Posted on: 9/17/2012
Steven Plitt, Joshua D. Rogers
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It is well known within the legal community that plaintiffs prefer to argue their cases in state court. This preference is more than whimsical fancy. Federal judges have increasingly disposed of cases by exercising stringent control of discovery, aggressively encouraging settlement, and granting summary judgment more frequently. Jonathan T. Molot, An Old Judicial Role for a New Litigation Era, 113 Yale L.J. 27, 39-41 (2003). Plaintiffs’ fear of federal court is borne out by statistics that show that the “win rate” for defendants in removed federal civil cases was higher compared to the overall win rate in federal civil cases. See Kevin M. Clermont & Theodore Eisenberg, Do Case Outcomes Really Reveal Anything About the Legal System? Win Rates and Removal Jurisdiction, 83 Cornell L. Rev. 581, 593 (1998).
Given these concerns, plaintiff attorneys have developed various strategies for defeating the removal of their lawsuits to federal court. One strategy utilizes fraudulent joinder to defeat diversity. It is important to note that while outright fraud in the pleading of jurisdictional facts would allow removal based on fraudulent joinder, see Delgado v. Shell Oil Co., 231 F.3d 165, 179 (5th Cir. 2000); Hoosier Energy Rural Elec. Co-op, Inc. v. Amoco Tax Leasing IV Corp., 34 F.3d 1310, 1315 (7th Cir. 1994), “fraudulent joinder” is defined more broadly as a term of art that does not necessarily reflect on the integrity of plaintiff or plaintiff’s counsel. Morris v. Princess Cruises, Inc., 236 F.3d 1061, 1067 (9th Cir. 2001); Lewis v. Time, Inc., 83 F.R.D. 455, 460 (E.D. Cal. 1979), aff’d 710 F.2d 549 (9th Cir. 1983).
Often defense counsel confuse the doctrine of fraudulent joinder with the exception under 28 U.S.C. § 1446(b), which, for cases that initially do not appear removable, allows a defendant to file a notice of removal “within 30 days after receipt by the defendant … of a copy of an amended pleading, motion, order or other paper from which it may first be ascertained that the case is one which is or has become removable.” 28 U.S.C.A. § 1446(b) (emphasis added). Under this misconception, in those cases that involve a non-diverse (fraudulently joined) party, defense counsel often seek the dismissal of the non-diverse party after which the defendant may seek removal. When it comes to fraudulent joinder, this strategy is likely to fail.
Generally removal is improper if complete diversity does not exist at the time the suit was filed and when the removal petition is also filed. Because of this, defendants will file a motion to dismiss or motion for summary judgment against the liability of the non-diverse party in the hopes of removing the non-diverse party from the litigation so that removal can be accomplished. Even though the state court may in fact dismiss the non-diverse party, plaintiffs will often challenge the removal under the voluntary-involuntary rule in federal court. The voluntary-involuntary rule requires that a suit remain in state court unless a plaintiff’s voluntary act brings about a change that renders the case removable. See, e.g., Self v. General Motors Corp., 588 F.2d 655, 657 (9th Cir. 1978). Thus, where an involuntary dismissal is achieved by the defense through dismissal or summary judgment, the involuntary nature of the dismissal generally does not permit a subsequent removal.
However, an exception to the voluntary-involuntary rule exists when a plaintiff fraudulently joins a defendant. The Supreme Court first recognized fraudulent joinder as an exception to the requirement of complete diversity in Wecker v. National Enameling & Stamping Co., 204 U.S. 176 (1907). The Wecker Court’s recognition of the exception was an attempt to prevent plaintiffs from naming sham defendants to prevent removal. 204 U.S. at 185-86. “Joinder of a non-diverse defendant is deemed fraudulent, and the defendant’s presence in the lawsuit is ignored for purposes of determining diversity, if the plaintiff fails to state a cause of action against a resident defendant, and the failure is obvious according to the settled rules of the state.” Morris v. Princess Cruises, Inc., 236 F.3d at 1067.
There are two element s to a finding of fraudulent joinder: (1) a plaintiff fails to state a cause of action against the defendant; and (2) the failure is obvious under the settled rules of the state. The burden of proving fraudulent joinder to prevent diversity is a heavy one that rests upon the removing party. Green v. Amerada Hess Corp., 707 F.2d 201, 205 (5th Cir. 1983), cert. denied 464 U.S. 1039 (1984); McMorris v. Stafford, 655 F.Supp. 671 (M.D. La. 1987). “A court must find that there is absolutely no possibility the plaintiff will be able to establish a cause of action against the non-diverse defendant or that outright fraud exists in the plaintiff’s pleading of jurisdictional facts.” Green, 708 F.2d at 205; B. Inc. v. Miller Brewing Co., 663 F.2d 545, 549 (5th Cir. 1981). In determining whether the joinder of parties is fraudulent, the Court “must evaluate all of the factual allegations in the light most favorable to the plaintiff, resolving all contested issues of substantive fact in favor of the plaintiff.” B. Inc. v. Miller Brewing Co., 663 F.2d at 549. The Court will look to whether there is no possibility that a plaintiff can establish any cause of action against the alleged fraudulently joined defendant. Cabalceta v. Standard Fruit Co., 883 F.2d 1553, 1561 (11th Cir. 1989). The burden of proving this is upon the removing party. Coker v. Amoco Oil Co., 709 F.2d 1433, 1440 (11th Cir. 1983).
Given the high standard of proving fraudulent joinder identified above, the fraudulent nature of the joinder usually is or should be apparent from an examination of the Complaint in most cases. Therefore, a petition for removal to federal court based upon an allegation of fraudulent joinder should typically be brought within the statutory 30-day time period. A defendant is not entitled to tolling of the 30-day time limit until it is able to sufficiently prove fraudulent joinder. Skidmore v. Beech Aircraft Corp., 672 F.Supp. 923, 925 (M.D. La. 1987). The grounds for assertion of fraudulent joinder are typically apparent from an examination of the Complaint and therefore the 30-day time period will not be tolled. Bohanan v. Atchison T. & S.F. Ry. Co., 289 F.Supp. 490, 492 (D. Okla. 1968); Beasley v. Goodyear Tire & Rubber Co., 835 F.Supp. 269, 272 (D. S.C. 1993). As an example, defendants will file a motion to dismiss under Rule 12(b)(6) for failure to state a claim upon which relief can be granted. Invariably it takes more than 30 days for the parties to complete the briefing cycle and for the state court to make a ruling. In that intervening time period, if the state court grants the motion to dismiss, the plaintiff can, nevertheless, argue against removal because the 30-day removal window has expired.
When defense counsel believes that removal to federal court has been impeded due to the presence of a non-diverse fraudulently joined party, a removal petition can be filed. See Morris v. Princess Cruises, Inc., 236 F.3d at 1067 (noting “one exception to the requirement of complete diversity is where a non-diverse defendant has been ‘fraudulently joined’”); Nasrawi v. Buck Consultants LLC, 776 F.Supp.2d 1166, 1169 (E.D. Cal. 2011) (holding that “…removal is proper despite the presence of a non-diverse defendant if that defendant is a ‘fraudulently joined’ or ‘sham’ defendant.”); Calero v. Unisys Corp., 271 F.Supp.2d 1172, 1176 (N.D. Cal. 2003) (recognizing that “…one exception to the requirement of complete diversity is where a non-diverse defendant has been ‘fraudulently joined.’”). Waiting until the fraudulently joined party is dismissed from the state court action and then seeking removal based upon 28 U.S.C. § 1446(b) will likely fail against a challenge by plaintiff that the removal is untimely. A better approach is to remove within the initial 30-day time period and wait to see if plaintiff will seek remand. If defendant does not establish fraudulent joinder initially, the motion to dismiss can be pursued following remand and if the state trial court grants the motion to dismiss for failure to state a cause of action upon which relief can be granted, then the exception set forth in 28 U.S.C. § 1446(b) can be used to seek removal at that point.
Joshua D. Rogers
Kunz Plitt Hyland & Demlong