Summary
remanding due to a lack of an essential federal issue
Summary of this case from Anderson v. ThompsonOpinion
No. 02-2775 Ma
January 27, 2003
ORDER OF REMAND
Before the court are the motions to remand of James Weir ("Weir") and Chemical Valley Pension Fund of West Virginia, Inc. ("CVPF"), filed on October 28, 2002, and the motion to remand of Plaintiff Michelle Rafkin, filed on October 30, 2002. Defendants have responded to these motions and Plaintiffs have filed replies. For the foregoing reasons, the court GRANTS Plaintiffs' motions to remand.
I. Background
Plaintiff Weir filed a shareholder derivative action on September 9, 2002 in the Circuit Court of Shelby County, Tennessee, alleging the following claims: intentional breach of fiduciary duty, negligent breach of fiduciary duty, abuse of control, waste of corporate assets, gross mismanagement, unjust enrichment, and usurpation of corporate opportunities. Plaintiff Rafkin filed a similar shareholder derivative action against the same or similar parties on September 10, 2002. On October 9, 2002, the Shelby County Circuit Court consolidated four related cases, including Weir's and Rafkin's actions. All four actions arise out of Defendants' alleged mismanagement of Concord EFS, Inc. On October 11, 2002, Defendants removed the consolidated action to this court pursuant to 28 U.S.C. § 1441 and 1446(a), claiming that the federal court has jurisdiction pursuant to 28 U.S.C. § 1331. The court now considers Plaintiffs' motions to remand this action, Docket Number 02-2775, to the Circuit Court of Shelby County, Tennessee.
The substance of Plaintiff Rafkin's arguments in support of her motion to remand is that the consolidated cases may be examined separately so that, even if the court held that remand of Weir was improper, it could separately remand her case. Because the court finds that it must remand the entire action, it does not consider the merits of Rafkin's arguments separately.
On the face of their complaint, Plaintiffs allege only state law causes of action. Nevertheless, the allegations in the complaint include accusations that Defendants violated federal securities laws. First, the complaint alleges as part of the breach of fiduciary claims: "Defendants abdicated their corporate responsibilities by mismanaging the company" in four different ways — two of which refer to federal securities laws. Plaintiffs again reference federal securities laws in alleging the causation element of the breach of fiduciary duty claims. Specifically, the complaint alleges that Concord was damaged "[a]s a result of Defendant's wrongful conduct and wrongful action, including the failure to maintain a system of internal controls adequate to insure the Company's compliance with the federal securities law." Finally, Plaintiffs refer to federal securities laws in stating that one of the ways in which Defendants wasted corporate assets was through "the exposure [of Concord EFS, Inc.] to liability for violations of the securities laws and professional fees incurred in connection therewith."
Although the cases have been consolidated, no consolidated complaint has been filed. Because the Weir complaint was attached to Defendant's Notice of Removal and serves as the basis for Plaintiffs' primary arguments in support of their motion to remand, the court will treat this as the relevant complaint for purposes of this order.
Numerous class action complaints alleging the violation of federal securities laws were filed in this court. The complaints in these cases described much of the behavior also described in the complaint in this case. Those actions have been consolidated as In re Concord EFS, Inc. Securities Litigation, No. 02-2697 (W.D. Tenn 2002).
The first of the four ways alleged is that Defendants "caused concord to violate the federal securities laws" and the fourth is that Defendants misused corporate assets in a manner which "result[ed] in inflated earnings in violation of federal and state laws . . . ."
II. Analysis
A. Motion to Remand
Defendants claim that removal is appropriate under 28 U.S.C. § 1441(b), because Plaintiffs' right to relief depends "on resolution of a substantial question of federal law." Specifically, Defendants aver that the state court would necessarily have to determine "whether defendants have violated or participated in or permitted a violation of the federal securities laws." Furthermore, Defendants allege that the complaint makes Concord's threat of exposure in the federal securities actions "a major element of [Plaintiffs'] claim." Plaintiffs disagree. They maintain that their claims are based solely on state law.
Neither side disputes that the parties are not diverse for purposes of diversity of citizenship jurisdiction. Thus, "the propriety of removal turns on whether the case falls within the original `federal question' jurisdiction of the United States District Courts." Franchise Tax Bd. of Cal. v. Constr. Laborers Vacation Trust for S. Cal., 463 U.S. 1, 8 (1983). Defendants claim that the district court has original jurisdiction over Plaintiffs' state court action under the general federal question jurisdiction statute, 28 U.S.C. § 1331. Section 1331 provides that "district courts shall have original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States." 28 U.S.C. § 1331.
Under the well-pleaded complaint rule, the court only has "arising under" jurisdiction if "the plaintiff's well-pleaded complaint raises an issue of federal law." Robinson v. Michigan Consol. Gas Co., Inc., 918 F.2d 579, 584 (6th Cir. 1990). More specifically, "in order for arising under jurisdiction to attach, `a right or immunity created by the institution or laws of the United States must be an element, and an essential one, of the plaintiff's cause of action.'" Id. at 585 (quotingFranchise Tax Bd., 463 U.S. at 10-11). As a result of the well-pleaded complaint rule, the plaintiff controls where the cause of action proceeds: "The rule makes the plaintiff the master of the claim; he or she may avoid federal jurisdiction by exclusive reliance on state law."Caterpillar Inc. v. Williams, 482 U.S. 386, 392 (1987). Because of federalism concerns, and in deference to Plaintiff's choice of forum, courts construe removal statutes narrowly. Long v. Bando Mfg. of America, Inc., 201 F.3d 754, 757 (6th Cir. 2000). Furthermore, the burden of showing that the district court has original jurisdiction rests with the party seeking removal. Id.
An exception to the well-pleaded complaint rule, the artful pleading doctrine, provides that federal courts have federal question jurisdiction over causes of action "when plaintiffs artificially plead their complaint in order to avoid federal jurisdiction of claims that are federal in nature." Her Majesty the Queen in Right of the Province of Ontario v. City of Detroit, 874 F.2d 332, 339 (6th Cir. 1989) (internal quotations and citations omitted). The artful pleading doctrine generally applies in one of two circumstances: (1) if "it appears that some substantial, disputed question of federal law is a necessary element of one of the well-pleaded state claims" or (2) if Plaintiff's "claim is `really' one of federal law." Franchise Tax Bd., 463 U.S. at 13.
Despite its availability, the artful pleading doctrine, especially if applied expansively, raises problems: "Unless applied with circumscription, the artful pleading doctrine may raise difficult issues of federal-state relations. An expansive application of the doctrine could effectively abrogate the rule that a plaintiff is master of his or her complaint." Her Majesty the Queen, 874 F.2d at 340 (quoting United Jersey Banks v. Parell, 783 F.2d 360, 368 (3d Cir. 1986)).
In order to address this concern, the Sixth Circuit has articulated a general rule that "federal jurisdiction will not be found when the complaint states a prima facie claim under state law." Id. Where violations of federal law are alleged in a complaint that purports to be based solely on state law, the court must determine whether any of those alleged federal violations is an essential element of any of Plaintiffs' state law claims. If the state law claims as alleged in the complaint can be proven, absent resort to federal law, the court is without jurisdiction and must remand the case for adjudication in state court.See Desaigoudar v. California Micro Devices Corp., No. 98-15116, 1999 WL 51511, at *2 (9th Cir. Jan. 22, 1999) (holding that removal is only proper if "adjudication of a state cause of action necessarily involves the resolution of a substantial federal issue.")
The District of Colorado was faced with a dilemma similar to the one in the case at bar: the application of the artful pleading doctrine to a case involving allegations of federal securities law violations made in support of a derivative action based on state law. See Envtl. Remediation Holding Corp. v. Talisman Opportunity Fund, Ltd., 106 F. Supp.2d 1088 (D. Colo. 2000) ("Environmental Remediation"). In Environmental Remediation, minority shareholders brought a derivative suit against the majority shareholders in Colorado state court alleging only state law claims. Id. at 1091. In stating their breach of fiduciary duty claim, Plaintiffs alleged that Defendants did so by "committing violations of federal securities laws." Id. at 1090-91. Elsewhere in the complaint, Plaintiffs stated that "[Defendant] continues to violate federal securities law." Id. at 1091. Finally, Plaintiffs alleged that "because of [Defendant] the SEC is currently investigating [the corporation]. The mere existence of this investigation further damages [the corporation's business relationships]." Id. at 1091-92. Defendants sought removal pursuant to 28 U.S.C. § 1331. Id. at 1091. The court granted Plaintiffs' motion to remand because it found that, while violations of the federal securities laws had been alleged, they were part of a list of ways in which Defendants allegedly violated their duties under state corporate law. Id. at 1094-95. Thus, Plaintiffs could recover on all claims without the state court's being required to construe the federal securities laws. Id. Therefore, the court held that construction of securities law would not be "determinative" of Plaintiffs' claims and remanded the case to state court. Id. at 1095.
Although the complaint in the instant action discusses the violations of federal securities law in greater detail than the complaint inEnvironmental Remediation, that case is more closely analogous to the case at bar than any of the cases cited by Plaintiffs (most of which involved a removal provision not applicable to this case) and Defendants (none of which was a derivative action). Like Environmental Remediation, this case must be remanded because the alleged securities violations are offered in support of Plaintiffs' claims, but are not an "essential element" of any of those state law claims. Plaintiffs have framed the complaint so that both federal securities law violations and matters unrelated to federal law are among the alternative ways in which Defendants allegedly violated state corporate law to the detriment of Concord EFS, Inc. For the court to assert "arising under" jurisdiction over Plaintiffs' claims, it is not sufficient to establish that Defendants' violation of federal securities law would be one way that Plaintiffs could recover. Rather, for the court to find that Plaintiffs' state law claims are really artfully pleaded federal claims, the court would have to find that Plaintiffs' success on the federal issue is "essential" to its recovery. Defendants have not demonstrated that the federal issue is essential. Therefore, the court holds that it does not have federal question jurisdiction under 28 U.S.C. § 1331 and remands this case to Shelby County Circuit Court.
B. Fees and Expenses
Plaintiffs seek an award of attorneys fees and costs pursuant to 28 U.S.C. § 1447. That section provides that a district judge remanding a case for lack of subject matter jurisdiction, "may require payment of just costs and any actual expenses, including attorneys fees, incurred as a result of the removal." 28 U.S.C. § 1447(c). "[A]n award of costs, including attorney fees, is inappropriate where the defendant's attempt to remove the action was `fairly supportable,' or where there has not been at least some finding of fault with the defendant's decision to remove." Strategic Assets, Inc. v. Fed. Express Corp., 190 F. Supp.2d 1065, 1071 (M.D. Tenn. 2001) (quoting Ahearn v. Charter Township of Bloomfield, No. 97-1187, 1998 WL 384558, at *2 (6th Cir. June 18, 1998)). An attempt to remove is "fairly supportable" where Defendant provides "at least some statute or case law supporting its position that subject matter jurisdiction existed and that removal was appropriate." Id.
In this case, Defendants' theory that this court had subject matter jurisdiction over Plaintiffs' claims was fairly supportable. The artful pleading doctrine is well-established, and Plaintiffs' numerous allegations with respect to federal securities law violations made this case a candidate for application of that doctrine. Because the cases in this area turn on a case-by-case analysis of the complaint to determine whether the state law claims are free-standing, both in form and in fact, Plaintiffs' arguments were fairly supportable although ultimately unpersuasive. Accordingly, the court denies Plaintiffs' request for fees and costs.
III. Conclusion
For the foregoing reasons, the court GRANTS Plaintiff Rafkin's and Plaintiffs Weir and CVPF's motions to remand this action to Shelby County Circuit Court. Because Defendants had a "fairly supportable" basis for seeking removal, however, the court DENIES Plaintiffs' request for fees and costs.
So ORDERED.