NEW YORK (3/18/11)--A federal court in New York has remanded a case involving insurance coverage on claims on mortgages fraudulently sold to Fannie Mae by U.S. Mortgage/CU Mortgage back to a New York state court. TCT FCU, based in Ballston Spa, N.Y., had sued Cumis Insurance Society, of Madison,Wis., and Waverly, Iowa, and 11 homeowners whose mortgages were sold in the fraud. It won the remand back to the original trial-level court, the New York Supreme Court, Saratoga County, in a decision by Senior U.S. District Court Judge Frederick J. Scullin Jr. of the U.S. District Court Northern District of New York , Syracuse. The lawsuit stemmed from claims the credit union submitted with Cumis. The insurance company denied coverage on the claims on the ground that the insurance provided in that bond did not cover the type of losses the credit union suffered as a result of CU National's action, according to court documents. On Feb. 8, 2010, Cumis filed a notice of removal of the case to the U.S. District Court in Syracuse, noting that federally chartered credit unions are considered national citizens unless a "localization" doctrine applies. A localization doctrine would indicate that the credit union is a citizen of its home state by virtue of its activities there. The district court found that TCT is considered a New York citizen because its activities are localized to New York, and therefore would have met the "complete diversity" principle that requires federal suit parties to be from separate states but for the presence of the homeowner defendants in the case. In an earlier case involving both TCT and Cumis, TCT conceded it was diverse to Cumis. Cumis also argued that the homeowner defendants were fraudulently joined in the case to defeat the "diversity" requirement, because all the homeowners are from New York. The doctrine of fraudulent joinder is meant to prevent plaintiffs from joining nondiverse parties in an effort to defeat federal jurisdiction, Cumis maintained. The court found that Cumis met its burden of proof on the initial diversity issue, but did not meet the burden to show that the defendants were joined fraudulently. That means the individual defendants' presence in the case defeats the complete diversity requirement, and the federal court lacks subject matter jurisdiction over the case. The case will now return to New York state court.