Link Motion Inc. v. DLA Piper LLPLink Motion Inc. v. DLA Piper LLP
23-944
Link Motion Inc. v. DLA Piper LLP, et al.
Before: LEVAL, RAGGI, and BIANCO, Circuit Judges.
VACATED AND REMANDED.
MICHAEL J. MALONEY (Rosanne E. Felicello, on the briefs), Felicello Law P.C., New York, N.Y., for Plaintiff-Appellant.
NANCY E. HART (Kevin S. Rosen, Peter M. Wade, William J. Moccia, and Katherine Moran Meeks, on the brief), Gibson, Dunn & Crutcher LLP, New York, NY, Los Angeles, CA, Washington, DC, for Defendants-Appellees.
REENA RAGGI, Circuit Judge:
Link Motion Inc. (“LKM“), a Chinese company incorporated in the Cayman Islands, brought this legal malpractice action against the law firm of DLA Piper LLP
BACKGROUND
The facts relevant to this appeal derive from LKM‘s complaint, documents referenced therein, and matters arising in this and related litigation of which we may take judicial notice in considering federal jurisdiction. See Romano v. Kazacos, 609 F.3d 512, 520 (2d Cir. 2010) (“[I]f subject matter jurisdiction is contested, courts are permitted to look to materials outside the pleadings.“).
In July 2018, LKM engaged DLA Piper for “corporate advice,” both generally and specifically in connection with a stock offering. LKM Compl. ¶ 12, J. App‘x 22. Later that year, Wayne Baliga, a holder of LKM‘s American Depositary Receipts (“ADRs“), sued LKM; its chairman, Vincent Shi; and other executives and directors by filing what was styled as a “Verified Shareholder Derivative Complaint” in the United States District Court for the Southern District of New York. See Compl., Baliga v. Link Motion Inc., No. 1:18-cv-11642 (S.D.N.Y. Dec. 13, 2018), Dkt. 1 [hereafter ”Baliga Compl.” and ”Baliga Dkt.“].1 In that action—also assigned to Judge Marrero—Baliga asserted common law claims for breach of fiduciary duty and unjust enrichment, and federal securities law claims. Id. ¶¶ 36-54. LKM‘s present malpractice action arises out of DLA Piper‘s purported negligent representation of LKM in the Baliga action. Accordingly, we briefly review the history of that action before turning to jurisdictional analysis in the instant case.2
I. The Baliga Action
A. DLA Piper‘s Conduct in the Baliga Action
DLA Piper learned of the Baliga action on December 13, 2018, when Baliga‘s counsel,
DLA Piper promptly emailed notice of the Baliga action to LKM‘s in-house counsel and reported that an associate would appear in connection with the next day‘s TRO application and advise the court that the firm had not yet received instructions from LKM on how to proceed.
The next day, December 14, 2018, the district court entered a TRO enjoining LKM from transferring or dissipating any assets for fourteen days. At the same time, the district court ordered the parties to confer and to submit a joint letter by December 21 indicating whether LKM consented to extend the TRO and proposing a briefing schedule on the preliminary injunction and receiver motions.
Over the next several days, DLA Piper repeatedly sought LKM‘s guidance as to how to proceed in the Baliga action. Receiving none, on December 21, 2018, Baliga‘s counsel and a DLA Piper attorney submitted a joint letter to the district court consenting to extension of the TRO pending decision on Baliga‘s preliminary injunction and receiver motions. On December 27, 2018, the district court ordered LKM to file a response to these outstanding motions by January 21, 2019.
Over the next month, DLA Piper continued to seek LKM‘s instructions as to how it wished to proceed in the Baliga action. On January 14, 2019, DLA Piper sent an email, in both English and Mandarin, to all members of the LKM Board, including Board Chair Shi, stating that the firm had “repeatedly asked for instruction on how to proceed” in the Baliga action “but ha[d] not received any guidance from the Company or the individual defendants.” Ex. D at 3, Decl. of Nancy Hart, China AI Cap. Ltd. v. DLA Piper LLP (US), et al., No. 1:21-cv-10911 (S.D.N.Y. Sept. 26, 2022), Dkt. 37-4 (Jan. 14, 2019 email).3 Receiving no response to this communication, on January 18, 2019, DLA Piper sent LKM another email advising that if no instructions were received within 24 hours, DLA Piper would “assume that [it] ha[d] [LKM‘s] consent to not oppose the [Baliga] motion.” Id. at 1 (Jan. 18, 2019 email).
With no response forthcoming from LKM, on January 21, 2019, DLA Piper and Baliga‘s counsel filed a joint stipulation with the district court stating that LKM did not oppose entry of a preliminary injunction and that Baliga agreed to an extension of time for LKM to answer the complaint. The district court so-ordered the stipulation and, on February 1, 2019, issued the requested preliminary injunction and appointed a receiver.
On March 1, 2019, DLA Piper sought leave to withdraw from the Baliga action, citing LKM‘s failure both to pay the firm‘s overdue legal fees and “to cooperate in the [firm‘s] representation by failing to respond to [counsel‘s] inquiries.” Letter at 3, Baliga Dkt. 28. The district court granted the request the same day.
B. Dissolution of Preliminary Injunction and Receivership
Several years later, on review of various motions and amended pleadings filed in the Baliga action, the district court adopted a magistrate judge‘s detailed report recommending rejection of a challenge
although Baliga, as an LKM ADR holder but not a registered shareholder, appeared to lack standing under Cayman Islands law to bring derivative common law claims on behalf of LKM, he had standing under federal law to pursue his federal securities claims. See Baliga v. Link Motion Inc., No. 1:18-cv-11642, 2022 WL 2531535, at *10–14 (S.D.N.Y. Mar. 9, 2022), report and recommendation adopted, 2022 WL 3699339, at *1, *5 (S.D.N.Y. Aug. 25, 2022).4 Accordingly, the district court found that its order imposing receivership was not void ab initio. See Baliga v. Link Motion Inc., 2022 WL 3699339, at *5. Further, because Baliga‘s second amended complaint stated only direct, not derivative, claims for which he could not show that available legal remedies would be inadequate, the court concluded that continued receivership was unwarranted and ordered dissolution. See id. at *5-6.5
II. The Instant Action
A. Initiation and Removal
The road to the instant action has not been direct. Prior to dissolution of the LKM receivership, only the receiver could sue in the name of the company. The receiver did not bring suit against DLA Piper for legal malpractice in the Baliga
action. Instead, on December 20, 2021, LKM registered shareholder China AI Capital Ltd. (“China AI“) brought such a claim derivatively in the Southern District of New York, where it too was assigned to Judge Marrero. After dissolution of the receiver, China AI moved voluntarily to dismiss its malpractice action.6
On September 12, 2022, LKM initiated the instant malpractice action in New York Supreme Court. Therein, it alleges that, in the Baliga action, DLA Piper acted without LKM‘s informed consent in representing to the district court that LKM did not oppose entry of the preliminary injunction. LKM also alleges that no preliminary injunction or receivership would have been ordered had DLA Piper timely advised LKM and argued to the district court that Baliga (1) lacked standing to bring derivative claims on behalf of the company (which DLA Piper knew or should have known based on its representation of LKM in the July 2018 stock offering); (2) failed to state the elements of a federal securities law claim; and (3) in any event, was required by
DLA Piper removed the action to federal court on September 29, 2022, where it was assigned to Judge Marrero as related to the Baliga action. DLA Piper based the removal on federal question jurisdiction under
LKM moved for remand of its malpractice action to state court, arguing that federal question jurisdiction did not lie because DLA Piper could not show that the claim presented substantial federal issues as required by Gunn v. Minton, 568 U.S. at 258. As to supplemental jurisdiction, LKM argued that the plain language of
The district court denied remand. See Link Motion Inc. v. DLA Piper LLP (US), No. 1:22-cv-8313, 2022 WL 17884167 (S.D.N.Y. Dec. 23, 2022). While agreeing with DLA Piper that LKM‘s state malpractice claim did not arise directly under federal law, the district court concluded that it, nevertheless, fell within the narrow category of state law claims presenting substantial federal issues so as to warrant the exercise of federal jurisdiction. See id. at *5–9. The district court also denied LKM‘s subsequent motion for reconsideration or, in the alternative, certification of the issue for immediate interlocutory appeal.
B. Dismissal
On May 26, 2023, the district court dismissed LKM‘s complaint with prejudice as time barred. See id., 2023 WL 3687731 (S.D.N.Y. May 26, 2023). Applying New York law, the district court found that LKM‘s claim accrued, at the latest, on January 21, 2019—the date on which DLA Piper joined Baliga‘s counsel in filing the joint stipulation stating that LKM did not oppose entry of a preliminary injunction. See id. at *4–5. LKM‘s September 12, 2022 filing of the instant malpractice action thus fell outside the applicable New York three-year statute of limitations, see id. at *5, and no tolling principles supported a contrary conclusion, see id. at *5–7. Denied reconsideration by the district court, see id., 2023 WL 4080638 (S.D.N.Y. June 20, 2023), LKM timely filed this appeal challenging both the district court‘s judgment of dismissal and its earlier denial of LKM‘s motion to remand the malpractice action to state court.
For reasons that we will now discuss, we vacate the judgment of dismissal without considering timeliness because we conclude that the case must be remanded to the state court for lack of federal subject matter jurisdiction.
DISCUSSION
I. Standard of Review
We review de novo a district court‘s denial of a motion to remand a removed case to the state court where it was originally filed, mindful that (1) the removing party—here DLA Piper—“bears the burden of demonstrating the propriety of removal,” O‘Donnell v. AXA Equitable Life Ins. Co., 887 F.3d 124, 128 (2d Cir. 2018) (internal quotation marks omitted); (2) “statutory procedures for removal are to be strictly construed“; and (3) we must “resolve any doubts against removability,” Taylor v. Medtronic, Inc., 15 F.4th 148, 150 (2d Cir. 2021) (alteration adopted) (internal quotation marks omitted).
II. Subject Matter Jurisdiction
Federal law states that civil actions brought in state court over which “the district courts of the United States have original jurisdiction” may be removed to federal court.
The question of federal jurisdiction here depends on whether the asserted claim “aris[es] under the Constitution, laws, or treaties of the United States.”
balance approved by Congress.” Gunn v. Minton, 568 U.S. at 258; see Grable & Sons Metal Prods., Inc. v. Darue Eng‘g & Mfg., 545 U.S. at 314. While the first two factors here support the exercise of federal jurisdiction, the third and fourth do not.
A. Federal Issue “Necessarily Raised”
The parties here agree that LKM‘s malpractice action implicates the federal law question of whether Baliga had standing to pursue his federal securities claims.8 LKM nevertheless contends that this issue is not “necessarily raised” within the meaning of Gunn because it “relates to [a] defense,” not an element of its malpractice claim. Appellant‘s Reply Br. at 4; see Caterpillar Inc. v. Williams, 482 U.S. 386, 393 (1987) (“[I]t is now settled law that a case may not be removed to federal court on the basis of a federal defense[.]” (emphasis in original)). We are not persuaded.
Although LKM characterizes the federal law standing issue as a “defense,” its own complaint, on its face, demonstrates that the issue is integral to its malpractice claim. LKM there alleges that DLA Piper “breache[d] . . . the duty of care owed to the Company” by, inter alia, “failing to advise the Company that Baliga lacked standing.” LKM Compl. ¶ 78, J. App‘x at 37-38. Thus, to prove malpractice, particularly the causation element of that claim, LKM must show that it would have prevailed on a federal law standing challenge in the Baliga action.
See Rudolf v. Shayne, Dachs, Stanisci, Corker & Sauer, 8 N.Y.3d 438, 442 (2007) (holding that to establish causation in legal malpractice action, “plaintiff must show that he or she would have prevailed in the underlying action or would not have incurred any damages, but for the lawyer‘s negligence“); see also Gunn v. Minton, 568 U.S. at 259 (“In cases like this one, in which the attorney‘s alleged error came in failing to make a particular argument, the causation element requires a ‘case within a case’ analysis of whether, had the argument been made, the outcome of the earlier litigation would have been different.“). Standing to pursue a federal securities claim necessarily raises a federal law issue. See Drachman v. Harvey, 453 F.2d 722, 727 (2d Cir. 1971) (“Federal law must be consulted to decide whether there is standing to sue under the Exchange Act[.]“); accord CILP Assocs., L.P. v. PriceWaterhouse Coopers LLP, 735 F.3d 114, 122 (2d Cir. 2013).
B. Federal Issue “Actually Disputed”
Because the federal law standing issue is critical to the causation element of LKM‘s malpractice claim, it qualifies as a “central point of dispute” in that state action, satisfying the second requirement for the exercise of federal jurisdiction in this case. Gunn v. Minton, 568 U.S. at 259. It may well be that the district court‘s ruling in the Baliga action—that, as a matter of federal law, the plaintiff had standing to pursue his securities claims—will prevent LKM from succeeding on this point. The weakness of its position, however, does not alter the fact that the dispute, grounded in federal law, is central to its malpractice claim.
Nevertheless, as the Supreme Court has cautioned, “the mere presence of a [disputed] federal issue in a state cause of action does not automatically confer federal-question jurisdiction.” Merrell Dow Pharm., Inc. v. Thompson, 478 U.S. 804, 813 (1986). To avoid remand, DLA Piper also must satisfy Gunn‘s third and fourth factors. This it cannot do.
C. Substantiality
The federal issue raised and disputed in a state action must be “substantial” to support the exercise of federal jurisdiction. To satisfy this third Gunn requirement “it is not enough that the federal issue be significant to the particular parties in the immediate suit“; rather, “[t]he substantiality inquiry . . . looks instead to the importance of the issue to the federal system as a whole.” Gunn v. Minton, 568 U.S. at 260. The law draws this distinction to ensure “a serious federal interest in claiming the advantages thought to be inherent in a federal forum.” Grable & Sons Metal Prods., Inc. v. Darue Eng‘g & Mfg., 545 U.S. at 313. Upon “careful, case-specific consideration, most federal law questions raised in connection with state law claims will not be deemed substantial.” NASDAQ OMX Grp., Inc. v. UBS Sec., LLC, 770 F.3d at 1029. That is the case here. The federal law standing issue embedded in LKM‘s state malpractice claim, however important to DLA Piper in this particular action, lacks the sort of significance to the federal system as a whole warranting the exercise of federal jurisdiction.
To explain, we discuss Gunn in more detail. The Supreme Court there considered whether a state law claim of legal malpractice in the handling of a patent case had to be brought in federal court because Congress had vested “exclusive jurisdiction” over patent disputes in the
DLA Piper argues that the “something more,” missing in Gunn but present here, is the district court‘s August 25, 2022 order deciding the federal law issue embedded in LKM‘s instant malpractice action, i.e., Baliga‘s standing to pursue federal securities law claims against LKM. See supra at 7. DLA Piper submits that as a result of this ruling—adverse to LKM—the malpractice action does not require the sort of retrospective, hypothetical analysis that the Supreme Court determined was, by nature, unlikely to hold significance for the federal system as a whole. See Gunn v. Minton, 568 U.S. at 259. Rather, it characterizes this action as a “collateral attack” on the August 2022 order that asks the state court “effectively to overrule [a] decision[] that the district court actually rendered.” Appellee‘s Br. at 25, 32.9 DLA Piper argues that “the possibility that a state court might render a contrary decision on an issue already decided—without any opportunity for correction by
the federal courts—threatens to undermine the finality of federal decisions and the development of a uniform body of federal law.” Id. at 32 (internal quotation marks omitted). The argument fails to persuade.
In the unlikely event that the state court were to misapply federal law on remand, the error would not necessarily be federally unreviewable. Rather, review would be to the Supreme Court. See
Even absent federal review, substantiality is not shown by the mere possibility of a state court ruling at odds with federal law. See Gunn v. Minton, 568 U.S. at 263 (explaining that possibility “that a
Old Dominion Electric Cooperative v. PJM Interconnection, LLC, 24 F.4th 271 (4th Cir. 2022), cited by DLA Piper, is not to the contrary. The state contract claims there at issue were “inextricably intertwined with federal law” such that they would “alter the terms” of the parties’ federally regulated relationship. Id. at 286–87. Here, the parties’ attorney-client relationship is regulated by state, not federal, law. See infra at 19–20.10
In any event, we do not readily assume that state courts will cast aside applicable federal precedent. As the Supreme Court recognizes, a state court “is
competent to apply federal law, to the extent it is relevant” to resolution of a state claim. Empire Healthchoice Assurance, Inc. v. McVeigh, 547 U.S. 677, 701 (2006). Thus, in declining to exercise federal jurisdiction over the state malpractice claim in Gunn v. Minton, the Court instructed federal courts to trust their state counterparts to “hew closely to the pertinent federal precedents” in deciding federal issues embedded in state malpractice actions as “[i]t is those precedents, after all, that would have applied” had counsel made the argument allegedly omitted negligently. 568 U.S. at 262.
That conclusion applies with particular force here where the federal law standing issue allegedly neglected by DLA Piper was eventually raised and decided adversely to LKM in written decisions by both the magistrate judge and district judge in the Baliga action. See supra at 7. On return of this case to the New York Supreme Court, that court will have the benefit of these decisions, and we have no reason to doubt that it will give them careful review and appropriate weight in deciding LKM‘s claim of legal malpractice based on DLA Piper‘s alleged failure to raise a federal law standing challenge in the Baliga action.11
claim as anything other than backward-looking and hypothetical. 568 U.S. at 264. The claim looks backward to ask whether the district court would have denied Baliga‘s motions for a TRO, preliminary injunction, and appointment of a receiver if, hypothetically, DLA Piper had timely challenged Baliga‘s standing under federal securities law. Thus, because the federal issue raised by LKM‘s state malpractice claim “is not substantial in the relevant sense,” id. at 260, the district court was without jurisdiction to hear the claim.
D. Federal-State Balance
The fourth Gunn factor requires little discussion because, as the Supreme Court has stated, in the absence of a substantial federal issue, “[i]t follows” that exercise of federal jurisdiction over a state claim would disrupt the “appropriate balance of federal and state judicial responsibilities.” Id. at 264 (internal quotation marks omitted).
The balance inquiry requires sensitivity in recognizing claims of the “sort ordinarily resolved in state courts.” Empire Healthchoice Assurance, Inc. v. McVeigh, 547 U.S. at 683; see New York ex rel. Jacobson v. Wells Fargo Nat‘l Bank, N.A., 824 F.3d 308, 316 (2d Cir. 2016) (explaining that balance analysis properly focuses on “the nature of the claim, the traditional forum for such a claim, and the volume of cases that would be affected,” as well as any “special state interest in a category of litigation“). But, as the Supreme Court has repeatedly recognized, legal malpractice actions and attorney disciplinary proceedings plainly present the sort of claims ordinarily resolved in state courts. See Gunn v. Minton, 568 U.S. at 264 (identifying states’ “special responsibility for maintaining [professional] standards” and emphasizing states’ “especially great” interest in regulating lawyers as professionals “essential to the primary governmental function of administering justice” (internal quotation marks omitted)); Middlesex Cnty. Ethics Comm. v. Garden State Bar Ass‘n, 457 U.S. 423, 434 (1982) (identifying state‘s “extremely important interest in maintaining and assuring the professional conduct of the attorneys it licenses” and reversing federal court‘s decision not to abstain from deciding challenge to state disciplinary rules, concluding that such disciplinary “proceedings are of a character to warrant federal-court deference“); see also Leis v. Flynt, 439 U.S. 438, 442 (1979) (“Since the founding of the Republic, the licensing and regulation of lawyers has been left exclusively to the States and the District of Columbia within their respective jurisdictions.“). DLA Piper cites no authority suggesting “congressional[] approv[al]” for relocating legal malpractice claims away from their traditional state fora to federal courts. Grable & Sons Metal Prods., Inc., v. Darue Eng‘g & Mfg., 545 U.S. at 314; see Gunn v. Minton, 568 U.S. at 264 (noting absence of such authority).
Thus, because the established federal-state balance expects for legal malpractice
III. Supplemental Jurisdiction
With little discussion, DLA Piper argues that the district court had supplemental jurisdiction over LKM‘s state malpractice action due to its factual overlap with the federal Baliga action. In fact, this argument is foreclosed by the federal removal statute, which confers federal jurisdiction only over removed civil actions “of which the district courts of the United States have original jurisdiction.”
CONCLUSION
For the foregoing reasons, we conclude that the district court was without subject matter jurisdiction to consider LKM‘s removed state legal malpractice claim against DLA Piper. We therefore VACATE the district court‘s judgment of dismissal without addressing its finding that LKM‘s action was untimely filed, and we REMAND with instructions that the district court return this case to the New York State Supreme Court for New York County.