Removal and the Doctrine of Fraudulent Joinder
Ordinary removal is a simple procedure familiar to defense counsel. A case originally filed in state court can be removed to the federal district court embracing the location where suit was originally filed provided a basis for federal jurisdiction is apparent from the plaintiff’s complaint. See 28 U.S.C. § 1441(a).
However, 28 U.S.C. section 1441(b) precludes removal where the basis for federal jurisdiction is diversity and “any of the parties in interest properly joined and served as defendants is a citizen of the State in which such action is brought.” Colloquially termed the “forum defendant rule,” this rule opens the door for plaintiffs to defeat a diversity-based removal and remain in state court by joining a nondiverse or forum-state defendant.
Savvy defense counsel seeking to circumvent application of the forum defendant rule often find refuge by arguing that one of more nondiverse defendants were fraudulently joined for the purpose of defeating an otherwise proper removal. The doctrine of fraudulent joinder allows a defendant to remove a case to federal court despite the plaintiff’s joinder of a nondiverse or forum-state defendant. In this sense, some courts have termed it an “exception to the requirement of complete diversity.” Triggs v. John Crump Toyota, Inc., 154 F.3d 1284, 1287 (11th Cir. 1998).
Where the putative fraudulently joined defendant is a citizen of the forum, the analysis stems from the limits that Congress has placed on the forum defendant rule, restricting its application to situations where the forum defendant is “properly joined and served.” The reasoning is that if a forum defendant is not “properly joined and served” under section 1441(b), then it may be ignored for purposes of jurisdictional analysis; thus, its presence is not an impediment to removal.
A simpler analysis governs the fraudulent joinder of a nondiverse defendant. If the removing defendant meets its burden in showing that the nondiverse defendant has been fraudulently joined to defeat diversity, “the defendant’s presence in the lawsuit is ignored for purposes of determining diversity.” Weeping Hollow Ave. Trust v. Spencer, 831 F.3d 1110, 1112–13 (9th Cir. 2016).
The requisite showing sufficient to support removal on the basis of fraudulent joinder differs among the U.S. courts of appeals. Generally, however, removing an action on the basis of fraudulent joinder requires a showing that the plaintiff cannot assert a viable state-law claim against the defendant whose presence in the lawsuit precludes federal jurisdiction.
Considerations for Establishing Fraudulent Joinder
A party seeking to establish fraudulent joinder should keep a few considerations in mind to present the most compelling case in support of removal.
Use the proper terminology. Courts have often criticized the label fraudulent joinder as a misnomer. As one federal judge explained, “the doctrine requires neither fraud nor joinder.” See, e.g., Schur v. L.A. Weight Loss Ctrs., Inc., 577 F.3d 752, 763 n.9 (7th Cir. 2009). Nonetheless, most U.S. courts of appeals continue to refer to the doctrine as fraudulent joinder.
Fifth Circuit practitioners, however, should eschew the phrase in favor of the more delicate term improper joinder. Indeed, in Smallwood v. Illinois Central Railroad Co., 385 F.3d 568 (5th Cir. 2004), the Fifth Circuit “adopt[ed] the term ‘improper joinder’ as being more consistent with the statutory language than the term ‘fraudulent joinder.’” Id. at 571 n.1. The Smallwood court disclaimed any substantive difference between the terms but nonetheless declared that “improper joinder is preferred.” Id.
Save the argument for the opposition to remand. Counsel for removing defendants often concentrate time and argument getting a case to federal court that should instead be spent keeping it there. Indeed, it is far more difficult to defeat a motion to remand than it is to invoke federal jurisdiction by way of removal. Counsel sometimes forget that when removing a case on the basis of fraudulent joinder, the real battle is fought in opposing remand—not in initially removing the case.
A removing defendant’s notice of removal need only contain “a short and plain statement of the grounds for removal” and the relevant state court documents. See 28 U.S.C. § 1446(a). Despite the thin requirement, removing defendants on occasion needlessly clutter their notices of removal with legal argument. Not only is this practice inconsistent with the spirit and letter of section 1446, it is also bad strategy. A removing defendant need not show its hand prematurely. Including in your notice of removal the specific reasons why the defendant whose presence defeats federal jurisdiction is fraudulently joined sets the stage for the plaintiff to file a fully informed motion to remand. Even worse, it ensures that the arguments contained in the notice of removal will simply be rehashed in the memorandum opposing remand.
To give the client the best possible chance to defeat the inevitable motion to remand, counsel for a defendant removing a case on the basis of fraudulent joinder should limit the notice of removal to the absolute essentials: (1) the factual basis for diversity jurisdiction; (2) factual allegations establishing compliance with the specific requirements of section 1446; and (3) an allegation that the defendant whose presence in the lawsuit defeats federal jurisdiction has been fraudulently joined, accompanied by a brief explanation and a supporting legal citation. The allegation of improper joinder should not be conclusory, but neither should it precede a paragraph of legal argument and a slew of citations. Adopting a disciplined, succinct approach to the notice of removal allows the removing defendant to save its best arguments for the time at which they will most effectively resonate with the court—in opposition to remand.
Study the jurisdiction-specific standard. The standard applicable to fraudulent joinder varies considerably among jurisdictions. It is critical to evaluate removal on the basis of the jurisdiction-specific standard because courts within some circuits allow removing defendants to “pierce the pleadings” to establish fraudulent joinder, while courts within others limit the analysis to the plaintiff’s pleadings. Further, some circuits do not recognize fraudulent joinder as a means of overcoming the forum-defendant rule. Indeed, this remains an open question in the Seventh Circuit, which has, without ruling definitively on the issue, deemed it “a very close question whether the fraudulent joinder doctrine ought to extend to diverse resident defendants.” Morris v. Nuzzo, 718 F.3d 660, 670–71 (7th Cir. 2013).
Federal courts within some circuits liken the test for fraudulent joinder to the familiar Rule 12(b)(6) motion to dismiss standard—that is, resolving doubtful cases in the plaintiff’s favor and ultimately querying whether the plaintiff has alleged sufficient facts to state a plausible claim against the forum-defendant under state law. See Casias v. Wal-Mart Stores, Inc., 695 F.3d 428, 432–33 (6th Cir. 2012) (applying a test “similar to, but more lenient than, the analysis applicable to a Rule 12(b)(6) motion to dismiss”). Other circuits, however, have carefully distinguished the Rule 12(b)(6) standard from the test for fraudulent joinder: “This plausibility standard asks for more than a sheer possibility that a defendant has acted unlawfully. In contrast, all that is required to defeat a fraudulent joinder claim is a possibility of stating a valid cause of action.” Stillwell v. Allstate Ins. Co., 663 F.3d 1329, 1332–33 (11th Cir. 2011) (internal quotations omitted).
The analysis adopted by courts within other circuits more closely resembles the Rule 56 summary judgment standard. Consider the Fifth Circuit: it permits the reviewing court to “pierce the pleadings” when the plaintiff’s complaint “has misstated or omitted discrete facts that would determine the propriety of joinder.” Mumfrey v. CVS Pharmacy, Inc., 719 F.3d 392, 401–02 (5th Cir. 2013).
The circuits also differ in the precise formulation of the fraudulent joinder standard. The First and Fourth Circuits, for example, employ a relatively plaintiff-friendly standard, requiring the removing defendant to show “no reasonable possibility” of recovery against the home-state defendant. See, e.g., Universal Truck & Equip. Co. v. Southworth-Milton, Inc., 765 F.3d 103, 108 (1st Cir. 2014); Johnson v. Am. Towers, LLC, 781 F.3d 693, 704 (4th Cir. 2015). Removal is defeated if the plaintiff shows a mere “glimmer of hope.” Johnson, 781 F.3d at 704. The Sixth and Tenth Circuits, by contrast, apply a more forgiving fraudulent joinder standard. Under Sixth Circuit precedent, a nondiverse or forum defendant against whom “it is clear that there can be no recovery under the law of the state on the cause alleged” is considered fraudulently joined. See Casias, 695 F.3d at 432–33. Likewise, a removing party demonstrates fraudulent joinder in the Tenth Circuit by establishing an “inability of the plaintiff to establish a cause of action against” the party whose presence in the lawsuit would defeat federal jurisdiction. Dutcher v. Matheson, 733 F.3d 980, 988 (10th Cir. 2013).
In sum, to evaluate the potential of successfully removing a case to federal court on the basis of fraudulent joinder, the astute defendant should consult with care recent fraudulent joinder decisions from the relevant U.S. courts of appeals. At a minimum, counsel should determine whether courts within the relevant circuit (1) extend the doctrine of fraudulent joinder to the forum-defendant rule, (2) permit the removing party to “pierce the pleadings” to show fraudulent joinder, and (3) employ an exacting “no reasonable possibility” or “glimmer of hope” standard.
Know the effect of fraudulent joinder on the fraudulently-joined defendant. There is much confusion about the effect of a court’s determination that a party has been fraudulently joined. Some contend that such a determination results in the dismissal with prejudice of the defendant the court rules that the plaintiff has fraudulently joined, as if the court granted a Rule 12(b)(6) dismissal in favor of that defendant. The misapprehension is understandable given that the standard for fraudulent joinder in most jurisdictions resembles the Rule 12(b)(6) standard.
But the U.S. courts of appeals generally agree that the proper relief as to the fraudulently joined defendant is actually a dismissal without prejudice. The courts reason that because a court lacks jurisdiction over a fraudulently joined defendant (whose presence in the lawsuit by definition defeats federal jurisdiction), once it has ruled that the defendant is in fact fraudulently joined, it lacks the power to dismiss that defendant on any other basis than an absence of jurisdiction. See, e.g., Int’l Energy Ventures Mgmt. v. United Energy Grp., Ltd., 818 F.3d 193 (5th Cir. 2016); Wivell v. Wells Fargo Bank, N.A., 773 F.3d 887 (8th Cir. 2014), Hogan v. Raymond Corp., 536 F. App’x 207 (3d Cir. 2013); Albert v. Smith’s Food & Drug Ctrs., Inc., 356 F.3d 1242 (10th Cir. 2004). But cf. Walton v. Bayer Corp., 643 F.3d 994 (7th Cir. 2011) (affirming trial court’s dismissal with prejudice of fraudulently joined defendant).
An effective fraudulent joinder argument can be an important tool in the defense lawyer’s jurisdictional toolbox. By keeping these considerations in mind, defense counsel can best position their clients for success in the preferred federal forum.
Jordan Redmon is a litigation associate with Baker, Donelson, Bearman, Caldwell & Berkowitz, PC, in New Orleans, Louisiana.