Federal Court in United States
A branch of the United States government with power derived directly from the U.S. Constitution. Federal courts decide cases involving the U.S. Constitution, federal law, and some cases where the parties are from different states.
By Bryant Y. Yang and Emerson H. Kim. Bryant Y. Yang is a litigation associate at Irell and Manella in Los Angeles. Emerson H. Kim, a 2012 graduate of Loyola Law School, is a former extern for U.S. District Judge S. James Otero.
When defendants remove cases to federal court on diversity grounds, a number of procedural and jurisdictional issues are sure to arise.
Seasoned litigators know that defendants will often remove a civil case to federal court. The most common reason for this tactic is that state court procedural rules are more favorable to plaintiffs. For example, California requires parties (usually defendants) to file their motions for summary judgment at least 105 days prior to trial – a minimum notice of 75 days and a hearing no later than 30 days before trial. (Cal. Code Civ. Proc. § 437c(a).) In federal court, the window for filing stays open much longer: Defendants may move for summary judgment at any time until 30 days after the end of discovery. (Fed. R. Civ. P. 56(b).)
In their rush to change venue to what they perceive as a more favorable forum, defendants often fail to determine whether removal jurisdiction exists. Pursuant to statute, defendants may remove a state civil action to federal court if original jurisdiction exists. (See 28 U.S.C. § 1441.) Federal courts most commonly have original jurisdiction where:
– the action arises under the U.S. Constitution, federal law, or treaties of the United States;
– the dispute is an admiralty or maritime case; and
– the amount in controversy exceeds $75,000 and there is complete diversity in the parties’ citizenships.
Defendants seem to encounter the most difficulty when removing diversity jurisdiction cases. They forget that “the core principle of federal removal jurisdiction on the basis of diversity … is determined (and must exist) as of the time the complaint is filed and removal is effected.” (Strotek Corp. v. Air Transp. Ass’n of Am., 300 F.3d 1129, 1131 (9th Cir. 2002).) This “time-of-filing” rule mandates that diversity jurisdiction must exist when the complaint is filed and when the action is removed.
There are two general exceptions to the time-of-filing rule. The rule does not apply if there is a voluntary dismissal of the nondiverse parties, and also if a “fraudulent joinder” exists.
The voluntary-dismissal exception provides that “a voluntary act by a plaintiff,” such as the dismissal of a nondiverse defendant through settlement, “could create diversity removal jurisdiction where none existed from the complaint.” It is crucial to note that this exception applies only to voluntary dismissals; it has no application in cases where the court has ordered that a party be removed from the case. Thus, the rule “does not allow creation of diversity removal jurisdiction by court order dismissing [a] nondiverse defendant.” (Gould v. Mut. Life Ins. Co. of N.Y., 790 F.2d 769, 773 (9th Cir. 1986) (citations omitted).)
The fraudulent-joinder exception permits removal of cases where the plaintiffs joined sham or nominal nondiverse defendants. (Ritchey v. Upjohn Drug Co., 139 F.3d 1313, 1318 (9th Cir. 1998).)
Failure to Remand
Often times, these two exceptions don’t apply and removal is improper. Yet, despite improper removal, many plaintiffs do not move for remand to state court. Instead, they remain silent and proceed to litigate. The problem arises when a plaintiff who has acquiesced to faulty removal later seeks to assert a jurisdictional challenge to an unfavorable outcome on the merits.
The U.S. Supreme Court has ruled that once a judgment is entered, it will not be disturbed so long as diversity jurisdiction existed at the time of judgment. (See Caterpillar Inc. v. Lewis, 519 U.S. 61, 73 (1996).) Consequently, even if removal jurisdiction did not exist and the case should have remained in state court, the judgment will be upheld. “[A] district court’s error in failing to remand a case improperly removed is not fatal to the ensuing adjudication if federal jurisdictional requirements are met at the time judgment is entered.” (Caterpillar, 519 U.S. at 64.) In fact, regardless of whether plaintiffs moved for remand or the district court improperly denied the motion, the judgment will be affirmed if original jurisdiction existed at the time of judgment.
Defendants who wish to remove on the basis of diversity should be mindful of the time-of-filing rule and its exceptions. Equally important, if there is no proper basis for removal, a plaintiff needs to promptly seek a remand to state court and, if the district court denies the request, seek interlocutory appeal. Otherwise, the plaintiff risks a double-barreled calamity: being stuck with an unfavorable result, imposed in an improper forum that was not of the plaintiff’s own choosing.
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