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Jurisdictional Manipulation and The Federal Constitutional Right of Removal

The most frequent justification for diversity jurisdiction – authorized by Section 2, Article III of the United States Constitution – is to protect non-residents from prejudice and bias whether they appeared as plaintiffs or defendants in another state’s courts.  E.g., Aerojet-General Corp. v. Askew, 511 F.2d 710, 716 (5th Cir. 1975) (the “very purpose of federal diversity jurisdiction is to avoid bias against parties from outside the forum state”); accord, Szanty v. Beech Aircraft Corp., 349 F.2d 60, 65 (4th Cir. 1965) (the purpose of diversity jurisdiction is “to avoid discrimination against non-residents”) (citing The Federalist No. 80 (Hamilton); Martin v. Hunter’s Lessee, 14 U.S. (1 Wheat.) 304, 347 (1816) (Story, J.)).

This grant of subject matter jurisdiction in Article III serves as a balance and check over the state governments whether their actions against non-residents take the form of state legislation, rules of procedure, or final judgments.[1]  As the Supreme Court has explained, non-resident defendants have a “federal constitutional right . . . to resort to the federal courts” through the exercise of their federal right of removal and any “state action” that interferes with this federal constitutional right is invalid.  See Terral v. Burke Constr. Co., 257 U.S. 529, 532-33 (1922) (emphasis added).

Early in our nation’s history, Justice Story wrote that the Article III grant of diversity jurisdiction “was not to be exercised exclusively for the benefit of parties who might be plaintiffs, and would elect the national forum, but also for the protection of defendants who might be entitled to try their rights, or assert their privileges, before the same forum.”  Martin v. Hunter’s Lessee, 14 U.S. (1 Wheat.) 304, 348 (1816).  The Supreme Court noted later that “this constitutional privilege . . . may be considered [to be the] most valuable. ***  The right of choosing an impartial tribunal is a privilege of no small practical importance . . . to corporations themselves that they should enjoy the same privileges, in other States, where local prejudices or jealousy might injuriously affect them.”  Marshall v. Baltimore & O.R.R., 57 U.S. 314, 328-29 (1854) (citing Federalist No. 80).[2]

Given the vital importance of this federal constitutional right, the Supreme Court has called upon federal courts to be “vigilant” to detect improper devices that attempt to prevent non-resident defendants from being able to invoke the right:

While the plaintiff, in good faith may proceed in the state courts upon a cause of action which he alleges to be joint, it is equally true that the Federal courts should not sanction devices intended to prevent a removal to a Federal court where one has that right, and should be equally vigilant to protect the right to proceed in the Federal court as to permit the state courts, in proper cases, to retain their own jurisdiction.

Wecker v. Nat’l Enam. & Stamp. Co., 204 U.S. 176, 185-86 (1907) (emphasis added).

The exercise of vigilance on the part of the federal courts first arose in the context of fraudulent joinder.  The phrase “fraudulent joinder” as applied to a state law claim brought by a plaintiff against a non-resident defendant and a resident defendant is a term of art.  It does not refer to the plaintiff’s subjective state of mind.  To establish fraudulent joinder, the removing party must prove either that (a) there has been actual fraud in the pleading of jurisdictional facts or (b) there is no reasonable possibility that the plaintiff will be able to establish a cause of action against the resident defendant in state court.  See, e.g., Cuevas v. BAC Home Loans Servicing, LP, 648 242, 249 (5th Cir. 2011).  The second approach, by far the more common of the two, asks whether “there is no reasonable basis for the district court to predict that the plaintiff might be able to recover against an in-state defendant” under state law.  Id. (quoting Smallwood v. Ill. Cent. RR., 385 F.3d 568, 573 (5th Cir. en banc).

“[F]raudulent misjoinder of plaintiffs is no more permissible than fraudulent misjoinder of defendants to circumvent diversity jurisdiction.”  In re Benjamin Moore & Co., 318 F.3d 626, 630-31 (5th Cir. 2002) (citing Tapscott v. MS Dealer Serv. Corp., 77 F.3d 1353, 1360 (11th Cir. 1996), abrogated on other grounds by, Cohen v. Office Depot, 204 F.3d 1069 (11th Cir. 2000)).  Like the fraudulent joinder of claims against putative joint tortfeasors, the fraudulent misjoinder of claims or parties is an exception to Strawbridge diversity.

Fraudulent misjoinder “refers to the joining of claims into one suit in order to defeat diversity jurisdiction ‘where in reality there is no sufficient factual nexus among the claims to satisfy the permissive joinder standard.’” Reed v. Am. Med. Sec. Group, Inc., 324 F. Supp. 2d 798, 803 n. 4 (S.D. Miss. 2004) (quoting Conk v. Richards & O’Neil, LL, 77 F. Supp. 2d 956, 971 (S.D. Ind. 1999).

According to Wright & Miller, the fraudulent misjoinder doctrine “was first articulated” in Tapscott v. MS Dealer Serv. Corp., 77 F.3d 1353, 1360 (11th Cir. 1996), abrogated on other grounds by, Cohen v. Office Depot, 204 F.3d 1069 (11th Cir. 2000).  See Charles Alan Wright, Arthur Miller, Edward Cooper, and Joan Steinman, 14B Federal Practice and Procedure § 3723, at p. 876 (4th ed. 2009).  In point of fact, the federal courts have been making determinations about whether a non-diverse plaintiff has been improperly misjoined under state law long before Tapscott was decided.  See, e.g., Iowa Pub. Serv. Co. v. Med. Bow Coal Co., 556 F.2d 400 (8th Cir. 1977).  Thus, the issue of whether parties have been misjoined as plaintiffs to defeat diversity was at the time of Tapscott neither novel nor complex.

The Fifth Circuit has simplified its misjoinder analysis by rejecting any requirement of egregiousness.  “A party . . . can be improperly joined without being fraudulently joined. . . . If the[] requirements [of Federal Rule Civil Procedure 20(a)] are not met, joinder is improper even if there is no fraud in the pleadings and the plaintiff does have the ability to recover against each of the defendants.”  See Crockett v. R.J. Reynolds Tobacco Co., 436 F.3d 529, 533 (5th Cir. 2006) (footnote omitted).

According to Wright & Miller, the fraudulent misjoinder doctrine

may represent a third type of fraudulent joinder, the others being the lack of any possibility of the plaintiff having a claim against a joined party and outright fraud by the plaintiff in the statement of jurisdictional facts.  The three hold the promise of providing strong protection for the defendant’s statutory right to remove.

Charles Alan Wright, Arthur Miller, Edward Cooper, and Joan Steinman, 14B Federal Practice and Procedure § 3723, at p. 876 (4th ed. 2009).  This treatise nevertheless goes on to say that the “complexity of the analysis” under the fraudulent misjoinder rule has purportedly  “increased” based on the argument that “misjoinder of plaintiffs should be treated differently than misjoinder of defendants.”  Id.  The reference in Wright & Miller to the “complexity of the analysis” in assessing the misjoinder of claims or parties for the purposes of ascertaining federal diversity jurisdiction is in this writer’s judgment not merely unfortunate but unsupportable.  With respect, the fundamental question is whether a non-resident defendant is being deprived of a substantive right so important that the framers of the U.S. Constitution agreed that it be placed in Article III and the Supreme Court has since then zealously safeguarded while at the same time honoring and enforcing state substantive law.

The overarching principle of Wecker, supra, a judicially created exception to the requirement of Strawbridge diversity, is not limited to the improper joinder of an in-state defendant against whom the in-state plaintiff has no legal right of recovery.  In addressing the scope of the federal constitutional right, a defendant’s “right of removal” cannot be defeated by the joinder of a party “having no real connection with the controversy.”  Chesapeake & O. R. Co. v. Cockrell, 232 U.S. 146, 152 (1914).  As the Supreme Court has explained, a plaintiff may not defeat jurisdiction through the artifice of  “joining formal or unnecessary parties.  The right of removal depends upon the case disclosed by the pleadings when the petition therefor is filed . . . .”  See Salem Trust Co. v. Mfr.’s Fin. Co., 264 U.S. 182, 189 (1923).

“When a defendant seeks to remove a suit . . . he is entitled to contend that a party joined by the plaintiff is not a necessary party and therefore does not make the removal impossible by defeating the jurisdiction.”  Lee v. Lehigh Valley Coal Co., 267 U.S. 542, 543 (1925) (Holmes, J.).  The language used here is without limitation.  As should be plain from these decisions of the Supreme Court, the “vigilant” scrutiny that federal courts must exercise to detect improper manipulation of jurisdiction called for in Wecker, supra, is not restricted to the fraudulent joinder of non-diverse defendants but also extends to non-diverse plaintiffs.  Indeed, the federal courts have an obligation to exercise their jurisdiction, and they have “no more the right to decline the exercise of jurisdiction which is given, than to usurp that which is not given.”  Marshall v. Marshall, 547 U.S. 293, 298 (2006) (quoting Cohens v. Virginia, 19 U.S. 204, 404 (1821)).

Thus, the Supreme Court does not permit any party – whether plaintiff or defendant — to engage in manipulative attempts to create or defeat diversity jurisdiction.  As a result, the Supreme Court has struck down a variety of such manipulative artifices, including:  (1) the naming of unnecessary parties, see Salem Trust Co. v. Mfrs. Fin. Co., 264 U.S. 182, 189 (1924); (2) the improper alignment of a party to create or defeat diversity, see City of Indianapolis v. Chase Nat’l Bank, 314 U.S. 63 (1941); (3) collusive assignments to manufacture or thwart diversity, see Kramer v. Caribbean Mills, Inc., 394 U.S. 823, 826-30 (1969); (4) the naming of nominal parties, Navarro Savings Ass’n v. Lee, 446 U.S. 458, 460, 461 (1980); (5) permissible but nonetheless sham practices, see Hertz Corp. v. Friend, 559 U.S. 77, 97 (2010); and (6) the filing of non-binding stipulations, see Standard Fire Ins. Co. v. Knowles, 133 S. Ct. 1345, 1350 (2013).

Notably, the Supreme Court very recently reaffirmed its well-established, longstanding interpretation of “the diversity jurisdiction statute to require courts in certain contexts to look behind the pleadings to ensure that parties are not improperly creating or destroying diversity jurisdiction.” Mississippi ex rel. Hood v. Au Optronics Corp., 134 S. Ct. 736, 745 (2014) (citing Wecker and Kramer).  The “vigilant” scrutiny that federal courts are to exercise is not limited to these examples.  “[S]ince 1887 the [Supreme] Court has condemned similar practices in a way which makes it clear that the federal courts should be alert to protect their jurisdiction against cleverly-designed maneuvers designed by ingenious counsel to defeat it.”  Gentle v. Lamb-Weston, 302 F. Supp. 161, 165 (N.D. Me. 1969).

While ordinarily “‘a court will not interfere with the consequences of a plaintiff’s selection in naming parties,’” this is not the case where “‘the plaintiff has impermissibly manufactured diversity or used an unacceptable device to defeat diversity.’”  Slater v. Republic-Vanguard Ins. Co., 650 F.3d 1132, 1135 (8th Cir. 2011) (quoting Lincoln Prop. Co. v. Roche, 546 U.S. 81, 93 (2005)).  When “the ‘nondiverse’ plaintiff is not a real party in interest, and is purely a formal or nominal party, [her] presence in the case may be ignored in determining jurisdiction.”  Cascades Dev. of Minn. LLC v. Nat’l Spec. Ins. Co., 675 F.3d 1095, 1098 (8th Cir. 2012).  Thus, joinders that are “unilateral attempts to destroy the federal courts’ diversity jurisdiction over matters that the courts [are] in a suitable position to decide,” require that “a trial court should look with particular care at such motive in removal cases . . . .”  Desert Empire Bank v. Ins. Co. of N. Amer., 623 F.2d 1371, 1376-77 (9th Cir. 1980) (citing with approval in Carter v. Seaboard C.R.R., 318 F. Supp. 368, 372-73 (D.S.C. 1970) (claims of sham joinder to defeat diversity apply to misjoinder of plaintiffs as well as defendants)).

Where multiple plaintiffs – some of whom are diverse and some of whom are non-diverse – join in a single suit against a non-resident defendant, it is essential to analyze the nature and relationship of the plaintiffs’ claims to determine if their joinder into a single suit is a sham and done for the purpose of depriving the non-resident defendant of the federal constitutional right to elect to be in federal court.  This calls for a determination of whether any plaintiff is a necessary party to any other plaintiff’s case.  When each plaintiff alleges a separate claim against the non-diverse defendants based on an entirely different set of facts, each plaintiff named in the pleadings has her own individual “case or controversy” against Defendants, see U.S. Const. art. III, § 2, cl. 1, and each plaintiff is the real party in interest for her individual claims.  See Fed. R. Civ. P. 17.  Where this occurs, no plaintiff has standing to enforce the substantive legal rights of any other plaintiff, and no plaintiff will be bound by a judgment entered against another plaintiff in the suit.

“Early in its history, [the Supreme] Court established that the “citizens” upon whose diversity a plaintiff grounds jurisdiction must be real and substantial parties to the controversy.” Navarro Sav. Ass’n v. Lee, 446 U.S. 458, 460 (1980) (citing Marshall, supra).  The inclusion of state law claims that are several and not joint does not pass muster under this standard.  As the Ninth Circuit has explained, “there is no more reason for federal courts to countenance destruction of jurisdiction by the use of straw parties than there is for them to countenance the creation of jurisdiction in that manner.”  See Attorneys Trust v. Videotape Computer Products, Inc., 93 F.3d 593, 598 (9th Cir. 1996).

In determining whether a plaintiff has acted in such a manner so as to manipulate diversity jurisdiction, the federal courts of appeals have adopted those approaches which “insure[] that federal jurisdiction will be invoked . . . when necessary to protect the party whose personal interest in the suit might be prejudiced by the presence of local bias, which has been the historical view for why diversity jurisdiction originated.”  See Bishop v. Hendricks, 495 F.2d 289, 291 (4th Cir. 1974) (citation and internal quotation marks omitted); compare Bailey v. Bayer CropScience L.P., 563 F.3d 302, 309 (8th Cir. 2009), with Ryan v. Schneider Nat’l Carriers, Inc., 263 F.3d 816, 819-20 (8th Cir. 2001) (where non-diverse plaintiffs are included for the purpose of defeating diversity, the non-resident defendant’s right to a federal forum outweighs the diverse plaintiffs’ right to return to state court when there is no palpable prejudice to the diverse plaintiffs).

Attempts by a diverse plaintiff to join a non-diverse plaintiff to defeat a non-resident defendant’s constitutional right to a federal forum run counter to the well-settled principle that procedural rules addressing permissive joinder may not be used to limit subject matter jurisdiction.  See Fed. R. Civ. P. 82 (“These rules do not extend or limit the jurisdiction of the district courts or the venue of actions in those courts.”); see also Fed. R. Civ. P. 20, advisory committee’s note (1937) (expressly stating Rule 20 is subject to Rule 82).  Indeed, as already seen, when “a Federal court is properly appealed to in a case over which it has by law jurisdiction, it is its duty to take such jurisdiction.”  England v. La. State Bd. of Med. Exam’rs, 375 U.S. 411, 415 (1964) (emphasis added) (quoting Willcox v. Consol. Gas Co., 212 U.S. 19, 40 (1909)).  Thus, any such procedural rule must yield to 28 U.S.C. § 1332(a).

The Federal rules of procedure clearly authorize the Federal courts to dismiss non-diverse plaintiffs as well as nondiverse defendants.  When a non-resident defendant has shown that a plaintiff has attempted to defeat the non-resident defendant’s federal constitutional right to be in federal court through fraudulent joinder, Tapscott misjoinder, or sham joinder all for the purpose of attempting to manipulate federal jurisdiction, the federal court should be vigilant in protecting Defendants’ federal constitutional right to a federal forum and not permit the plaintiffs’ manipulation of jurisdiction.

John C. Henegan

[1] See A. Hamilton, J. Madison and J. Jay, The Federalist xxxvii (Barnes & Nobles Classics 2006).

[2]  See also Bank of United States v. Deveaux, 9 U.S. 61, 87 (1809) (“However true the fact may be, that the state tribunals will administer justice as impartially as those of the nation, to parties of every description, it is not less true that the constitution itself either entertains apprehensions on this subject, or views with such indulgence the possible fears and apprehensions of suitors, that it has established national tribunals for the decision of controversies between aliens and a citizen, or between citizens of different states.”), overruled on other grounds, Louisville, C. & C.R.R. v. Letson, 43 U.S. 497, 558 (1844).