Removing a Case to Federal Court When Diversity Jurisdiction Exists

• Jurisdiction: United States,Federal
• Citation: Vol. 18 No. 11
• Publication year: 2014

Removing a Case to Federal Court When Diversity Jurisdiction Exists

by Lennes Omuro, David Hoftiezer, and Kelly Suzuka

Removal is the process by which a party sued in state court can transfer that litigation to a federal court. In general, pursuant to 28 U.S.C. § 1441(a), any civil action brought in a state court for which federal courts also have original jurisdiction may be removed by the defendant to the appropriate federal district court. Federal courts, however, are courts of limited jurisdiction and are only empowered to hear actions involving issues subject to federal question jurisdiction or actions of "complete diversity" involving an amount in controversy exceeding $75,000.¹ In other words, "[r]emoval statutes do not create jurisdiction [but] are instead a mechanism to enable federal courts to hear cases that are already within their original jurisdiction."²

The First Congress established the process for removal through the Judiciary Act of 1789. Lawyers have therefore argued about removal jurisdiction for over two hundred years, making removal one of the most nuanced aspects of litigation in this country. This article does not pretend to provide an exhaustive analysis of removal jurisdiction, but rather provides background and analysis on some aspects of removal based on diversity jurisdiction beginning with the amount in controversy and complete diversity requirements and ending with a discussion of the fraudulent joinder exception to the requirement of complete diversity and its cousin, the doctrine of fraudulent mis-joinder.

Diversity Jurisdiction: The Amount in Controversy

Determining the Amount in Controversy

One requirement for diversity jurisdiction is that the amount in controversy exceeds the sum or value of $75,000, exclusive of interest and costs.³ The determination of the amount in controversy for federal subject matter jurisdiction is generally the same whether an action is removed to federal court or if a case is brought originally in federal court, and it is an issue decided under federal law.⁴ Federal courts will, however, look to applicable state law to determine the nature of the plaintiff's substantive claim and related damages.⁵

Numerous courts, including the United States Supreme Court have held that the amount in controversy for jurisdictional purposes is measured by the direct pecuniary value of the right that the plaintiff seeks to enforce or the value of the object that is the subject matter of the suit.⁶ In general, this is simply an estimate of the total amount in dispute rather than an assessment of liability.⁷The amount in controversy is determined without considering accrued or accruing interest or the costs associated with the lawsuit.⁸ Moreover, courts have held that collateral effects, such as the effect a judgment may have on other matters or controversies because of application of stare decisis or collateral estoppel principles will not be taken into account when calculating the amount in controversy.⁹ In addition, courts have also held that a defendant's counterclaim is not considered or used to reduce the amount in controversy.¹⁰

The amount in controversy may include compensatory damages including general and special damages such as pain and suffering and out of pocket loss. The amount in controversy may also include punitive damages.¹¹ The courts may, however, scrutinize punitive damages claims closely, especially if such claims make up the bulk of the amount in controversy.¹² In addition, courts have also held that if there is direct legal authority, by statute or contract, for the recovery of attorneys' fees, then the fee claim may be included in determining the amount in controversy regardless of whether the award of fees is mandatory or discretionary.¹³

Hawaii Cases and the Amount in Controversy.

Research reveals that there are a number of reported Hawaii federal district court decisions involving issues of measuring and calculating the amount in controversy. The cases are rather fact specific and involve a detailed analysis of the controversy at issue. Some decisions of interest are summarized as follows.

In Hideo Matusda v. Michiko Wada, the plaintiff sought declaratory relief to escape liability under an oral contract.¹⁴At issue was the amount of compensation promised for services rendered. The court held that when the object of the suit is to escape liability under a contract, the value of relief is measured by the liability that will follow if the contract is valid and enforceable.

In White v. IndyMac Bank, FSB, plaintiff was challenging the foreclosure of his property.¹⁵ When determining the amount in controversy in foreclosure actions, the court noted that some courts have relied on the amount of indebtedness while others have looked to the fair market value of the real property. In an action to quiet title and to determine which entity is entitled to receive mortgage payments, however, there are a number of cases beginning with Pascua v. Option One Mortgage Corp. that determine the amount in controversy, not by the value of the property or debt, but rather by the subjective value to the mortgagor of eliminating the uncertainty of who to pay.¹⁶ So far the Hawaii federal district court has not held that the elimination of such uncertainty satisfies the amount in controversy requirement.

In Guzman v. Blockbuster, the court also addressed some significant issues related to the calculation of the amount in controversy.¹⁷ First, settlement letters are relevant evidence of the amount in controversy but only if they reflect a reasonable estimate of the plaintiff's claim. Second, in Hawaii, attorneys' fees are considered in the amount of controversy when there is an underlying statute authorizing the award of such fees. Third, dismissed or non-viable claims are not considered when calculating the amount in controversy.

Finally, in Scher v. Premier Holdings, Inc., the court remarked that both compensatory and punitive damages must be considered to the extent they are recoverable and to the extent claimed.¹⁸Where the plaintiff sought over $35,000 for time spent trying to resolve a claim arising out of the break- in of his car and theft of a $750 GPS unit, the court held that such damages were not recoverable consequential damages. In addition, the plaintiff asserted a $1 million punitive damages claim. Because the punitive damage claim made up the bulk of the claim, the court closely scrutinized the claim.

When is the Amount in Controversy Determined and the Burden of Proof

For removal actions, the amount in controversy is determined at the time the notice of removal is filed in federal court.¹⁹ The applicable law will be the law in effect at the time of the removal.²⁰Subsequent amendments to the removal petition or complaint reducing the amount to less than $75,000 do not divest the court of diversity jurisdiction.²¹Likewise, the court is not divested of jurisdiction if the amount actually recovered by plaintiff fails to exceed $75,000.²² Moreover, where at least one plaintiff's claims satisfy the amount in controversy requirement, 28 U.S.C. § 1367 authorizes supplemental jurisdiction over the claims of other plaintiffs not meeting the amount in controversy requirement.²³

In 2011, Congress enacted a new section 1446(c)(2) within Title 28, which codified the rule that the sum demanded in good faith in the plaintiff's initial pleading is the amount in controversy.²⁴ If the complaint alleges less than the jurisdictional amount or is ambiguous, however, the defendant may demonstrate in the notice of removal that the jurisdictional amount is actually satisfied. A defendant may remove an action not removable at the time of its initial filing due to an insufficient amount in controversy within thirty days after receipt of an amended pleading, motion, order or other paper indicating, for the first time, that the amount in controversy exceeds the jurisdictional amount. Removal is also allowed beyond the usual one year limitation for diversity actions if the court finds that the plaintiff deliberately failed to disclose the actual amount in controversy to prevent removal during the one-year window.

It is well established that the removing party has the burden of proving that the amount in controversy meets the jurisdictional requirement. In Miyasato v. Hyatt Corp., however, the Hawaii federal district court recognized that two different standards may apply in connection with this burden.²⁵ First, in many cases filed in Hawaii state courts, the complaint may be silent or ambiguous as to the total amount of damages in controversy. If it is not evident from the complaint that more than $75,000 is in controversy, a defendant seeking removal must establish by a preponderance of the evidence that the amount in controversy exceeds $75,000. Second, however, if the complaint filed in state court affirmatively alleges that the amount in controversy is less than this jurisdictional threshold amount, then the removing party must prove with legal certainty that the amount in controversy exceeds the threshold. When assessing the amount in controversy, the court will assume that all the allegations of the complaint are true and that a jury will return a verdict for the plaintiff on all claims. The jurisdictional threshold amount is based on the amount in controversy and not what a defendant will ultimately owe.

The legal certainty standard may also apply when the amount in controversy is challenged by a party contesting jurisdiction. A party contesting the amount in controversy will prevail only if it is shown to a "legal certainty" that the amount in controversy does not meet the jurisdictional requirement. As noted by the Hawaii federal district court in Smallwood v. NCSOFT, there are only three situations under which the legal certainty standard is clearly met: (1) when the terms of the contract limit the plaintiff's possible recovery; (2) when a specific rule of law or...