicle, 2024 WL 150733, at *2 (quoting Gasch, 491 F.3d at
281–82). American Zurich fails to clearly establish that the improper-joinder
exception applies to this novel—and unprecedented—situation. Thus, the voluntary-
involuntary rule applies, meaning removal was improper. The case should be
remanded.
IV. 	CONCLUSION
Accordingly, the Court RECOMMENDS Plaintiffs’ motion to remand, ECF
No. 5, be GRANTED.
The 	Parties 	have 	fourteen 	days 	from 	service 	of 	this 	Report 	and
Recommendation to file written objections. 28 U.S.C. § 636(b)(1)(C); F ED. R.
C IV . P. 72(b). Failure to file timely objections will preclude review of factual
findings or legal conclusions, except for plain error. Quinn v. Guerrero, 863 F.3d
353, 358 (5th Cir. 2017).
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Signed at Houston, Texas, on May 25, 2026.
Dena Hanovice Palermo
United States Magistrate Judge
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