Choice of law in fraudulent joinder litigation.

AuthorSimons, Walter

INTRODUCTION I. LEGAL PRINCIPLES APPLICABLE TO CHOICE OF LAW IN FRAUDULENT JOINDER LITIGATION A. Diversity Jurisdiction and Its Justifications B. Development of Fraudulent Joinder Law 1. The Supreme Court's Elaboration of Fraudulent Joinder 2. The Lower Courts and Modern Fraudulent Joinder Standards a. No Reasonable Basis Standard b. No Possibility of Recovery Standard c. No Reasonable Possibility of Recovery Standard 3. Extrinsic Evidence C. Choice of Law Approaches 1. Traditional Approach 2. Interest Analysis Approach 3. Most Significant Relationship Approach II. CONFLICTING APPROACHES TO CHOICE OF LAW IN FRAUDULENT JOINDER LITIGATION A. Refusing to Engage in Choice of Law B. Reasonable Possibility Test C. Resolving Ambiguity in Favor of Plaintiff's Choice of Law. D. Applying Forum Law E. Conducting a Choice of Law Inquiry Prior to the Fraudulent Joinder Analysis III. APPLYING FRAUDULENT JOINDER RULES TO THE CHOICE OF LAW ANALYSIS A. Refusing to Make a Choice of Law Determination B. Assuming Forum Law C. Assuming the Plaintiff's Choice of Law D. Making a Choice of Law Prior to the Fraudulent Joinder Determination E. Applying Fraudulent Joinder Burdens to the Choice of Law Determination CONCLUSION INTRODUCTION

The grant of subject matter jurisdiction to federal courts based on diversity of citizenship has, for centuries, required complete diversity between parties to the litigation. (1) If a case is brought in state court and complete diversity exists between the parties, the defendant has the statutory right to remove the case to federal court. (2) Absent another basis for federal jurisdiction, the lack of complete diversity strips the federal court of subject matter jurisdiction, and the court is required to remand the case to state court. (3) Therefore, the presence of a single nondiverse defendant is sufficient to defeat diversity jurisdiction.

The doctrine of fraudulent joinder has arisen in response to plaintiffs' efforts to take advantage of this complete diversity requirement and thereby control whether a state or federal court hears their case. Fraudulent joinder refers to a plaintiff's attempt to defeat complete diversity and generally occurs in one of two ways: (1) a plaintiff commits actual fraud by inaccurately pleading the citizenship of the parties to the lawsuit or (2) a plaintiff sues a nondiverse defendant against whom the plaintiff cannot establish a cause of action. (4) This Comment focuses only on the second method, which is litigated with much greater frequency than the first. (5) In this context, the diverse defendant will generally remove the case to federal court and argue that the judge should ignore the citizenship of the nondiverse co-defendant because the plaintiff has no chance of stating a claim against that defendant. (6)

If the federal court determines that the plaintiff has no cause of action against the nondiverse defendant, the court is permitted to ignore that defendant's citizenship and thereby establish complete diversity. (7) However, if the court determines that the nondiverse defendant is properly joined, then complete diversity is absent and the case must be remanded to state court. The result of a fraudulent joinder dispute therefore determines whether a suit will be heard in state or federal court--an important consideration for litigants. (8)

To resolve the fraudulent joinder question, the federal judge must look to a source of law to determine whether the plaintiff has established a cause of action against the nondiverse defendant. In many cases, all parties agree on which law applies to the case; in those circumstances, the judge will conduct the fraudulent joinder inquiry using the agreed-upon legal standards. In some cases, however, the events giving rise to the litigation have connections to multiple jurisdictions and therefore multiple laws could potentially apply. In these cases, the judge must decide which state's law to use to determine whether the plaintiff has stated a claim against the nondiverse defendant.

In such a case, it is not clear how a judge should approach this choice of law determination or whether the judge is even permitted to make a choice of law determination at all. On the one hand, if the nondiverse defendant is properly joined, the federal court does not have subject matter jurisdiction and arguably cannot make a choice of law determination. On the other hand, there may be cases in which the plaintiff can state a claim against the nondiverse defendant under one state's substantive standard, but not under another state's standard. In these cases, the court cannot resolve the fraudulent joinder dispute without making a choice of law determination.

This Comment takes the position that a court must perform a choice of law analysis as part of its fraudulent joinder inquiry. This determination is necessary to decide whether a law could apply to the case that would sustain the action against the nondiverse defendant. Further, the court should give the same deference to the plaintiff's choice of law as it gives to the plaintiff's choice of forum under the jurisdiction's fraudulent joinder standard. This conclusion draws upon the idea that choice of law is fundamentally a merits-based inquiry and that a decision on the merits requires reference to an applicable law. Therefore, a court cannot properly make a determination about whether the suit against the nondiverse defendant has merit, or is merely "fraudulent," without selecting and applying an appropriate law.

Part I of this Comment discusses the legal standards and principles behind diversity jurisdiction, fraudulent joinder, and choice of law. Part II discusses the inconsistent approaches that courts have taken to choice of law in the fraudulent joinder context. Finally, Part III argues that a choice of law determination is necessary in a fraudulent joinder case because a federal court cannot determine whether a plaintiff has a colorable claim against the nondiverse defendant without reference to a colorable law. This Comment contends that the choice of law determination should be made with reference to the particular jurisdiction's fraudulent joinder standard.

  1. LEGAL PRINCIPLES APPLICABLE TO CHOICE OF LAW IN FRAUDULENT JOINDER LITIGATION

    This Part reviews the key legal standards that are relevant to choice of law issues in fraudulent joinder litigation. Section A discusses the legal authority for diversity jurisdiction and the justifications for federal courts to hear diversity cases. Section B discusses the different standards courts use to decide whether a party has been "fraudulently joined" to the litigation. Section C reviews the most common choice of law approaches that courts use to determine which state's law applies to a case.

    1. Diversity Jurisdiction and Its Justifications

      The concept of jurisdiction based on diversity of citizenship appears in the Constitution, which provides that "[t]he judicial Power shall extend to all Cases, in Law and Equity ... between Citizens of different States." (9) The power of federal district courts to hear diversity cases is statutory. Section 1332 of the U.S. Code provides that district courts "shall have original jurisdiction of all civil actions where the matter in controversy exceeds the sum or value of $75,000" and where the lawsuit is between "citizens of different States." (10) The diversity requirement of section 1332 has long been understood to require complete diversity of citizenship, (11) meaning that each plaintiff must be diverse from each defendant. By contrast, the Constitution requires only minimal diversity, (12) which provides for federal jurisdiction as long as any one plaintiff is diverse from any one defendant.

      The original justification for diversity jurisdiction is a matter of some debate. Many commentators argued that diversity jurisdiction was necessary to provide "a forum where parochial state laws would not be enforced"; instead, the federal courts would apply a "general federal law" to those cases. (13) But as Professor Percy points out, this rationale cannot support the existence of diversity jurisdiction today in light of the Supreme Court's decision in Erie Railroad Co. v. Tompkins. (14) At the time of the Constitutional Convention, only a small number of delegates suggested that diversity jurisdiction was designed to protect out-of-state citizens from local prejudice. (15) Today, although there is some dispute over whether such prejudice exists,16 the fear of local prejudice is a commonly cited justification for the existence of diversity jurisdiction. (17)

      Diversity jurisdiction is undoubtedly a powerful tool that has a very real effect on litigation. If diversity exists, a defendant may remove a case initially filed in state court to federal court. (18) On the other hand, if the plaintiff can show at any point during the litigation that complete diversity does not exist, then the district court must remand the case to state court. (19)

      Whether a suit will be heard in federal or state court is often extremely important to litigants. In many cases, ensuring that the most desirable forum hears the case is "the most important strategic decision a party makes in a lawsuit." (20) Because state courts are generally considered more favorable toward plaintiffs, many plaintiffs file in state court and fight removal to federal court; by contrast, defendants have a strong incentive to remove the case. (21) This practice indicates that the concerns about bias toward in-state parties are likely justified. (22) In fact, studies have shown that the result of the dispute over removal to federal court has a strong predictive effect on the outcome of the litigation. (23) Putting concerns of bias aside, the federal forum provides a number of procedural advantages for defendants, "includ[ing] the increased availability of summary judgment, the possibility of separating the trial into liability and damages phases...

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