Tuesday, January 6, 2009

Fradulent Joinder and the Voluntary-Involuntary Rule

In Morgan v. Chase Home Finance, the 5th Circuit issued an unpublished decision that will likely surprise many readers.  It requires practitioners (and my students) to be agile with the concept of fraudulent joinder and its interplay with the voluntary-involuntary rule. And it's conceptually wrong.

The voluntary-involuntary (V-I) rule is familiar:  if diversity is not present at the time the plaintiff files the state-court action, a change in parties that creates diversity does not authorize removal unless the change resulted from the voluntary act of a plaintiff.  Take the two textbook examples:  (1)If the plaintiff nonsuits the spoiler, the defendant can remove because the nonsuit is a voluntary act; (2) if the spoiler wins summary judgment, though, the other defendants cannot remove because diversity was created against the plaintiff's wishes. 

Fraudulent joinder allows a defendant to remove the case, despite a spoiler, when the defendant can prove that the spoiler was "fraudulently joined."  In the typical fraudulent-joinder case (indeed, in just about any reported case you can find), the defendant sees the state-court pleading or other document, realizes the spoiler has been fraudulently joined and removes NOW, arguing that the court should disregard the citizenship of the spoiler. The defendant does NOT wait for the spoiler to be dismissed ... because of the V-I rule.

Recently, in the Crockett case (cited below), the 5th circuit quoted without critical analysis an old not-often-cited headnote that fraudulent joinder is an exception to the voluntary-involuntary rule.  The Crockett case involved improper procedural joinder and contained several puzzling errors.  I didn't think the court would extend the principle to the situation in the Morgan case.  I was wrong.  In Morgan, the court stated and applied the "rule:"

Generally, "a case nonremovable on the initial pleadings [can] become removable only pursuant to a voluntary act of the plaintiff"; this is the "voluntary-involuntary" rule. Weems v. Louis Dreyfus Corp., 380 F.2d 545, 547 (1967). We have long recognized an exception to this rule, however, "where a claim against a nondiverse or in-state defendant is dismissed on account of fraudulent joinder. Fraudulent joinder can be established by demonstrating either '(1) actual fraud in the pleading of jurisdictional facts, or (2) inability of the plaintiff to establish a cause of action against the non-diverse party in state court.' "Crockett v. R.J. Reynolds Tobacco Co., 436 F.3d 529, 532 (5th Cir.2006) (quoting Travis v. Irby, 326 F.3d 644, 646- 47 (5th Cir .2003)).

Morgan's suit did not become removable until the probate court dismissed Alexander. [FN4] Because her dismissal was not a voluntary act by the plaintiff, Morgan believes that the voluntary-involuntary rule should have barred removal. The district court, on the other hand, found that Alexander had been fraudulently joined, because Morgan could not establish a cause of action against her. We agree.

Morgan's complaint alleged a single cause of action against Alexander: breach of fiduciary duty. As the district court correctly noted, under Texas law "the trustee ... does not owe a fiduciary duty to the mortgagor." Stephenson v.LeBoeuf, 16 S.W.3d 829, 838 (Tex.App.-Houston [14th Dist.] 2000, pet. denied). The only cause of action alleged against Alexander was therefore invalid. . . . Accordingly, because Morgan failed to establish a cause of action against Alexander, we agree with the finding that she was fraudulently joined. [FN5]

There are several questions far too important to be glossed over in an unpublished opinion.

First, In both the Crockett case and the Morgan case, the court treated state-court dismissals as "tantamount to findings of fraudulent joinder."  I'm not sure why.  When a defendant removes arguing fraudulent joinder, the defendant must prove that there is no reasonable basis to predict the plaintiff might recover against the spoiler under state law.  State courts dismissing for misjoinder, or summary judgment, or on the pleadings, will not be applying this standard.  Indeed, those rulings may indeed all involve "close calls;" that is, just because there is no "genuine issue of material fact" does not mean a defendant can remove initially based on fraudulent joinder -- otherwise, fraudulent joinder would federalize summary judgment in a strange way in close cases.   Surely not every summary judgment or severance is "tantamount to a finding" by the state court of fraudulent joinder.  So which ones are?  Does the defendant, upon removal, have to argue that the misjoinder or merits were so obviously deficient as to make the obviously appropriate dismissal equivalent to fraudulent joinder? ..... 

If so, then what about the time limits?  It is clear that the defendant can remove NOW if fraudulent joinder is present.  If the joinder is so fraudulent that a state-court dismissal is tantamount to the conclusion that there is "no reasonable basis to predict that the plaintiff might recover ..." then why doesn't the 30-day clock for removal begin to run from the time the defendant receives the pleading

Before these two decisions, a defendant spotting a spoiler needed to remove BEFORE the spoiler was dismissed by the state court, because the spoiler's dismissal would be an involuntary act.  Now, it appears that the defendant need not, so long as the dismissal is "tantamount" to a finding of fraudulent joinder.   If all dismissals are "tantamount," then the vol-involuntary rule is dead.  If only some rulings are tantamount, which ones?  Is there that second layer of whether the dismissal also meets the no-reasonable-basis standard?   If so, if it's only the obvious dismissals, then why doesn't the 30-day clock start to tick before there is the state-court dismissal?   

I suspect the en banc court will eventually reverse course and clarify the conceptual distinction between the doctrines.  For defendants, this means heads up.  Don't rely upon being allowed to wait for an involuntary dismissal.   --RR

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