193 F. Supp. 3d 1132
C.D. Cal.2016Background
- Plaintiffs Sheila and Richard Warner sued SPS and U.S. Bank in California state court over claims related to their home loan; defendants removed to federal court.
- After removal the Warners filed a first amended complaint adding Innovative Financial Services, Inc. (IFS), a California corporation and the original lender.
- Defendants argued IFS was a sham (fraudulently joined) to destroy diversity and urged the court to ignore its citizenship.
- The court issued two orders to show cause and considered whether joinder of IFS violated 28 U.S.C. § 1447(e) and whether IFS was sham-joined.
- The parties disputed timeliness, statute of limitations, and sufficiency of allegations against IFS; defendants bore the burden to prove fraudulent joinder.
- The court concluded defendants failed to show that the Warners could not possibly recover against IFS, found IFS was not a sham defendant, and remanded the case to state court.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether post-removal joinder of non-diverse defendant requires court permission under § 1447(e) | Warner: amendment adding IFS was proper to assert claims tied to original lender | SPS/U.S. Bank: § 1447(e) requires court permission and joinder should be denied or ignored to preserve federal jurisdiction | Court: § 1447(e) controls; plaintiffs needed permission but OSCs effectively required them to seek it; court addressed joinder on the merits |
| Whether IFS is a sham/fraudulently joined (i.e., no possibility Warner could recover) | Warner: IFS had privity and factual allegations plausibly state claims; not sham-joined | SPS/U.S. Bank: IFS cannot be liable (statute of limitations, insufficient facts); thus its citizenship should be disregarded | Court: Defendants did not meet the heavy standard; any doubts resolved for plaintiff; IFS not a sham |
| Burden and standard for proving fraudulent joinder | Warner: ambiguity should be resolved in plaintiffs’ favor; defendants must show impossibility of recovery | Defendants: must show claims fail as a matter of law or are unsupported by any factual detail | Court: confirmed defendants bear burden; must resolve all doubts and ambiguities for plaintiff; defendants failed to meet that burden |
| Remedy if non-diverse defendant is properly joined | Warner: addition of IFS destroys complete diversity and mandates remand | Defendants: if IFS is sham, federal court can retain jurisdiction | Held: IFS is a proper party; diversity destroyed; case REMANDED to state court and other pending federal matters VACATED |
Key Cases Cited
- Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375 (principle that federal courts presume lack of jurisdiction)
- Gaus v. Miles, Inc., 980 F.2d 564 (9th Cir.) (strict construction of removal statute; defendants bear burden)
- Padilla v. AT & T Corp., 697 F. Supp. 2d 1156 (C.D. Cal. 2009) (fraudulent joinder standard: resolve all doubts for plaintiff; plaintiff could not possibly recover must be shown)
- United Computer Sys. v. AT & T Corp., 298 F.3d 756 (9th Cir.) (failure to state a claim against non-diverse defendant must be obvious)
- Caterpillar, Inc. v. Lewis, 519 U.S. 61 (rule that fraudulent-joinder party’s citizenship may be ignored for jurisdictional analysis)
- Morris v. Princess Cruises, Inc., 236 F.3d 1061 (9th Cir.) (where non-diverse defendant is properly joined, district court must remand)