A Primer On 'Bad Faith' In Federal Removal

Law360, New York (October 08, 2014, have only recently started asserting bad faith as a 10:04 AM ET) -- We all know the story. basis for removal, and courts have just begun to A plaintiff sues in state court and wants weigh in on the question. What follows is a review of to hometown the out-of-state the limited case law discussing the bad faith defendant. In order to ensure a favorable state-court exception. forum and jury, the plaintiff throws in another Background defendant for the purpose (or appearance) of defeating . One year passes, and Until 2011-2012, 28 U.S.C. § 1446 strictly prohibited — magically! — the diversity-destroying defendant is defendants from removing cases based on diversity dropped from the case. Remove the case to federal jurisdiction more than one year after a case is court, right? Unfortunately, the statutory one-year started. This one-year limitation led to buzzer will already have sounded (28 U.S.C. § gamesmanship by plaintiffs seeking to keep cases in 1446(c)(1)), and removal to a federal forum is what they perceived to be friendly state courts and prohibited. juries.

Congress attempted to fix this problem in 2011, but Prior to the act, some federal courts picked up on litigants and courts are just now getting around to this tactic and crafted a narrow equitable exception addressing it. In an effort to thwart removal-defeating to the one-year limitation on removal. Most notably, strategies by plaintiffs, Congress enacted a bad faith in Tedford v. Warner- Lambert Co., 327 F.3d 423, exception to the one-year bar on removal as part of 428–29 (5th Cir. 2003), the Fifth Circuit held that an the Federal Courts Jurisdiction and equitable exception to the one-year removal bar Clarification Act of 2011, Pub. L. No. 112-63, 125 applied to cases in which the plaintiff manipulated Stat. 758 (codified in scattered sections of 28 the statutory rules to prevent removal. U.S.C.). The act, applicable to all cases filed after Jan. 6, 2012, grants a federal district court discretion In Tedford, the plaintiff joined a nondiverse to permit removal after the one-year period if it finds defendant hours after learning that the original a plaintiff has “acted in bad faith” to prevent removal. defendant intended to remove the case to federal court. Then, the plaintiff signed and post-dated a But what does “bad faith” mean in the context of notice of nonsuit as to the nondiverse defendant federal removal jurisdiction? Because the act’s before the one-year limitation on removal expired, practical effective date was January 2013, litigants but did not file the document or notify the original

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

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appellate guidance on the bad faith exception is only pursuant to the bad faith exception in a number of likely to come in the narrowest of circumstances — contexts, including where: (1) a plaintiff conceals the through that rare bird called a writ of mandamus or actual amount in controversy, (2) a plaintiff fails to through the cramped collateral order doctrine. prosecute its claims against a nondiverse defendant, and/or (3) a nondiverse defendant fails to defend Notwithstanding these limitations at the appellate against a plaintiff’s claims. level, however, the bad faith exception hasn’t necessarily flopped. Federal district courts have just Bad Faith Defined recently (2013-2014) begun to grapple with the 1. Failing to Disclose the Actual Amount in exception and have provided some minimal Controversy guidance on how the exception should be interpreted. As stated, the act expressly provides that a plaintiff’s deliberate failure to disclose the actual amount in Bad Faith Is Not the Same Thing as Fraudulent controversy to prevent removal constitutes bad faith Joinder (28 U.S.C. § 1446 (c)(3)(B)). Federal courts have To begin with, the bad faith exception is not the thus permitted removal under the bad faith exception same thing as the doctrine of fraudulent joinder. where a plaintiff initially alleges damages below the While both doctrines are intended to discourage jurisdictional minimum but delays amending its gamesmanship by plaintiffs in diversity cases, courts or otherwise notifying the defendant that have declared that the standard for each differs. the amount in controversy exceeds $75,000 until after the one-year period passes. Although one might think that the threshold for establishing either bad faith or fraudulent joinder is However, if a defendant can ascertain the value of a high, the early bad faith cases suggest otherwise. To plaintiff’s claims from independent evidence, a court establish fraudulent joinder, a defendant generally is less likely to permit removal under the bad faith bears the often heavy burden of demonstrating by exception. To be sure, the act focuses on the clear and convincing evidence that there is no plaintiff’s “fail[ure] to disclose” the amount in possibility, based on the pleadings, that a plaintiff controversy, suggesting that the conduct of the can state a against the nondiverse defendant in ascertaining the true amount is defendant. irrelevant. Nevertheless, where a plaintiff discloses information regarding the value of its claims through Not so with the bad faith exception, at least as it has (say through the initial disclosure process, been molded so far. Courts have permitted removal an interrogatory , or in ) and that

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

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defendant after the one-year deadline without its clients, or Portfolio Media Inc., or any of its or serving discovery on the nondiverse defendant, their respective affiliates. This article is for general without deposing the nondiverse defendant, and/or information purposes and is not intended to be and failing to otherwise justify the delay in dismissing the should not be taken as legal advice. nondiverse defendant. All Content © 2003-2014, Portfolio Media, Inc. Conclusion

Although the bad faith standard didn’t come with a clear definition, recent case law offers guidance as to the criteria courts will consider when applying the act’s bad faith exception. What we know is that federal courts have applied an objective test and have examined the circumstances surrounding the presence of a nondiverse defendant rather than the subjective reasons that a plaintiff may have for bringing that defendant into the case. Apparently summoning the age-old adage that actions speak louder than words, plaintiffs who seek to bar defendants from federal court may have a hard time doing so if their actions (or those of the phony defendant) suggest an improper attempt to stave off federal jurisdiction where such jurisdiction rightly exists.

—By Ugo Colella and Todd Seaman, Thompson Hine LLP

Ugo Colella is a partner in Thompson Hine's Washington, D.C., office. Todd Seaman is an associate in the firm's Columbus, Ohio, office.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm,

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