Practice Tip: Federal Jurisdiction and Venue

With little fanfare or forewarning, the Federal Courts Jurisdiction and Venue Clarification Act of 2011 became effective Jan. 6, 2012. Signed into law on Dec. 7, 2011, the Act (H.R. 394 P.L. 112-63) reforms or clarifies removal procedures, diversity jurisdiction, and federal venue.

The Act implemented the most extensive amendments in years to Chapter 28 of the United States Code. Despite their stealthy adoption, however, the changes deserve close consideration by all litigators. Fortunately, the House Committee on the Judiciary also issued a 33-page report (H.R. Rep. 112-10) in February 2011 discussing the rationale and process behind the amendments as well as a section-by-section analysis of the Act.

Multiple Defendants

In removable cases involving multiple defendants, 28 U.S.C.A. ' 1446(b) previously provided that a notice of removal must be filed “within 30 days after the service of summons upon the defendant.” Different jurisdictions interpreted this provision in different ways. See Marano Enterprises of Kansas v. Z-Teca Restaurants, L.P., 254 F.3d 753, 755-57 (8th Cir. 2001). Some courts held that the first-served defendant must file a timely notice of removal and that later-served defendants were locked into state court if timely removal did not occur.

New language in ' 1446(b) is expected to eliminate differing interpretations of the statute and do away with a potential trap for the unwary when multiple defendants are served at different times. Adopting an interpretation recognized in a majority of circuits, ' 446(b) now provides that “each defendant” shall have 30 days after “service on that defendant” to file the notice of removal. Moreover, revised ' 1446(b)(2)(C) expressly allows an earlier-served defendant to consent to removal by a later-served defendant. The unanimity rule still applies, however, requiring all defendants in an action to consent to removal to federal court. See 28 U.S.C. ' 1446(b)(2)(A).

State and Federal Claims

A common challenge to removal jurisdiction arises when a plaintiff makes both state law and federal law claims. To remove on the basis of federal question jurisdiction, courts have long used the “well-pleaded complaint” doctrine to determine if a case arises under federal law. See Smolarek v. Chrysler Corp., 858 F.2d 1165 (6th Cir. 1988), cert. denied, 493 U.S. 992 (1989).

Revised ' 1441(c) now mandates that, upon removal, a district court “shall sever from the action” all claims not within the original or supplemental jurisdiction of the district court, or claims made non-removable by statute, and “shall remand the severed claims to the State Court from which the action was removed.” In other words, district courts no longer have discretion to retain unrelated state law claims.

Amount in Controversy

Effective Jan. 6, 2012, new procedures also apply to determining the amount in controversy necessary for diversity jurisdiction. Section 1446(c)(2) once appeared unambiguous in declaring that “[t]he sum demanded in good faith in the initial pleading shall be deemed to be the amount in controversy.” But practitioners know that pleadings seeking non-monetary relief or lacking a specific ad damnum (as when forbidden by state practice) create genuine uncertainty as to the amount in controversy.

A defendant's notice of removal, therefore, is often the primary ' if not the only ' source of the amount in controversy available to the receiving court. Amended ' 1446(c)(2)(B) now makes clear that the amount in controversy can and should be determined “by the preponderance of the evidence” submitted to the court. The “other paper” useable to establish the amount in controversy can safely be broadly construed and to include “information relating to the amount in controversy in the record of the State proceeding, or in responses to discovery.” 28 U.S.C.
' 1446(c)(3)(A).

Removing a Case

Before the Act's amendments, ' 1446 placed an outer time limit on a defendant's ability to remove a case, prohibiting removal on the basis of diversity jurisdiction more than one year after the commencement of an action. Even though the statute seemed to allow no exceptions, some federal circuits viewed the one-year time limit as procedural, see Tedford v. Warner-Lambert Co., 327 F.3d 423 (5th Cir. 2003), while other courts deemed it jurisdictional. See, e.g., Burns v. Windsor Ins. Co., 31 F.3d 1092 (11th Cir. 1994).

The amendment to ' 1 446 resolves this disparity by creating an explicit exception to the one-year removal period. Section ' 1446(c) now permits removal based on diversity of citizenship when the “district court finds that the plaintiff has acted in bad faith in order to prevent a defendant from removing the action.” Revised ' 1446(c)(3)(B) defines “bad faith” as including those situations where “the plaintiff deliberately failed to disclose the actual amount in controversy to prevent removal.”

Although fraudulent joinder of a non-diverse defendant is not expressly included in ' 1446(c)(3)(B) as grounds for extending the one-year limit, a plaintiff's bad-faith conduct intended “to prevent a defendant from removing” logically would also include fraudulent joinder.

Citizenship Determination

The rise in legal and illegal immigrants seeking redress in our nation's courts is apparently behind new ' 1332(a) regarding the citizenship determination of resident aliens. Revisions to ' 1332(a) eliminate the unintended consequences of the “resident alien proviso” added by Congress in 1988. Although intended to preclude federal jurisdiction in the context of suits between an alien permanently residing in a state and a citizen of that same state, the resident alien proviso expanded jurisdiction in other contexts by deeming resident aliens to be citizens of the state in which they reside. H.R. Rep. 112-10, at 7 (2011). The proviso no longer appears in the statute.

Section 1332(a)(2) now specifically precludes diversity jurisdiction between a citizen of a state and a citizen of a foreign nation if the latter is lawfully admitted to the U.S. as a permanent resident and domiciled in the same state. By removing resident aliens' status as citizens of the state in which they reside, the revisions also foreclose diversity jurisdiction over claims between two resident aliens domiciled in different states. As for corporations, ' 1332(c) makes clear that a corporation, either foreign or domestic, will be deemed a citizen of both its state of incorporation and any other state where it maintains its principal place of business.

Federal Venue Provisions

True to its name, the Act also clarifies federal venue provisions. A new ' 1391(b) provides a single approach to federal venue rules, eliminating the distinction between venue in actions based on diversity jurisdiction versus federal question jurisdiction and clarifying the “fallback” venue in such cases.

Section 1391(b)(1) clarifies that venue in multiple-defendant cases is proper in a judicial district in which any defendant resides, provided that district is located in the state where all defendants reside. In the case of natural persons and aliens lawfully admitted for permanent residence, the new law clarifies that, for purposes of venue, the person is deemed to “reside” in the district in which that person is domiciled. 28 U.S.C. 1391(c)(1).

The Act also defines residency, including the residency of unincorporated entities. Section 1391(c) provides that a defendant-entity resides in “any judicial district in which such defendant is subject to the court's personal jurisdiction with respect to the civil action in question,” while a plaintiff-entity resides “only in the judicial district in which it maintains its principal place of business.”

In addition, the new law expands federal court discretion in determining proper venue. Section 1392(b)(3) permits venue in “any judicial district in which any defendant is subject to the court's personal jurisdiction with respect to such action.” The new law also amends ' 1404 to allow for transfer of a matter “to any district or division to which all parties have consented,” making clear that transfer is permitted even if the district chosen by the parties would not otherwise be proper.

Conclusion

In the coming months, we will begin to see whether these changes will have the intended effect of clarifying recurring problems with federal jurisdiction, and allow federal courts to direct more time and energy to the merits. As with any change, we may also see unintended consequences that create new and different challenges. Although they came onto the scene quietly, these amendments will have a significant impact as attorneys and courts grapple with the Act's implications.

John Tate ([email protected]), a member of this newsletter's Board of Editors, and Sarah Cronan Spurlock ([email protected]) practice in the Louisville, KY, office of Stites & Harbison, PLLC.

With little fanfare or forewarning, the Federal Courts Jurisdiction and Venue Clarification Act of 2011 became effective Jan. 6, 2012. Signed into law on Dec. 7, 2011, the Act (H.R. 394 P.L. 112-63) reforms or clarifies removal procedures, diversity jurisdiction, and federal venue.

The Act implemented the most extensive amendments in years to Chapter 28 of the United States Code. Despite their stealthy adoption, however, the changes deserve close consideration by all litigators. Fortunately, the House Committee on the Judiciary also issued a 33-page report (H.R. Rep. 112-10) in February 2011 discussing the rationale and process behind the amendments as well as a section-by-section analysis of the Act.

Multiple Defendants

In removable cases involving multiple defendants, 28 U.S.C.A. ' 1446(b) previously provided that a notice of removal must be filed “within 30 days after the service of summons upon the defendant.” Different jurisdictions interpreted this provision in different ways. See Marano Enterprises of Kansas v. Z-Teca Restaurants, L.P. , 254 F.3d 753, 755-57 (8th Cir. 2001). Some courts held that the first-served defendant must file a timely notice of removal and that later-served defendants were locked into state court if timely removal did not occur.

New language in ' 1446(b) is expected to eliminate differing interpretations of the statute and do away with a potential trap for the unwary when multiple defendants are served at different times. Adopting an interpretation recognized in a majority of circuits, ' 446(b) now provides that “each defendant” shall have 30 days after “service on that defendant” to file the notice of removal. Moreover, revised ' 1446(b)(2)(C) expressly allows an earlier-served defendant to consent to removal by a later-served defendant. The unanimity rule still applies, however, requiring all defendants in an action to consent to removal to federal court. See 28 U.S.C. ' 1446(b)(2)(A).

State and Federal Claims

A common challenge to removal jurisdiction arises when a plaintiff makes both state law and federal law claims. To remove on the basis of federal question jurisdiction, courts have long used the “well-pleaded complaint” doctrine to determine if a case arises under federal law. See Smolarek v. Chrysler Corp. , 858 F.2d 1165 (6th Cir. 1988), cert. denied, 493 U.S. 992 (1989).

Revised ' 1441(c) now mandates that, upon removal, a district court “shall sever from the action” all claims not within the original or supplemental jurisdiction of the district court, or claims made non-removable by statute, and “shall remand the severed claims to the State Court from which the action was removed.” In other words, district courts no longer have discretion to retain unrelated state law claims.

Amount in Controversy

Effective Jan. 6, 2012, new procedures also apply to determining the amount in controversy necessary for diversity jurisdiction. Section 1446(c)(2) once appeared unambiguous in declaring that “[t]he sum demanded in good faith in the initial pleading shall be deemed to be the amount in controversy.” But practitioners know that pleadings seeking non-monetary relief or lacking a specific ad damnum (as when forbidden by state practice) create genuine uncertainty as to the amount in controversy.

A defendant's notice of removal, therefore, is often the primary ' if not the only ' source of the amount in controversy available to the receiving court. Amended ' 1446(c)(2)(B) now makes clear that the amount in controversy can and should be determined “by the preponderance of the evidence” submitted to the court. The “other paper” useable to establish the amount in controversy can safely be broadly construed and to include “information relating to the amount in controversy in the record of the State proceeding, or in responses to discovery.” 28 U.S.C.
' 1446(c)(3)(A).

Removing a Case

Before the Act's amendments, ' 1446 placed an outer time limit on a defendant's ability to remove a case, prohibiting removal on the basis of diversity jurisdiction more than one year after the commencement of an action. Even though the statute seemed to allow no exceptions, some federal circuits viewed the one-year time limit as procedural, see Tedford v. Warner-Lambert Co. , 327 F.3d 423 (5th Cir. 2003), while other courts deemed it jurisdictional. See, e.g., Burns v. Windsor Ins. Co. , 31 F.3d 1092 (11th Cir. 1994).

The amendment to ' 1 446 resolves this disparity by creating an explicit exception to the one-year removal period. Section ' 1446(c) now permits removal based on diversity of citizenship when the “district court finds that the plaintiff has acted in bad faith in order to prevent a defendant from removing the action.” Revised ' 1446(c)(3)(B) defines “bad faith” as including those situations where “the plaintiff deliberately failed to disclose the actual amount in controversy to prevent removal.”

Although fraudulent joinder of a non-diverse defendant is not expressly included in ' 1446(c)(3)(B) as grounds for extending the one-year limit, a plaintiff's bad-faith conduct intended “to prevent a defendant from removing” logically would also include fraudulent joinder.

Citizenship Determination

The rise in legal and illegal immigrants seeking redress in our nation's courts is apparently behind new ' 1332(a) regarding the citizenship determination of resident aliens. Revisions to ' 1332(a) eliminate the unintended consequences of the “resident alien proviso” added by Congress in 1988. Although intended to preclude federal jurisdiction in the context of suits between an alien permanently residing in a state and a citizen of that same state, the resident alien proviso expanded jurisdiction in other contexts by deeming resident aliens to be citizens of the state in which they reside. H.R. Rep. 112-10, at 7 (2011). The proviso no longer appears in the statute.

Section 1332(a)(2) now specifically precludes diversity jurisdiction between a citizen of a state and a citizen of a foreign nation if the latter is lawfully admitted to the U.S. as a permanent resident and domiciled in the same state. By removing resident aliens' status as citizens of the state in which they reside, the revisions also foreclose diversity jurisdiction over claims between two resident aliens domiciled in different states. As for corporations, ' 1332(c) makes clear that a corporation, either foreign or domestic, will be deemed a citizen of both its state of incorporation and any other state where it maintains its principal place of business.

Federal Venue Provisions

True to its name, the Act also clarifies federal venue provisions. A new ' 1391(b) provides a single approach to federal venue rules, eliminating the distinction between venue in actions based on diversity jurisdiction versus federal question jurisdiction and clarifying the “fallback” venue in such cases.

Section 1391(b)(1) clarifies that venue in multiple-defendant cases is proper in a judicial district in which any defendant resides, provided that district is located in the state where all defendants reside. In the case of natural persons and aliens lawfully admitted for permanent residence, the new law clarifies that, for purposes of venue, the person is deemed to “reside” in the district in which that person is domiciled. 28 U.S.C. 1391(c)(1).

The Act also defines residency, including the residency of unincorporated entities. Section 1391(c) provides that a defendant-entity resides in “any judicial district in which such defendant is subject to the court's personal jurisdiction with respect to the civil action in question,” while a plaintiff-entity resides “only in the judicial district in which it maintains its principal place of business.”

In addition, the new law expands federal court discretion in determining proper venue. Section 1392(b)(3) permits venue in “any judicial district in which any defendant is subject to the court's personal jurisdiction with respect to such action.” The new law also amends ' 1404 to allow for transfer of a matter “to any district or division to which all parties have consented,” making clear that transfer is permitted even if the district chosen by the parties would not otherwise be proper.

Conclusion

In the coming months, we will begin to see whether these changes will have the intended effect of clarifying recurring problems with federal jurisdiction, and allow federal courts to direct more time and energy to the merits. As with any change, we may also see unintended consequences that create new and different challenges. Although they came onto the scene quietly, these amendments will have a significant impact as attorneys and courts grapple with the Act's implications.

John Tate ([email protected]), a member of this newsletter's Board of Editors, and Sarah Cronan Spurlock ([email protected]) practice in the Louisville, KY, office of Stites & Harbison, PLLC.