A Primer On 'Bad Faith' In Federal Removal Jurisdiction

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1 Law360, New York (October 08, 2014, 10:04 AM ET) -- We all know the story. A plaintiff sues in state court and wants to hometown the out-of-state defendant. In order to ensure a favorable state-court forum and jury, the plaintiff throws in another defendant for the purpose (or appearance) of defeating diversity jurisdiction. One year passes, and magically! the diversity-destroying defendant is dropped from the case. Remove the case to federal court, right? Unfortunately, the statutory one-year buzzer will already have sounded (28 U.S.C. 1446(c)(1)), and removal to a federal forum is prohibited. Congress attempted to fix this problem in 2011, but litigants and courts are just now getting around to addressing it. In an effort to thwart removal-defeating strategies by plaintiffs, Congress enacted a bad faith exception to the one-year bar on removal as part of the Federal Courts Jurisdiction and Venue Clarification Act of 2011, Pub. L. No , 125 Stat. 758 (codified in scattered sections of 28 U.S.C.). The act, applicable to all cases filed after Jan. 6, 2012, grants a federal district court discretion to permit removal after the one-year period if it finds a plaintiff has acted in bad faith to prevent removal. But what does bad faith mean in the context of federal removal jurisdiction? Because the act s practical effective date was January 2013, litigants have only recently started asserting bad faith as a basis for removal, and courts have just begun to weigh in on the question. What follows is a review of the limited case law discussing the bad faith exception. Background Until , 28 U.S.C strictly prohibited defendants from removing cases based on diversity jurisdiction more than one year after a case is started. This one-year limitation led to gamesmanship by plaintiffs seeking to keep cases in what they perceived to be friendly state courts and juries. Prior to the act, some federal courts picked up on this tactic and crafted a narrow equitable exception to the one-year limitation on removal. Most notably, in Tedford v. Warner- Lambert Co., 327 F.3d 423, (5th Cir. 2003), the Fifth Circuit held that an equitable exception to the one-year removal bar applied to cases in which the plaintiff manipulated the statutory rules to prevent removal. In Tedford, the plaintiff joined a nondiverse defendant hours after learning that the original defendant intended to remove the case to federal court. Then, the plaintiff signed and post-dated a notice of nonsuit as to the nondiverse defendant before the one-year limitation on removal expired, but did not file the document or notify the original ATLANTA CINCINNATI CLEVELAND COLUMBUS DAYTON NEW YORK WASHINGTON, D.C. ATTORNEY ADVERTISING

2 defendant until after the one-year period passed. The court concluded that the plaintiff s conduct justified an equitable exception to the one-year rule, reasoning that strict application of the one-year limitation would incentivize plaintiffs to add nondiverse defendants for 366 days simply to avoid federal court. However, most federal courts declined to put an equitable, judge-made gloss on a statutory period set by Congress. When presented with the argument that a bad faith exception should be read into the removal statute, courts declared themselves powerless to make the addition, leaving it to Congress to do the work if it so desired. As such, Tedford stood out as an anomaly. The vast majority of federal courts stuck to the words of the statute and its legislative history and rigidly applied the oneyear rule. Congress came off the bench in 2011 and resolved the conflict by codifying a bad faith exception to the one-year removal limitation. As amended, 28 U.S.C. 1446(c)(1) now provides: A case may not be removed... on the basis of [diversity] jurisdiction... 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." The act says precious little about what it means for a plaintiff to have acted in bad faith, other than to state that it is bad faith if a plaintiff deliberately fail[s] to disclose the actual amount in controversy to prevent removal (28 U.S.C. 1446(c)(3)(B)). Congress only other advice appears to be a throwaway statement in a House report that the exception is limited in scope. So, we have an acted in bad faith standard that is supposed to be limited in scope, yet there is no definition of bad faith in the statute or legislative history (only an example of bad faith in a subsection) and no reference to what the supposed limit[ation] to the new exception should be. There are many questions posed by the act. Because Congress expressly stated that bad faith occurs when a plaintiff does not disclose the actual amount in controversy, does that mean that courts are not permitted to find other (by definition, nonstatutory) bases for bad faith? Is the burden of meeting the bad faith statutory exception different than the burden of establishing fraudulent joinder, which is a judge-made gloss on removal jurisdiction? Should a court look to a plaintiff s subjective intent and motive? Or is the test objective, focusing on the plaintiff s conduct both before and after the litigation started? Is it a hybrid? Because the bad faith exception is fresh, federal courts have not encountered it much. Nor should expectations run high. Guidance from federal appellate courts will be hard to come by because an order remanding a case to state court for lack of diversity jurisdiction is not appealable, even in the face of evidence suggesting bad faith. Thus, 2

3 appellate guidance on the bad faith exception is only likely to come in the narrowest of circumstances through that rare bird called a writ of mandamus or through the cramped collateral order doctrine. Notwithstanding these limitations at the appellate level, however, the bad faith exception hasn t necessarily flopped. Federal district courts have just recently ( ) begun to grapple with the exception and have provided some minimal guidance on how the exception should be interpreted. Bad Faith Is Not the Same Thing as Fraudulent Joinder To begin with, the bad faith exception is not the same thing as the doctrine of fraudulent joinder. While both doctrines are intended to discourage gamesmanship by plaintiffs in diversity cases, courts have declared that the standard for each differs. Although one might think that the threshold for establishing either bad faith or fraudulent joinder is high, the early bad faith cases suggest otherwise. To establish fraudulent joinder, a defendant generally bears the often heavy burden of demonstrating by clear and convincing evidence that there is no possibility, based on the pleadings, that a plaintiff can state a cause of action against the nondiverse defendant. Not so with the bad faith exception, at least as it has been molded so far. Courts have permitted removal pursuant to the bad faith exception in a number of contexts, including where: (1) a plaintiff conceals the actual amount in controversy, (2) a plaintiff fails to prosecute its claims against a nondiverse defendant, and/or (3) a nondiverse defendant fails to defend against a plaintiff s claims. Bad Faith Defined 1. Failing to Disclose the Actual Amount in Controversy As stated, the act expressly provides that a plaintiff s deliberate failure to disclose the actual amount in controversy to prevent removal constitutes bad faith (28 U.S.C (c)(3)(b)). Federal courts have thus permitted removal under the bad faith exception where a plaintiff initially alleges damages below the jurisdictional minimum but delays amending its complaint or otherwise notifying the defendant that the amount in controversy exceeds $75,000 until after the one-year period passes. However, if a defendant can ascertain the value of a plaintiff s claims from independent evidence, a court is less likely to permit removal under the bad faith exception. To be sure, the act focuses on the plaintiff s fail[ure] to disclose the amount in controversy, suggesting that the conduct of the defendant in ascertaining the true amount is irrelevant. Nevertheless, where a plaintiff discloses information regarding the value of its claims through discovery (say through the initial disclosure process, an interrogatory answer, or in deposition) and that 3

4 information reasonably suggests that the amount in controversy exceeds $75,000, a court may reject a defendant s contention that the plaintiff acted in bad faith. 2. Looking Beyond the Act for Examples of Bad Faith The general rule is that when Congress is specific in a statute about the meaning of a term (as in the act s example of failing to disclose the actual amount in controversy), federal courts should infer that Congress excluded all other possibilities. But there is an exception to that rule where Congress supposed intent to exclude all else is not stated expressly and would otherwise defeat the purpose of a statute, or would not comport with a common sense interpretation of the statute. Although not expressly saying it, federal courts have not limited themselves to the fail[ure] to disclose example of bad faith described in subsection (c)(3)(b). There are at least two other examples of bad faith recognized by federal courts. First, if a plaintiff names a nondiverse defendant but fails to pursue its claims against that defendant, a court is likely to conclude that the plaintiff acted in bad faith to prevent removal, especially if the nonprosecuted defendant was the only barrier to removal. For example, if a plaintiff voluntarily dismisses a nondiverse defendant beyond the oneyear removal period without ever seeking discovery from that defendant, the late dismissal would suggest bad faith. Similarly, if a plaintiff does not designate an expert witness to testify that a nondiverse defendant breached an applicable standard of care, when the need for such an expert is reasonably clear, that conduct may also support a finding of bad faith. Second, not only is a plaintiff s failure to prosecute its claims against a non-diverse defendant evidence of bad faith, but a nondiverse defendant s failure to vigorously defend an action also is evidence that the plaintiff named the nondiverse defendant solely to prevent removal. Indeed, a federal district court recently supported its finding that a plaintiff acted in bad faith to prevent removal on the ground that a nondiverse defendant possessed an iron clad statute of limitations defense, yet failed to raise it. Finally, because Congress endorsed the bad faith exception to the one-year limit on removal, it would be appropriate to rely on pre-act case law (like the Fifth Circuit s Tedford decision) for additional examples of bad faith. This is especially true because, when it made the statutory change in 2011, Congress did not expressly disapprove the pre-act case law that read bad faith into the removal statute. Prior to the act, for instance, courts permitted removal beyond the one-year period where a plaintiff: delayed service of process until after the one-year period expired; failed to seek a default judgment against a nondiverse defendant who never filed an answer; or dismissed a nondiverse 4

5 defendant after the one-year deadline without serving discovery on the nondiverse defendant, without deposing the nondiverse defendant, and/or failing to otherwise justify the delay in dismissing the nondiverse defendant. Conclusion its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice. All Content , Portfolio Media, Inc. Although the bad faith standard didn t come with a clear definition, recent case law offers guidance as to the criteria courts will consider when applying the act s bad faith exception. What we know is that federal courts have applied an objective test and have examined the circumstances surrounding the presence of a nondiverse defendant rather than the subjective reasons that a plaintiff may have for bringing that defendant into the case. Apparently summoning the age-old adage that actions speak louder than words, plaintiffs who seek to bar defendants from federal court may have a hard time doing so if their actions (or those of the phony defendant) suggest an improper attempt to stave off federal jurisdiction where such jurisdiction rightly exists. By Ugo Colella and Todd Seaman, Thompson Hine LLP Ugo Colella is a partner in Thompson Hine's Washington, D.C., office. Todd Seaman is an associate in the firm's Columbus, Ohio, office. The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, 5