Removal; fraudulent joinder

In Gray v. Beverly Enterprises-Mississippi, Inc., decided November 9, the Fifth Circuit ordered a case to be remanded to state court, reversing a district-court judgment holding that the non-diverse had been fraudulently joined. To get there, the Fifth Circuit made these interesting points:

1. The court held that the "talismanic words" ("no just reason for delay") are not necessary to certify an interlocutory judgment as appealable under FRCP 54(b). Rather, what is required is the district court's "unmistakable intent to render the issue appealable under rule 54(b) ...." In Beverly, the district court found "that there exists a danger of hardship or injustice through delay which would be alleviated by immediate appeal .... As such, the Court finds that justice will be served by the immediate appeal of this issue ...." The Fifth Circuit found that these words satisfied Rule 54(b). "The district court expressed its finding merely using a phraseology different" from the magic words "no just reason for delay."

2. If state law is ambiguous on whether the plaintiff has a cause of action against the non-diverse defendant, then that defendant has not been fraudulently joined. To prove fraudulent joinder, a defendant must prove that the plaintiff has no reasonable basis for recovering againt the non-diverse defendant in state court. In deciding whether the plaintiff has a reasonable basis for recovering, "all disputed questions of fact and all ambiguities in state law must be resolved in favor of the plaintiff." In Beverly, the plaintiffs relied on statutes that had not yet been interpreted by Mississippi state courts. Thus, state law was unclear on whether the statutes gave plaintiffs a cause of action against the non-diverse defendants. For removal / remand purposes, that hiatus in Mississippi law had to be resolved in plaintiffs' favor.

3. On the other hand, where a plaintiff has no law authorizing recovery against the non-diverse defendant, then that defendant has been fraudulently joined. The court explained that, although ambiguous state-law questions must be resolved in plaintiffs' favor, a plaintiff cannot reasonably expect to recover in the absence of any legal authority supporting recovery.

4. The plaintiffs had brought five claims against the non-diverse defendants (simple negligence, gross negligence, medical malpractice, fraud, and breach of fiduciary duty), but appealed only with respect to two (simple negligence and gross negligence). On remand, was the district court's finding of no claim under the other three theories conclusive? The defendants argued that because those three claims had not been appealed, they could not be included in the remand. The Fifth Circuit found the defendants' argument "interesting" and possibly "persuasive," but rejected it. "Underlying the entire argument is the notion that by not appealing the decision on some counts, the plaintiffs have 'waived' the issue of subject matter jurisdiciton over htose counts. Subject matter jurisdiction, however, cannot be waived.... That being so, plaintiffs' failure to appeal the other causes of action is not dispositive."

Posted by RPW at November 13, 2004 04:14 PM