28 U.S.C. § 1446(c)’s New Exception Allowing Removal after One Year If Plaintiff Acted in Bad Faith — Two Part Test — Reasons Plaintiffs Prefer State to Federal Court

Aguayo v. AMCO Ins. Co., 2014 U.S. Dist. LEXIS 160244 (D.N.M. Oct. 31, 2014):

THIS MATTER comes before the Court on the Plaintiffs' Motion to Remand, filed May 28, 2014 (Doc. 12)("Motion"). The Court held a hearing on August 7, 2014. The primary issue is whether the Court should grant the Motion and remand this case to state court, because it was pending there for "more than 1 year" at the time of removal; or deny the Motion and keep the case on the ground that the Plaintiffs "acted in bad faith in order to prevent [Defendant AMCO Insurance Company] from removing the action." 28 U.S.C. § 1446(c)(1). The Court interprets the bad-faith exception -- which is only two years old and which no court has yet comprehensively construed -- to require an inquiry into whether the plaintiff kept a removal-spoiling party in the case only for the purpose of [*2]  preventing removal. The Court construes this inquiry to entail a two-step standard. First, the Court assesses whether the plaintiff actively litigated its case against the removal spoiler in state court. A finding that the plaintiff did not actively litigate against the removal spoiler constitutes bad faith, and the Court will retain jurisdiction over the case. If, on the other hand, the Court finds that the plaintiff actively litigated against the removal spoiler, that finding creates a rebuttable presumption that the plaintiff acted in good faith. Second, the defendant may rebut the good-faith presumption, with evidence already in the defendant's possession, that the plaintiff kept the removal spoiler in the case to defeat removal; the defendant will not, however, receive discovery or an evidentiary hearing in federal court to obtain such evidence. The Court adopts an expansive view of active litigation: the plaintiff need not expect to recover damages from the removal-spoiling defendant; if the plaintiff keeps the removal spoiler joined to obtain discovery from him or her, to force a settlement, to pressure the removal spoiler to testify on the plaintiff's behalf against other defendants, [*3]  or to obtain a judgment against the removal spoiler that the plaintiff knows the removal spoiler cannot pay, the Court will consider the plaintiff to have actively litigated against the removal spoiler, and unless the removing defendant can adduce other evidence of bad faith, such as communications from the plaintiff directly attesting to bad faith, the Court will presume good faith and remand the case. In this case, the Plaintiffs actively litigated both against Defendant Michael Trujillo, whom the Plaintiffs twice deposed, and against Defendants Trace Spoonhoward, the New Mexico State Police ("NMSP"), and the State of New Mexico (collectively, "the State Defendants"), with whom the Plaintiffs settled, thus entitling them to a rebuttable presumption of good faith. AMCO Insurance has introduced no direct or convincing circumstantial evidence of bad faith, and has therefore failed to rebut the presumption. The Court, accordingly, grants the Motion and remands the case to state court.

FACTUAL BACKGROUND

***This case arises out of the July, 2010, murder of a young man, Christopher Aguayo, by another young man, Michael Trujillo, using a gun belonging to Trujillo's surrogate father, Spoonhoward, an officer with the NMSP. Complaint ¶¶ 12-24, at 3-4. All events occurred in Santa Fe, New Mexico, see Complaint ¶ 2, at 2, and all persons involved are New Mexico citizens with the exception of AMCO Insurance, which is a foreign corporation, see Complaint ¶¶ 3, 5-11, at 2-3.

Trujillo lived with his mother and Spoonhoward, who was not Trujillo's biological father, but to whom Trujillo would commonly refer as his "dad." Complaint ¶ 23, at 4. See id. ¶ 26, at 4. Trujillo had disciplinary problems: in 2006, he was caught taking a pellet gun from his home to his school; in 2007, he was involved in a fight with another student at his [*5]  high school; in 2009, his mother had reported him missing, and, when police found him, they reported that he was "belligerent, verbally abusive and that he referred to an officer as a pig." Complaint ¶ 27, at 5 (internal quotation marks omitted)(quotation unattributed). See id. ¶¶ 28-29, at 5. Trujillo's mother acknowledges that she had "extreme difficulties with her son" and worried that he might be in a gang. Complaint ¶ 28, at 5 (internal quotation marks omitted)(quotation unattributed). See id. ¶ 26, at 4-5. It is unclear what role Spoonhoward played in Trujillo's life over the years, but Spoonhoward was aware of Trujillo's disciplinary issues and of his possible gang affiliation. See Complaint ¶ 30, at 5.

The NMSP had issued Spoonhoward a .357 Smith & Wesson pistol. See Complaint ¶ 17, at 3; id. ¶¶ 23-24, at 4. Pursuant to New Mexico Department of Public Safety ("NMDPS") policy, Spoonhoward was required to safely secure the firearm at all times, whether he was on-or off-duty. See Complaint ¶¶ 31-32, at 5-6. ***

Trujillo was able to get his hands on this pistol, and, on July 8, 2010, he had his girlfriend arrange a meeting at the Santa Fe Place Mall between him and C. Aguayo. See Complaint ¶ 12, at 3. Trujillo was angry at C. Aguayo about cellular telephone communications that C. Aguayo had engaged in with Trujillo's girlfriend, and, when C. Aguayo arrived at the mall, Trujillo drove up to him, got out of the car, and shot him four or five times with the pistol. See Complaint ¶¶ 13-18, at 3. C. Aguayo collapsed to the ground, and Trujillo walked up to within three feet of him and emptied the rest of the gun's magazine into C. Aguayo. See Complaint ¶ 18, at 3. Trujillo and his girlfriend fled the scene, but Trujillo was picked up by police less than an hour after the shooting. See Complaint ¶ 19, at 3; id. ¶ 22, at 4. Immediately upon apprehension, Trujillo told police that he "ha[d] to tell you guys I got the gun from my dad[;] he's a state cop." Complaint ¶ 23, [*7]  at 4.

C. Aguayo was bleeding, and slipping in and out of consciousness, when officers arrived at the scene. See Complaint ¶ 20, at 3. He was in great pain and at one point asked officers to shoot him to end his suffering. See Complaint ¶ 20, at 4. Officers rushed him to the hospital, but, shortly after his arrival, he succumbed to his injuries and died. See Complaint ¶ 21, at 4.

At the time C. Aguayo was murdered, the Aguayo family had an AMCO Insurance policy that provided them with uninsured motorist benefits. See Complaint ¶ 60, at 9. Because Trujillo used a vehicle in his commission of the crime, the Aguayo family submitted an insurance claim for the full amount of the policy limit. See Complaint ¶ 62, at 9. AMCO Insurance denied the claim without interviewing any witnesses or speaking with the Aguayo family. See Complaint ¶¶ 63-64, at 9-10.

PROCEDURAL BACKGROUND

This case involves the Plaintiffs' Motion to remand the case to state court after AMCO Insurance removed it to federal court, arguing that, because the case was pending in state court "more than 1 year," AMCO Insurance's removal was improper. 28 U.S.C. § 1446(c)(1). AMCO Insurance, for its part, contends that removal was justified under the recently [*8]  passed bad-faith exception to the one-year limitation, which requires that the Plaintiffs' actions in state court were "in bad faith in order to prevent a defendant from removing the action." 28 U.S.C. § 1446(c)(1). As such, the relevant background to the resolution of this Motion are the parties' procedural actions while litigating this case in state court. The parties vary widely in the motives they ascribe to their own and each other's actions; the objective facts of how the litigation unfolded, however, are not in dispute.

1. The Plaintiffs File Their Case in State Court.

The Plaintiffs -- C. Aguayo's family members and his personal representative -- first filed suit in state court on May 24, 2012, naming Trujillo, Spoonhoward, the NMDPS, and the State of New Mexico as Defendants. See Complaint for Damages, filed in state court May 24, 2012, filed in federal court April 29, 2014 (Doc. 1-1). The Plaintiffs then filed an Amended Complaint for Damages, filed in state court November 18, 2012, filed in federal court April 29, 2014 (Doc. 1-2), which additionally alleged one claim against AMCO Insurance -- for a declaratory judgment that AMCO Insurance is obligated to "pay the full measure of any judgment obtained [*9]  against it." Amended Complaint for Damages ¶ 60, at 9. See Amended Complaint for Damages ¶¶ 50-60, at 8-9. On November 18, 2013 -- exactly one year after naming AMCO Insurance -- the Plaintiffs dismissed Spoonhoward from the case, and on December 5, 2013, the Plaintiffs dismissed the State of New Mexico and the NMDPS from the case. See Stipulation of Dismissal with Prejudice of All Claims Against New Mexico Department of Public Safety and State of New Mexico at 1, filed in state court December 5, 2013, filed in federal court April 29, 2014 (Doc. 1-3)("All claims against Defendant Trace Spoonhoward previously were dismissed with prejudice, by stipulation filed November 18, 2013."). On December 6, 2013, the Plaintiffs filed their most recent version of the Complaint, which names only Trujillo and AMCO Insurance. See Complaint ¶ 56-84, at 9-12. The Complaint alleges two new claims against AMCO Insurance: "bad faith" and "violations of the insurance code." Complaint ¶¶ 70-84, at 10-12 (capitalization altered). On April 25, 2014 -- six days before the case was set to go to trial in state court -- the Plaintiffs dismissed Trujillo from the case, leaving AMCO Insurance as the only Defendant. See Notice of Dismissal, filed in state court April 25, 2014, filed in federal court April 29, [*10]  2014 (Doc. 1-11); Notice of Removal ¶ 11, at 3, filed April 29, 2014 (Doc. 1).

Through all of these filings, the Plaintiffs avoided pleading a specific dollar amount of damages sought. See, e.g., Notice of Removal ¶ 10, at 3. According to an affidavit to which AMCO Insurance's attorney swore, the Plaintiffs served AMCO Insurance with an offer of settlement on April 22, 2014, offering to dismiss the case. See Attorney's Affidavit ¶ 4, at 1, filed April 29, 2014 (Doc. 1-5); N.M. Civ. P. 1-068 (providing that parties may make offers of settlement, which are similar to offers of judgment in the federal system, see Fed. R. Civ. P. 68). AMCO Insurance's attorney states that she cannot provide a copy of the offer of settlement or disclose the exact amount involved, but that it is greater than $225,000.00. See Attorney's Affidavit ¶ 4, at 1 (citing N.M.R. Evid. 11-408 (providing that offers of settlement cannot be used as evidence)).

2. AMCO Insurance Removes the Case to Federal Court.

On April 29, 2014, two days before the case was set to go to trial in state court, AMCO Insurance removed the case to federal court. See Notice of Removal at 1. It asserts diversity jurisdiction, noting that, once Trujillo was dismissed, there is complete [*11]  diversity between the Plaintiffs -- all New Mexico citizens -- and AMCO Insurance, an Iowa citizen. See Notice of Removal ¶ 12, at 3; id. ¶¶ 13-15, at 4. See also note 2, supra, at 3. It further asserts that it has met its burden in proving satisfaction of the amount-in-controversy requirement by pointing to the offer of judgment, in which the Plaintiffs seek more than $75,000.00 in damages. See Notice of Removal ¶¶ 18-19, at 5 (citing McPhail v. Deere & Co., 529 F.3d 947, 956 (10th Cir. 2008))("Documents that demonstrate a plaintiff's own estimation of the claim's value are a proper means of supporting the allegations in the notice of removal.").

Rather than wait for the inevitable motion to remand, AMCO Insurance preemptively addresses the timeliness of its removal. See Notice of Removal ¶12, at 3-4; id. ¶¶ 16-17, at 4-5; id. ¶¶ 20-39, at 5-10. It acknowledges that "removal must ordinarily be sought . . . within one year of the initiation of the action," but contends "th[at] requirement[] do[es] not apply where the plaintiffs have acted in bad faith in order to prevent removal." Notice of Removal ¶ 12, at 3-4 (citing 28 U.S.C. § 1446(c)(1)). AMCO Insurance alleges that the "Plaintiffs have employed a variety of procedural machinations in order to thwart removal" in light of the complete-diversity [*12]  requirement. See Notice of Removal ¶ 12, at 4.

AMCO Insurance's argument is that: (i) the claims against Spoonhoward, NMDPS, and the State of New Mexico never had anything to do with AMCO Insurance, and, therefore, only Trujillo's presence in the case made AMCO Insurance a proper party; and (ii) the Plaintiffs kept Trujillo in the case for over a year, never intending to take him to trial, for the purpose of defeating complete diversity and keeping the case in state court. ***

AMCO Insurance argues that, "[w]ith its amendment effective January 6, 2012, 28 U.S.C. § 1446(c)(1) now recognizes the right of a defendant to remove an action kept out of federal court for more than one year by bad-faith conduct of plaintiffs," and that "[t]he comments to the amendment indicate that it is intended to apply in circumstances such as those at bar." Notice of Removal ¶¶ 33-34, at 8. It asserts that, because of the amendment's recentness, "there is a dearth of circuit-level authority construing the scope of 'bad faith,'" but it cites to a district court opinion, Lawson v. Parker Hannifin Corp., No. CIV 13-0923 O, 2014 WL 1158880 (N.D. Tex. Mar. 20, 2014)(O'Connor, J.), which AMCO Insurance says supports its argument.

   [T]he court found sufficient ground to apply the "bad-faith" exception to the one-year rule where the plaintiff "did not take a default judgment against Hanlon [the nondiverse defendant] when he failed to timely file an answer in the State Court action . . . , never served Hanlon with any [*15]  discovery, . . . non-suited Hanlon approximately one year and three months following the expiration of the one-year removal deadline . . . [did not require] Hanlon to pay any money to Plaintiff to settle her allegedly egregious claim against him [and] took her nonsuit against Hanlon less than five weeks before the existing trial date." Lawson, at *5 (citing Shiver v. Sprintcom, Inc., 167 F. Supp. 2d 962, 963 (S.D. Tex. 2001) to show that, even before the amendment to 28 U.S.C. § 1446(c)(l), a federal court would refuse to remand where the defendant removed the case outside one-year period when the plaintiff dismissed the only nondiverse defendant on the eve of trial).

See Notice of Removal ¶ 36, at 8-9. AMCO Insurance criticizes the "Plaintiffs' stated justification for dismissing Trujillo," arguing that, in reality, the Plaintiffs dismissed him from the case because he is judgment-proof. See Notice of Removal ¶ 37, at 9. AMCO Insurance asserts that the Plaintiffs knew from the inception of the case that Trujillo is incarcerated for murder and is extremely unlikely to have assets worth suing to collect. See Notice of Removal ¶ 37, at 9. AMCO Insurance concludes its Notice of Removal by setting forth that it has complied with all the formalities of the removal procedure. See Notice of [*16]  Removal ¶¶ 40-44, at 10-11.

***

5. The "Bad Faith" Exception to the One-Year Removal Bar for Diversity Cases.

Since 1988, 28 U.S.C. § 1446 has provided that no case that has been pending more than one year in state court can be removed on the basis of diversity jurisdiction.13 On January 6, 2012, Congress put into effect the Federal Courts Jurisdiction and Venue Clarification Act of 2011, Pub. L. No. 112-63, 125 Stat. 760, 762 ("JVCA"), which, among other changes, added a bad-faith exception to the one-year limitation. As a result, the current subsection (c) is almost entirely new***:

Requirements; removal based on diversity of citizenship. --

(1) A case may not be removed under subsection (b)(3) on the basis of jurisdiction conferred by section 1332 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.

(2) If removal of a civil action is sought on the basis of the jurisdiction conferred by section 1332(a), the sum demanded in good faith in the initial pleading shall be deemed to be the amount in controversy, except that --

   (A) the notice of removal may [*83]  assert the amount in controversy if the initial pleading seeks --

   (i) nonmonetary relief; or

(ii) a money judgment, but the State practice either does not permit demand for a specific sum or permits recovery of damages in excess of the amount demanded; and

(B) removal of the action is proper on the basis of an amount in controversy asserted under subparagraph (A) if the district court finds, by the preponderance of the evidence, that the amount in controversy exceeds the amount specified in section 1332(a).

 (3) (A) If the case stated by the initial pleading is not removable solely because the amount in controversy does not exceed the amount specified in section 1332(a), information relating to the amount in controversy in the record of the State proceeding, or in responses to discovery, shall be treated as an 'other paper' under subsection (b)(3).14

   (B) If the notice of removal is filed more than 1 year after commencement of the action and the district court finds that the plaintiff deliberately failed to disclose the actual amount in controversy to prevent removal, that finding shall be deemed bad faith under paragraph (1).

28 U.S.C. § 1446(c)***.

13   The one-year limitation applies only to standard diversity [*84]  jurisdiction under 28 U.S.C. § 1332(a) and not to class actions removed under § 1332(d), which is a part of the Class Action Fairness Act of 2005, Pub. L. No. 109-2, 119 Stat. 4-14 ("CAFA"). Although exempting CAFA from the one-year limitation appears to defy the § 1446(c)(1)'s text, which refers to cases brought "on the basis of jurisdiction conferred by section 1332," another section of Title 28 clarifies the issue:

   A class action may be removed to a district court of the United States in accordance with section 1446 (except that the 1-year limitation under section 1446(c)(1) shall not apply), without regard to whether any defendant is a citizen of the State in which the action is brought, except that such action may be removed by any defendant without the consent of all defendants.

28 U.S.C. § 1453(b) (emphasis added). See Reece v. Bank of N.Y. Mellon, 760 F.3d 771, 775-76 (8th Cir. 2014).

14   Subsection (b)(3) provides that,

   [e]xcept as provided in subsection (c), if the case stated by the initial pleading is not removable, a notice of removal may be filed within 30 days after receipt by the defendant, through service or otherwise, of a copy of an amended pleading, motion, order or other paper from which it may first be ascertained that the case is one which is or has become removable.

28 U.S.C. § 1446(b)(3). The combination of subsection (c)(3)(A)'s new provisions and subsection (b)(3)'s pre-JVCA provisions means that the defendant's thirty-day clock to remove a case starts whenever [*85]  they have sufficient information -- obtained from anywhere in the case, and not merely from the pleadings or settlement communications -- to conclude that the case meets the amount-in-controversy requirement.

A plaintiff's "bad faith" can manifest itself in either of the two requirements for diversity jurisdiction: (i) a plaintiff can name or retain nondiverse parties or forum-citizen defendants to defeat complete diversity or the forum-defendant rule, respectively; or (ii) it can obfuscate the quantity of damages it seeks for the purpose of defeating the amount-in-controversy requirement.15 It is clear how the Court should construe (ii) -- the Tenth Circuit's opinion in McPhail v. Deere & Co. has already fleshed out a detailed framework for analyzing the amount-in-controversy requirement, see Law Regarding Diversity Jurisdiction Part 2, supra, at 22-26 (describing McPhail v. Deere & Co. in detail), and the JVCA's legislative history indicates that, far from abrogating McPhail v. Deere & Co., section 1446(c)'s amount-in-controversy provisions were intended to codify the approach that the Seventh Circuit chartered in Meridian Securities Insurance Co. v. Sadowski and that the Tenth Circuit advanced in McPhail v. Deere [*86]  & Co., see Report to the Committee on the Judiciary of the United States House of Representatives § 103, at 15-16, H.R. 112-10 (2011)(citing only two cases under the heading "Amount in controversy and removal timing," McPhail v. Deere & Co. and Meridian Securities Insurance Co. v. Sadowski, and stating that the JVCA's amendments "follow the lead of [those] cases" (emphasis omitted)). On the other hand, § 1446(c)'s text says nothing at all about (i), nor has any court attempted to comprehensively define it. The JVCA's legislative history gives the Court some clue as to the exception's basic nature, but, in answering this question -- what constitutes "bad faith" vis-à-vis improperly joining or keeping joined nondiverse parties or forum-citizen defendants -- the Court will have to stake out its own definition.

15   [I]t was unclear before the JVCA's passage whether the common-law doctrine of fraudulent joinder creates an exception to the forum-defendant rule or just to complete diversity.... The bad-faith exception, however, is statutory, and the statute applies to all cases in which [*87]  "the plaintiff has acted in bad faith in order to prevent a defendant from removing the action." 28 U.S.C. § 1446(c)(1). The statute's plain meaning thus includes both the bad-faith joinder of a nondiverse party -- which defeats removal jurisdiction by defeating original diversity jurisdiction -- and the bad-faith joinder of a forum-citizen defendant -- which only defeats removal jurisdiction. Moreover, as the Court is largely writing on a blank slate in interpreting the bad-faith exception, it sees no reason to read in a nonsensical double standard.

For the reasons explained in the Analysis, the Court construes the bad-faith exception as a two-step standard. First, the Court inquires whether the plaintiff actively litigated against the removal spoiler in state court: asserting valid claims, taking discovery, negotiating settlement, seeking default judgments if the defendant does not answer the complaint, et cetera. Failure to actively litigate against the removal spoiler will be deemed bad faith; actively litigating against the removal spoiler, however, will create a rebuttable presumption of good faith. Second, the defendant may attempt to rebut this presumption with evidence already in the defendant's possession that establishes that, despite the plaintiff's active litigation against the removal spoiler, the plaintiff would [*92]  not have named the removal spoiler or would have dropped the spoiler before the one-year mark but for the plaintiff's desire to keep the case in state court. The defendant may introduce direct evidence of the plaintiff's bad faith at this stage -- e.g., electronic mail transmissions in which the plaintiff states that he or she is only keeping the removal spoiler joined to defeat removal -- but will not receive discovery or an evidentiary hearing in federal court to obtain such evidence.

ANALYSIS

The Plaintiffs did not act in bad faith by keeping the removal-spoiling defendants, Trujillo and the State Defendants, joined past the one-year mark, because the Plaintiffs actively litigated against them, and AMCO Insurance has produced no direct evidence to rebut the presumption of good faith that this active litigation creates. The Court interprets the bad-faith exception to apply to plaintiffs who keep a removal-spoiling party in the case past the one-year mark for the purpose of defeating removal, i.e., it applies when the removal spoiler would not have been in the case at the one-year mark but for the plaintiffs' deliberate forum manipulation. To create a workable gauge for this inquiry [*93]  -- one that honors the bad-faith exception's statutory content and respects Congress' desire for additional removals, while protecting plaintiffs from unwelcome intrusions into their work-product and private litigation strategy -- the Court construes the bad-faith exception to entail a two-step standard. First, the Court looks to whether the plaintiff actively litigated against the removal-spoiling defendant in state court: asserting valid claims, taking discovery, negotiating settlement, seeking default judgments if the defendant does not answer the complaint, et cetera. If the plaintiff did not actively litigate against the removal spoiler, then bad faith is established; if the plaintiff actively litigated against the removal spoiler, then good faith is rebuttably presumed. In the standard's second step, the defendant may attempt to rebut the good-faith presumption with direct evidence of the plaintiff's subjective bad faith. Although the Court will allow subjective evidence at the second step, the Court will only permit defendants to use the evidence they already have on hand, and will not permit discovery or provide an evidentiary hearing on the bad-faith issue.

After laying out [*94]  its construction of the bad-faith exception, the Court will discuss concerns it has with construing the bad-faith exception as a standard rather than a rule: it will be difficult for defendants to prevail on a bad-faith removal and keep the case in federal court; it will be easy, however, for defendants to concoct a colorable bad-faith argument, remove the case to federal court, and then lose the remand battle without having costs assessed against them -- a result that the Court fears many defendants will prefer over staying quietly in state court. The Court is thus concerned that the bad-faith exception is a recipe for many more improper removals. These removals, while doomed for remand, will produce significant judicial inefficiency and needless friction between federal and state courts. Ultimately, however, § 1446(c)(1)'s text demands a standard, and not a rule, and the Court must be faithful to the statutory text above all else. Similarly, current Supreme Court precedent forecloses the other method of which the Court could conceive to curb wasteful improper removals -- presumptively imposing costs against defendants under § 1447(c) on all removals that result in remand.

I. THE COURT CONSTRUES THE BAD-FAITH [*95]  EXCEPTION AS A TWO-STEPSTANDARD.

The Court fashions its two-step standard by first interpreting the statute's content and then forming a workable test to effectuate that content. Section 1446's historical development and present-day text elucidate the exception's content. The bad-faith exception does not codify fraudulent-joinder doctrine or expand it to reach new claims;17 it has little to do with fraudulent joinder, and the plaintiff's assertion of legally or factually unsound claims does not trigger the exception. Rather, the bad-faith exception prohibits plaintiffs from asserting good claims in bad faith: it permits removal whenever a plaintiff keeps a removal-spoiling party in the case past the one-year mark, and the removal-spoiling party is one whom the plaintiff would not have kept in the case but for the plaintiff's desire to defeat removal.

17   The bad-faith amendment has a significant impact on fraudulent-joinder doctrine, but it is an incidental impact. Before the JVCA's passage, there was a split among courts whether a case could be removed on fraudulent-joinder grounds after the one-year mark. See Law Regarding Removal, Remand, Fraudulent Joinder, Procedural Misjoinder, and Bad Faith Part [*96]  3, supra, at 47-49. This split came as a result of the courts' differing conclusions whether the one-year limitation was procedural, and thus subject to waiver and exception, or jurisdictional, and thus not subject to waiver or exception. See Analysis Part I.A.1.d, infra at 69-72. After the JVCA's passage, the statute now contains an explicit exception to the one-year limitation: the bad-faith exception. See 28 U.S.C. § 1446(c)(1). Although the bad-faith exception has little to do with fraudulent joinder substantively, if the one-year limitation permits of an exception on one ground, there is little basis for continuing to conclude that it bars removals for fraudulent joinder. See Law Regarding Removal, Remand, Fraudulent Joinder, Procedural Misjoinder, and Bad Faith Part 3, supra, at 47-49.

This subjective inquiry into the plaintiff's intent is a difficult test for courts to apply, and runs the risk of putting the plaintiffs' attorneys on the stand and asking them about their litigation strategy. Furthermore, this subjective inquiry -- if it focused only on what is in the plaintiff's counsel's mind -- could result in the Court almost never sustaining removal, because the plaintiff can virtually always articulate some basis other than forum manipulation [*97]  for keeping the removal spoiler in the case; because there is no marginal expense to the plaintiff associated with naming or keeping an additional defendant in a case, the plaintiff could then argue that the non-forum manipulation reason that he or she articulated, however weak, outweighs the nonexistent costs of joining or keeping the removal-spoiling defendant. To craft a workable standard, the Court will not focus on whether the plaintiff was motivated by a desire to stay out of federal court, but will instead approach the issue by looking primarily at objective criteria, evaluating whether the plaintiff in fact pursued a non-forum-manipulation reason for joining and keeping the removal-spoiling defendant, i.e., whether the plaintiff actively litigated against the removal spoiler.

The Court will define "actively litigate" broadly. The core incentive that the judicial system provides for plaintiffs to assert claims against defendants is money damages -- plaintiffs name defendants with the goal of obtaining a judgment against them and, ultimately, of collecting on that judgment. Recovery is not the only permissible end for which a plaintiff can name a defendant, however, and plaintiffs [*98]  often name defendants from whom they have no hope of recovering damages. Provided that the plaintiff has colorable claims against the defendant -- and fraudulent-joinder doctrine, not the bad-faith exception, permits removal when the plaintiff lacks a colorable claim -- any of the following are permissible purposes for naming and keeping a defendant in a case: (i) recovering damages from the defendant pursuant to a judgment; (ii) obtaining a judgment against the defendant, even if the plaintiff knows the defendant will be unable to satisfy the judgment; (iii) obtaining a settlement from the defendant, even if the plaintiff has already decided that it would not under any circumstances be economical to take the defendant to trial; (iv) leveraging the claims against the defendant to encourage the defendant to testify on the plaintiff's behalf against other defendants; or (v) obtaining discovery from the defendant by virtue of the increased scope of discovery available against parties relative to nonparties. If the plaintiff shows that he or she pursued any of these ends, then the Court will presume that the plaintiff acted in good faith. At that point, the defendant may attempt to rebut [*99]  the good-faith presumption with evidence of the plaintiff's subjective bad faith, but the defendant may only use evidence already in his or her possession, and will not receive additional discovery or an evidentiary hearing to develop the bad-faith argument.

The Court will first describe how it interprets the bad-faith exception to apply to plaintiffs whose subjective desire to stay in state court is the but-for cause of their decision to keep the removal-spoiling party joined in the case past the one-year mark. It will then describe how it crafted the two-step standard.

A. THE COURT INTERPRETS THE BAD-FAITH EXCEPTION TO REQUIRE THE COURT TO GAUGE THE PLAINTIFF'S SUBJECTIVE INTENT TO DEFEAT REMOVAL.

Interpreting the bad-faith exception is as much a matter of figuring out what it does not do as it is figuring out what it does. First, the bad-faith exception is an exception only to the one-year limitation -- not to complete diversity or the forum-defendant rule. If the plaintiff keeps a removal-spoiling party, i.e., a diversity-destroying party or a forum-citizen defendant, joined all the way through trial, then the defendant can never remove the case under the bad-faith exception, regardless [*100]  how much "bad faith" the plaintiff had in doing so. The text compels this interpretation: the bad-faith exception is linguistically linked to the one-year limitation by the conjunction "unless," meaning "[e]xcept on the condition that"; there is no suggestion that bad faith also constitutes an exception to the complete-diversity and forum-defendant rules, which are in different United States Code sections. 28 U.S.C. § 1446(c)(1) ("A case may not be removed . . . more than 1 year after commencement of the action, unless the district court finds that the plaintiff has acted in bad faith . . . ."); The American Heritage Dictionary of the English Language 1402 (William Morris ed., New College ed. 1976)(defining "unless").

Second, the bad-faith exception does not abrogate, nor is it an exception to, the voluntary-involuntary rule -- the rule that states that the plaintiff must voluntarily dismiss the removal spoiler, rather than the removal spoiler securing his or her own dismissal, for the case to be removable. The voluntary-involuntary rule pre-exists, by roughly a century, both the bad-faith exception and its parent rule, the one-year limitation. It would be odd to conclude that a rule, the voluntary-involuntary rule, [*101]  whose operation was unaltered by the passage of a second rule, the one-year limitation, would then be altered or abrogated by passage of an exception to the second rule. Moreover, the voluntary-involuntary rule still does most of its work -- and, before the JVCA, did all of its work -- before the one-year mark. For example, if a defendant names a single nondiverse defendant and several diverse defendants, and the nondiverse defendant successfully moves to dismiss the case against him within a month of filing, the remaining, completely diverse defendants would still be unable to remove the case unless they could prove that the nondiverse defendant had been fraudulently joined. The core operation of the voluntary-involuntary rule has nothing to do with the one-year limitation, and the Court sees no reason why an exception to the one-year limitation would impact it.

Third, as the Court has already stated, the bad-faith exception is not a codification or expansion of fraudulent-joinder doctrine. Perhaps it should have been: fraudulent-joinder doctrine is a judicially created doctrine; if a defendant has a right to remove when there is complete diversity, and a single nondiverse party destroys [*102]  diversity, then there must be something to prevent the plaintiff from naming a nondiverse defendant, against whom he or she has no valid claim, just to prevent removal. The historical development of § 1446 and the JVCA's legislative history, however, make it clear that the bad-faith exception does something different. It was designed to codify an equitable exception, which a minority of courts had recognized, that applied to plaintiffs who joined -- and then, after one year, dismissed -- defendants that they could keep in the suit, but that they did not want to keep in the suit, except as removal spoilers.

Turning to what the bad-faith exception does, the statute's text offers little guidance, and what few clues it provides can be better understood once bad faith is separated from the much more intuitive concept of fraudulent joinder, which requires delving into the statute's historical development and legislative history. That the inquiry focuses on the plaintiff's subjective intent can be gleaned from the statutory text, which forbids removal more than one year after filing "unless the district court finds that the plaintiff has acted in bad faith in order to prevent a defendant from removing the action." [*103]  28 U.S.C. § 1446(c)(1) (emphasis added). These words strongly suggest intentionality and purpose.

***

2. The Court Interprets "Bad Faith" as a But-For Test of the Plaintiff's Subjective Desire for Removal.

"Bad faith" does not mean anything in a vacuum. Black's Law Dictionary 159 (9th ed. 2009)(defining "bad faith" as "[d]ishonesty of belief or purpose"). The Court can conceive of three ways of defining bad faith in this context. At one end of the spectrum, the Court could require the plaintiff to exhibit inappropriate behavior -- such as fraudulent joinder -- beyond forum manipulation to find bad faith. This interpretation would involve reading two sequential phrases of the exception, "acted in bad faith," and "in order to prevent . . . remov[al]," as separate, cumulative requirements for triggering removal. 28 U.S.C. § 1446(c)(1). The Court concludes that § 1446(c)(1)'s history forecloses this interpretation; Congress intended to codify an emerging Fifth Circuit doctrine, the Tedford exception, in § 1446(c)(1), and those cases, including Tedford itself, did not identify any misconduct [*119]  other than the plaintiffs' forum manipulation as the cause for applying the exception. At the other extreme, the Court could interpret the bad-faith exception to warrant removal whenever the plaintiff's actions are partially motivated by a desire to stay in state court, regardless whether that desire was the but-for cause of the plaintiff keeping the removal spoiler in the case. This reading, however, would allow the bad-faith exception to swallow the one-year limitation almost entirely, as almost all plaintiffs strongly desire a state forum,18 and, thus, view removal spoilers as welcome additions to the case caption.

18   Regardless of the Framers' intentions, modern plaintiffs' aversion to federal court, and modern defendants' preference for it, have little to do with out-of-state prejudice. Plaintiffs prefer to argue in front of state judges, who are often elected, rather than appointed, and who often do not have law clerks. They also prefer state juries, who are often selected from driver-license registries, to federal juries, who are often selected from voter-registration rolls. Additionally, perhaps as a result of the greater influence of trial lawyers organizations on state legislatures [*120]  and judiciaries than on their federal counterparts -- for one thing, state judges are often not life-tenured -- or perhaps because national corporate defendants have a greater ability to exert influence in Washington than in the fifty capitals of the states in which they do business, procedural practice has diverged in a number of ways between the federal and state courts. These divergences almost always fall in the same direction: state courts favor plaintiffs while federal courts favor defendants. Federal pleading standards are often higher, especially after Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), and Ashcroft v. Iqbal, 556 U.S. 662 (2009); rule 11's demands are more stringent, and its sanctions harsher, than many of its state counterparts, see Gregory P. Joseph, Federal Litigation -- Where Did It Go off Track?, 34 Litigation 5 (2008); federal courts require mandatory disclosure of certain information at the front end of discovery, see Fed. R. Civ. P. 26(a); federal courts are more apt to grant summary judgment, usually in favor of defendants, see Joe S. Cecil, Rebecca N. Eyre, Dean Miletich & David Rindskopf, A Quarter Century of Summary Judgment Practice in Six Federal District Courts, 4 J. Empirical Legal Studies, 861 (2007); federal courts are less liberal in admitting expert testimony at trial, see [*121]  Joseph, supra, at *5-6; and, if a plaintiff is lucky enough earn a favorable verdict but is unhappy with the figure on the verdict form, the Supreme Court, unlike many state courts, does not countenance additur, see Dimick v. Schiedt, 293 U.S. 474, 486 (1935); ClearOne Commc'ns, Inc. v. Biamp Sys., 653 F.3d 1163, 1179 (10th Cir. 2011).

These divergences are just the ones that apply generally across the nation. In New Mexico, plaintiffs' preference for state court may be stronger than in most places. The New Mexico state courts are generally perceived as relatively liberal and plaintiff-friendly; on the federal side, however, the Tenth Circuit is a comparatively conservative institution.

Bad faith should not refer simply to a desire to stay in state court; the Court will demand that this desire be the but-for cause of the plaintiff's decision to keep the removal spoiler joined in the case past the one-year mark. Adding the but-for requirement is consistent with the general legal principle of causation and avoids reading the one-year limitation out of existence. Additionally, it reflects that no pre-existing duty animates the bad-faith exception. There is nothing wrong with plaintiffs having a preference for state court, nor is there anything inherently invidious or "bad faith" about using deliberate tactics to defeat federal [*122]  jurisdiction. As masters of their complaints, plaintiffs are allowed to forego federal causes of action to defeat federal-question jurisdiction and to forego potentially recoverable damages to avoid meeting the amount-in-controversy requirement.19 Conversely, a plaintiff who wants a federal forum can also forego valid claims against nondiverse defendants -- provided they are not required parties under rule 19 -- to create complete diversity. See Fed. R. Civ. P. 19. It is difficult to define "bad faith" in the absence of some clear, agreed-upon duty to do something. Even in this context, joining and keeping removal spoilers for the purpose of defeating diversity, plaintiffs can still do it; they must now simply keep the removal spoiler on board through trial to avoid the bad-faith exception. Any attempt the Court makes to discern such a duty is doomed to be tightly circular: (i) the plaintiff has a duty to accede to removal when the defendant has a right to remove; (ii) a defendant has a right to remove, under the statute, when the plaintiff acts in bad faith; and (iii) the plaintiff acts in bad faith when he or she violates the duty to accede to removal. It would be odd for to penalize the plaintiff so harshly [*123]  for an impulse -- desire to remain in state court -- that they can still pursue by the using deliberate, and just as facially deceptive, tactics in slightly different contexts.

19   In New Mexico state-court practice, the plaintiff cannot allege a dollar value in his or her complaint. See N.M.R. Civ. P. 1-008A(3) ("Unless it is a necessary allegation of the complaint, the complaint shall not contain an allegation for damages in any specific monetary amount."). It is common practice in small cases, however, for the plaintiff to stipulate to recovering an amount less than $75,000.00 to avoid federal jurisdiction.

B. THE COURT ADOPTS A TWO-STEP STANDARD FOR DETERMINING BAD FAITH.

The Court's interpretation of the bad-faith exception as calling for a but-for test of subjective intent is not, without more, a workable standard to apply in most real-world cases. For one thing, a literal application of the standard would likely result in it almost never being satisfied. The way this test would work in principle -- in the absence of direct evidence, into which, as the Court explains below, it is unwilling to delve -- is that the Court would weigh the potential non-forum-manipulation benefits the plaintiff [*124]  stands to gain by naming the removal spoiler against the costs the plaintiff incurs by naming the spoiler, and economic rationality of keeping the spoiler provides a strong clue whether the plaintiff would keep the spoiler in the case but for the forum-manipulation benefits. There are, however, almost no necessary costs associated with naming an additional defendant; defendants usually waive service, and discovery need not be taken from any party. A but-for test for bad faith is thus tantamount to asking whether the sole reason for the joinder was to defeat removal. This standard is impossibly high. Plaintiffs often name defendants for whom they do not have any particular plans; the plaintiffs suspect that they are judgment-proof and might not even believe they have any useful information for discovery. The idea is to shake loose as much potential recovery and information as possible, and there is little harm to society and no cost to the plaintiff in naming defendants against whom the plaintiff has colorable claims. Separating defendants that a plaintiff joins to cover his or her bases from defendants that a plaintiff joins to defeat removal is a daunting task, even assuming perfect [*125]  evidence.

1. The Standard's First Step Is That Active Litigation Creates a Rebuttable Presumption of Good Faith.

The Court cannot usually discern the plaintiff's subjective intent, and the economic balancing test described immediately above, which would otherwise seem sensible, will almost invariably justify the plaintiff's actions. The Court will thus, instead, focus its inquiry on whether the plaintiff actively litigated against the removal spoiler in state court. The Court notes, at the outset, that this active litigation inquiry is a proxy for the statutory inquiry; it relies on circumstantial evidence of intent and is thus under-inclusive and, at least theoretically, over-inclusive. It is under-inclusive because a plaintiff can actively litigate against a removal spoiler even though the plaintiff is only keeping the spoiler in the case for the forum manipulation purposes. While this course of action may have been irrational before the JVCA, the bad-faith exception incentivizes its own satisfaction, and plaintiffs will be able to defeat removal under the exception by jumping through the hoops of actively litigating in state court.20 The active-litigation standard is over-inclusive, [*126]  because a plaintiff could keep a defendant in a case without litigating against him or her, but nonetheless desire the defendant's presence in the case for reasons other than forum manipulation. For example, if the case is slow-moving, the plaintiff may have been putting off taking discovery from the removal spoiler until after the one-year mark, and then received an acceptable settlement offer from the spoiler before any discovery was taken; given that discovery is not costless, naming and retaining a defendant is, in this scenario, perfectly plausible. That there are diverse parties, i.e., not removal spoilers, out there who have been joined to cases for over a year without being actively litigated against is a testament to the standard's over-inclusivity.

20   The only standard that would truly work is a secret standard, i.e., one about which plaintiffs do not know and to which they cannot conform their behavior. If plaintiffs believe that no bad-faith exception exists and that they are thus absolutely immune to removal after a year in state court, they might engage in behavior that is easily identifiable as bad faith, such as dismissing removal spoilers on day 366 in state court or even [*127]  openly admitting that a party was joined only to defeat diversity. Taking this concept a step further, if plaintiffs were falsely informed that a case could never be removed to federal courts once it is filed in state courts, then their behavior in this situation -- whether a plaintiff kept a nondiverse party joined past the one-year mark -- would provide definitive proof that the plaintiff did not join or retain the party only to defeat removal.

By keeping the bad-faith exception nebulous, unpredictable, and open to different constructions from judge to judge, the courts benefit from this same hide-the-ball effect. It is, however, impractical to expect -- even if it were desirable, which the Court doubts -- that the federal courts can ever keep a doctrine from being known and understood by the plaintiffs' bar forever. The courts will one day have to tell plaintiffs, in clear terms, what they have to do to avoid being punished for "bad faith." From that day forward, the observer effect will kick in, and the test that the courts designed will become the tool that plaintiffs use to insulate themselves from removal. It would defy well-accepted scientific and economic principles for plaintiffs [*128]  to fail to adjust their behavior in response to the changed incentives of a new standard.

Still, the active-litigation proxy is not an unreasonable one, and it can be proven by factual evidence that the parties already have on hand when they enter federal court: the discovery taken against different parties, the hours spent negotiating settlements, and any motion practice in which the parties engaged in state court. As the Court has already stated, it takes a wide-open view of what constitutes active litigation; any one form of active litigation satisfies the standard's first step. Most often, the relevant factor will be whether the plaintiff took discovery from the defendant, although the plaintiff can satisfy the standard even if he or she did not take discovery if he or she engaged in any other form of active litigation, such as seeking a default judgment against a removal-spoiling defendant who does not respond to the complaint within the required timeframe or settling the case for more than nominal damages with a removal spoiler from whom the defendant has not yet taken discovery.

The Court will set forth a few firm principles for when a plaintiff's litigation efforts qualify him [*129]  or her for the rebuttable presumption of good faith. Any non-token amount of discovery or other active litigation against a removal spoiler entitles the plaintiff to the presumption. In assessing whether a quantum of litigation is token, the Court will consider the amount of litigation commenced against the spoiler in light of: (i) the amount of time the spoiler spent joined to the case -- the Court will expect less discovery taken from a spoiler joined for six months than from one joined for a year; and (ii) the size and money value of the case -- the Court expects that discovery and motion practice bear some proportionality to the case's worth. The Court recognizes some danger in consideration (i); the Court does not want to incentivize plaintiffs to name and drop multiple removal spoilers over the course of the first year in state court, but, rather, thinks it preferable for at least one single removal spoiler to be present in the case throughout the first year -- that way, if the plaintiff's claims against the spoiler are frivolous, the defendant has ample time to develop a fraudulent-joinder argument without the plaintiff playing a shell game of rotating different removal spoilers [*130]  through the case at different times. The Court will, thus, demand a separate showing of active litigation against every removal spoiler who is, at any time before the one-year mark, the only removal spoiler in the case.

2. In the Second Step, the Court Will Consider Evidence Offered to Rebut the Good-Faith Presumption Created in the First Step.

If the plaintiff can establish that he or she actively litigated against the removal spoiler, the plaintiff is entitled to a rebuttable presumption of good faith. The defendant may attempt to rebut this presumption with direct evidence of bad faith, but is limited to the evidence that he or she has on hand: the defendant may not take discovery in federal court or call witnesses at a hearing to develop this rebuttal; the defendant may, however, produce affidavits. The Court gives five justifications for this evidentiary limitation. First and foremost, the Court does not want to open the plaintiff up to intrusions into its attorneys' strategy, their opinions about what avenues of discovery are likely to be fruitful, and their impressions regarding likely recovery from various defendants -- otherwise known as attorney work-product. It would be unfair [*131]  to disclose this proprietary information to the defendants, and, even if the bad-faith exception contemplated in camera review, the Court is resistant to demanding this information from an attorney who might subsequently have to prosecute his or her case in front of the Court. The Court generally avoids putting attorneys on the stand or otherwise in positions where they are obligated to waive privileges to bring out favorable evidence, which might occur if an attorney had good-faith reasons for joining a removal-spoiling party. Even indirect evidence of good faith comes perilously close to prying into the plaintiff's work-product and attorney-client relationship. For example, if the Plaintiffs in this case dismissed Trujillo because he offered to testify against AMCO Insurance, revealing that information at the motion-to-remand stage might undermine the Plaintiffs' plan to conceal Trujillo's cooperation until a later date. Courts assiduously avoid making this kind of inquiry, and if Congress had intended to open up plaintiffs' attorneys to mind-probing depositions on their strategies and overrule the common-law work-product doctrine, then it likely would have said so in clearer terms. [*132]

Second, and perhaps most obviously, the Court does not want to expend any more judicial or litigation resources on these issues than necessary. Direct evidence of subjective intent, e.g., an electronic mail transmission from the plaintiff to the defendant saying "[removal spoiler] is only in the case because he keeps it nondiverse," will not exist in most cases, and the Court has no desire to set up a costly and time-consuming discovery period or evidentiary hearing when it will turn out fruitless in most cases. Third, and relatedly, even if some plaintiffs' attorneys were to honestly admit to bad-faith intentions on the stand, the Court dislikes the strong disincentives this creates regarding candor to the tribunal, particularly if this candor persists throughout a lengthy examination on the attorney's case strategy. Fourth, the statute requires that the defendant have evidence of bad faith to remove the case in the first place and not just to keep the case in federal court once it is removed. Congress could have placed the bad-faith exception in § 1447, the remand statute, but, instead, it put the exception in the removal statute. The result is normatively desirable, as well as textually [*133]  sound: defendants cannot use removal under the bad-faith exception as a fishing expedition for evidence of the very basis of the removal. Fifth, the evidentiary limitation in step two effectuates something of a trade-off for the active-litigation standard of step one. As already discussed, the active-litigation standard is over-inclusive, and it results in more removals than a standard that requires direct evidence of subjective intent, which plaintiffs could usually satisfy by simply keeping quiet about their bad faith, or an economic balancing test, which plaintiffs could satisfy by pointing to any positive-value, non-forum-manipulation benefit to naming the removal spoiler. Prohibiting discovery is a fair counterbalance to the active-litigation standard for the Court to protect the plaintiff's sensitive strategic opinions, impressions, and litigation goals, from unwelcome, adversarial, non-reciprocal prying.

The substantive operation of the second step will vary depending on the quantity and quality of the defendant's evidence, but the Court will make a few points on the front end. First, the Court will draw all reasonable inferences in the plaintiff's favor. There is a general presumption [*134]  against removal, see, e.g., Laughlin v. Kmart Corp., 50 F.3d 871, 873 (10th Cir. 1995), and a policy justification for keeping the bad-faith exception narrow, see Analysis Part II, infra, at 82-90, and, if the standard's first step is to mean anything, there is a need for the good-faith presumption to have bite. Second, the Court is more concerned with the quality of evidence than the quantity. The Court wants a smoking gun or close to it. The suspicious timing of a dismissal, a drop in a settlement offer to the removal spoiler after the one-year mark,21 or an ambiguous comment about how the plaintiff plans to drop the removal spoiler before trial, will not suffice. If a defendant wants the removal to stick, then he or she should be able to show either: (i) that the plaintiff did not litigate at all, or engaged in a mere scintilla of litigation against the removal spoiler; or (ii) that the defendant has strong, unambiguous evidence of the plaintiff's subjective intent, for which the plaintiff cannot offer any plausible alternative explanation.

21   Settlement premiums are another reason to disfavor an expansive view of the bad-faith exception. If a plaintiff names multiple diverse defendants and a single nondiverse defendant, then the plaintiff may rationally demand [*135]  a larger settlement from the nondiverse defendant than the true expected value of the plaintiff's case. The expected value of the plaintiff's claims against the removal spoiler is the summation of all products of each potential damages figure multiplied by its corresponding probability. The nondiverse defendant's presence in the case, however, imparts additional value onto the plaintiff's claims against the diverse defendants, because those claims have a lower expected value in federal court, where the case will be removed once the nondiverse defendant is dismissed. The plaintiff may, and in fact should, demand that the nondiverse defendant cover that loss of value in the form of a settlement premium, but, because the nondiverse defendant experiences no corresponding benefit from the case's removal to offset the settlement premium, the nondiverse defendant may rationally reject the settlement offer, stay in the case, and keep the case in state court. No part of this process constitutes bad faith under the exception.

***

IT IS ORDERED that the Plaintiffs' Motion to Remand, filed May 28, 2014 (Doc. 12), is granted. The case is remanded to the State of New Mexico First Judicial District Court, County of Santa Fe, State of New Mexico.

Share this article:

Share on facebook
Facebook
Share on twitter
Twitter
Share on linkedin
LinkedIn
Share on email
Email

Recent Posts

Archives