MEMORANDUM OPINION AND ORDER REGARDING DEFENDANT RVS'S MOTION TO TAKE LIMITED DISCOVERY; PLAINTIFF WELLS' DAIRY'S MOTION TO REMAND; AND PLAINTIFF WELLS' DAIRY'S MOTION TO STRIKE AFFIDAVIT
BENNETT, Chief Judge.
TABLE OF CONTENTS
I. BACKGROUND ............................................................... 1022
II. LEGAL ANALYSIS .......................................................... 1025
A. General Principles Of Diversity Jurisdiction And Fraudulent Joinder ... 1025
B. Discovery On "Fraudulent Joinder" Issues ............................. 1026
1. Contentions of the parties ........................................ 1026
2. Face of the pleadings ............................................. 1028
3. "Piercing the pleadings" .......................................... 1031
4. Predetermination discovery ........................................ 1033
a. Guidance from precedent ........................................... 1033
b. Guidance from applicable standards ................................ 1034
i. Comparison of "fraudulent joinder" and Rule 12(b)(6)
standards ..................................................... 1034
ii. The "species" of fraudulent joinder ...................... 1036
C. Wells' Dairy's Motion To Remand ...................................... 1041
D. Attorneys' Fees And Costs ............................................ 1041
III. CONCLUSION ............................................................. 1043
I. BACKGROUND
Wells' Dairy's original petition
More specifically, Wells' Dairy alleges that AIR is a California corporation with its principal place of business in Watsonville, California, that AIR entered into a written contract with Wells' Dairy in October 1991 under which AIR agreed to design and build the Plant, and that AIR thereafter contracted to upgrade and add to the Plant. Wells' Dairy alleges that AIR was responsible for designing, installing, and inspecting the liquid ammonia circulation system, a ventilation system, and an ammonia detection system for the Plant. In Counts I, II, and III of its original state-court petition, Wells' Dairy asserts claims of breach of contract, negligence, and strict liability in tort, respectively, against AIR for damages arising
Defendants Livermore and AIR answered Well's Dairy's original state-court petition and asserted affirmative defenses, Livermore on April 16, 2001, and AIR on May 2, 2001. However, on May 30, 2001, with the consent of AIR, RVS removed this action to this federal court, alleging that defendant Livermore had been fraudulently joined solely to defeat federal diversity jurisdiction. Accordingly, RVS alleged that this action is removable pursuant to 28 U.S.C. § 1441 et seq., as this is an action over which this court would have original jurisdiction pursuant to 28 U.S.C. § 1332(a) where the citizenship of defendant Livermore is properly disregarded.
On June 4, 2001, shortly after removing this action, RVS filed a motion in this court for leave to take limited discovery on the issue of the fraudulent joinder of Livermore. The essence of RVS's contention that Livermore has been fraudulently joined is that "Livermore had no involvement in the design of the Plant or any of its Systems, including the ventilation system, and its role in construction of the Plant did not include any responsibilities for the construction of the ventilation system, the liquid ammonia circulation system, or the ammonia detection system which are the only systems alleged by Wells in its Petition to have contributed to cause the explosion." Defendant RVS's Memorandum Of Law In Support Of The Motion For Leave To Take Limited Discovery On The Issue Of The Fraudulent Joinder Of O.H. Livermore Construction, Inc. (RVS's Brief In Support Of Limited Discovery) at 2-3 (emphasis added). RVS argues that it should be permitted to take limited discovery to allow it to support these contentions, which would demonstrate that Wells' Dairy's claims against Livermore are frivolous, thereby establishing that Livermore has been fraudulently joined in this action solely to defeat federal diversity jurisdiction.
However, on June 15, 2001, Wells' Dairy filed its own motion to remand this action to state court and combined with that motion a resistance to RVS's motion to take limited discovery. Wells' Dairy contends that discovery is not required, because the impropriety of removal and the propriety of remand should be judged on the face of the pleadings. Wells' Dairy contends that RVS has failed to plead fraudulent joinder with the particularity required for pleading this or any other kind of fraud, and certainly RVS's disputes with the allegations in Wells' Dairy's petition do not amount to "clear and convincing evidence" of fraudulent joinder. On the other hand, Wells' Dairy contends that its claims against Livermore satisfy the applicable Iowa pleading requirements, are sufficient to defeat a Rule 12(b)(6) motion to dismiss for failure to state a claim — which Wells' Dairy points
On July 17, 2001, RVS's counsel submitted his affidavit in support of RVS's resistance to Wells' Dairy's motion to remand, in which counsel avers that he has been informed by Livermore's counsel that Livermore was responsible only for building the "shell" of the Plant pursuant to plans provided by Wells' Dairy, that Livermore had no responsibility for design or construction of any of the ammonia systems, the failure of which allegedly caused the explosion, and that officers of Wells' Dairy had assured officers of Livermore prior to the filing of this litigation that Wells' Dairy did not believe that Livermore had done anything wrong, but that Wells' Dairy's insurers were "calling the shots" in the impending litigation. Counsel averred that he had not yet been able to procure affidavits from those officers of Livermore involved in the alleged conversations with Wells' Dairy's officers. On August 2, 2001, Wells' Dairy moved to strike RVS's counsel's affidavit, on the ground that it was not based on personal knowledge of the affiant, at best consisted of hearsay, and was therefore inadmissible. RVS did not resist the motion to strike the affidavit from its counsel, but on August 3, 2001, RVS submitted the affidavits of Bob Livermore and O.H. Livermore concerning conversations they had with officers of Wells' Dairy about impending litigation.
The court heard oral arguments on the pending motions on August 6, 2001. Plaintiff Wells' Dairy was represented at the oral arguments by Gregg Williams of Heidman, Redmond, Fredregill, Patterson, Plaza, Dykstra & Prahl, L.L.P., in Sioux City, Iowa, and Richard Strawbridge of Clausen Miller, P.C., in Chicago, Illinois. Defendant RVS was represented by Thomas Harrington of Cozen and O'Connor in Philadelphia, Pennsylvania, and John Mayne of Mayne, Marks, Madsen & Hirschbach, L.L.P., in Sioux City, Iowa. Defendant AIR was represented by Matthew Early of Rawlings, Nieland, Probasco, Killinger, Ellwanger, Jacobs & Mohrhauser, L.L.P., in Sioux City, Iowa, and by Bradley Lindeman of Meagher & Geer, L.L.P., in Minneapolis, Minnesota, who appeared by telephone. Defendant Livermore did not appear at the oral arguments. At the oral arguments, Wells' Dairy orally moved to strike the affidavits of Bob and O.H. Livermore to the extent they consisted of hearsay. In addition, during the oral arguments, Wells' Dairy offered, and the court admitted, as Wells' Dairy's Hearing Exhibit 1, the affidavit of David Wells concerning employment of Livermore as general contractor for construction of the Plant.
II. LEGAL ANALYSIS
A. General Principles Of Diversity Jurisdiction And Fraudulent Joinder
As the parties recognize, in Foslip Pharmaceuticals, Inc. v. Metabolife Int'l, Inc., 92 F.Supp.2d 891 (N.D.Iowa 2000), this court summarized the principles of subject matter jurisdiction implicated by removal and remand of cases originally filed in state court, including the doctrine of "fraudulent joinder." Therefore, the court will begin with a review of the standards articulated in Foslip.
In Foslip, this court summarized the statutory requirements for removal and remand, as follows:
Foslip, 92 F.Supp.2d at 900-01.
In Foslip, this court also explained the principle of "complete diversity" for federal subject matter jurisdiction and the effect of "fraudulent joinder" on the "complete diversity" requirement in the context of removal and remand:
Foslip, 92 F.Supp.2d at 901-02.
In Foslip, this court also articulated the test for determining whether a defendant has been "fraudulently joined" to defeat diversity jurisdiction:
Foslip, 92 F.Supp.2d at 902-03. The parties do not disagree with these standards, although they do disagree with each other on whether or not these standards require remand in this case, and whether or not discovery should be permitted on the question of Livermore's fraudulent joinder before the court rules on the motion to remand. To resolve these disagreements, the court turns to the specific contentions of the parties and supplementation of the principles articulated in Foslip, as necessary, in light of those contentions.
While the court is sympathetic to the desire of the removing defendants not to pursue this litigation in Plymouth County, where the plaintiff is undoubtedly the largest employer, and their preference for litigating what will doubtless be a complicated and contentious lawsuit in this federal court instead, this court must also keep in mind that it is a court of limited jurisdiction. Marbury v. Madison, 5 U.S. (1 Cranch) 137, 2 L.Ed. 60 (1803). The court does not find that the favorableness or unfavorableness of the state forum to one party or another is a factor in the analysis of fraudulent joinder issues, or removal and remand issues generally, under Foslip or any of the other precedents explored herein.
B. Discovery On "Fraudulent Joinder" Issues
1. Contentions of the parties
In its motion to take limited discovery on the jurisdictional issue of whether or
Id. at ¶¶ 5-6.
In its supporting brief, RVS notes that Wells' Dairy "alleges that Livermore breached its contract by failing to `... build the structure of the Plant to properly ventilate [it] in the event of an ammonia leak ...' and by failing to `supervise the construction ... to make sure the Plant was properly ventilated in the event of an ammonia leak.'" RVS's Brief In Support Of Limited Discovery at 2 (quoting Wells' Dairy's Petition at ¶ 44). RVS notes that similar allegations are made in support of Wells' Dairy's negligence claim against Livermore. Id. (quoting the Petition at ¶ 50). However, RVS points out that it is "interesting" that Wells' Dairy also alleges that defendant AIR was responsible for the design, assembly, manufacture, sale, and inspection of the Plant's ventilation system. Therefore, RVS argues that, upon information and belief, "Livermore had no involvement in the design of the Plant or any of its Systems, including the ventilation system, and its role in construction of the Plant did not include any responsibilities for the construction of the ventilation system, the liquid ammonia circulation system, or the ammonia detection system which are the only systems alleged by Wells in its Petition to have contributed to cause the explosion." Id. at 2-3 (emphasis added). RVS also argues that Livermore built the physical structure of the Plant on the basis of, and in strict adherence to, plans supplied by Wells' Dairy itself. Thus, RVS argues that no acts, omissions, or other conduct of Livermore caused or could have caused or contributed to the cause of the explosion at issue or any of the damages Wells' Dairy alleges that it sustained as a result of the explosion. Hence, RVS argues that there is simply no possibility that Wells' Dairy can prove any cause of action against Livermore, leading logically to the conclusion that Livermore has been fraudulently joined in this action solely to defeat federal diversity jurisdiction and to make the action "non-removable."
The gravamen of RVS's motion for limited discovery appears to be the following argument in its supporting brief:
RVS's Brief In Support Of Limited Discovery at 4. RVS argues further that it is well-settled that a party asserting fraudulent joinder is entitled to present facts to support its contention and that various courts have allowed limited discovery prior to disposing of motions to remand where the removing party has asserted removal was appropriate on the basis of fraudulent joinder of a party to destroy diversity jurisdiction.
On the issue of discovery, in its June 15, 2001, Motion To Remand And Combined Resistance To Defendant's Motion To Take Limited Discovery, Wells' Dairy argues that this court and the Eighth Circuit Court of Appeals have adopted the position that evidentiary hearings are improper in the context of removal proceedings. Instead, Wells' Dairy argues that the impropriety of removal should be determined on the basis of the pleadings alone. Therefore, Wells' Dairy asks the court simply to deny RVS's motion for leave to take limited discovery in the course of ruling on Wells' Dairy's motion to remand. However, if the court finds that there is some basis for limited discovery, Wells' Dairy requests that the court grant the parties additional time to brief the issue.
On July 2, 2001, RVS filed a "Response" to Wells' Dairy's motion to remand and combined resistance to RVS's motion for limited discovery, and a supporting memorandum, which the court construes in pertinent part as RVS's reply in support of its motion for limited discovery. In that reply, RVS contends that a rule against evidentiary hearings on motions to remand is not the same as a rule against limited discovery on the issue of fraudulent joinder or a rule against submission of supporting affidavits, depositions, discovery responses, or other exhibits in support of the removing party's contention that a party has been fraudulently joined to destroy diversity jurisdiction. RVS argues that supporting affidavits and discovery responses are commonly and properly considered in disposition of motions to remand, where removal is based on allegations of fraudulent joinder. RVS reiterates its contention that all of the facts necessary to establish its claim of fraudulent joinder are within the knowledge of Wells' Dairy and Livermore. RVS contends that discovery will demonstrate that Livermore was not responsible for the design of the Plant, or the design, assembly, or installation of the ammonia circulation or ventilation systems. Thus, RVS contends that Wells' Dairy will be unable to show that any conduct, error, or omission by Livermore caused the explosion or damage to Wells' Dairy. Consequently, RVS contends that there is no possibility that Wells' Dairy can prevail on any claim against Livermore, leading to the further conclusion that Livermore has been fraudulently joined in this action solely to attempt to defeat federal diversity jurisdiction.
2. Face of the pleadings
As Wells' Dairy contends, in Anderson v. Home Insurance Company, 724 F.2d 82 (8th Cir.1983), the Eighth Circuit Court of Appeals stated that "[f]raudulent joinder exists if, on the face of the pleadings, no cause of action lies against the resident defendant." Anderson, 724 F.2d at 84 (emphasis added). In Anderson, the court affirmed the district court's determination that, "[o]n the face of the pleadings, Anderson stated no claim against [the resident defendant]." Id. (emphasis added). Here, Wells' Dairy contends that, on the face of its pleadings, it has stated claims against Livermore, the resident defendant, and the court need look no further. The court deems it appropriate, therefore, to examine, first, what appears on the face of
In Count VI of its state court petition, Wells' Dairy alleges that, as general contractor for construction of the Plant, Livermore had a contractual obligation to design and build the Plant in a good and workmanlike manner, including following all applicable industry codes, standards, and good construction practices. Petition at ¶ 43. Wells' Dairy alleges that, although it performed all of its duties and obligations under the contract between the parties, Livermore breached the contract. Id. at ¶¶ 44-45. Specifically, Wells Dairy alleges that Livermore breached the terms of the contract in the following ways:
Petition at ¶ 44. Wells' Dairy alleges that, as a direct and proximate result of one or more of Livermore's breaches of the contract, on or about March 27, 1999, the liquid ammonia circulation system catastrophically failed at the Plant, flooding the engine room with liquid ammonia, and resulting in an explosion that caused damage to Wells' Dairy's business and property. Id. at ¶ 46. As relief on this claim, Wells' Dairy seeks damages to compensate it for its loss, interest as provided by law, costs, fees, and any other relief the court deems appropriate. Id., prayer to Count VI.
Under Iowa law, "[i]n a breach-of-contract claim, the complaining party must prove: (1) the existence of a contract; (2) the terms and conditions of the contract; (3) that it has performed all the terms and conditions required under the contract; (4) the defendant's breach of the contract in some particular way; and (5) that plaintiff has suffered damages as a result of the breach." Molo Oil Co. v. River City Ford Truck Sales, Inc., 578 N.W.2d 222, 224 (Iowa 1998) (citing Iowa-Illinois Gas & Elec. Co. v. Black & Veatch, 497 N.W.2d 821, 825 (Iowa 1993)). "A party breaches a contract when, without legal excuse, it fails to perform any promise which forms a whole or a part of the contract." Id. (citing Magnusson Agency v. Public Entity Nat'l Co., 560 N.W.2d 20, 27 (Iowa 1997)). It is readily apparent that Wells' Dairy has pleaded each and every element of a breach-of-contract claim against Livermore. Compare Anderson, 724 F.2d at 84 (in an action for libel and wrongful denial of an insurance claim, the complaint failed to state a claim against the resident defendant, the insurance agent, where the agent was not a party to the insurance contract and was not alleged to be involved in the libel claim). Therefore, it cannot be said that, on the face of the complaint, there is such a flaw in the pleading of this claim that there is no "`reasonable basis for asserting that state law might impose liability on the resident defendant under the facts alleged.'" Foslip, 92 F.Supp.2d at 903 (standard for fraudulent joinder) (quoting Commercial Sav. Bank, 939 F.Supp. at 680). Moreover, while RVS asserts that some of the facts alleged are not true, RVS has done no more than generate a factual dispute on the elements of Wells' Dairy's breach-of-contract claim. Such a factual dispute does not satisfy RVS's "`heavy burden of proving fraudulent joinder,'" especially where "`all doubts should be resolved
In Count VII, Wells' Dairy's negligence claim against Livermore, Wells' Dairy alleges that, as general contractor for the construction of the Plant, Livermore "had a duty to exercise reasonable care and due caution in designing and constructing the Plant so as not to cause damage to the property and business" of Wells' Dairy. Id. at ¶¶ 48-49. However, Wells' Dairy alleges that Livermore breached these duties by committing one or more of the following negligent acts or omissions:
Id. at ¶ 50. Wells' Dairy alleges that, as a result of these negligent acts and/or omissions, on or about March 27, 1999, the liquid ammonia circulation system catastrophically failed at the Plant, flooding the engine room with liquid ammonia, and resulting in an explosion that caused damage to Wells' Dairy's business and property. Id. at ¶ 51. Again, as relief on this claim, Wells' Dairy seeks damages to compensate it for its loss, interest as provided by law, costs, fees, and any other relief the court deems appropriate. Id., prayer to Count VII.
As the Iowa Supreme Court recently explained,
Sain v. Cedar Rapids Community Sch. Dist., 626 N.W.2d 115, 122 (Iowa 2001) (citations omitted); see also Kolbe v. State, 625 N.W.2d 721, 725 (Iowa 2001) ("To prove their negligence claim, the Kolbes must establish (1) the State owed them a duty; (2) the State breached or violated that duty; (3) this breach or violation was a proximate cause of their injuries; and (4) damages."). Again, it is readily apparent that Wells' Dairy has pleaded each and every element of its negligence claim against Livermore. Compare Anderson, 724 F.2d at 84. Therefore, it cannot be said that, on the face of the complaint, there is such a flaw in the pleading of this claim that there is no "`reasonable basis for asserting that state law might impose liability on the resident defendant under the facts alleged.'" Foslip, 92 F.Supp.2d at 903 (standard for fraudulent joinder) (quoting Commercial Sav. Bank, 939 F.Supp. at 680). Moreover, while RVS also asserts that some of the facts alleged in support of this negligence claim are not true, RVS has done no more than generate a factual dispute on the elements of this claim. Such a factual dispute does not satisfy RVS's "`heavy burden of proving fraudulent joinder,'" especially where "`all doubts should be resolved in favor of remand.'"
Thus, looking only at the face of the pleadings, this action should be remanded to state court, because defendant Livermore was not fraudulently joined. However, while Anderson supports a "face of the pleadings" rule, the court in Anderson was not presented with the question of whether jurisdictional discovery is ever permissible before disposition of removal/remand issues hinging on alleged fraudulent joinder. The court will consider that question next, in light of RVS's motion to take limited discovery on jurisdictional issues.
3. "Piercing the pleadings"
In addition to various cases in which the court apparently permitted discovery on jurisdictional issues before resolving the "fraudulent joinder" issue — or at least, cases in which some discovery had taken place before the issue was presented to the court
Badon, 224 F.3d at 389-90 (emphasis added). In Badon, the court recounted how emphatically it had stated this rule that the pleadings may be pierced to determine fraudulent joinder:
Badon, 224 F.3d at 389 n. 10; see also Ford v. Elsbury, 32 F.3d 931, 935 (5th Cir.1994) ("[F]raudulent joinder claims can be resolved by `piercing the pleadings' and considering summary judgment-type evidence such as affidavits and deposition testimony.") (quoting Carriere, 893 F.2d at 100). At least two other Circuit Courts of Appeals permit looking beyond the face of the pleadings. See Ritchey v. Upjohn Drug Co., 139 F.3d 1313, 1318 (9th Cir.) (although determination of the propriety of removal ordinarily depends only upon the plaintiff's pleadings, in the case of fraudulent joinder, the court may "go somewhat further. `The defendant seeking removal to the federal court is entitled to present the facts showing the joinder to be fraudulent.'") (quoting McCabe v. General Foods Corp., 811 F.2d 1336, 1339 (9th Cir.1987)), cert. denied, 525 U.S. 963, 119 S.Ct. 407, 142 L.Ed.2d 330 (1998); Fowler v. Safeco Ins. of Am., 915 F.2d 616, 617 (11th Cir. 1990) ("Defendants have the opportunity to submit affidavits, depositions, or other evidence to support removal.").
These decisions permitting "piercing the pleadings" to determine fraudulent joinder, however, do not necessarily translate into a rule that the district court must permit limited discovery on jurisdictional issues, in order to allow the party asserting fraudulent joinder to assemble such "summary judgment type evidence," because "piercing the pleadings," even in the Fifth Circuit, is a matter of the district court's discretion. See Badon, 224 F.3d at 389 ("[W]e have consistently recognized that diversity removal may be based on evidence outside the pleadings to establish that [a] defendant is fraudulently joined....") (emphasis added); Burden, 60 F.3d at 217 ("[I]n testing for fraudulent joinder the district court in its discretion may `pierce the pleadings'....") (emphasis added). Moreover, even though the Fifth Circuit Court of Appeals permits "piercing the pleadings" to determine whether or not a resident defendant has been fraudulently joined, that court has "cautioned against `pretrying a case to determine removal jurisdiction,'" recognizing "piercing the pleadings" in cases involving fraudulent joinder as a limited exception to that rule, allowing the submission of "summary judgment type" evidence. Hart v. Bayer Corp., 199 F.3d 239, 246 (5th Cir. 2000) (quoting Carriere v. Sears, Roebuck and Co., 893 F.2d 98, 100 (5th Cir.), cert. denied, 498 U.S. 817, 111 S.Ct. 60, 112 L.Ed.2d 35 (1990)); Ford, 32 F.3d at 935 (same). Thus, the question becomes, under what circumstances should discovery be permitted before the court rules on the issue of whether or not a resident defendant has been fraudulently joined?
4. Predetermination discovery
a. Guidance from precedent
RVS contends that Ford v. Elsbury, 32 F.3d 931 (5th Cir.1994), stands for the proposition that the court may permit limited discovery of jurisdictional facts before resolving the "fraudulent joinder" issue, and may even grant summary judgment sua sponte in favor of the fraudulently joined defendant. In Ford, the court set out the procedural background, in pertinent part, as follows:
Ford, 32 F.3d at 933. Although the district court permitted limited discovery, the propriety of that decision was simply not before the Fifth Circuit Court of Appeals on appeal. Rather, "[t]he Ford plaintiffs complain[ed] on appeal that the district court erred in dismissing the claims against Elsbury and denying the motion to remand." Id. The Fifth Circuit Court of Appeals reiterated its rule that "piercing the pleadings" is appropriate to resolve a question of fraudulent joinder, without ever stating or suggesting that discovery is required, let alone identifying any circumstances in which discovery is appropriate, before resolving that question. Id. at 935. The appellate court ultimately concluded that the district court had improperly found fraudulent joinder after improperly disregarding evidence submitted with a "motion to reurge" remand, which the court found generated a factual dispute on the basis for the liability of individual defendant Elsbury. See id. at 936-39. Thus, Ford is not instructive on whether, in what circumstances, or to what extent jurisdictional discovery should be permitted before resolving the question of whether or not a defendant has been "fraudulently joined."
One court to confront more directly the question of whether or not to permit jurisdictional discovery before ruling on fraudulent joinder issues is the district court in Wright v. American General Life & Accident Insurance Company, 136 F.Supp.2d 1207 (M.D.Ala.2001). In Wright, a decision of a district court in the Eleventh Circuit, a circuit in which "piercing the pleadings" is also expressly permitted, the court considered whether the plaintiffs had fraudulently joined a defendant by asserting a "fraudulent suppression" claim against that defendant. Wright, 136 F.Supp.2d at 1213. The defendant sought discovery on the "fraudulent suppression" issue before the court ruled on the fraudulent joinder issue. In Wright, the court's entire discussion of the issue of permitting discovery consisted of the following:
Wright, 136 F.Supp.2d at 1215. Although brief, this decision is instructive, in that it demonstrates that the court is not required to permit jurisdictional discovery if the party from whom such discovery is sought simply is not in possession of pertinent information. A corollary of this rule
b. Guidance from applicable standards
The court finds no other decisions directly on point, but will assume, for the sake of argument, that it has the discretion to permit or refuse to allow discovery concerning fraudulent joinder before ruling on the present motion to remand. Therefore, the question is, what should guide the court's exercise of that discretion? To determine when discovery should be allowed, the court finds it is appropriate to return to a more detailed examination of the standards applicable to fraudulent joinder determinations, hoping for guidance on the question of when discovery is appropriate from the standards for actual disposition of the fraudulent joinder issue.
In the context of a Rule 12(b)(6) motion, because the plaintiff's factual allegations must be taken as true, the question is whether or not there is some "insuperable bar" to the plaintiff's claim, that is, a barrier as a matter of law, not simply a dispute
Moreover, in Chesapeake & Ohio Railway Company v. Cockrell, 232 U.S. 146, 34 S.Ct. 278, 58 L.Ed. 544 (1914), the Supreme Court appeared to distinguish between challenges to "jurisdictional" facts and disputes about facts going to the merits of the claims against the non-diverse defendants in the context of fraudulent joinder:
Chesapeake & Ohio Ry. Co., 232 U.S. at 153-54, 34 S.Ct. 278. Thus, the Court plainly distinguished between a mere "traverse" or challenge going to the merits of the action as an entirety and a challenge going to joinder of the non-diverse defendants, finding the latter plainly did not establish that the non-diverse defendants were improper parties to the action such that their joinder was "fraudulent," and leaving the merits to be tested by the trier of fact under Kentucky law. Similarly, some time ago, the Eighth Circuit Court of Appeals stated, "If there is doubt as to whether, under the state laws, a case of joint liability is stated, or if there is doubt whether the allegations with respect to the resident defendant are false, as when that question depends upon the credibility of witnesses and the weight of the evidence, the joinder is not fraudulent." Morris v. E.I. Du Pont De Nemours & Co., 68 F.2d 788, 792 (8th Cir.1934). This decision again distinguishes between a properly "jurisdictional" challenge, and a mere dispute as to the merits of the claim against the non-diverse defendant.
In light of the favorableness of the fraudulent joinder standard to the plaintiff, the focus of the inquiry primarily on the
As to the first species, outright fraud in recitation of jurisdictional facts, the "fraud" consists of knowingly — or possibly mistakenly — pleading that a defendant is a citizen of the same state as the plaintiff, when the defendant in fact is a citizen of a different state. See, e.g., B., Inc. v. Miller Brewing Co., 663 F.2d 545, 549 n. 8 (5th Cir.1981) ("There have been no allegations of fraud in the plaintiff's pleading of jurisdictional facts [where] [a]ll parties concede that the plaintiff and four of the named defendants are Texas residents."). In other words, what is at stake with this species of fraudulent joinder is both the possibility of an actual "fraud" and facts that are truly "jurisdictional," in the sense that they are determinative of whether or not diversity of citizenship actually exists — a sort of "pure" jurisdictional challenge. Challenges to a court's subject matter jurisdiction pursuant to Rule 12(b)(1) are not restricted to the face of the pleadings. See, e.g., Stevens v. Redwing, 146 F.3d 538, 546 (8th Cir.1998) (the court may consider matters outside of the pleadings on a motion to dismiss pursuant to Rule 12(b)(1) to determine jurisdictional facts); Deuser v. Vecera, 139 F.3d 1190, 1191 n. 3 (8th Cir.1998) (same). By analogy, when fraudulent joinder involves fraudulent or mistaken pleading of "jurisdictional" facts, it seems to the court that "jurisdictional discovery" may be appropriate to go beyond the pleadings to determine
However, this conclusion does not support RVS's request to conduct limited discovery in this case. Although RVS contends that Wells' Dairy has "concealed" the factual basis, or lack of it, for its claims against Livermore, the court concludes that RVS has not asserted "fraud in the pleading of jurisdictional facts." RVS does not contend that Livermore is not in fact a citizen of Iowa, as alleged by Wells' Dairy. RVS's contention is only that Wells' Dairy has "concealed" the lack of merit in its claims against Livermore.
As opposed to the first species of fraudulent joinder, which involves an outright fraud, when the second species of fraudulent joinder — no reasonable possibility of stating a claim against the non-diverse defendant — is at issue, the term "fraudulent joinder" "`is a term of art.'" See Morris v. Princess Cruises, Inc., 236 F.3d 1061, 1067 (9th Cir.2001) (quoting McCabe v. General Foods Corp., 811 F.2d 1336, 1339 (9th Cir. 1987)). Joinder in such cases "is deemed fraudulent," as opposed to constituting an actual fraud. Id. In such circumstances, there is ordinarily an "insuperable bar" or legal defect in the plaintiff's claim against the non-diverse plaintiff — i.e., the failing of the claim is obvious under applicable state law — not merely a perceived failing arising from a disagreement as to the merits of the plaintiff's claim against that defendant. The obvious failure of the claim under applicable state law may consist of failure to allege a factual basis for an element of the plaintiff's claim against the non-diverse defendant. See, e.g., Anderson v. Home Ins. Co., 724 F.2d 82, 84 (8th Cir.1983) (the defendant insurance agent was fraudulently joined in a breach-of-contract claim, because he was not alleged to be a party to the contract, and fraudulently joined in a libel claim, because, on the face of the complaint, he was "uninvolved" in the libel); Johnson v. Heublein, Inc., 227 F.3d 236, 240 (5th Cir.2000) (the plaintiffs failed to allege any facts, such as "alter ego" liability for a corporation's misconduct, that would reasonably demonstrate that they had an independent or derivative cause of action against the non-diverse defendant); and compare Hart v. Bayer Corp., 199 F.3d 239, 247-48 (5th Cir.2000) (the district court erred in finding fraudulent joinder where the district court considered
In most such cases, the court believes that no discovery would be required to assess such a legal impediment to the plaintiff's claim against the non-diverse defendant, any more than discovery is required to determine whether or not there is an "insuperable bar" to a claim on a Rule 12(b)(6) motion to dismiss for failure to state a claim upon which relief can be granted. See Parnes, 122 F.3d at 546; Frey, 44 F.3d at 671. Such a failing appears on the face of the complaint. This conclusion, however, does not bar discovery in this case, because RVS does not disagree with Wells' Dairy's assertion that it has pleaded facts in support of all of the elements of its claims against Livermore. Rather, RVS contends that some of the facts Wells' Dairy has alleged simply are not true, and for that reason, there is no reasonable basis for asserting that liability could be imposed on Livermore.
The no-reasonable-possibility-of-stating-a-claim species of fraudulent joinder may also consist of pleading that the "status" of the non-diverse defendant is such that he, she, or it can be liable on the plaintiff's claim, when the non-diverse defendant in fact lacks such "status." Examples include disputes about whether or not the non-diverse defendant was the plaintiff's "employer," or whether or not the non-diverse defendant, rather than an out-of-state subsidiary or parent corporation, was a party to a contract with the plaintiff. See, e.g., Jernigan v. Ashland Oil, Inc., 989 F.2d 812, 815 (5th Cir.) (analyzing "fraudulent joinder" in circumstances in which the plaintiff identified the wrong entity as his employer in terms of inability to state a claim against the named defendant), cert. denied, 510 U.S. 868, 114 S.Ct. 192, 126 L.Ed.2d 150 (1993). Although there may be underlying fact issues concerning the defendant's "status" that are susceptible to discovery prior to ruling on the fraudulent joinder issue, the facts at issue in such cases can still properly be described as "jurisdictional," because they go to the question of whether the purportedly non-diverse defendant is a proper party to the action, rather than going to the "merits" of the plaintiff's allegations concerning the defendant's allegedly wrongful conduct. Discovery of such
RVS made what might appear at first blush to be a "status" challenge to the claims against Livermore. RVS contends that Livermore was not a "general contractor" in the ordinary sense, with ultimate responsibility, and hence liability, for the construction of the Plant, but instead played more of a "consultant" role, providing oversight on the reasonableness of building costs. However, the court finds that the disagreement is really about what work Livermore was to perform under its agreement with Wells' Dairy or in fact did perform in the construction of the Plant, i.e., a question of whether Livermore's "conduct" gives rise to liability, not a question of whether Livermore's "status" permits or prevents it from being liable on Wells' Dairy's breach-of-contract and negligence claims. Thus, the facts in dispute are not truly "jurisdictional," but go directly to the factual merits of Wells' Dairy's claims against Livermore.
Moreover, the court finds that discovery on this issue is highly unlikely to be dispositive of whether or not Wells' Dairy has a reasonable basis for asserting that state law might impose liability on Livermore under the facts alleged, see Foslip, 92
Finally, as is the case here, the assertion that the plaintiff cannot possibly state a claim against the non-diverse defendant may be based on the removing defendant's contention that the plaintiff cannot, as a matter of fact, prevail upon its claims against that defendant, i.e., a direct challenge to the "merits" of the plaintiff's claims against the non-diverse defendant. As the preceding discussion suggests, discovery is not appropriate in such a case, because the court is to take as true the factual allegations going to the merits of the plaintiff's claims against the non-diverse defendant, and where there is a reasonable possibility that those factual allegations state a claim under state law — even where the truth of those allegations is challenged — fraudulent joinder cannot be shown, and the truth of the allegations and merits of the claim under state law are properly left to the trier of act. See Chesapeake & Ohio Ry. Co., 232 U.S. at 153-54, 34 S.Ct. 278; Morris, 68 F.2d at 792; see also Foslip, 92 F.Supp.2d at 902-03.
In summary, from an examination of the standards applicable to determination of fraudulent joinder questions and from an examination of the species of fraudulent joinder, the court reaches the following conclusions about when discovery is appropriate before ruling on the fraudulent joinder issue. As a general principle, discovery is only appropriate where it goes to "jurisdictional" facts, rather than to the merits of the claim against the non-diverse defendant. More specifically, where actual fraud in the recitation or pleading of jurisdictional facts is alleged, discovery is most likely to be appropriate to determine the truth of the jurisdictional basis for the claim against the non-diverse defendant. Where fraudulent joinder instead involves the plaintiff's ability to state a claim against the purportedly non-diverse defendant, whether or not discovery is appropriate depends upon the nature of the alleged failure of the claim, again guided by the distinction between challenges to "jurisdictional" facts or facts going to the merits of the claim. If the removing party asserts that the plaintiff has failed to allege facts, or legally sufficient facts, in support of an element of a claim, determination of the fraudulent joinder issue is unlikely to require any discovery, because the insufficiency of the claim will be apparent on the face of the pleadings. However, where the removing party asserts that the non-diverse defendant does not have the proper "status" to be liable on the plaintiff's claim, discovery may be appropriate to determine whether the defendant is a proper party to the action, i.e., a matter going to jurisdiction over the party rather than the merits of the claim against that party. Finally, where the fraudulent joinder challenge is
C. Wells' Dairy's Motion To Remand
Resolving Wells' Dairy's motion to remand requires little more than reiteration of salient points from the prior discussion. Whatever RVS's challenges to the truth of Wells' Dairy's allegations against Livermore may be, that challenge is insufficient to carry RVS's burden to establish that Livermore has been fraudulently joined. See Foslip, 92 F.Supp.2d at 903 (removing party bears the heavy burden to show fraudulent joinder). Rather, as the court explained above, in Section II.B.2, Wells' Dairy has alleged a factual basis for each and every element of its breach-of-contract and negligence claims against Livermore and, at this stage of the proceedings, the court must take those allegations as true on their face. See Anderson, 724 F.2d at 84. Taking those allegations as true, there is at least a reasonable basis for asserting that Iowa law might impose liability on Livermore, the resident defendant, and Livermore's joinder in this action thus was not fraudulent. See Foslip, 92 F.Supp.2d at 903; see also Chesapeake & Ohio Ry. Co., 232 U.S. at 153, 34 S.Ct. 278 (a challenge to the merits of a claim is "[p]lainly ... not such a showing as to engender or compel the conclusion that [the resident defendant was] wrongfully brought into a controversy which did not concern [it]"); Morris, 68 F.2d at 792 ("If there is doubt as to whether ... the allegations with respect to the resident defendant are false, as when that question depends upon the credibility of witnesses and the weight of the evidence, the joinder is not fraudulent."). In these circumstances, Wells' Dairy has the right, under the laws of Iowa, to insist upon the presence of Livermore in this litigation as a real defendant. Chesapeake & Ohio Ry. Co., 232 U.S. at 153, 34 S.Ct. 278. Removal here was improper, and the action must be remanded to the Iowa District Court for Plymouth County.
D. Attorneys' Fees And Costs
In the Judicial Improvements and Access to Justice Act of 1988, Congress greatly expanded the discretion afforded to federal district courts to award costs and attorneys' fees pursuant to 28 U.S.C. §§ 1446 and 1447 where an action has been improperly removed to a federal court. See Pub.L. 100-702, Title X, § 1016(c), 102 Stat. 4670. The amended version of § 1447(c) provides, in part, that "[a]n order remanding the case may require payment of just costs and any actual expenses, including attorney fees, incurred as a result of the removal." 28 U.S.C. § 1447(c). "Central to the determination of whether attorneys' fees should be granted is the propriety of the defendant's decision
As to the amount of fees to be awarded, the Seventh Circuit Court of Appeals recently explained,
Wisconsin v. Hotline Indus., Inc., 236 F.3d 363, 366-68 (7th Cir.2000).
In this case, the court finds that RVS's removal of this action was not based on "frivolous" grounds, but was instead based on a fairly supportable, if ultimately unsuccessful, argument and that RVS acted in good faith. Therefore, the court declines, in its discretion, to award any attorneys' fees or costs to Wells' Dairy pursuant to 28 U.S.C. § 1447(c) for seeking the remand of this action.
III. CONCLUSION
Upon review of the standards for determination of fraudulent joinder issues and drawing guidance from various precedents, the court concludes that this is not a case in which even limited discovery should be permitted before ruling on the fraudulent joinder issues. Rather than a challenge to "jurisdictional" facts, which might properly be the subject of such discovery, RVS's fraudulent joinder challenge goes directly to the merits of Wells' Dairy's claims against the resident defendant, Livermore, but it is precisely the facts challenged in this case that must be taken as true under the applicable standards. Therefore, the court will deny RVS's motion to take limited discovery on the fraudulent joinder issue. As to Wells' Dairy's motion to remand, the court finds that there is at least a reasonable basis for asserting that Iowa law might impose liability on the resident defendant, Livermore, under the facts alleged, such that joinder of Livermore was not fraudulent and does indeed prevent removal. Wells' Dairy's motion to remand will be granted.
THEREFORE,
1. RVS's June 4, 2001, motion to take limited discovery on the issue of the fraudulent joinder of Livermore is
2. Wells' Dairy's June 15, 2001, motion to remand this action to state court is
3. Wells' Dairy's August 2, 2001, motion to strike the affidavit of RVS's counsel and Wells' Dairy's August 6, 2001, oral motion to strike, at least in part, the affidavits of Bob and O.H. Livermore, are
FootNotes
However, as this court reads Chesapeake & Ohio Railway Company, as explained above, allegations that the non-diverse defendant was the plant manager, i.e., that he had the "status" to be individually liable, coupled with allegations going to the merits of his liability, i.e., that he failed to use due care in delegating responsibility for safe maintenance and operation of machinery and was aware of a risk of harm, but failed to respond appropriately, would suffice to establish that joinder of the non-diverse plant manager was not fraudulent, because challenges to the allegations beyond "status" would amount only to a "traverse" or challenge to the merits of the claim against the non-diverse plant manager. See Chesapeake & Ohio Ry. Co., 232 U.S. at 153-54, 34 S.Ct. 278; see also supra, p. 1035.
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