Limits on Diversity Removal

Limits on Diversity Removal

Section 1441(a) lets a defendant remove any state-court action over which the federal district courts have original jurisdiction, but it opens with a reservation: "Except as otherwise expressly provided by Act of Congress."¹ Congress has used that reservation to narrow removal in diversity cases. The premise that began this chapter, that a defendant may remove only what the plaintiff could have filed in federal court, is therefore necessary in a diversity case but not sufficient.

A federal-question case needs nothing more. The federal claim supplies original jurisdiction, and neither the defendant's home state nor the size of the demand enters the analysis.² A diversity case faces three further limits. The first turns on where the defendant lives, the second on the sum the plaintiff pleaded, and the third on whom the plaintiff chose to sue.

These limits attach to diversity because diversity exists to give litigants a federal forum where state courts might favor, or seem to favor, home-state parties.³ Removal extends that protection to a defendant sued in the plaintiff's courts. Where the protection has no work to do, as when a defendant is sued at home, the right to remove disappears.

The same defendant, court, and plaintiff produce opposite answers depending on whether a federal claim appears in the complaint. That pair shows what is at stake in the three limits below.

The Forum Defendant Rule

Section 1441(b)(2) takes the removal option away from a defendant sued in its own state. A civil action otherwise removable solely on the basis of § 1332(a) jurisdiction may not be removed if any party in interest properly joined and served as a defendant is a citizen of the state in which the action is brought.⁵ A defendant who fits that description is a forum defendant, and the provision is the forum defendant rule. The rule operates on top of the removal premise rather than in place of it. The case must first be one the plaintiff could have filed in federal court, and only then does the statute ask where the defendants live. A diversity case can pass the first step and fail the second, which is why removal jurisdiction is narrower than original jurisdiction here.⁶

The rule follows from the purpose of diversity jurisdiction. Removal gives a defendant sued in the plaintiff's home courts a neutral federal forum, because that defendant faces the local favoritism diversity was built to counter.⁷ A defendant sued in its own state is the local party. If anyone in that suit risks prejudice based on state citizenship, it is the out-of-state plaintiff, who accepted the risk by choosing the state court, so the defendant has no claim to override the choice.⁸ The plaintiffs in Merrell Dow sued the company in Ohio, where it was headquartered. Because diversity removal is unavailable from a defendant's home state, the company could reach federal court only by arguing that the case presented a federal question.⁹

Moving the courthouse while holding everything else constant shows the rule at work. An Iowa plaintiff sues an Illinois defendant on an $80,000 contract claim in an Iowa state court. The defendant may remove, because the plaintiff could have filed under § 1332 originally, and the Illinois defendant is being sued away from home.¹⁰ Had the same plaintiff sued in an Illinois state court, the defendant would be a forum defendant, and § 1441(b)(2) would bar removal even though the case could have been filed in federal court.

The word any makes the bar collective. Suppose a Texas plaintiff sues Murphy, a Utah citizen, and Mercer, a Nevada citizen, in a Utah state court on a state-law contract claim. Mercer is an out-of-state litigant who may fear local prejudice, yet Mercer cannot remove. One properly joined and served defendant, Murphy, is a Utah citizen, and that single forum defendant blocks removal of the whole action.¹¹ The statute carves out no exception for the second defendant. The bar attaches to the action, not to the defendant who wants out.

Each half of the phrase properly joined and served limits which local defendants count. A plaintiff who adds a local defendant against whom there is no colorable claim has not properly joined that defendant, and the removing defendant may ask the federal court to disregard the party as fraudulently joined.¹² A local defendant who has been named but not yet served does not trigger the bar either.

A plaintiff cannot block removal with placeholder defendants, because the citizenship of defendants sued under fictitious names is disregarded in deciding whether a case is removable on diversity.¹⁴

The word solely confines the rule to cases whose only route into federal court is § 1332(a). A federal claim carries the case in under § 1331 by itself, so a forum defendant does not block removal. The same is true when the parties are also diverse, because the case is just as squarely founded on federal law with diversity as without it, and it is not founded solely on diversity.¹⁵ Check every state-court diversity case for an in-state defendant before assuming removal is available. Examiners favor the point because the in-state defendant is easy to slip into a fact pattern and easy for a student to miss.¹⁶

The policy explains where the rule stops. A Kansas plaintiff who uses the Kansas state courts against two defendants, neither a Kansan, presents the strongest risk of prejudice to the defendants. No defendant is a forum citizen, so they may remove despite § 1441(b).¹⁷

A corporation can be a forum defendant on either of two grounds, because it is a citizen of its state of incorporation and of the state of its principal place of business.¹⁸ Under the nerve center test of Hertz Corp. v. Friend, the principal place of business is the state of the corporation's headquarters, not the state where it does the most business or has the most employees.¹⁹ A corporate defendant that wants to remove must check both citizenships. Acme Drug Corporation, incorporated in Delaware with its principal place of business in Pennsylvania, could remove a diversity suit that a Utah plaintiff brought against it alone, unless she sued in Pennsylvania or Delaware.²⁰ The test can also help a corporation. A corporation incorporated and headquartered in State Red, with its major manufacturing plant in State Green, may remove a contract suit brought by a Blue plaintiff in a Green state court. The plant does not make Green the principal place of business, so the corporation is a citizen only of Red and is not a forum defendant.²¹

Amount in Controversy on Removal

When a diversity case begins in state court, the federal court takes the amount in controversy from the plaintiff's own pleading. Section 1446(c)(2) provides that, if removal is sought under § 1332(a), the sum demanded in good faith in the initial pleading is deemed to be the amount in controversy.²³ Diversity requires that the amount in controversy exceed $75,000,²⁴ so a good-faith demand at or below that figure leaves a case with no federal question outside the reach of removal. A state-court plaintiff is always free to claim less than $75,000 to defeat removal, even if the plaintiff has really suffered a larger loss, provided the lower figure is named before the defendant removes.²⁵ The freedom is traced to St. Paul Mercury Indemnity Co. v. Red Cab Co.

That freedom has a price. The plaintiff gives up damages to buy the state forum, and plaintiffs often decide the forum is worth the cost.²⁷ A rule that let the defendant argue "you could have demanded more" would make every modest state-court demand a candidate for removal.

The deemed-amount rule assumes the complaint reveals the stakes, and § 1446(c)(2)(A) names the situations in which that assumption fails. In those situations the notice of removal may itself assert the amount in controversy.²⁸ The first is a complaint that seeks nonmonetary relief, such as an injunction, which carries no dollar figure to deem.²⁹ The second is a complaint that seeks a money judgment in a state whose practice either does not permit a demand for a specific sum or permits recovery of damages in excess of the amount demanded.³⁰ In each case the pleading gives either no number or a number that does not cap the case. The usual error is to treat any demand under $75,000 as conclusive. The real question is whether state practice holds the plaintiff to the figure, because only then does the demand cap the case.

Section 1446(c)(2)(B) sets the standard once the notice asserts the amount. Removal is proper if the district court finds, by a preponderance of the evidence, that the amount in controversy exceeds the amount specified in § 1332(a).³² A preponderance means more likely than not, and the defendant, who invokes federal jurisdiction, must be ready to prove it. A defendant who cannot carry that burden loses the federal forum, because a court that lacks subject-matter jurisdiction must remand the case at any time before final judgment.³³ For an application of the standard, see Troupe v. C & S Wholesale Grocers, Inc.

The defendant's first move is the notice of removal itself. The notice must be signed under Rule 11 and must contain a short and plain statement of the grounds for removal.³⁴ Holiday, for example, is sued in a state court on a complaint that does not say whether more than $75,000 is in dispute. He must still remove within 30 days or waive the right, but § 1446(a) allows him to include in the notice whatever further allegations are needed to show his right to remove.³⁵ The 30 days run from the defendant's receipt of the complaint, not from its filing in state court, and receipt by the defendant or by its own authorized agent starts the clock.³⁶ Because Twombly tests pleaded allegations for plausibility, the safest notice states the figure together with facts that make it plausible.³⁷

Sometimes the stakes stay hidden past the first 30 days. A defendant may have no reason to predict that a state-court case exceeds $75,000 until discovery reveals the plaintiff's damages, and the 2011 revision to § 1446 addresses that problem.³⁸ When the initial pleading is not removable solely because the amount falls short of the threshold, information about the amount in the state-court record or in responses to discovery is treated as an "other paper" under § 1446(b)(3).³⁹ A later filing that first makes the case removable gives the defendant a fresh 30 days. If an amended complaint first adds a federal claim, for example, the defendant has 30 days from service of the amended complaint, and the clock restarts because a defendant cannot be expected to remove a case that does not yet look removable.⁴⁰

For diversity, the restart has an outer limit. A case may not be removed under § 1446(b)(3) on the basis of § 1332 more than one year after the action commenced, unless the district court finds that the plaintiff acted in bad faith to prevent removal.⁴¹ The one-year limit does not apply when removal rests on a federal question.⁴² A defendant with solid grounds to assert the amount should remove within the first 30 days rather than wait for a confirmation that may arrive too late.⁴³

Joinder to Defeat Removal

A plaintiff who prefers state court can protect that preference through the choice of defendants. Section 1441(a) permits removal only of cases the federal courts could have heard originally,⁴⁵ and diversity requires that no plaintiff share a state's citizenship with any defendant.⁴⁶ One defendant from the plaintiff's own state therefore takes the case outside original jurisdiction. A defendant from the forum state works differently, since the case may still satisfy § 1332, but a diversity case may not be removed if any properly joined and served defendant is a citizen of the state where the action is brought.⁴⁷ In both situations the plaintiff's drafting choice, made before any defendant responds, fixes the forum.

A prescription-drug injury shows the tactic. Chang, a Utah citizen, is hurt by a drug made by Acme Drug Corporation, incorporated in Delaware with its principal place of business in Pennsylvania. If Chang prefers state court but sues only Acme, Acme can remove on diversity unless she sues in Pennsylvania or Delaware.⁴⁸ She can also sue Acme in Pennsylvania together with Dr. Maroni, a Utah doctor who prescribed the drug. Maroni shares Chang's Utah citizenship, so the case would remain in state court. The plan works only if Chang has a viable claim against Maroni and Maroni is subject to personal jurisdiction in the Pennsylvania action, which is doubtful if Maroni treated Chang in Utah.⁴⁹ The tactic therefore succeeds only when the added claim is genuine, and that condition is where the law draws its line.

The two scenes differ in a single fact, the existence of a real claim against James, and the plaintiff's motive is the same in both. Ethical rules prohibit frivolous claims, but a plaintiff with a valid claim against a nondiverse party is entitled to pursue it even if she is motivated by a desire to avoid federal court, and most lawyers would call that an acceptable tactical choice.⁵² A real claim also carries its own cost, because the plaintiff accepts the expense and complexity of litigating against another defendant, so the state forum is bought with effort and is never free.⁵³

Courts call the sham version fraudulent joinder, and the label overstates what must be shown. A party is fraudulently joined when the plaintiff cannot state a reasonable or colorable claim for relief against that party under the applicable substantive law.⁵⁴ The test looks at the claim and ignores the plaintiff's state of mind. No federal statute prohibits improper or collusive joinder used to defeat jurisdiction, so the rule against sham defendants is judge-made law. Courts will often disregard obvious removal-defeating tactics, such as joining a defendant who has nothing to do with the dispute but who is a citizen of the plaintiff's state.⁵⁵

The line falls there for a practical reason. The plaintiff controls the complaint, and if any in-state or nondiverse name sufficed to block removal, the limits on diversity removal would bind only plaintiffs who chose to be bound. Disregarding parties without a reasonable claim removes the reason to name them, and it leaves a plaintiff who joins a real co-defendant undisturbed.

The defendant makes the response in the removal itself, because the complaint on its face names a party that appears to block removal. The defendant removes anyway and argues that the case is a proper diversity case once the fraudulently joined party is set aside. If the federal court agrees, it dismisses that party and takes jurisdiction over the case.⁵⁶ Courts have traditionally been stringent in reviewing these claims, in keeping with the principle that the plaintiff is the master of the complaint. Some federal courts have begun to reconsider their reluctance to allow removal whenever an in-state defendant is named, and the law remains unsettled.⁵⁷

The deadline is the practical problem. The notice of removal is due within 30 days after the defendant receives the initial pleading,⁵⁸ and the period runs from receipt, not from filing.⁵⁹ Bean may not know whether the claim against James is frivolous, so counsel must investigate that claim at once and prepare a signed notice stating the grounds for disregarding him, for a case that looks nonremovable on its face.⁶⁰

A failed fraudulent-joinder argument costs the defendant the forum. If the court finds a reasonable claim against the nondiverse party, complete diversity is missing, the court lacks subject-matter jurisdiction, and the case must be remanded. The remand order may also require payment of just costs and actual expenses, including attorney fees, incurred as a result of the removal.⁶¹ A related problem arises when a plaintiff adds a nondiverse defendant only after the defendant has removed. A plaintiff who started in federal court and later added a Kansas defendant would lose for want of jurisdiction, as in Owen Equipment & Erection Co. v. Kroger. If Earp could win a remand by adding James after Bean removes, he would defeat the right to remove by a choice he was not inclined to make until Bean invoked removal jurisdiction.⁶² The remand sections return to that problem.

Step three does the real work. A plaintiff who joins a nondiverse defendant almost always hopes to stay in state court, so a motive to avoid federal court is present in nearly every fact pattern and cannot separate the two outcomes. Only the existence of a reasonable claim against the added party does.