From proxy to principle: fraudulent joinder reconsidered.

AuthorUnderwood, James M.

    1. Background

      To most seasoned trial lawyers, the identity of the court hearing their case is at least as important as the facts of their case. (1) As one legal scholar has commented, "'[e]very trial lawyer ... would agree that [where] the case is to be tried, is without question one of the most significant factors, perhaps the most significant factor, in the outcome of the case.'" (2) Even if one would like to believe that the locale of the lawsuit is not outcome determinative, the fact is that lawyers who try cases believe that it makes a big difference. (3) In a world where most cases are disposed of by settlement, (4) perception becomes reality. Nobody would dispute the importance of a lawsuit's venue. As two researchers concluded, "forum matters." (5) This preoccupation with the identity of the decision-maker is no more profound than in the context of the choice between a state and federal court for resolution of a civil lawsuit, particularly when the plaintiff is deprived of her original selection of a state court as the preferred forum due to a defendant's removal to federal court. (6) As one researcher noted, "a plaintiffs ability to avoid removal [from state to federal court] could mean the difference between winning and losing." (7) Empirical research that is available suggests that such assertions are not hyperbole, with removed cases sharing a statistically significant low win-rate. (8) Issues affecting the forum that will adjudicate claims, therefore, have a profound impact on the adjudication of such claims.

      In terms of federal-state jurisdiction, the last decade might fairly be characterized as one wherein the legal profession has witnessed a three-fold significant expansion of federal court jurisdiction over state law claims. First, in 1990, Congress passed the supplemental jurisdiction statute--28 U.S.C. [section] 1367--which not only provided sustenance to the threatened doctrines of pendent and ancillary jurisdiction, (9) but when read literally, undermines some doctrinal creatures of the federal courts designed to limit the scope of the courts' diversity jurisdiction. (10) At the end of its 2004-05 term, the United States Supreme Court finally resolved a longstanding circuit split (11) by giving the statute a literal interpretation such that no longer must each claimant in a diversity case joined pursuant to Federal Rule of Civil Procedure 20 independently satisfy [section] 1332's amount in controversy requirement (12) despite the Supreme Court's contrary pre-statutory (13) requirements enunciated in Clark v. Paul Gray, Inc. (14) and Zahn v. International Paper Co. (15) Indeed, in certain contexts, (16) this statute arguably permits results inconsistent with the complete diversity requirement of Strawbridge v. Curtiss. (17) Most interestingly, in a very recent case the Supreme Court displayed a tolerance for a broad reading of the supplemental jurisdiction statute even in the face of increasing the reach of diversity jurisdiction in a way that the Court found illogical:

      It is not immediately obvious why Congress would withhold supplemental jurisdiction over plaintiffs joined as parties "needed for just adjudication" under Rule 19 but would allow supplemental jurisdiction over plaintiffs permissively joined under Rule 20. The omission of Rule 20 plaintiffs from the list of exceptions in [section] 1367(b) may have been an "unintentional drafting gap." If that is the case, it is up to Congress rather than the courts to fix it. (18) Second, in 2002, Congress passed the Multi-Party Jurisdiction Statute--28 U.S.C. [section] 1369--which provides for federal court jurisdiction over certain mass tort state law claims (e.g., suits arising out of single occurrences resulting in the deaths of at least seventy-five people) with only minimal diversity--cases that would have traditionally only been heard in state courts. (19)

      Third, after more than a decade of wrangling, Congress finally passed the Class Action Fairness Act in 2005 (revising, in part, [section] 1332), which provides for federal court diversity jurisdiction over putative state law damage class actions with minimal diversity and an aggregate amount in controversy of at least $5 million. (20) Congress passed this statute because it believed that many state courts could not be trusted to adjudicate nationwide class actions fairly:

      Abuses in class actions undermine the national judicial system, the free flow of interstate commerce, and the concept of diversity jurisdiction as intended by the framers of the United States Constitution, in that State and local courts are--

      (A) keeping cases of national importance out of Federal court;

      (B) sometimes acting in ways that demonstrate bias against out-of-State defendants; and

      (C) making judgments that impose their view of the law on other States and bind the rights of the residents of those States. (21)

      This triumvirate of change in the arena of federal court diversity jurisdiction, at least on a macro level, demonstrates a desire and willingness, respectively, by a relatively bipartisan Congress (22) and the Supreme Court to lower some of the barriers that have historically prevented federal courts from hearing many state law disputes. With regard to congressional legislation, this desire seems to be fueled by the emerging perception that in certain contexts, a federal forum is more appropriate than a state court, even for adjudication of purely state law claims. (23) Ironically, this expansion of diversity jurisdiction comes on the heels of the important Report of the Federal Courts Study Committee, which recommended that Congress eliminate diversity jurisdiction essentially to save the federal courts for more important work on federal issues. (24) Far from adopting this proposal, Congress instead has shown a determination to expand diversity jurisdiction, at least in certain circumstances, while maintaining general diversity of citizenship jurisdiction in the federal courts.

      Against this backdrop of expansion of diversity jurisdiction lies the important doctrine of fraudulent joinder. Stated simply, fraudulent joinder is a doctrine that permits federal courts to essentially ignore the inclusion in a lawsuit of a nondiverse party who would otherwise destroy federal diversity jurisdiction when the district court concludes that the party's joinder is a sham. (25) This doctrine has significant impact on the determination of which state law claims receive a federal forum, yet it has been largely ignored by the academic community, (26) even while the federal circuits are enmeshed in a seemingly intractable and fruitless search for an analytical Rosetta stone--the proper standard to apply to the doctrine. (27) This Article will attempt to work through this thicket of judicial confusion, and will propose a change to the analysis that will eliminate the doctrinal dilemmas with which the courts have grappled and will ensure that the state law claims most deserving of a federal forum receive one without trampling on federalism.

    2. Fraudulent Joinder and the Voluntary/Involuntary Rule

      The phrase "fraudulent joinder" is a bit of a misnomer "because the doctrine requires neither a showing of fraud nor joinder in one sense." (28) While a defendant may support the invocation of the doctrine by demonstrating that the plaintiff has made fraudulent allegations (e.g., falsely stating the citizenship of a defendant) in the state court complaint or petition, (29) this is only one of the two most significant contexts where courts apply fraudulent joinder. (30) The more important context, at least in terms of the frequency of its attempted use, (31) is where the diverse defendant removes a case to federal court asking the district court judge to find that a codefendant who shares citizenship with a plaintiff should be ignored jurisdictionally because the plaintiff has no possible claim against that co-defendant. (32) As will be seen later in this Article, (33) this latter situation does not really focus upon the intentions of the plaintiff, but upon the viability of the claim against the local defendant. For this reason, at least one circuit has recently abandoned the nomenclature "fraudulent joinder" and replaced it with the phrase "improper joinder." (34) This latter scenario is the type of fraudulent joinder where the federal courts have been unable to embrace a single standard and is the focus of this Article.

      When a plaintiff in a state court suit joins a questionable claim against a local (nondiverse) defendant to a claim against a diverse defendant, one might wonder why the case cannot simply be removed to federal court after the spuriously named local defendant obtains a summary judgment or other dismissal of the claim. After all, the removal statute contemplates the possibility of a case becoming removable sometime after the inception of the suit and permits defendants thirty days after the case becomes removable to file the notice of removal. (35) An important corollary to fraudulent joinder, however, is the voluntary/involuntary dismissal rule. (36) The Supreme Court made it clear a century ago that, while a plaintiffs decision to voluntarily dismiss the local defendant makes the case removable (e.g., following a settlement with that defendant), an involuntary dismissal of the local defendant effectively does not count. (37) As the Eleventh Circuit has stated this rule:

      [I]f the resident defendant was dismissed from the case by the voluntary act of the plaintiff, the case became removable, but if the dismissal was the result of either the defendant's or the court's action against the wish of the plaintiff, the case could not be removed. (38) Thus, where the local defendant obtains summary judgment, even early in the litigation, the local defendant's citizenship still counts and destroys diversity jurisdiction. (39) As discussed below, by virtue of this voluntary/involuntary...

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