A Confusing Clarification: How the Bad-Faith Exception in 28 U.S.C. [section] 1446(c) Costs More Than It Is Worth.

• Author: Cooper, Tate

1. INTRODUCTION

   It matters where a case is heard. (1) Venue and jurisdiction are not solely dry, esoteric matters--they impact the course of litigation and litigants' rights. In general, plaintiffs prefer to litigate in state court, (2) while defendants prefer federal court. (3) Unfortunately for defendants, federal courts have limited jurisdiction. (4) To remove an action from state to federal court, defendants must plausibly characterize an action as fitting within a particular jurisdictional grant. As attentive civil procedure students remember from World-Wide Volkswagen Corp. v. Woodson, (5) defendants go to extraordinary lengths to avoid plaintiff-friendly jurisdictions. (6)

   Congress recently gave defendants a new arrow in their quiver: 28 U.S.C. [section] 1446(c)(1)'s bad-faith exception to the one-year bar on diversity removals. (7) This exception allows defendants to remove an action for diversity more than one year after commencement if the district court finds that the plaintiff "acted in bad faith in order to prevent" removal. (8) In a typical bad-faith removal, a plaintiff brings state claims against diverse and non-diverse defendants in state court, and dismisses non-diverse defendants after one year has passed. (9) The diverse defendants then remove the case to federal district court, alleging that the plaintiffs acted in bad faith to prevent earlier removal. (10) In most cases, the district court does not find bad faith and remands the case to state court. (11) This Comment examines how this avenue to federal jurisdiction has been used by litigants and understood by courts.

   U.S. District Courts apply the bad-faith exception with almost no binding case law because U.S. Courts of Appeals lack jurisdiction over district court orders remanding cases. (12) Additionally, there is very little academic research about how district courts apply the bad-faith exception. (13) This Comment reviews decisions involving the bad-faith exception from June 30, 2018, through November 20, 2022 to provide a new survey of evolving judicial interpretations of this provision. District courts have applied five distinct standards in interpreting "bad faith" under 28 U.S.C. [section] 1446(c)(1). (14) While these standards overlap, there are fine-grained distinctions that demonstrate the pseudo-common-law process that district courts have followed to interpret and apply the bad-faith exception.

   The bad-faith exception provides opportunities for defendants to delay resolution and increases litigation costs for plaintiffs (and courts). (15) These costs could be justified if the bad-faith exception protected defendants' rights to proceed in federal court under diversity jurisdiction, but the exception fails to do that. First, findings of bad faith are rare and largely confined to a small subset of plaintiffs' conduct. (16) Further, plaintiffs can easily avoid a determination of bad faith, generally by engaging in token litigation activities and hiding their motivation for decisions, or by providing any plausible explanation for decisions beyond thwarting removal. (17) Thus, the exception fails to protect defendants' right to remove against all plaintiffs that act in bad faith to prevent removal. Rather, it punishes only those unfortunate plaintiffs who hired incompetent, and perhaps unlucky, attorneys. In the past decade, hundreds of removals have relied on this snippet of statute, but a little less than ninety percent of these cases were remanded to state court. (18)

   The bad-faith exception is costly to both plaintiffs and courts and fails to achieve its main objective--protecting defendants' right to remove. Courts, however, have a mechanism to discourage frivolous removals: district courts may impose costs upon defendants who unsuccessfully remove their cases. (19) Imposing costs more frequently on removing defendants deters frivolous removals but still protects defendants' right to remove when appropriate. Courts infrequently impose costs, however, largely because they refuse to conclude that defendants acted unreasonably in removing an action, considering the ill-defined nature of the bad-faith exception. (20) Congress could easily amend the statute to presumptively award costs to plaintiffs for diversity removals after one year, absent a showing of good cause by defendants. In the absence of congressional action, courts could more frequently impose costs on unsuccessful removing defendants, but this requires some form of coordinated action in the absence of precedent.

2. LEGAL BACKGROUND

   Federal district courts are courts of limited jurisdiction and may hear cases only if granted jurisdiction by a statute. (21) Cases satisfy this "subject-matter" jurisdiction requirement if they present a "federal question," (22) or if a party establishes "diversity jurisdiction." (23) Diversity jurisdiction occurs when the amount in controversy exceeds $75,000 and no plaintiff shares state citizenship with any defendant. (24) The requirements of diversity jurisdiction represent a balance between preserving access to federal forums in cases where defendants may have an unfair disadvantage in state court and limiting that access to avoid overburdening the federal judiciary. (25)

   1. Origins of the One-Year Bar and Bad-Faith Exception

      28 U.S.C. [section] 1446 provides the procedural requirements for defendants removing a case to federal court. Generally, a defendant must remove an action within thirty days of receiving the initial pleading. (26) If the case is not initially removeable, however, the defendant must remove within thirty days of receiving any filing that provides notice that the case is or has become removeable. (27) In general, diversity cases cannot be removed more than one year after commencement. (28) This one-year bar was added in 1988 by the Judicial Improvements and Access to Justice Act. (29) According to scholars, Congress intended to lighten federal courts' caseloads even if doing so inevitably invited forum manipulation by plaintiffs aiming to remain in state court. (30)

      District courts adopted different applications of the statute. Some recognized an equitable exception to the one-year bar on diversity removals when a plaintiff engaged in forum manipulation. (31) In Tedford v. Warner-Lambert Co., the Fifth Circuit became the first court of appeals to address the issue. (32) The Tedford court held that the one-year bar on removal was procedural, rather than jurisdictional, (33) and was therefore subject to an equitable exception when a plaintiff engaged in forum manipulation to prevent removal. (34) The opinion, however, "did not define the exception's scope or suggest relevant factors to its application." (35) The vast majority of courts interpreted the one-year bar as jurisdictional and did not recognize any equitable exceptions in its application. (36)

      Nonetheless, in 2004, the American Law Institute ("ALI") proposed removing the one-year bar, (37) and, in its place, authorizing district courts to remand diversity cases removed more than one year after commencement "in the interest of justice." (38) ALI reasoned that this new formulation "substitutes for the currently overbroad and easily abused one-year time limit on diversity removal a more flexible yet limited provision allowing remand." (39) ALI also viewed this proposal as aligning with the Tedford exception. (40) The House Judiciary Subcommittee on Courts, the Internet, and Intellectual Property heard testimony on proposed changes in 2005, and legislation was introduced in subsequent Congresses. (41) In 2011, Congress passed the Jurisdiction and Venue Clarification Act ("JVCA"), which provided:

      (1) A case may not be removed under subsection (b)(3) on the basis of jurisdiction conferred by section 1332 more than 1 year after commencement of the action, unless the district court finds that the plaintiff has acted in bad faith in order to prevent a defendant from removing the action. (42) The House Report noted that some courts interpreted the one-year bar as an absolute jurisdictional limit, while others approached it as a procedural requirement subject to equitable tolling and concluded that "inclusion of statutory language to resolve the conflict is appropriate." (43) The JVCA took effect in January 2012. (44)

   2. Standards

      There are several forms of gamesmanship that plaintiffs may employ in joining parties. (45) The bad-faith exception is generally seen as addressing strategic joinder, or cases in which a plaintiff brings non-frivolous claims against a non-diverse defendant, without any intention of meaningfully pursuing those claims, for the sole purpose of defeating diversity jurisdiction. (46) This is distinct from fraudulent joinder, where a plaintiff pursues frivolous claims against an in-state defendant. (47) Similarly, strategic joinder is distinct from "fraudulent procedural misjoinder," which entails pursuing non-frivolous claims against a non-diverse defendant but in an improper fashion under state joinder rules. (48) The following standards generally focus on rooting out strategic joinder.

      The statute sets out one form of bad-faith conduct for plaintiffs: "deliberately fail[ing] to disclose the actual amount in controversy to prevent removal." (49) Most commentators identify two standards that district courts have applied to other actions: (50) (a) "intentional conduct," which finds bad faith if a plaintiff intentionally engages in an action specifically to prevent a defendant from removing the action; (51) and (b) a two-part test from Aguayo v. AMCO Insurance Co. based on whether a plaintiff actively litigated against a non-diverse defendant or if there is direct evidence of bad faith. (52) In reviewing district court decisions from over the past four years, however, three further standards emerge: (a) Heacock v. Rolling Frito-Lay Sales, LP, (53) which requires active litigation to avoid bad faith and considers the timing of naming...