Late Pleading Amendment Prevents Federal Jurisdiction

A federal court declined to interfere with a state court’s procedural ruling that prevented removal jurisdiction. The state court’s ruling permitted the plaintiff to amend his complaint in a manner that eliminated diversity jurisdiction just days before defendant tried to remove the case. ABA Litigation Section leaders agree with the federal court’s decision and caution practitioners to promptly file notices of removal to avoid pleading amendments which can terminate that right.

Insurance Company Short-Changes Claimants

In Turner v. GoAuto Insurance Company, the plaintiff sued his automobile insurance company in Louisiana’s 19th Judicial District Court in East Baton Rouge Parish. He had totaled his car in an accident and claimed that the defendant insurer paid him less than his policy benefit and less than what Louisiana law required. After extensive pretrial activity, the plaintiff amended his complaint to make it a class action. The class consisted of all “residents of Louisiana” who were insured by the defendant, had totaled their vehicles, and whose payments from the defendant were reduced by the specific adjustment at issue.

Class Amendment Changes Diversity Jurisdiction

After several more months, the plaintiff again sought permission to amend his complaint, this time to redefine class members as “citizens of Louisiana.” Two days after the plaintiff received permission to amend his complaint, the defendant filed a notice of removal to the U.S. District Court for the Middle District of Louisiana alleging diversity jurisdiction under the Class Action Fairness Act (CAFA).

CAFA grants subject matter jurisdiction for class actions to federal courts when there is just minimal diversity. This occurs when at least one class member is the citizen of a different state than the defendant. This is a departure from the more typical diversity jurisdiction where the state citizenship of all plaintiffs must be diverse from all defendants.

As the defendant is a citizen of Louisiana, the plaintiff moved to remand arguing that the defendant could not show minimal diversity when the class was limited to “citizens of Louisiana.” By definition, no plaintiff could be a citizen of another state, and therefore, all parties were citizens of Louisiana. The district court agreed and denied the motion to remand. The defendant appealed to the U.S. Court of Appeals for the Fifth Circuit.

Subverting Federalism Requires Extraordinary Circumstances

The defendant argued that the amended complaint should be disregarded because either it was not the operative complaint or it should not have been. The defendant claimed the Louisiana state court did not follow state law by allowing the amended complaint. The Fifth Circuit was unpersuaded, particularly since the state court had accepted the plaintiff’s amended complaint before the defendant filed the notice of removal.

More importantly, the circuit court noted that any action on its part to review a state court’s procedural ruling made before removal offends basic precepts of federalism, as well as the jurisdictional parameters set forth in Article III, Section 2 of the U.S. Constitution. Federal courts ought not to interfere with state court proceedings concerning matters of state law except in extraordinary circumstances, the court reasoned. In this ordinary case, the court of appeals would not guess at how the state court should have ruled on a motion to amend the complaint.

Section Leaders Agree with Holding and Warn Practitioners

Litigation Section leaders are not surprised by the court of appeals’ decision. “On the whole, I think the court got its role right,” explains Jeffrey J. Greenbaum, Newark, NJ, cochair of the Section’s Federal Practice Task Force. “A federal court evaluating removal has no right to look into the proceedings of the state court and second guess its determination to allow an amendment of the complaint,” he adds.

“Federal courts are courts of limited jurisdiction, and the idea of removal is very much an exception to the concept that a state court gets to decide issues of state law and operate free of interference from federal courts,” echoes Ian H. Fisher, Chicago, IL, cochair of the Section’s Class Actions & Derivative Suits Committee. “This case is interesting because diversity jurisdiction, as it is laid out in the Constitution, would not support removal at all. It is only with the Act that diversity jurisdiction was extended to allow minimal diversity for class actions,” he elaborates.

Federal courts can review state court procedural rulings in the instance of fraudulent joinder: the intentional joinder of nondiverse defendants to frustrate diversity jurisdiction. “Federal courts are permitted to look into the propriety of adding a nondiverse defendant and have the power to look beyond the actual pleading,” to the plaintiff’s intent, asserts Fisher. “We don’t know if there was any manipulation in the days before the second motion to amend was filed,” remarks Greenbaum. “If I got the sense that games were being played to frustrate diversity, I would be arguing that in court.”

Finally, Section leaders urge diligence. “A defendant needs to think about removal immediately upon being served with the complaint,” cautions Fisher. “If additional information is necessary to confirm that a case is removable, the defendant should form a strategy for getting that information before anything else.”