“Directly Resulting” Means Non‑Derivative: Sixth Circuit Narrows Economic-Damages Exposure Under Tennessee’s Insurance Fraud Act

Introduction

This published Sixth Circuit decision addresses the scope of private civil remedies under Tennessee’s Insurance Fraud Act, Tenn. Code Ann. § 56‑53‑101 et seq. The case arises from a dispute between a general contractor, Continental Building Co., and its framing subcontractor, US Framing International LLC, concerning two student-housing projects in Knoxville, Tennessee and Ann Arbor, Michigan. After relations soured and US Framing left the Knoxville job, Continental submitted a “subguard” insurance claim asserting US Framing’s default. US Framing then sued Continental and several executives alleging that Continental committed insurance fraud in violation of the Act by misrepresenting facts to its insurer.

The district court dismissed the complaint under Rule 12(b)(6), concluding that US Framing failed to plead any injury “directly resulting from” Continental’s allegedly fraudulent submission. On appeal, the Sixth Circuit affirmed. The court also resolved several threshold removal issues: it admonished both sides for incomplete Rule 7.1 disclosures in an LLC diversity case, held that any forum-defendant objection was waived by failing to timely move to remand, and confirmed that the amount-in-controversy inquiry for removal is distinct from the merits.

The central legal development is the court’s construction of the Act’s phrase “economic damages directly resulting from the violation” (§ 56‑53‑107(b)(1)(C)): the Sixth Circuit held that derivative or contingent harms—such as a subcontractor’s litigation costs allegedly made worse because an insurer funded the opposing party—are not “directly resulting” within the Act’s meaning. The court reached this outcome without choosing between “direct-is-direct” and “proximate cause” tests because the alleged injuries failed under either approach.

Summary of the Opinion

• Jurisdictional preliminaries:
  • Complete diversity exists: the court ordered supplemental briefing because neither side initially satisfied Rule 7.1(a)(2)’s disclosure requirements for LLC citizenship. After supplementation, the court was satisfied that US Framing’s members were Kentucky citizens and defendants were citizens of Ohio and Indiana (and possibly Tennessee).
  • Forum-defendant rule waived: even assuming one defendant was a Tennessee citizen, the “home-state defendant” bar to removal (28 U.S.C. § 1441(b)(2)) is not jurisdictional and was waived because US Framing did not move to remand within 30 days. See 28 U.S.C. § 1447(c).
  • Amount in controversy satisfied: the removing defendants met their burden by a fair reading of the complaint, which alleged “over a million dollars” in damages. The fact that those damages ultimately prove unrecoverable on the merits does not defeat jurisdiction.
• Merits:
  • “Economic damages directly resulting”: US Framing’s alleged harms (lost Ann Arbor payments and increased litigation expenses) were not caused by Continental’s alleged fraud in the requisite way. Lost Ann Arbor payments began before the claim submission, defeating factual causation; litigation-expense theory was derivative and too remote even under a proximate-cause framework informed by Tennessee fraud/misrepresentation law (Steamfitters).
  • No treble damages: because no “economic damages” were plausibly alleged, treble damages under § 56‑53‑107(c) are unavailable.
  • No statutory penalty: a generic request for “damages” does not plead the separate “penalty” authorized by § 56‑53‑107(b)(1)(E). Damages and penalties are distinct, and the complaint did not request a penalty.
  • No attorneys’ fees: fee-shifting under Tennessee law generally requires prevailing-party status. Without entitlement to substantive relief under the Act, US Framing cannot recover fees or “related legal expenses.”
• Disposition: Affirmed.

Analysis

Precedents Cited and Their Influence

• LLC citizenship and removal:
  • Akno 1010 Mkt. Street St. Louis Mo. LLC v. Pourtaghi, 43 F.4th 624 (6th Cir. 2022), and Delay v. Rosenthal Collins Grp., LLC, 585 F.3d 1003 (6th Cir. 2009): LLCs take the citizenship of all members and sub-members; removing parties bear the burden to establish complete diversity.
  • Fed. R. Civ. P. 7.1(a)(2) (2022 amendment) and Advisory Committee Note: parties must disclose the citizenship of all persons whose citizenship is attributed to a party; the court used this to admonish both sides and ordered supplemental jurisdictional submissions.
  • Handy-Mack Co. v. Godchaux Sugar Co., 2 F.2d 435 (6th Cir. 1924), and Lively v. Wild Oats Mkts., Inc., 456 F.3d 933 (9th Cir. 2006): the forum-defendant rule is nonjurisdictional; objections are waived if not raised within 30 days under § 1447(c).
  • Northup Props., Inc. v. Chesapeake Appalachia, 567 F.3d 767 (6th Cir. 2009), and Hayes v. Equitable Energy Res. Co., 266 F.3d 560 (6th Cir. 2001): removing defendants may rely on a fair reading of a complaint without an ad damnum clause to establish the amount in controversy. The court also cited Schor v. State Farm Fire & Cas. Ins. Co., 2015 WL 1230200, for the proposition that jurisdictional amount ≠ concession of recoverability.
• Merits—statutory interpretation and causation:
  • Mansell v. Bridgestone Firestone, 417 S.W.3d 393 (Tenn. 2013); Abels ex rel. Hunt v. Genie Indus., Inc., 202 S.W.3d 99 (Tenn. 2006); Eastman Chem. Co. v. Johnson, 151 S.W.3d 503 (Tenn. 2004): Tennessee courts use plain meaning and ordinary usage in statutory interpretation.
  • Phillips & Buttorff Mfg. Co. v. Carson, 217 S.W.2d 1 (Tenn. 1949): “directly” means “in direct contact with, and without the intervention of any person or thing.” The Sixth Circuit deployed this dictionary-grounded approach as one lens for reading “directly resulting.”
  • Insurance-policy line of cases: Tooling, Mfg., & Techs. Ass’n v. Hartford, 693 F.3d 665 (6th Cir. 2012) (Michigan’s “direct is direct” view) and Retail Ventures, Inc. v. Nat’l Fire Ins. Co., 691 F.3d 821 (6th Cir. 2012) (Ohio’s proximate-cause approach). The panel declined to choose between these competing constructions because the outcome was the same either way; it stressed that the Act is a statute, not an insurance contract, and pro-insured interpretive canons do not apply to a statute aimed at deterring insureds’ fraud.
  • Int’l Paper Co. v. Beazley Ins. Co., 731 F. Supp. 3d 1013 (W.D. Tenn. 2024), and Farmers Mut. Fire Ins. Co. v. McMillan, 395 S.W.2d 798 (Tenn. 1965): authorities suggesting “direct loss” can be synonymous with “proximate cause” in insurance policies. Even granting that more permissive standard, the panel held US Framing’s harms were still too remote under Tennessee’s fraud jurisprudence.
  • Steamfitters Local Union No. 614 Health & Welfare Fund v. Philip Morris, Inc., 2000 WL 1390171 (Tenn. Ct. App. 2000), and Sixth Circuit adoption in Perry v. Am. Tobacco Co., 324 F.3d 845 (6th Cir. 2003): under proximate-cause principles in fraud-like claims, injuries that are contingent on harm to third parties are too remote. The panel analogized US Framing’s increased litigation expenses to Steamfitters’ “entirely derivative” injuries.
  • In re Darvocet, Darvon & Propoxyphene, 756 F.3d 917 (6th Cir. 2014); Combs v. Int’l Ins. Co., 354 F.3d 568 (6th Cir. 2004); Strayhorn v. Wyeth Pharms., 737 F.3d 378 (6th Cir. 2013): Erie “judicial modesty”—when predicting state law, federal courts should avoid expansive innovations absent authoritative signals from the state’s highest court. The panel declined to “greatly expand liability” under the Act.
  • Attorneys’ fees and penalties: Eberbach v. Eberbach, 535 S.W.3d 467 (Tenn. 2017); House v. Estate of Edmondson, 245 S.W.3d 372 (Tenn. 2008); Daron v. Dep’t of Corr., 44 S.W.3d 478 (Tenn. 2001) (prevailing-party requirement and substantial-relief standard); Fred Simmons Trucking, Inc. v. U.S. Fid. & Guar. Co., 2004 WL 2709262 (Tenn. Ct. App. 2004) (distinguishing punitive damages from statutory penalties).

Legal Reasoning

1) “Economic damages directly resulting from the violation” (§ 56‑53‑107(b)(1)(C))

The court framed the core question narrowly: whether US Framing’s alleged harms were “economic damages directly resulting from” Continental’s alleged fraudulent claim submission. Rather than select a single doctrinal test for “directly”—“direct-is-direct” versus “proximate cause”—the court explained that US Framing’s theories fail under either.

• Lost Ann Arbor payments: The complaint alleged Continental ceased paying US Framing on the Ann Arbor project before it submitted the subguard claim. Because the nonpayment predated the alleged fraud, the fraud could not be a factual cause (“but for” cause) of this injury, let alone a “direct” or “proximate” cause. The panel rejected US Framing’s appellate suggestion that nonpayment was part of a premeditated “Subguard scheme” because that theory was neither pleaded nor argued below.
• Increased litigation expenses: US Framing argued that insurer funds paid to Continental (as a result of the allegedly fraudulent claim) enabled or compelled subrogation pursuits that inflated US Framing’s costs in the Michigan litigation. The court identified multiple problems:
  • Factual-cause defect: US Framing itself initiated the Michigan suit to recover Ann Arbor payments; the immediate cause was Continental’s earlier nonpayment, not the later insurance claim.
  • Even if some “but-for” causation existed, the harm is derivative: The alleged injury is contingent on harm to (or actions by) Continental’s insurer—the primary victim of any insurance fraud. Under Tennessee fraud/misrepresentation proximate-cause principles (Steamfitters and Perry), such contingent or third-party-dependent injuries are too remote.
  • American Rule backdrop: US Framing’s theory also brushes up against the general rule that litigation expenses are not damages, with a limited exception for third-party litigation caused by a defendant’s wrongful act. That exception “generally has no application” when the prior litigation is between the same parties, which was the case here. The court flagged this as an additional reason for skepticism but rested its holding on lack of direct/proximate causation.

The court also consulted dictionary usage and Tennessee precedent for “directly,” citing Phillips & Buttorff’s “without intervention” formulation. On that plain-meaning view, US Framing’s injuries involved an “intermediate step” (insurer payment/subrogation posture/funding) and thus were not “direct.” And even shifting to a more forgiving proximate-cause framework (as with insurance-policy interpretations like McMillan or Int’l Paper), Tennessee’s fraud jurisprudence would still label such derivative injuries too remote. The court underscored Erie modesty: absent a clear state high-court signal expanding liability to such derivative harms, federal courts will not do so.

2) Treble damages under § 56‑53‑107(c)

Treble damages require “economic damages” plus clear and convincing proof of a pattern or practice. Because US Framing failed to plausibly allege any economic damages “directly resulting” from the violation, treble damages were categorically unavailable.

3) Statutory penalty under § 56‑53‑107(b)(1)(E)

US Framing’s complaint requested “damages,” but did not request a “penalty” or cite the penalty provision. The court held that “damages” and “penalty” are distinct remedial concepts—confirmed by textual separation within § 56‑53‑107(b)(1) and standard legal definitions. A generic damages request does not subsume a statutory penalty. Consequently, the penalty was not pleaded.

4) Attorneys’ fees and “related legal expenses”

Although the Act authorizes recovery of “reasonable attorneys’ fees [and] related legal expenses” for violations, Tennessee’s prevailing-party framework governs such fee awards. A prevailing party must succeed on a significant claim affording a substantial measure of relief. Because US Framing failed to plead an entitlement to substantive relief (no direct economic damages and no penalty pleaded), it could not be a prevailing party and thus could not recover fees.

5) Reserved questions

The panel noted, but did not decide, an important structural question under the Act: whether a private plaintiff may pursue civil remedies under § 56‑53‑107 for conduct that constitutes a “criminal violation” under § 56‑53‑102 in light of state prosecutorial authority referenced in § 56‑53‑107(d). The court resolved the case on causation and remedy-pleading grounds and left that interaction for another day.

Impact

• Constraints on private plaintiffs under the Tennessee Insurance Fraud Act:
  • “Directly resulting” is a demanding causation standard. Plaintiffs must connect their economic loss to the alleged fraudulent insurance act itself without intervening causal chains. Injuries that depend on insurer behavior (payments, subrogation, funding) or that are by-products of pre-existing disputes will likely be too remote.
  • Derivative injuries are out. Borrowing from Steamfitters and Perry, harms that are “entirely derivative” of a third party’s injury (here, the insurer’s) are not compensable as “economic damages directly resulting” under § 56‑53‑107(b)(1)(C) even under a proximate-cause lens applied in fraud contexts.
  • Pleading matters: A request for a statutory penalty must be explicit. Labeling relief as “damages” will not preserve penalty claims. And fee claims require a path to prevailing-party status through actual compensable relief.
  • Litigation-expense theories are disfavored. Even apart from causation, Tennessee’s version of the American Rule limits recovery of litigation expenses as “damages,” particularly where the earlier litigation is between the same parties.
• Practical guidance for construction and subguard disputes:
  • Subcontractors seeking redress for alleged misrepresentations in subguard claim submissions must identify non-derivative economic harms they themselves suffered because of the fraudulent act—e.g., demonstrable, immediate business or property loss triggered by the fraudulent submission, not merely by contract disputes or insurer-driven steps.
  • Parties remain better served by vindicating contract and payment rights directly (e.g., arbitration or breach-of-contract suits), rather than attempting to repurpose the Insurance Fraud Act as a vehicle for recovering fees or leverage in collateral disputes.
• Removal practice reminders in LLC cases:
  • Rule 7.1(a)(2) has teeth. Courts expect early, accurate identification of every member’s citizenship for LLCs and will demand supplementation if missing.
  • Forum-defendant rule is waivable. Litigants must move to remand within 30 days; otherwise, the home-state removal defect is forfeited.
  • Amount-in-controversy ≠ merits. A complaint that in good faith places more than $75,000 at issue satisfies removal—even if the legal theory ultimately fails to support recovery.
• Doctrinal signal to Tennessee courts:
  • While the Sixth Circuit did not definitively choose a “direct-is-direct” or proximate-cause construction for “directly resulting” in the Act, it sent a clear message: under either approach, derivative injuries are too remote. Unless and until the Tennessee Supreme Court expands liability, federal courts will apply a narrower, non-derivative conception of “direct” injury in this context.

Complex Concepts Simplified

• Subguard insurance: A general contractor buys a “subguard” policy to protect against a subcontractor’s default. If the GC claims default, the insurer pays the GC and then steps into the GC’s shoes (subrogation) to pursue recovery against the subcontractor.
• “Directly resulting” versus “proximate cause”:
  • “Directly” in ordinary usage means immediately, without anyone or anything intervening.
  • “Proximate cause” is a legal standard that limits liability to injuries closely and foreseeably connected to the wrongful act. Even under proximate cause in fraud cases, injuries that depend on harm to someone else (derivative injuries) are usually considered too remote.
• Derivative injury: A harm that comes about only because a third party was harmed. Example here: a subcontractor’s litigation expenses allegedly inflated because the owner’s insurer funded the owner’s litigation. The primary injury is to the insurer; the subcontractor’s costs are derivative and remote.
• Forum-defendant rule: In diversity cases, a defendant sued in its home state generally cannot remove to federal court. But this is a procedural defect; if the plaintiff does not move to remand within 30 days, the objection is waived.
• Amount in controversy: For removal, courts look at the amount the plaintiff put in dispute at the time of removal, not whether those damages are ultimately recoverable on the merits.
• LLC citizenship for diversity: An LLC’s citizenship is that of every member (and sub-member), not its state of formation. Parties must disclose all such citizenships under Rule 7.1(a)(2).
• Damages versus penalty: “Damages” compensate for loss. A “penalty” punishes and is distinct. A complaint seeking only “damages” does not automatically claim a statutory penalty; the penalty must be specifically requested where the statute treats it separately.
• Prevailing party for fees: In Tennessee, a party generally recovers statutory attorneys’ fees only if it prevails—i.e., wins significant relief on the merits.

Conclusion

US Framing Int’l LLC v. Continental Building Co. is a significant guidepost on the reach of Tennessee’s Insurance Fraud Act. The Sixth Circuit holds that “economic damages directly resulting from the violation” does not encompass harms that are derivative or contingent upon an insurer’s actions or funding. Even assuming a proximate-cause lens, Tennessee’s fraud jurisprudence treats such injuries as too remote. The decision also underscores careful pleading and remedial distinctions: a statutory penalty is not “damages” and must be expressly requested, and attorneys’ fees ride on prevailing-party success with substantial relief.

Beyond the merits, the court reinforced best practices in diversity removals involving LLCs: comply with Rule 7.1(a)(2), understand the forum-defendant rule’s waivability, and keep the amount-in-controversy inquiry conceptually distinct from merits defenses. Finally, in classic Erie fashion, the court declined to expand state tort exposure absent clear direction from Tennessee’s high court. For litigants contemplating private suits under the Act, the message is clear: identify a non-derivative, insurer-independent economic loss caused by the fraudulent claim itself, plead the specific statutory remedies sought, and be prepared to satisfy a stringent causation requirement.