Summary
retaining legal malpractice claim when the question of deficient performance turned on the question of "severance pay and/or deferred compensation arising from their ERISA benefits plans"
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No. 05 Civ. 2172 (CSH).
May 25, 2005
MEMORANDUM OPINION AND ORDER
Plaintiffs Craig R. Nazzaro and Richard Doran filed a complaint in the Supreme Court of the State of New York, County of New York against defendants Scott Balber, Kelly Balber, LLP, The Kelly Group P.C. (successor-in-interest to Kelly Balber, P.C.) and John Q. Kelly, alleging various claims for attorney malpractice. Defendants timely removed the case to this federal district court. Presently before me is plaintiffs' motion to remand the case to the state court for lack of subject matter jurisdiction, and for attorney's fees and costs in opposing removal. For reasons stated in this opinion, plaintiff's motion is denied.
BACKGROUND
Defendants in this action were formerly plaintiffs' counsel in a lawsuit captioned Augienello et al. v. Coast to Coast Fin. Corp., et al., docketed at 01 Civ. 11608. Plaintiffs in that action, former employees of non-party Superior Bank FSB ("Superior"), filed suit against Coast-to-Coast Financial Corporation ("CCFC") and various CCFC managers, owners, and board members, asserting rights to severance pay and deferred compensation arising from the fact that plaintiffs were "participants in an employee pension benefit plan (the `ERISA Plan') formed by CCFC to provide retirement income to employees of Superior." Augienello et al. v. Coast to Coast Fin. Corp., et al., No. 01 Civ. 11608, 2002 U.S. Dist. LEXIS 14584, at *3 (S.D.N.Y. Aug. 7, 2002) ( Augienello I), aff'd, 64 Fed. Appx. 820 (2d Cir. May 9, 2003) ( Augienello II), citing the Employment Retirement Income Security Act of 1974, 29 U.S.C. §§ 1001 et seq. ("ERISA").
Plaintiffs in the original action also included Susan Augienello, Philip Einhorn, and Eileen Papp. None of those claimants are plaintiffs to the present action.
Plaintiffs alleged three claims for relief in their initial complaint: first, that defendants breached their fiduciary duties to plaintiffs in their capacity as fiduciaries under the ERISA plan; second, that certain of the defendants breached employment contracts that plaintiffs entered into with Superior; and third, that certain of the defendants were unjustly enriched by taking money from the ERISA plan and by unjustly making use of plaintiffs' labor. Augienello I, at *2-*3. Notably, plaintiffs filed their action in federal district court. While the precise contours of federal jurisdiction were not described in Augienello I, it is clear that the parties were non-diverse, and therefore subject matter jurisdiction could not have risen from 28 U.S.C. § 1332. Instead, jurisdiction arose pursuant to § 1331, the "federal question" provision, because plaintiffs asserted claims arising under their ERISA plan.
In a decision upheld by the Second Circuit, Judge Sweet dismissed plaintiffs' complaint, holding that "the provisions of [12 C.F.R.] § 563.39, as incorporated in plaintiffs' Employment Agreements, [were] sufficient for purposes of [Fed.R.Civ.P.] Rule 12(b)(6) to dismiss plaintiffs' claims." Augienello I, at *13. 12 C.F.R. § 563.39 is a federal provision which governs employment contracts in savings associations. The court held that pursuant to § 563.39, along with the terms of plaintiffs' employment contracts, plaintiffs' contracts automatically terminated when the Federal Deposit Insurance Corporation ("FDIC") placed Superior into receivership. Therefore, plaintiffs would only be entitled to their contractual benefits if those benefits had "vested." Based on the terms of plaintiffs' Employment Agreements, the court found that plaintiffs rights had not vested, and therefore they were not due deferred compensation or severance pay. See Augienello I, at *8-*13.
In affirming the district court's decision, the Second Circuit made note of plaintiffs' claim that "even if the defendants did not violate the express terms of the contracts, they violated the implied covenant of good faith and fair dealing." Augienello II, at 822. Because the plaintiffs had not included that claim in their complaint, asserting it for the first time on appeal, the court of appeals declined to consider it. Id.
Meanwhile, just prior to the district court's decision in Augienello I, plaintiffs filed a second complaint in this Court, based on the same underlying facts, captioned Augienello et al. v. Fed. Deposit Ins. Corp., as Receiver for Superior Bank FSB, docket number 02 Civ. 4317 (S.D.N.Y.). In that action, plaintiffs asserted claims not against CCFC but the FDIC, as receiver for Superior, due to the FDIC's repudiation of plaintiffs' employment agreements and refusal to remit previously earned compensation. See Plaintiff's Amended Complaint, dated Nov. 5, 2003, at ¶¶ 1-5, found in Defendants' Memorandum of Law in Opposition to Motion to Remand, Mar. 10, 2005, Ex. 4. Plaintiffs asserted that their claims arose under the Financial Institutions Reform, Recovery and Enforcement Act ("FIRREA"), 12 U.S.C. § 1821 et seq. Id. at ¶ 13. In consequence, plaintiffs again invoked the federal question provision of 28 U.S.C. § 1331 and filed their action in this federal district court.
The parties agreed that further proceedings in plaintiffs' action against the FDIC would be deferred until after the disposition of Augienello II, which the Second Circuit decided on May 9, 2003. After the Second Circuit's ruling, plaintiffs filed an amended complaint on November 10, 2003, which was "identical to their original complaint in this case except for the addition of a new Count II, which alleges a cause of action against the FDIC-Receiver for breach of `its duty of good faith and fair dealing in its dealings with plaintiffs.'" Augienello et al. v. Fed. Deposit Ins. Corp., as Receiver for Superior Bank FSB, 310 F.Supp.2d 582, 585 (S.D.N.Y. 2004) ( Augienello III), citing Plaintiffs' Amended Complaint, at ¶¶ 44-48.
Once again, Judge Sweet dismissed plaintiffs' complaint, this time pursuant to Fed.R.Civ.P. Rule 12(b)(1), holding that the court lacked subject matter jurisdiction of the complaint. Augienello III, at 588-590. FIRREA stipulates that a claimant may file suit "in the district or territorial court of the United States for the district within which the depository institution's principal place of business is located or the United States District Court for the District of Columbia." 12 U.S.C. § 1821(d)(6)(A). Because the court found that Superior's principal place of business was in the Northern District of Illinois, it found that it had no jurisdiction over the matter. Augienello III, at 590-592. For these reasons, the court did not reach plaintiffs' second count for breach of good faith and fair dealing, either in Augienello III, or the subsequent opinion denying plaintiff's motion for reconsideration. Augienello et al. v. Fed. Deposit Ins. Corp., as Receiver for Superior Bank FSB, No. 02 Civ. 4317, 2004 U.S. Dist. LEXIS 7807 (S.D.N.Y. May 10, 2004).
Following Judge Sweet's rulings, plaintiffs filed this present complaint for attorney malpractice in Supreme Court of the State of New York, County of New York. Defendants filed a notice of removal to this federal court on February 16, 2005. Defendants allege, and plaintiffs do not dispute, that defendants' notice of removal was timely filed. Plaintiffs now timely move to remand the case to state court. The issue I must now decide is whether this court has subject matter jurisdiction over plaintiffs' malpractice claim.
DISCUSSION
Defendants's Notice of Removal recites that the case is being removed from the New York State court to this Court "pursuant to 28 U.S.C. §§ 1331, 1441 and 1446." § 1446 describes the procedures to be followed in respect of a case that is properly removable. The asserted subject matter jurisdictional bases for removal are stated in defendants' references to §§ 1331 and 1441. As noted supra, § 1331 is the federal question provision. § 1441(b) provides:
Any civil action of which the district courts have original jurisdiction founded on a claim or right arising under the Constitution, treaties or laws of the United States shall be removable without regard to the citizenship or residence of the parties. Any other such action shall be removable only if 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 first sentence of § 1441(b) tracks the language of § 1331's grant of federal question subject matter jurisdiction in the federal district courts. This is the provision upon which defendants rely in removing the case. Specifically, defendants say that plaintiffs' complaint in the case at bar "asserts a claim arising under federal law," namely, FIRREA. Defendants' Notice of Removal, dated Feb. 15, 2005, at ¶ 11. The dispositive question on plaintiffs' motion to remand the case to the state court is whether defendants' assertion of the existence of a federal question is correct.
Defendants cannot rely upon the diversity jurisdiction conferred by 28 U.S.C. ¶ 1332 because the parties are not completely diverse. Even if they were, certain defendants appear to be New York citizens, which under the second sentence of § 1441(b) would constitute a procedural bar to removal if plaintiffs raised the issue within 30 days. See Handelsman v. Bedford Village Assocs. Ltd. P'ship, 213 F.3d 48, 50 n. 2 (2d Cir. 2000). But such questions do not arise in the case at bar, since defendants depend solely on federal question jurisdiction, and plaintiffs limit their motion for remand to the soundness of defendants' federal question theory.
As a general proposition, "[a] suit arises under the law that creates the cause of action." American Well Works Co. v. Layne Bowler Co., 241 U.S. 257, 260 (1916). Were this the only test for federal question jurisdiction, this Court would not have subject matter over plaintiffs' present complaint, whose four causes of action all assert claims for that branch of common law negligence known as legal malpractice. Indeed, that is plaintiffs' basis for remand; they argue that "[t]he complaint filed in State court was a garden or varietal attorney malpractice action. . . . [N]o federal claims were stated, and no claims in the complaint arise under federal law." Plaintiffs' Memorandum of Law in Support of Motion to Remand to State Court, dated Feb. 21, 2005 ("Plaintiffs' Memorandum"), at 3.
However, § 1331 paints with a broader brush. Original federal jurisdiction is present when "it appears that some substantial, disputed question of federal law is a necessary element of one of the well-pleaded state claims, or that one or the other claim is `really' one of federal law." Franchise Tax Bd. of the State of California v. Constr. Laborers Vacation Trust for S. California, 463 U.S. 1, 13 (1983) (" Franchise Tax"). In Franchise Tax the Supreme Court went on to say:
Even though state law creates appellant's causes of action, its case might still `arise under' the laws of the United States if a well-pleaded complaint established that its right to relief under state law requires resolution of a substantial question of federal law in dispute between the parties.Id. Accord, D'Alessio v. New York Stock Exchange, Inc., 258 F.3d 93, 99 (2d Cir. 2001) ("Federal jurisdiction in these circumstances is predicated on the presence of a federal issue in a state-created cause of action.") (citation and internal quotation marks omitted).
Ordinarily, the "well-pleaded complaint rule" dictates that whether a case arises under federal law "must be determined from what necessarily appears in the plaintiff's statement of his own claim in the bill or declaration, unaided by anything alleged in anticipation of avoidance of defenses which it is thought the defendant may interpose." Taylor v. Anderson, 234 U.S. 74, 75-76 (1914), cited in Oklahoma Tax Comm'n v. Graham, 489 U.S. 838, 840-41 (1989). However, the well-pleaded complaint rule is balanced by its "independent corollary," the "artful pleading exception," which holds that "a plaintiff may not defeat removal by omitting to plead necessary federal questions in a complaint." Franchise Tax, 463 U.S. at 22.
The first cause of action in plaintiffs' complaint alleges in ¶ 29 that defendants:
[N]egligently failed to render competent legal service, negligently failed to initiate proper legal proceedings, negligently failed to state a cause of action, failed to amend the complaint within appropriate time limits, failed to bring an action sounding in fraud, although there were adequate factual circumstances to bring the cause of action in fraud, failed to cross-move to amend, failed to seek leave to amend the complaint, failed to allege a breach of a covenant, failed to bring an action sounding in RICO, although there were adequate factual circumstances to bring the cause of action and failed to bring an action in State Court.
Comparable allegations appear in the other three causes of action. Thus, as previously noted, plaintiffs' claims are for legal malpractice. While plaintiffs do not specifically identify the elements of a legal malpractice claim brought in the state of New York, they are described in a recent state court opinion, Gursky Ederer, LLP v. GMT Corp., No. 109011/03, 2004 WL 2793175 (N.Y.Sup. Oct. 5, 2004):
In order to properly plead a claim for legal malpractice, defendant must allege (1) the negligence of the attorney, that is to say, that the attorney failed to exercise "the ordinary reasonable skill and knowledge" commonly possessed by a member of the legal profession ( Darby Darby, P.C. v. VSI Intern., Inc., 268 A.D.2d 270 [1st Dept] affd, 739 N.E.2d 744 [2000]); (2) that the negligence was the proximate cause of the loss, and (3) proof of actual damages as a direct result of the attorney's actions ( Franklin v. Ward, 199 A.D.2d 220 [1st Dept 1993]). As to the latter of the three elements, a legal malpractice cause of action is subject to dismissal where the complaint fails to set forth the requisite allegation, that "but for" the attorneys' alleged malpractice, the plaintiff would not have sustained some actual ascertainable damages ( Franklin, supra; Stroock Stroock Lavan v. Beltramini, 157 A.D.2d 590, 591 [1st Dept 1990]).
The roles of plaintiff and defendant are reversed in the quoted passage, but its essence remains the same. In order for the plaintiffs at bar to succeed, an element of their claim they must establish is that "but for" the defendants' negligence, they would have succeeded in obtaining actual damages in the underlying action — that is, that they would have won on the merits of at least some part of their original action. This is often described as a "lawsuit within a lawsuit." See, e.g., Ocean Ships, Inc. v. Stiles, 315 F.3d 111, 119 (2d Cir. 2004), citing Katsaris v. Scelsi, 453 N.Y.2d 994, 996 (1982).
How do plaintiffs intend to prove this element of their claims? Plaintiff's brief says little in this regard, beyond reciting the truism that defendants may be held in damages for their conduct in the two prior actions plaintiffs filed in this Court "if it is found that the defendants deviated from good and accepted practice, and proximately caused the outcome to plaintiffs, and that `but for' the negligence or breach of contract of the defendants there would have been a better or different outcome." Plaintiffs' Memorandum at 4.
It is at least conceptually possible that plaintiffs intend to limit their claim (and therefore any potential damages awards) to a showing that but for defendants' negligent practice, they would have recovered monetary damages on their claim against the defendants in the underlying cases for breach of the implied covenant of good faith and fair dealing. If so, then plaintiffs' action would be limited to a state claim, and the case should be remanded to state court.
On the other hand, plaintiffs may intend to attempt to establish that the defendants were negligent in their representation with respect to federal claims: that they were entitled to severance pay and/or deferred compensation arising from their ERISA benefits plans, perhaps on a theory that their rights had vested prior to termination of their employment contracts; or that plaintiffs were entitled to compensation from the FDIC arising under FIRREA. Each of these claims would turn upon a substantial, disputed question of federal law. Therefore, if it is plaintiffs' intention to seek damage awards arising from these claims, federal jurisdiction would be proper.
I find that this is indeed plaintiffs' intent. This conclusion is based upon a careful reading of plaintiffs' complaint. On ¶ 42 of the complaint, for example, plaintiffs allege that defendants "negligently failed to initiate proper legal proceedings in a proper court or a court which actually had subject matter jurisdiction." This language comes directly from Judge Sweet's opinion in Augienello III, dismissing plaintiffs' federal claims arising from FIRREA for lack of subject matter jurisdiction, and implicates the issues arising under that federal statute. Notably, plaintiffs separately plead defendants' negligence for failing to "bring an action in State Court," which is found in plaintiff's complaint, ¶ 29. But ¶ 29 also alleges that defendants negligently "failed to bring an action sounding in RICO, although there were adequate factual circumstances to bring the cause of action . . ." RICO is another federal statute.
Thus plaintiffs' pleading compels the inference that plaintiffs intend to argue underlying claims arising from federal law in their suit for malpractice against their former counsel. Because the resolution of substantial, disputed questions of federal law is necessary to establish an element of plaintiffs' well-pleaded state claims for attorney malpractice, I hold that this court has federal question has federal question subject matter jurisdiction over this case.
"For purposes of the general federal question jurisdiction statute, federal laws include federal statutes." 15 James Wm. Moore et al., Moore's Fed. Practice, § 103.32[2], page 103-55 (3d ed. 2004) (emphasis in original). This is especially true when the federal statutes expressly create a private right of action. Id. at 103-55-103-56.
For these reasons, plaintiffs' motion to remand the case to the state court is denied, as is their application for attorneys' fees.
In a prior memorandum endorsement order, I held in abeyance defendants' motions to dismiss, which defendants filed on February 24, 2005, until resolution of this present motion. Having denied plaintiffs' motion for a remand, they are now directed to file and serve their papers in opposition to defendants' motions to dismiss on or before June 10, 2005. If so advised, defendants may file and serve reply papers not later than June 17, 2005. If the Court desires oral argument, counsel will be advised.
It is SO ORDERED.