Opinion
CASE NO. 05CV1889 DMS (AJB).
January 20, 2006
ORDER GRANTING PLAINTIFFS' MOTION TO REMAND [Doc. No. 4]
Before the Court is Plaintiffs' motion to remand this matter to San Diego County Superior Court. Having carefully considered the parties' pleadings and the relevant legal authority, the Court grants Plaintiffs' motion to remand.
I. FACTUAL AND PROCEDURAL BACKGROUND
The instant action was filed by Plaintiffs in state court, in the County of San Diego, on August 24, 2005. Plaintiffs are two groups of investors and their affiliated entities, all of whom participated in various investment strategies and tax shelters allegedly recommended and provided by the Defendants, Deutsche Bank AG et al. ("Deutsche Bank").
According to their Complaint, in late 1998 through early 1999, Plaintiffs received tax advice from their accountants regarding a complicated tax avoidance strategy. As a result of that advice, Plaintiffs were introduced to a tax-advantage investment strategy involving foreign exchange digital options contracts (the "Strategy"). In October 1999, Plaintiffs agreed to engage in the Strategy, which they contend was based in large measure upon Defendants' advice. Plaintiffs subsequently claimed resulting losses on tax returns with respect to these transactions.
On December 27, 1999, the Internal Revenue Service ("IRS") issued IRS Notice 1999-59, entitled "Tax Avoidance Using Distribution of Encumbered Property", which notified Plaintiffs that the IRS and the Treasury Department had become aware of certain transactions that were marketed to taxpayers for the purpose of generating tax losses. Plaintiffs contend Notice 1999-59 alerted taxpayers and their representatives that the losses arising from certain transactions (including those involving the Strategy) were not properly allowable for Federal Income Tax purposes. In August 2000, the IRS issued a subsequent notice, Notice 2000-44, entitled "Tax Avoidance Using Artificially High Basis", which Plaintiffs contend, clearly and unequivocally informed accountants and tax attorneys across the country that the IRS believed the Strategy was illegal.
Plaintiffs assert that as a result of Notices 1999-59 and 2000-44, the losses they generated from engaging in the Strategy were improper and disallowed by the IRS under the Internal Revenue Code. According to Plaintiffs, the IRS formalized its position on the status of the tax-advantaged strategies in June 2003 by issuing Notice CC-2003-020. In addition to formalizing its position on the illegality of the Strategy, that Notice offered to settle with Plaintiffs and other like-situated taxpayers by requiring those parties to pay to the IRS (a) all of the taxes avoided by use of these transactions, (b) all interest due; (c) a 10% penalty, and (d) a loss of 50% of the fees and other "out of pocket" costs deducted. Plaintiffs settled with the IRS in May of 2004.
On August 24, 2005, Plaintiffs filed this lawsuit, alleging that Defendants unlawfully and fraudulently provided bad advice and information regarding the investment strategies in question, which induced them to participate in the Strategy, and ultimately caused them to incur liability to the IRS. Specifically, Plaintiffs' Complaint alleges claims for: (1) declaratory judgment and unjust enrichment; (2) breach of contract and breach of the duty of good faith and fair dealing; (3) breach of fiduciary duty; (5) fraud; (5) negligence; (6) negligent misrepresentation; (7) declaratory judgment; (8) civil conspiracy; and (9) violation of Cal. Bus. Prof. Code § 17200, et seq.
Thereafter, on October 3, 2005, Defendants timely removed the case, on grounds that Plaintiffs' Complaint raises a federal question under 28 U.S.C. § 1331. In their notice of removal, Defendants assert that Plaintiffs' right to relief necessarily depends upon the resolution of substantial and disputed federal questions, that Plaintiffs' claims necessarily turn on the interpretation of the federal tax code, and that federal subject matter jurisdiction over the tax issues in this case is mandated by the Supreme Court's recent decision in Grable Sons Metal Products, Inc. v. Darue Engineering Manufacturing, 125 S.Ct. 2363 (2005). Plaintiffs subsequently filed the instant motion to remand the case to state court, contending that no federal issues are actually in dispute, and further contesting the application of Grable to the facts of this case.
II. LEGAL STANDARD
The removing party bears the burden of establishing that removal is proper. See Emrich v. Touche Ross Co., 846 F.2d 1190, 1195 (9th Cir. 1988). The removal statutes are construed restrictively, and doubts about removability are resolved in favor of remanding the case to state court. Shamrock Oil Gas Corp. v. Sheets, 313 U.S. 100, 108-09 (1941); Guas v. Miles, Inc., 980 F.2d 564 (9th Cir. 1992). There is a strong presumption in favor of remand. Sanchez v. Monumental Life Ins. Co., 102 F.3d 398, 403-04 (9th Cir. 1996). Federal question jurisdiction is normally invoked when a plaintiff pleads a cause of action created by federal law. However, federal question jurisdiction will be recognized despite the presence of state causes of action, wherever those state law claims implicate significant federal issues. Grable, 125 S.Ct. at 2366-67.
III. DISCUSSION
The parties do not dispute that whether federal jurisdiction exists in this case should be resolved by the Supreme Court's recent decision in Grable Sons Metal Products Inc. v. Darue Engineering Manufacturing, 125 S.Ct. 2363 (2005). There, the IRS seized real property owned by plaintiff to satisfy a federal tax delinquency and notified him of the seizure by mail. Thereafter, the IRS sold the property to the defendant. Plaintiff brought a quiet title action in state court, claiming that defendant's title to the property was invalid because the IRS failed to comply with the notice requirement provided for under 26 U.S.C. § 6355 by notifying him of the seizure by mail rather than by personal service. The defendant subsequently removed the case to federal court, asserting federal question jurisdiction. Plaintiff's motion to remand to state court was denied. Grable, 125 S.Ct. at 2366.
Upon review, the Supreme Court held that federal jurisdiction was appropriate in a state action to quiet title, where the sole issue was whether the plaintiff had received adequate notice of the property's foreclosure sale from the IRS under the standards required by federal tax statutes. Id. at 2368. In so holding, the Grable court enunciated the following standard: federal jurisdiction exists, despite the existence of state-law claims, where the state law claims "necessarily raise a stated federal issue, actually disputed and substantial, which a federal forum may entertain without disturbing any congressionally approved balance of federal and state judicial responsibilities." Id.
Defendants assert that the Grable standard is satisfied here, because Plaintiffs' claims are premised on certain IRS notices which require interpretation of the federal tax code. Plaintiffs, on the other hand, argue that interpretation of the federal tax code is not a necessary element of their claims because the IRS has already made its position on the tax shelters at issue clear. A careful review of Plaintiffs' Complaint leads this Court to conclude that Plaintiffs are correct.
In contrast to Grable, where the sole issue before the court was whether a plaintiff had received proper notice under certain federal tax statutes (which therefore required interpretation of those statutes), resolution of the present case does not depend on interpretation of federal tax laws regarding the Strategy. A close reading of Plaintiffs' Complaint reveals a recurring theme which underlies many, if not all, of Plaintiffs' claims: as a result of the IRS's notices, "Defendants knew or certainly should have known that the IRS would assert that the purported losses arising from the Strategy were improper and not allowable for tax purposes; however, . . . the Defendants intentionally did not disclose this information to Plaintiffs and, indeed, told them the exact opposite." ( See Plaintiffs' Complaint at ¶ 83) (emphasis added). Plaintiffs' claims, therefore, do not depend upon the proper interpretation of federal tax law regarding the Strategy, but rather concern the reasonableness of Defendants' interpretation of federal tax law in light of the information known to them before advising Plaintiffs. The reasonableness of Defendants' interpretation of federal tax law under the circumstances then known to Defendants substantially involves the application of state law, as presently alleged in the Complaint.
Moreover, a genuine dispute does not appear to exist between the parties as to the validity and proper interpretation of the IRS's notices. The essence of Defendants' opposition to remand is that Plaintiffs cannot prevail without first establishing "that the tax advice allegedly given to them reflected a legally incorrect interpretation of federal tax law." ( See Defendants' Opposition to Remand at 1.) However, it appears undisputed that the IRS's notices have been enacted as Regulations with retroactive force of law. Accordingly, this case does not present as a central question the interpretation of federal tax law (as that law now appears to be settled); rather, the case centers on the propriety of Defendants' interpretation of the law at the time they advised Plaintiffs. Accordingly, there is no substantial dispute or controversy regarding the content or validity of the IRS's notices, despite Defendants' protestations to the contrary.
Finally, it is evident that invoking federal jurisdiction in this instance would be improper because the exercise of such jurisdiction would be inconsistent with Congressional judgment about the sound division of labor between state and federal courts. Grable, 125 S.Ct. at 2367. In contrast to Grable, where the court found that federal jurisdiction would "portend only a microscopic effect on the federal-state division of labor", Id. at 2368, here, the possible consequences of federal jurisdiction are more significant; invoking federal jurisdiction in this case would open federal courts to any state law claim involving interpretation of a federal statute, when interpretation of the statute is not at the heart of the dispute. The Court declines to exercise jurisdiction where, as here, the claims merely implicate issues involving federal law, rather than present a substantial federal question.
In sum, because Plaintiffs' state law claims do not necessarily raise a state federal issue, actually disputed and substantial, which the Court may entertain without disturbing the congressionally approved balance of federal and judicial state responsibilities, federal jurisdiction is not invoked under Grable.
Notably, a number of district courts have been faced with similar issues and, with the exception of one, all have found removal to be improper under Grable. See Sheridan v. New Vista, LLC, 2005 WL 2090898 (W.D.Mich. 2005); Baker v. Seidman, 390 F.Supp.2d 919 (N.D.Cal. 2005), Maletis v. Perkins Co., No. CV-05-820-ST (D.Or. 2005); Cantwell v. Deutsche Bank Securities, Inc., 2005 WL 2296049 (N.D.Tex. 2005); Ling v. Deutsche Bank AG, 2005 WL 3158040 (E.D.Tex. 2005); Robinson v. Deutsche Bank AG et al., No. W-05-CA-270 (W.D.Tex 2005); but see Becnel v. KPMG LLP, 2005 WL 2016246 (W.D.Ark. 2005) (holding removal proper). To the extent the claims in Becnel are similar to those in this case, this court respectfully disagrees with and declines to follow Becnel for the reasons set forth in this Order.
IV. CONCLUSION AND ORDER
For the reasons discussed above, the Court GRANTS Plaintiffs' motion to remand. The case shall be remanded to the Superior Court of the State of California, for the San Diego County.IT IS SO ORDERED.