Ninth Circuit Determines Removing Defendant’s Burden

In Guglielmino v. McKee Foods Corp., No. 05-16144, 2007 WL 2916193 (9th Cir. Oct. 9, 2007), the Ninth Circuit determined as a matter of first impression the burden that a removing defendant must meet to establish federal jurisdiction where plaintiff moves to remand but the complaint specifically alleges damages below the diversity amount.

Here, defendants removed a case in which the complaint alleged damages of “less than $75,000,” and plaintiff’s motion to remand under 28 U.S.C. § 1447 attached affidavits with similar disclaimers. The appellate court observed that its precedents have placed three different burdens on removing defendants, depending on the circumstances. First, when the complaint alleges an amount on its face suffucuent to meet the jurisdictional threshold, the Ninth Circuit presumes that federal jurisdiction is satisfied "unless it appears to a 'legal certainty' that the plaintiff cannot actually recover that amount." (That could be called the "we take the plaintiff at his word unless it is undeniably only wishful thinking" rule.) Second, when the complaint is unclear or ambiguous about the jurisdictional amount, the removing defendant must establish by a preponderance of the evidence that the jurisdictional amount is met. Finally, when a complaint specifically alleges an amount in controversy that is less than the jurisdictional threshold, the party seeking removal must prove with legal certainty that the jurisdictional amount is met.

The new wrinkle here is that the complaint did not allege an amount but also pled that, whatever the damages were, they were less than $75,000. The Ninth Circuit concluded that this situation fit the second category of complaints best because the controlling factor was the ambiguity of the allegations. Thus, where a plaintiff specifically alleges damages are below the jurisdictional amount for diversity, but does not allege an actual total amount in controversy, the defendant must support removal by a “preponderance of the evidence.”

I have wondered about why, in a situation in which plaintiff is the movant -- having filed a motion to remand -- the court expresses its view in terms of the burden the non-movant defendant faces. Usually the movant bears the burden on his own motion. Why shouldn't the plaintiff have the burden of demonstrating the lack of federal jurisdiction by a preponderance of the evidence, rather than the defendant having the burden to establish the existence of federal jurisdiction? Perhaps the answer is that federal jurisdiction is never assumed and always must be established to the court's satisfaction. It follows that whoever is the proponent of the federal forum has to bear the burden of estabilshing entitlement to that forum, and in this case it is the removing defendant. That principle apparently trumps the ordinary rule that a movant bears his own burden.

Judge O'Scannlain filed a concurrence in Guglielmino examining the issue of defendants' and plaintiffs' competing burdens that the majority glossed over. He disagreed with the majority's imposition of a "legal certainty" burden on the removing defendant, a party seeking to invoke federal jurisdiction, rather than the moving plaintiff, a party seeking to defeat federal jurisdiction. He concluded that "in all cases where removal to federal court is challeneged in any appropriate way, it is incumbent upon the party seeking federal jurisdiction to prove the facts giving rise to such jurisdiction by a preponderance of the evidence. Only then, and only by proof to a legal certainty, can a party defeat the exercise of federal jurisdiction which those established fact support." He quoted approvingly from Judge Frank Easterbrook's opinion in Meridian Security Ins. Co. v. Sadowski, 441 F.3d 536 (7th Cir. 2006), which he says attempted to organize and clarify that court's removal law into a coherent whole. He observed that his proposal was consistent with the views of the Fifth, Sixth, Seventh and Eighth Circuits, and would resolve the multiple approaches of his own court into a single standard.

Admiralty Defendant Still May Demand Jury Based On Counterclaims

A plaintiff bringing a case that satisfies the requirements for both admiralty and diversity jurisdiction can elect to proceed on either basis, the primary difference being that a jury generally is not available if plaintiff files a libel in admiralty rather than an ordinary civil complaint. See In re: Chimenti, 79 F.3d 534, 537 (6th Cir. 1996). A plaintiff might want to exclude a jury for strategic reasons, and therefore could elect the admiralty route.

However, In re: Lockheed Martin Corp., No. 06-1344, 2007 WL 2793112 (4th Cir. Sept. 27, 2007), illustrates that a defendant can frustrate that election by bringing a declaratory judgment counterclaim and filing a jury demand. In Lockheed Martin, plaintiff successfully moved to strike defen­dant’s jury demand, arguing that the declaratory judgment claim was merely the “flipside” of plaintiff’s affirmative claims, and that defendant should not be permitted an end-run around plaintiff’s admiralty strategy. Defendant filed a mandamus petition.

Noting a split in the circuits, the appellate court held that 28 U.S.C. § 1333 and Fed.R.Civ.P. 9(h) permitted a defendant to bring proper non-admiralty counterclaims and to have them tried to a jury. The court granted the writ of mandamus.

Propriety of Strategic Pre-Service Removal in Diversity Will Not Be Tested In Appellate Courts

The Seventh Circuit has just issued a ruling dismissing an appeal from a remand order for lack of jurisdiction. In so doing, the court was forced to hold off deciding a very interesting dispute over removal jurisdiction, which it concluded that Congress excluded from appellate jurisdiction. The ruling follows closely on the heels of an additional district court decision that noted the issue was on appeal.

The underlying issue concerned the "forum defendant" removal rule under 28 U.S.C. § 1441(b). That rule provides that even though diversity jurisdiction may be satisfied because of different citizenship, so it could have been commenced in federal court, a case is still not removable unless "none of the parties in interest properly joined and served as defendants is a citizen of the State in which such action is brought." The controversy raised in the appeal concerned the proper interpretation of the "properly joined and served" language.

In Holmstrom v. Harad, No. 05 C 2714, 2005 WL 1950672 (N.D. Ill. Aug. 11, 2005), a New Jersey shareholder brought a putative derivative action on behalf of Home Depot, Inc., a Delaware company, in Illinois state court against 28 officers and directors, two of whom are Illinois citizens. Before plaintiff actually served any of the defendants, one of them (an Ohio citizen) removed the case to the Northern District of Illinois. Plaintiff moved to remand on the ground that removal ran afoul of the forum defendant rule because two of the defendants are citizens of the forum state. The removing defendant responded that the rule was fully satisfied given that neither of the Illinois defendants had yet been "properly joined and served."

The district court granted the motion. It found only one other case on point, Recognition Communications, Inc. v. American Automobile Association, No. Civ. A. 3:97-CV-0945-P, 1998 WL 119528 (N.D. Tex. Mar. 5, 1998), and it agreed with that court's reasoning. It concluded that although the literal language of the rule favors the removing defendant in this scenario, Congress did not intend that a fast-acting defendant should have an end-run through strategic pre-service removal. Rather, Congress created the forum defendant rule to protect defendants from plaintiffs who listed among multiple defendants a resident of the forum state they did not intend to pursue but merely named to defeat removal.

The defendant appealed the remand order to the Seventh Circuit. While that case was being briefed and argued, the same scenario occurred in the district court in another case. In Vivas v. Boeing Co., 486 F.Supp. 2d 726 (N.D. Ill. Mar. 12, 2007), plaintiffs sued Boeing in Illinois state court in connection with a plane crash in another country. Although Boeing was an Illinois citizen, it removed the case before it or any other defendant had been served, as it is permitted to do under 28 U.S.C. § 1446(b). The district court, relying on Holmstrom (which it noted was on appeal), refused to allow Boeing to use the fact that one may file a notice of removal before formal service to defeat the "properly joined and served" language of 28 U.S.C. § 1441(b), and it granted plaintiffs' motion to remand.

When the Seventh Circuit ultimately ruled in Holmstrom v. Harad, 492 F.3d 833 (7th Cir. July 3, 2007), it did not speak to the merits of the district courts' refusal to apply 28 U.S.C. § 1441(b) literally. Following an exhaustive analysis of the legislative history and development of that statute across multiple versions, it concluded that the 1996 amendments made clear that Congress intended to exclude from appellate review any remand order that was based on a defect in removal. The court determined that a remand order based on "failure to comply with the forum defendant rule is a defect in removal subject to § 1447(d)’s jurisdictional bar."

If the Seventh Circuit's reasoning prevails, it will be up to the district courts to establish the common law of whether strategic pre-service removal can be used to avoid the forum defendant rule.

Third Circuit Finds One Panel May Overrule Another When Predicting State Rulings

In Jaworowski v. Ciasulli, 490 F.3d 331 (3d Cir. June 18, 2007), a panel of the Third Circuit took the unusual step of overruling a prior decision of the same court. It acknowledged that ordinarily the only way for the court to overrule its own precedent is for the court to act en banc, but it found that an exception exists for cases based on diversity jurisdiction in which the court predicts how a state’s highest court would decide an issue.

The panel said that in such circumstances an appellate court should be free to reexamine the validity of a previous prediction in light of subsequent decisions of the state’s highest court. It concluded that, although the New Jersey Supreme Court still had not decided the particular matter at issue, there were sufficient new decisions to reveal a “change in the legal landscape” and a clear direction for the Third Circuit to follow to change its prediction.

Sixth Circuit Finds State Law Governs Forum Selection Clauses In Diversity Actions

A recent series of transactions involving a company called Norvergence, which entered into contracts promising delivery of telecommunications services, has led to an interesting split among the courts. The Norvergence contracts contained a “floating” forum selection clause under which the choice of law and forum were subject to immediate change if Norvergence assigned the contract. Apparently, Norvergence had a practice of immediately assign­ing contracts to finance companies without customers’ prior knowledge and then not delivering services, which has led to litigation all over the country.

In a Seventh Circuit case, the court held that the floating forum selection clause was enforceable either under federal law or Illinois law, and therefore the court did not need to decide which law controlled. IFC Credit Corp. v. Aliano Bros. Gen. Contractors, 437 F.3d 606 (7th Cir. 2006). However, in Preferred Capital, Inc. v. Sarasota Kennel Club, Inc., 489 F.3d 303 (6th Cir. May 29, 2007), the Sixth Circuit had to contend with the fact that both it and the Ohio Supreme Court had reached opposite conclusions -- the state court found the clause unenforceable as against public policy while the Sixth Circuit had previously upheld the very same clause -- and therefore it had to decide as a matter of first impression whose law should govern a forum selection clause in a diversity case when that clause was the sole basis for personal jurisdiction.

Splitting from the Seventh Circuit, the court analogized to the law of personal jurisdiction and concluded that the law of the forum state should control. It affirmed the finding that the clause was unenforceable and therefore that the Ohio federal court was without jurisdiction.

Seventh Circuit Retracts Higher Standard For Diversity Jurisdiction

In Meridian Security Ins. Co. v. Sadowski, No. 05-2855 (7th Cir. Mar. 22, 2006), the Seventh Circuit examined and curtailed the development of a line of cases that had misconstrued a 1993 case to raise the barrier to diversity jurisdiction.

Shaw v. Dow Brands, Inc., 994 F.3d 364, 366 (7th Cir. 1993), had stated that defendants seeking removal must prove that they meet the jurisdictional amount through “proof to a reasonable probability that jurisdiction exists.” This language has since been construed within the Seventh Circuit to mean that uncertainty about the jurisdictional amount must be resolved against the removing defendants.

In Meridian, the court overruled that interpretation, which has not been adopted outside of the circuit. The court held that a proponent of federal jurisdiction must, if material jurisdictional facts are contested, prove those facts by a preponderance of the evidence. Once those facts have been proven, federal jurisdiction is satisfied and any uncertainty about whether the plaintiff will be able to prove its substantive claim has no effect on jurisdiction.

Federally Chartered Banks Are Citizens Only Of Their Main Branch’s State

A party’s citizenship is a critical issue when federal jurisdiction is being claimed on the basis of diversity. While it is well-settled that, for example, a corporation is a citizen of both the state of its incorporation and the state in which it has its principal place of business, and that limited partnerships are citizens of every state in which each partner is a citizen, the law was not settled concerning national banks.

Congress attempted to provide the answer by statute, but the language of 28 U.S.C. § 1348 (national banks deemed citizens of the state “in which they are respectively located”) has caused a split in the circuits.

In Wachovia Bank, N.A. v. Schmidt, No. 04-1186 (U.S. Jan. 17, 2006), the Court held that Congress intended that a national bank be a citizen only of the state in which its main branch, as specified in the charter, is located. The Court rejected the Fourth Circuit’s position that national banks be deemed citizens of each state in which they have any branch.