United States: Fraudulent Joinder & Bad Faith – Explaining Another Removal Muddle

Last Updated: July 21 2016
Article by James Beck

Here's some more inside baseball on grounds for removing cases from state to federal court.  In brief, the issue is this: does the "bad faith" standard added to the removal statute (28 U.S.C. §1446(c)(1)) in 2011 approximate the fraudulent joinder standard so that fraudulent joinder becomes a form of "bad faith" not subject to the one-year limit otherwise imposed on removals by reason of diversity of citizenship?  Fraudulent joinder is also an exception the "voluntary/involuntary" rule.  E.g., Crockett v. R.J. Reynolds Tobacco Co., 436 F.3d 529, 532 (5th Cir. 2006); Mayes v. Rapoport, 198 F.3d 457, 461 n.8 (4th Cir. 1999); Insinga v. LaBella, 845 F.2d 249, 254 (11th Cir. 1988).

We wish to acknowledge the assistance of Emily Kimmelman, a Reed Smith 2016 summer associate, in compiling the research for this post.

In 2011 (effective January 6, 2012), Congress passed the Federal Courts Jurisdiction & Venue Clarification Act (the "JVCA").  The JVCA did a number of things, which we discussed here (back then (in 2011), we were most interested in Congress having left intact the statutory language that allows removal before service).  What we're discussing today is the JVCA's creation of a "bad faith" exception in 28 U.S.C. §1446(c)(1).  Specifically, §1446(c)(1) provides for diversity jurisdiction removal, even after one year if "the district court finds that the plaintiff has acted in bad faith in order to prevent a defendant from removing the action."

Nothing is certain, except the controversy over how the bad faith exception interacts with the fraudulent joinder exception to the voluntary-involuntary rule.  Everybody knows the standard for fraudulent joinder.  It exists where "there is no reasonable basis in fact or colorable ground supporting the claim against the joined defendant, or no real intention in good faith to prosecute the action against the defendants or seek a joint judgment."  In re Briscoe, 448 F.3d 201, 217 (3d Cir. 2006).

The "voluntary-involuntary" rule is somewhat less well-known, so we'll explain it.  Basically, whenever a plaintiff does something (most obviously, a voluntary dismissal) that eliminates the non-diverse defendant(s), the resulting voluntary creation of complete diversity means that the remaining diverse defendant(s) can remove.  E.g., Self v. General Motors Corp., 588 F.2d 655, 657 (9th Cir. 1978). Conversely, if a plaintiff is forced to dismiss a non-diverse defendant (most obviously, by grant of a defense motion to dismiss), that's "involuntary" as to that plaintiff, and the remaining defendants – even though all diverse – still can't remove. Id.

Combining these aspects, under prior law plaintiffs who wanted to avoid removal (basically, all of them) would wait and not voluntarily dismiss non-diverse defendants until more than one year had passed after the action first commenced.  Before the JVCA, and the bad faith exception, that one-year mark was essentially all she wrote, as defendants had no further opportunity to seek diversity-based removal.  But the 2011 bad faith exception means defendants might now be able to invoke the fraudulent joinder defense to the voluntary-involuntary rule and obtain removal after more than a year.

That's because the "no intention" language used by most courts to define fraudulent concealment overlaps extensively with what is normally considered bad faith. Indeed, the Supreme Court, when it first recognized the concept of fraudulent joinder over a century ago, invoked "bad faith" explicitly:

So, when in such a case a resident defendant is joined with the nonresident, the joinder, even although fair upon its face, may be shown by a petition for removal to be only a fraudulent device to prevent a removal; but the showing must consist of a statement of facts rightly engendering that conclusion.  Merely to traverse the allegations upon which the liability of the resident defendant is rested, or to apply the epithet 'fraudulent' to the joinder, will not suffice: the showing must be such as compels the conclusion that the joinder is without right and made in bad faith.

Chesapeake & Ohio Railroad Co. v. Cockrell, 232 U.S. 146, 152 (1914).  Since "bad faith" can be any "intentional conduct to deny the defendant the chance to remove," Hiser v. Seay, 2014 WL 6885433, at *4 (W.D. Ky. Dec. 5, 2014), it can be (and has been) argued that fraudulent joinder (given the "no real intention" standard) is now also a subset of "bad faith" under §1446(c)(1).

And so some courts have held − equating the substantive standard of bad faith with the fraudulent joinder standard.

The defendants with the diverse citizenship, who want to remove, may not be entirely helpless.  If they can produce evidence to convince the court that the nondiverse defendant can in no way be liable under the applicable substantive law as applied to the facts as pleaded, they might convince the court to apply the so-called "fraudulent joinder" doctrine.  Under that doctrine, the citizenship of a person against whom the plaintiff has no genuine claim-a person whom the plaintiff has joined in what in effect is bad faith-can be ignored.

Taylor v. King, 2012 WL 3257528, at *4 (W.D. Ky. Aug. 8, 2012) (quoting and following Comments to 28 U.S.C.A. § 1446).

The Court concludes that the addition of the bad-faith exception to the one-year limitation clarifies that the one-year limitation is procedural, rather than jurisdictional, and, thus, extends the applicability of fraudulent joinder doctrine past the one-year mark. Thus, defendants may remove a case on fraudulent joinder grounds even after it has been pending in state court for more than one year.

De La Rosa v. Reliable, Inc., 113 F. Supp.3d 1135, 1164 (D.N.M. 2015) (quoting Aguayo v. AMCO Insurance Co., 59 F. Supp.3d 1225, 1256 (D.N.M. 2014)); McDaniel v. Loya, 304 F.R.D. 617, 631 (D.N.M. 2015) (same quotation).  Thus, in jurisdictions that equate bad faith and fraudulent joinder, the 2011 amendment effectively extended the availability of the fraudulent joinder defense past defendants' one year time limit to file for removal – allowing use of plaintiffs' litigation conduct to support a finding of fraudulent joinder/bad faith.  See Nele v. TJX Cos., 2013 WL 3305269, at *3 (E.D. Pa. July 1, 2013) (under §1446(c), "'bad faith' can take the form of fraudulent joinder of a defendant to defeat diversity"); Forth v. Diversey Corp., 2013 WL 6096528, at *2 (W.D.N.Y. Nov. 20, 2013) (utilizing fraudulent joinder standard to evaluate an bad faith allegation); Noyes v. Universal Underwriters Insurance Co., 3 F. Supp.3d 1356, 1363 (M.D. Fla. 2014) ("fraudulent joinder was meant to manipulate the state court’s jurisdiction and constitutes bad faith"); Escalante v. Burlington National Indemnity, Ltd., 2014 WL 6670002, at *3 (C.D. Cal. Nov. 24, 2014) ("examples of bad faith include removal-defeating strategies such as fraudulently joining parties to destroy diversity"); Sequeira v. Lincoln National Life Insurance Co., 2012 WL 260030, at *2 (E.D. Cal. Jan. 27, 2012) ("In removing a case based upon fraudulent joinder, the defendant must make a showing [that] compels the conclusion that the joinder is without right and made in bad faith.") (citation and quotation marks omitted).

However, "it is far from clear that the 'bad faith' and 'fraudulent joinder' standards are one and the same."  Ehrenreich v. Black, 994 F. Supp.2d 284, 288 (E.D.N.Y. 2014).  Other jurisdictions take the opposite approach − holding that the bad faith exception is separate and apart from fraudulent joinder.  See Heller v. American States Insurance Co., 2016 WL 1170891, at *2 (C.D. Cal. March 25, 2016) (noting that the "bad faith exception, as distinct from the doctrine of fraudulent joinder, applies to 'plaintiffs who joined – and then, after one year, dismissed – defendants [whom] they could keep in the suit, but that they did not want to keep in the suit except as removal spoilers"); In re Boston Scientific Corp., 2015 WL 6456528, at *6 (C.D. Cal. Oct. 26, 2015) ("a finding of misjoinder is not the same as a finding of bad faith"); Ramirez v. Johnson & Johnson, 2015 WL 4665809, at *4 n.3 (S.D.W. Va. Aug. 6, 2015) ("the bad faith standard under section 1446(c)(1) differs from the standard for proving fraudulent joinder").

In jurisdictions distinguishing between fraudulent joinder and the 2011 bad faith exception, we are still left wondering how the JVCA amendment could impact the voluntary-involuntary rule.  Perhaps the answer is simply that it hasn't.  The relatively sparse case law indicates that those courts resist blending their analyses of bad faith and the voluntary-involuntary rule.  Rather, they compartmentalize the two concepts and come to separate, unrelated conclusions for each.  See Heller, 2016 WL 1170891, at *1-3 (holding:  (1) plaintiff's action causing dismissal was voluntary, and (2) defendant was entitled to removal pursuant to the §1446(c) bad faith exception because there was sufficient evidence to show that plaintiff engaged in "strategic gamesmanship"); Skelton v. Johnson & Johnson, 2015 U.S. Dist. Lexis 141959, at *3-5 (C.D. Cal. Oct. 16, 2015) (holding (1) plaintiff failed to establish a violation of the voluntary-involuntary rule and (2) the removal did not violate §1446(c)(1)); Loelke v. Moore, 2012 U.S. Dist. Lexis 2709, at *10–11 (S.D. Ill. Jan. 10, 2012) (removal did not "run afoul of the voluntary-involuntary rule," but was untimely under one-year rule, evidence did not establish the plaintiff's bad faith).

Judicial interpretation of the JVCA's §1446(c)(1) bad faith exception is still very much evolving, and some jurisdictions view the bad faith exception as simply extending the availability of the fraudulent joinder defense past the one-year mark, while others don't.  Still, the statute now provides a basis for asserting fraudulent joinder as "bad faith" even after the one-year deadline has passed. In appropriate cases, defendants may want to raise this argument.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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