Bar News - July 19, 2017
Federal Practice, Bankruptcy & International Law: Removal to Federal Court: Five Questions to Ask
By: Dan Deane and Mark T. Knights
An important strategic consideration in defending a civil case filed in state court is the desirability of removal to federal court. That question often hinges on subjective considerations concerning individual preference and the demands of the particular case.
Defending in federal court rather than state court (or vice versa) may be preferable for any number of reasons: the discovery rules may be perceived to be more favorable in one court than the other; lawyer or client may feel more comfortable with the rules and expectations in one court; the lighter civil caseload in federal court may create an expectation of more individualized judicial attention or a quicker path to trial; and so on. Even for experienced practitioners, however, the more objective question – whether the case can, in fact, be removed – often proves more complex.
While the basic rules governing federal-court jurisdiction are well-known among members of the bar, there are a number of esoteric rules that can be pitfalls for the unwary. Although there are many questions that must be answered in any given case, we present here five questions that are often overlooked:
1. Does complete federal preemption apply to any state-law claims? The most frequently-invoked basis for federal jurisdiction is the presence of a federal question that “arises under” the Constitution or laws of the United States. Most experienced practitioners are familiar with the “well-pleaded complaint” rule, according to which a case “arises under” federal law when the complaint alleges the violation of, or raises a substantial question concerning, a federal law. But there is a common misconception that a plaintiff’s cause of action must be pled under federal law to invoke federal question jurisdiction.
Not so! Even if the complaint alleges solely state-law claims and does not appear to raise any question of federal law, the case may still be removed if there is “complete preemption.” Under that doctrine, where a state-law claim implicates an area of law in which Congress intended its legislation to wholly displace state law, the cause of action is deemed to arise under federal law, rendering the case removable to federal court.
Areas in which this doctrine comes into play include, among others, state-law contract claims to enforce a collective bargaining agreement subject to the federal Labor Management Relations Act, state-law tort or contract claims relating to the denial of disability benefits under an employee benefit plan subject to the Employee Retirement Income Security Act, and state-law usury claims against national banks subject to the National Banking Act.
2. Does federal law require the federal claims to be brought in state court? As a converse to the principle above, the mere allegation of a federal claim does not necessarily mean that the case is removable. Congress may create a federal cause of action, but limit the availability of a federal venue. For example, the federal Magnusson-Moss Warranty Act precludes a federal court from exercising jurisdiction over a consumer’s claim under that statute if the amount in controversy is less than $50,000, if there are fewer than 100 named plaintiffs in a putative class action under the Act, or if the value of any individual class member’s claim is less than $25.
Similarly, several federal district courts, including the District of New Hampshire, have held that the removal bar of the Securities Act of 1933 prevents the removal of securities class actions premised solely on the ’33 Act. The United States Supreme Court recently granted certiorari in Cyan, Inc. v. Beaver County Employees Retirement Fund, to answer the hotly contested question of whether state courts have subject matter jurisdiction to consider ’33 Act class actions (and the related question of whether such class actions may be removed).
Attorneys considering removal should not assume that the presence of a nominally federal claim will permit the exercise of federal jurisdiction, and should be sure to thoroughly review the statute in question for the potential presence of a jurisdiction-stripping provision.
3. Absent a federal question, are the parties diverse? Cases raising exclusively state-law claims ordinarily may be heard in federal court only if the parties are completely diverse, i.e., none of the plaintiffs is a citizen of the same state as any of the defendants. Where individuals and corporations are concerned, determining whether the parties are diverse is relatively straightforward: an individual is a citizen of the state in which she is domiciled, while a corporation is a citizen of both the state in which it is incorporated and the state of its principal place of business.
Confusion arises, however, where unincorporated associations, such as limited liability companies and limited partnerships, are concerned. Familiar with the rules governing corporate citizenship, attorneys may assume such unincorporated associations are citizens of the states in which they are organized and have their principal places of business. But such is not the case.
An unincorporated association holds the citizenship of each of its members or partners. Thus, to determine an unincorporated association’s citizenship, it is necessary first to identify that of all of the members or partners – which then passes through to the association itself. If any of the members or partners are citizens of the same state as any of the parties on the opposite side of the case, federal jurisdiction typically does not exist.
4. Was a defendant improperly joined for the purpose of destroying diversity? Even if complete diversity does not exist in a state-law case, there is still a possibility for removal. Under the “fraudulent joinder” rule, the court may disregard the citizenship of a non-diverse defendant if the state-law claims against that defendant stand no reasonable possibility of success. Despite the name, there is no requirement that the defendant seeking to remove must show fraud by the plaintiff, although fraudulent joinder most frequently arises in situations where the non-diverse defendant has been added as a tactic to prevent removal to federal court.
A defendant seeking to remove to federal court should closely scrutinize the claims against other, non-diverse defendants to determine whether those claims state a cognizable claim for relief. And while fraudulent joinder typically relates to claims against a non-diverse defendant, one can also argue that non-meritorious claims by a non-diverse plaintiff should also result in the court disregarding that plaintiff’s citizenship.
5. Have all other defendants assented to removal? Lastly, it bears noting a less complicated, but easily overlooked hurdle to removal. Under 28 USC Section 1446(b)(2)(A), the unanimous consent of all defendants to removal is required. Before seeking to remove, counsel should reach out to the other defendants or their counsel to obtain their assent to the removal.
Also note that there is a split of authority among the federal courts as to how to indicate unanimous consent in the removal papers: in some courts, it is sufficient for the removing party to simply certify in the notice of removal that the other defendants consent; others require all defendants to individually indicate their consent to removal in separately filed pleadings. As yet, neither the First Circuit Court of Appeals nor the District of New Hampshire have squarely addressed this issue. Cautious practitioners may be best served by following the more rigorous approach of filing separately-executed consents.
Dan Deane is a partner in the litigation department of Nixon Peabody, and the immediate past chair of the NH Bar Association’s Federal Practice Section.
Mark Knights is an associate in the litigation department of Nixon Peabody and incoming vice chair of the Federal Practice Section. Both authors clerked for federal court judges in New Hampshire.