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stating that while the Ninth Circuit has yet to reach this "interesting question" of "whether third-party defendants are 'defendants' for the purposes of section 1441 and thus may remove cases to federal court . . . , the great weight of district court authority within this circuit indicates that third-party defendants lack such a right."
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NO. C03-1396 TEH.
July 9, 2003
ORDER GRANTING PLAINTIFF'S MOTION TO REMAND
This matter comes before the Court on Plaintiff's Motion to Remand Case to State Court. After careful consideration of the parties' written briefs and oral arguments, and good cause appearing, Plaintiff's motion is GRANTED for the reasons set forth below.
I. FACTUAL BACKGROUND
On April 30, 2002, Plaintiff Nicklos Ciolino ("Ciolino") filed a Complaint in the Superior Court of San Mateo County against Defendant John Ryan ("Ryan"). Ciolino's Complaint alleges that Ryan, an investment advisor, fraudulently induced him to invest $100,000 into what Ciolino believed was the "Famco" transaction. Ciolino asserts state and common law causes of action against Ryan for fraud, negligent misrepresentation, negligence, breach of fiduciary duty, breach of oral contract, and violation of California Business and Professions Code § 17200 (unfair business practices). On that same day, Robert Aguilar, Charles Ciolino, Daniel DeLorenzi, and Steven Daniele filed similar lawsuits against Ryan in San Mateo Superior Court. These five cases were later consolidated by the Superior Court.
On or about June 24, 2002, the Securities and Exchange Commission ("SEC") filed a Complaint for Restraining Order, Accountings, and Other Equitable Relief against Ryan and nine other defendants in the United States District Court for the Southern District of Ohio. The SEC action alleges that the defendants induced investors to place more than $15 million in a "Ponzi" scheme. The SEC filed an Amended Complaint and added six additional defendants on or about November 14, 2002.
Ryan filed Answers to the state court actions on July 22, 2002. He also filed a Cross-Complaint, in which he asserts fifteen state and federal causes of action, against the five plaintiffs and sixteen other individuals and entities. Ryan added two additional defendants in his First Amended Cross-Complaint, which was filed on March 21, 2003.
On April 1, 2003, John Hawley ("Hawley"), an unrepresented third-party defendant in Ryan's Cross-Complaint, filed a Notice of Petition to Remove the Cross-Complaint and the five cases consolidated in San Mateo Superior Court under 28 U.S.C. § 1441 and 1446. The removal petition states that subject matter jurisdiction is based on the existence of a federal question under 28 U.S.C. § 1331. On April 16, 2003, in response to the removal, Ciolino filed a Motion to Remand the entire action back to state court.
The Court notes, for the purposes of clarification, that the procedural posture of this case is highly unusual. Though Hawley filed the petition for removal, Ryan is the party who opposes Ciolino's motion to remand. Ryan's attorney, Louis Franecke, drafted the opposition papers and appeared before this Court for oral argument. Ryan is effectively defending the removal of a third-party action that he filed (though he admittedly seems more concerned with the removal of Ciolino's underlying Complaint), a situation with which this Court has never been confronted.
Ryan filed a joinder to Hawley's notice of removal on April 1, 2003. Similarly, Hawley filed a joinder to Ryan's opposition to the motion to remand on June 4, 2003.
II. LEGAL STANDARD
A defendant in state court may remove an action to federal court so long as the case could have originally been filed in federal court. 28 U.S.C. § 1441(a); City of Chicago v. International College of Surgeons, 522 U.S. 156, 163 (1997). Removal can be based on either diversity jurisdiction or federal question jurisdiction. 28 U.S.C. § 1441(b).
A district court shall remand a case to state court if, at any time prior to final judgment, it appears that the court lacks subject construed, and federal jurisdiction must be rejected in favor of remand to state court if there are doubts as to the right of removal. Gaus v. Miles, Inc., 980 F.2d 564, 566 (9th Cir. 1992). When a plaintiff challenges the removal of a case to federal court, it is the defendant who bears the burden of establishing the propriety of that removal. Id. at 566-67. A district court's order remanding an action to state court for lack of subject matter jurisdiction or a defect in the removal procedure is not reviewable on appeal. 28 U.S.C. § 1447(d); Things Remembered, Inc. v. Petrarca, 516 U.S. 124, 127-128 (1995).
III. DISCUSSION
Ciolino asserts five grounds on which he believes this case should be remanded to state court: (1) a third-party defendant may not remove a case to federal court; (2) the Cross-Complaint is infected with fraudulent joinder; (3) federal jurisdiction is not presented on the face of the Complaint; (4) the Cross-Complaint was not removed within 30 days of service on Hawley; and (5) not all third-party defendants have joined in the removal petition. As is discussed below, the Court need look no further than the first issue, which is dispositive of this motion.
The parties refer to Hawley as a "cross-defendant." Hawley was not originally sued by Ciolino, but instead was subsequently sued and brought into the case by Ryan. As a result, Hawley is properly designated as a "third-party defendant." The Court will refer to Ryan's action as a "cross-complaint," however, because he asserts claims against the original plaintiffs as well as a number of third-party defendants.
Ciolino further asserts that the Court should impose sanctions on both Franecke and Hawley for their roles in effecting the improper removal of this case. The Court agrees that, under 28 U.S.C. § 1447(c), Ciolino should be reimbursed for a portion of the attorney's fees and costs he incurred in this proceeding.
A. Removal by a Third-Party Defendant
Ciolino's state court action against Ryan was removed by Hawley, a third-party defendant who was added to the case in Ryan's Cross-Complaint. Federal subject matter jurisdiction is based, at least in part, upon the allegations Ryan makes in the Cross-Complaint. Hawley's removal notice states that, within 30 days of the filing of the petition, he was served with the Cross-Complaint, which alleges violations of the Investment Advisor's Act of 1940, 15 U.S.C. § 80(b)-6(1)-(2), Section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77(q)(a), Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 77(j)(b), and Securities and Exchange Act Rule 10(b)-5, 17 C.F.R. § 240.10(b)-5. Notice of Pet. to Remove ("Notice") at 2. Violations of these federal statutes are alleged in the Cross-Complaint,see Decl. of Michael Liberty in Supp. of Mot. to Remand ("Liberty Decl."), Ex. L at ¶¶ 33-34, 77-90, but not in the underlying Complaint. It is therefore clear that removal of this case was achieved by a third-party defendant, and that the Cross-Complaint is the operative pleading on which removal of the entire action is based, two facts that Ryan acknowledged during the hearing on this motion. The Court must now determine whether a case may properly be removed to federal court by a third-party defendant.
Despite this admission, Ryan makes a number of arguments in support of the propriety of removal that ignore the fact that removal was accomplished by a third-party defendant and is based upon the allegations in the Cross-Complaint. For example, he asserts that Ciolino has somehow "consented" to federal jurisdiction by not "opting out" of the SEC action, an unusual proposition for which he fails to provide adequate legal support. He grossly distorts the substance of the underlying Complaint by stating that Ciolino "allege[s] violations of SEC [r]egulations as the basis of the Complaint." Mem. of P. A. in Supp. of Opp'n to Mot. to Remand ("Opp'n") at 6. In fact, the Complaint makes no such allegations of violations of federal securities laws, but instead notes only that Ryan has been interviewed by the SEC, and that the agency has indicated that it intends to contact individuals who invested with him. Liberty Decl., Ex. A at ¶ 33. Finally, Ryan points to Ciolino's Response to First Set of Form Interrogatories, in which Ciolino answers a question with which the Court was not provided by stating that Ryan has violated various federal securities laws. Notice, Ex. E at 5. This is hardly sufficient to demonstrate the existence of federal jurisdiction, especially since Ciolino's claims cannot form the basis of the removal.
1. Removal Under 28 U.S.C. § 1441(a)
Section 1441(a) of Title 28 of the United States Code provides that "any civil action brought in a State court of which the district courts of the United States have original jurisdiction, may be removed by the defendant or the defendants, to the district court of the United States for the district and division embracing the place where such action is pending." 28 U.S.C. § 1441(a) (emphasis added). The removal statute is to be strictly construed against removal jurisdiction, Boggs v. Lewis, 863 F.2d 662, 663 (9th Cir. 1988), and "[f]ederal jurisdiction must be rejected if there is any doubt as to the right of removal in the first instance," Gaus, 980 F.2d at 566.
Though there is not universal agreement as to whether the term "defendant" as it is used in the removal statute refers only to defendants joined by the plaintiff, according to one district court in this circuit, "the majority view is that the determination of who is a defendant is determined by the original complaint, not subsequent third or fourth-party complaints." Schmidt v. Association of Apartment Owners of Marco Polo Condominium, 780 F. Supp. 699, 702 (Haw. 1991). TheSchmidt court relied on a leading treatise, which states:
We believe that the reference in the general removal statute, [section] 1441, is only to [the] plaintiff's defendants and does not include such defendants as third-party defendants, cross-claim defendants, and other parties that are not defending a claim asserted against them by the plaintiff. . . . If the plaintiff and the plaintiff's defendants must, or have chosen to, adjudicate their suit in a state forum, we fail to find any statutory right clearly given to other type defendants, by the general removal [statute], to choose a federal forum.Id., quoting 1A Moore's Federal Practice § 0.157[7] (1989).
The Ninth Circuit has yet to reach the "interesting question" whether third-party defendants are "defendants" for the purposes of section 1441 and thus may remove cases to federal court. O'Halloran v. University of Washington, 856 F.2d 1375, 1381 (9th Cir. 1988). However, the great weight of district court authority within this circuit indicates that thirdparty defendants lack such a right. See Gartec v. Joseph Enterprises, Inc., 2002 U.S.Dist. LEXIS 21110, *3 (N.D. Cal. 2002) (concluding that a third-party defendant does not have the power to remove a case); Saeilo Machinery, Inc. v. Hirdes Freight, Ltd., 2000 AMC 1009, 1012 (C.D. Cal. 2000) (adopting the majority view that cross-defendants may not invoke the removal mechanism); Cross v. Kaiser Foundation Hospitals, 1998 U.S.Dist.LEXIS 16596, *3-4 (N.D. Cal. 1998) (following the majority rule that "cross-defendants and third-party defendants are not allowed to remove"); Orosco v. Royal Roofing Co., 1997 U.S.Dist.LEXIS 18153, *4 (N.D. Cal. 1997) (concluding that "third-party defendants cannot remove pursuant to section 1441(a) because a third-party defendant is not a `defendant'" for the purposes of the removal statute). As there is no reason to diverge from this well-established approach, the Court finds that Hawley, a third-party defendant, cannot remove this case under section 1441(a).
Courts have upheld removal by third-party defendants when there is express statutory authorization for the procedure. Several jurisdictions, including the Ninth Circuit, allow for a foreign third-party defendant to remove an entire case from state court to federal district court under 28 U.S.C. § 1441(d). See, e.g., Chuidian v. Philippine National Bank, 912 F.2d 1095, 1098 (9th Cir. 1990); Davis v. McCourt, 226 F.3d 506, 511 (6th Cir. 2000). Furthermore, removal by a Resolution Trust Corporation as a third-party defendant is proper under 12 U.S.C. § 1441a(1)(1). People of State of California v. Keating, 986 F.2d 346, 348-49 (9th Cir. 1993). Ryan does not identify any statute (nor is the Court aware of one) that explicitly imparts on Hawley the right to remove this case.
2. Removal Under 28 U.S.C. § 1441(c)
Though it is not entirely clear, Ryan seems to suggest that removal of this action is proper under 28 U.S.C. § 1441(c), which provides:
Whenever a separate and independent claim or cause of action, which would be removable if sued upon alone, is joined with one or more otherwise non-removable claims or causes of action, the entire case may be removed and the district court may determine all issues therein, or, in its discretion, may remand all matters not otherwise within its original jurisdiction.28 U.S.C. § 1441(c).
Federal circuit courts that have squarely decided the issue are split as to whether thirdparty defendants may remove an action under section 1441(c). Compare Thomas v. Shelton, 740 F.2d 478, 486-87 (7th Cir. 1984) (Posner, J.) (holding that third-party defendants may not remove under section 1441(c) in the "broad run of third-party cases") and Lewis v. Windsor Door Co., 926 F.2d 729, 733 (8th Cir. 1991) (following the Seventh Circuit's analysis in Thomas v. Shelton) with Carl Heck Engineers, Inc. v. Lafourche Parish Policy Jury, 622 F.2d 133, 135-36 (5th Cir. 1980) (holding that third-party defendants are empowered to remove actions to federal court by section 1441(c)), superceded by statute on other grounds as stated in National American Insurance Co. v. Advantage Contract Services, 200 F. Supp.2d 620, 621-22 (E.D. La. 2002). The Ninth Circuit has not had occasion to address this question.
Recent district court opinions indicate that the view espoused inCarl Heck is also followed in the Eleventh Circuit. See Hayduk v. United Parcel Service, Inc., 930 F. Supp. 584, 589, 593 (S.D. Fla. 1996); Price v. Alfa Mutual Insurance Co., 877 F. Supp. 597, 600-01 (M.D. Ala. 1995);see also 14C C. Wright, A. Miller, E. Cooper, Federal Practice and Procedure § 3731 at 254-55 (3d ed. 1998) (recognizing the minority view that has emerged in the Fifth and Eleventh Circuits).
In response to a question posed by the Court during oral argument, Ryan cites Motor Vehicle Casualty Insurance Co. v. Russian River County Sanitation District, 538 F. Supp. 488 (N.D. Cal. 1981), for the proposition that a third-party defendant is entitled to remove a case under section 1441(c), but a careful reading of this case demonstrates that it does not n necessarily support Ryan's position. InMotor Vehicle Casualty, the court observed that there are instances in which the removal power is available to third-party defendants under section 1441(c), stating that "when a truly separate and independent claim is made against a third-party defendant, which would be removable on its own, the fact that the removing party is not the original defendant does not impair the right of removal under federal law." Id. at 491. However, the court held that the claim that purportedly served as the basis for removal was not a "separate and independent" cause of action for the purposes of section 1441(c), and the entire case was remanded to state court. Id. at 494-95.
Ryan provides his legal authority in a document filed two days after the hearing on this motion. Under Local Rule 7-3, additional memoranda may not be filed after the submission of the reply brief absent prior Court approval. Civil L. R. 7-3(d). Ryan did not seek leave to file his supplemental memorandum, and thus the Court has the discretion to not consider its substance. However, given its preference to reach the merits of this issue, the Court will proceed to discuss the propriety of removal by a third-party defendant under section 1441(c).
A review of federal district court decisions indicates that the abstract position for which Motor Vehicle Casualty arguably stands has largely been abandoned, as a majority of courts that have addressed the issue have found that section 1441(c) "does not allow defendants other than defendants named in the original complaint to remove cases, even if a third or fourth-party defendant is attempting to remove a claim that is `separate and independent' from the original cause of action." Schmidt, 780 F. Supp. at 702. Several district courts within the Ninth Circuit have held that third-party defendants may not remove actions under section 1441(c). See Cross, 1998 U.S. Dist. LEXIS 16596 at *2-4;Schmidt, 780 F. Supp. at 703-04; Saeilo Machinery, 2000 AMC at 1012-13, n. 5; see also Orosco, 1997 U.S. Dist. LEXIS 18153 at *3-4 (suggesting that a third-party defendant is not considered a `defendant' for the purposes of either section 1441(a) or section 1441(c), and thus does not have the power to remove); cf. Erb v. Draper, 1994 U.S.Dist.LEXIS 12465, *7 n. 1 (N.D. Cal. 1994) (observing, without expressly finding, that the third-party defendant "would probably have been unable to remove the action from state court"); Queen Victoria Corp. v. Insurance Specialists of Hawaii, 711 F. Supp. 553, 554-55 (Haw. 1989) (acknowledging the majority view that "third-parties may not effect removal under [section] 1441(c)," but declining to directly decide the issue).
District courts in other jurisdictions have similarly concluded that section 1441(c) does not confer upon third-party defendants the power to remove cases to federal court. See Bolden v. Summers, 181 F. Supp.2d 951, 954 (N.D. Ill. 2002); Monmouth-Ocean Collection Service, Inc. v. Klor, 46 F. Supp.2d 385, 393 (N.J. 1999); Easton Financial Corp. v. Allen, 846 F. Supp. 652, 654 (N.D. Ill. 1994);Sterling Homes, Inc. v. Swope, 816 F. Supp. 319, 327 (M.D. Pa. 1993);Radio Shack Franchise Dept. v. Williams, 804 F. Supp. 151, 153 (Kan. 1992); Fleet Bank-NH v. Engeleiter, 753 F. Supp. 417, 419 (N.H. 1991);Andrews v. Electric Motor Systems, Inc., 767 F. Supp. 853, 855 (S.D. Ohio 1991); Harris v. G.C. Services Corp., 651 F. Supp. 1417, 1418-19 (S.D.N.Y. 1987); Elsis v. Hertz Corp., 581 F. Supp. 604, 608 (E.D.N.Y. 1984); Knight v. Hellenic Lines, Ltd., 543 F. Supp. 915, 917 (E.D.N.Y. 1982); see also Sanford v. Premier Millwork Lumber Co., 234 F. Supp.2d 569, 571 (E.D. Va. 2002) (suggesting that a third-party defendant may not remove under section 1441(c), as such a procedure "simply provides an end-run around section 1441(a)"); but see also Galen-Med, Inc. v. Owens, 41 F. Supp.2d 611, 615 (W.D. Va. 1999) (recognizing a disagreement within the Fourth Circuit as to whether third-party defendants have the power to remove under section 1441(c)).
The grounds on which federal courts reach this result are not entirely clear, although courts generally rely on one of the following considerations: (1) that third-party defendants and cross-defendants are not "defendants" within the meaning of the removal statute or (2) that section 1441(c) applies only to claims asserted by a plaintiff. Even in those courts that adhere to the minority approach to section 1441(c), removal is frequently held to be improper because the particular third-party claim before the court does not constitute a "separate and independent" cause of action. 14C Wright Miller § 3724 at 40-44.
The notion that a third-party defendant may not properly effect removal of a state court action to federal district court is further endorsed by the leading commentators on civil procedure. See 14C C. Wright, A. Miller, E. Cooper, Federal Practice and Procedure § 3724 at 40 (3d ed. 1998) (explaining that "[t]he majority of the rather considerable number of cases decided by the courts of appeal and the district courts have concluded that a third-party defendant or a cross-claim defendant is not entitled to remove the case"); 16 Moore's Federal Practice § 107.11[1][b][iv] (3d ed. 1997) (stating that "third-party defendants are not defendants within the meaning of the removal statute" and concluding that "[t]he better view . . . is that third-party claims are not removable, because only a party defending against claims asserted by a plaintiff ought to be able to remove") (emphasis in original).
Based on its review of the relevant authority, the Court is persuaded that the prevailing view is the correct one: removal by a third-party defendant is not permitted under 28 U.S.C. § 1441(c). The justifications for this approach are many. To begin, sound principles of statutory construction support this conclusion. In enacting section 1441(c), Congress sought to restrict, not expand, the right to remove an action from state court. American Fire Casualty Co. v. Finn, 341 U.S. 6, 9-10 (1951). Thus, permitting removal by a third-party defendant seems to be inconsistent with congressional intent. Moreover, given clear precedent in the Ninth Circuit holding that removal legislation is to be strictly construed and all doubts as to the propriety of removal are to be resolved in favor of remand, Gaus, 980 F.2d at 566, this Court is compelled to interpret section 1441(c) against third-party removal. See Monmouth-Ocean, 46 F. Supp.2d at 393.
Strong policy considerations also suggest that removal by third-party defendants is not provided for by section 1441(c). First, such a rule protects the plaintiff's choice of forum. Schmidt, 780 F. Supp. at 703-04. As one district court has remarked, permitting removal by a third-party defendant is tantamount to the "tail wagging the dog." Luebbe v. Presbyterian Hospital, 526 F. Supp. 1162, 1164 (S.D.N.Y. 1981); see also Walton v. UTV of San Francisco, Inc., 776 F. Supp. 1399, 1404 (N.D. Cal. 1991) (emphasizing that the plaintiff "for quite legitimate reasons fully consistent with concepts of federalism prefers a state forum for his state claims"). Second, because those tribunals that allow for removal by thirdparty defendants under section 1441(c) often assert jurisdiction over only the "separate and independent" third-party claims and remand the "jurisdictionally insufficient main case" to state court, the majority view furthers the interests of judicial economy that are intended to be served by the removal statute by requiring all closely related actions to be tried in the same court and not unduly increasing the number of preliminary procedural steps that must be negotiated in the litigation. 14C Wright Miller § 3724 at 49-50; see Schmidt, 780 F. Supp. at 703-04. Finally, disallowing removal by third-party defendants respects the sovereignty of state courts to adjudicate cases that are properly before them. Orosco, 1997 U.S. Dist. LEXIS 18153 at *5; see Shamrock Oil Corp. v. Sheets, 313 U.S. 100, 108-09 (1941) (observing that the removal statute must be strictly construed in order to properly respect the "power reserved to the states under the Constitution to provide for the determination of controversies in their courts").
This is a particularly compelling ground on which to find that section 1441(c) does not empower third-party defendants to remove cases to federal court. In Carl Heck Engineers, one of the cases upon which Ryan relies, the Fifth Circuit's conclusion that the removal of a cause of action that was "separate and independent" from the main claim was proper was based, to a large extent, on the district court's decision to sever the third-party action and remand the underlying claim to state court in order to respect the plaintiff's choice of forum. Carl Heck Engineers, 622 F.2d at 136. While such a procedure allows both the plaintiff and the third-party defendant to pursue parts of the case in their respective forums of choice, it certainly is inconsistent with the efficient use of judicial resources.
The Court sees no reason to depart from the nearly overwhelming body of authority holding that section 1441(c) does not give a third-party defendant the right to remove a case to federal court. See Easton Financial Corp., 846 F. Supp. at 653 (observing that "the substantial majority of the many judicial opinions that have dealt with the subject have consistently held that a third-party defendant cannot invoke removal jurisdiction at all"). Removal seems especially improper where, as here, a party not named in the original action is attempting to remove both the third-party claims asserted against him and the underlying complaint to federal court. Ryan, who, given the odd procedural posture of this motion, carries the burden of establishing the propriety of removal, has failed to overcome the "strong presumption" against removal jurisdiction. See Gaus, 980 F.2d at 566. Because the Court lacks subject matter jurisdiction over this action, section 1447(c) mandates that it be remanded to state court as improvidently removed.
Even if the Court were inclined to recognize a limited exception to the rule prohibiting removal by third-party defendants — which it is not — Ryan has failed to demonstrate that the Cross-Complaint alleges a "separate and independent" cause of action upon which removal may be based. The leading judicial construction of section 1441(c) remains the Supreme Court's pronouncement in American Fire Casualty Co. v. Finn, which requires "complete disassociation" between the claim that is federally cognizable under section 1441(c) and any otherwise unremovable claims. Finn, 341 U.S. at 12. The Court formulated a restrictive rule governing removal of a "separate and independent" cause of action, holding that removal is improper where the claims "aris[e] from an interlocked series of transactions" and the plaintiff seeks relief for a "single wrong." Id. at 14. No effort has been made, either in the removal petition or in the papers filed in opposition to this motion, to establish that any particular claim in the Cross-Complaint is "separate and independent," as that phrase is used in section 1441(c) and interpreted by the Supreme Court in Finn. See Gartec, 2002 U.S. Dist. LEXIS 21110 at *3. Ryan's failure in this regard provides an additional basis on which to grant the instant motion to remand.
B. Award of Attorney's Fees and Costs
Ciolino asserts that sanctions are warranted against Louis Franecke, Ryan's attorney, and John Hawley, the unrepresented third-party defendant who removed this case to federal court. Though Ciolino argues that monetary penalties should be pursued under Rule 11 of the Federal Rules of Civil Procedure, the Court finds it is appropriate to look only to the removal statute itself.
1. Fees and Costs Under 28 U.S.C. § 1447(c)
An order remanding a case to state court "may require payment of just costs and any actual expenses, including attorney fees, incurred as a result of the removal." 28 U.S.C. § 1447(c). A district court may exercise its discretion to award fees and costs absent a finding of bad faith on the part of the removing party. Moore v. Permanente Medical Group., Inc., 981 F.2d 443, 446 (9th Cir. 1992). Attorney's fees may be awarded in an order to remand or anytime thereafter. Id. at 445 (concluding that "an award of attorney's fees is a collateral matter over which a court normally retains jurisdiction even after being divested of jurisdiction on the merits"). A district court's award of attorney's fees and costs under section 1447(c) is reviewed for an abuse of discretion.K.V. Mart Co. v. United Food and Commercial Workers Int'l Union. Local 324, 173 F.3d 1221, 1223 (9th Cir. 1999). A district court abuses its discretion if its decision to remand is "grounded in [an incorrect] determination of law." Rutledge v. Sefarth, Shaw, Fairweather Geraldson, 201 F.3d 1212, 1215 (9th Cir. 2000); see Cooter Gell v. Hartmarx Corp., 496 U.S. 384, 405 (1990) ("[a] district court would necessarily abuse its discretion on an erroneous view of the law or on a clearly erroneous assessment of the evidence").
Appellate review of an award of attorney's fees and costs pursuant to section 1447(c) will inevitably entail some evaluation of the underlying remand order. Moore, 981 F.2d at 447. However, an appellate court "is not empowered to reverse the remand order, whether or not it is erroneous." Id.; see 28 U.S.C. § 1447(d).
2. Franecke's Conduct
In his declaration, Michael Liberty, Ciolino's attorney, offers the following version of the events that culminated in the submission of the motion now before the Court:
On April 2, 2003, one day after the removal petition was filed, Liberty spoke with Hawley, who admitted that the Notice of Petition to Remove had in fact been drafted by Franecke. Hawley stated that Franecke had, on numerous occasions over a three-week period, attempted to convince him to remove the case to federal court. Franecke represented to Hawley that it "was in his best interest to sign the removal papers because if the removal goes through, you could be deposed in New York or Ohio instead of having to fly to California." Liberty Decl. at ¶ 16. Franecke offered to "draft the document for [Hawley] if [he would] sign it." Id. Franecke wrote the notice of removal, faxed the signature page to Hawley to sign, and then filed the signed document with this Court. Id. On April 10, 2003, Liberty wrote a letter to Franecke, in which he raised his concerns about the propriety of Hawley's removal and asked Franecke to stipulate to a remand to state court. Id., Ex. O.
In his opposition papers, Ryan makes no attempt to refute the allegations Liberty makes in his declaration. Instead, he defends Franecke's conduct, which he characterizes as an effort "to assist an in pro per other party in effectuating, not only judicial economy, but to get (sic) the case before the proper [c]ourts." Opp'n at 14. When pressed by the Court during oral argument as to the circumstances surrounding the removal of this action, Franecke admitted that he discussed the possibility of removal with Hawley. He further admitted that he drafted the removal documents for Hawley, though he denied promising Hawley that he would not have to travel to California if the case was removed to federal court.
3. Ryan's Liability for Attorney's Fees and Costs
With respect to the merits of this remand motion, the Notice of Petition to Remove is deficient on its face. As has been illustrated, removal by a third-party defendant is contrary to the approach taken by the majority of courts, and Ryan makes almost no effort to demonstrate that this case is one that fits within the narrow exception recognized by a minority of courts. In fact, Ryan did not even address the propriety of removal by a third-party defendant until after briefing was completed and a hearing on this motion was held. In response to Ciolino's argument that he should recover fees and costs for Hawley's improper removal, Ryan makes a number of assertions suggesting that Ciolino's underlying Complaint is federal in nature, an argument that is totally irrelevant given that removal was accomplished by a third-party defendant and is based on allegations in the Cross-Complaint.
Courts that have found it appropriate to remand to state court actions that were improvidently removed by third-party defendants have reached different conclusions as to whether the removing party should be responsible for the plaintiff's attorney's fees and costs. In Saeilo Machinery, though it did not fault the removing party for basing its removal "on one of two competing views regarding the ability of a third-party defendant to remove," the court concluded that a partial award was warranted by the existence of other procedural defects in the removal petition. Saeilo Machinery, 2000 AMC at 1014; see Elsis, 581 F. Supp. at 608 (noting that jurisdiction was "poorly premised" and awarding attorney's fees and costs to each of the parties who sought remand). On the other hand, the plaintiff's request for fees and costs was denied in Schmidt, as the court found that "[t]he minority position regarding third-party removal is a plausible legal and factual basis for asserting removal jurisdiction in the case based on federal questions."Schmidt, 780 F. Supp. at 704.
This Courts agrees with those courts that have concluded that a removing third-party defendant (or, in this case, the individual who facilitated the improper removal) should be order to pay at least a portion of the plaintiff's attorney's fees and costs. Though there is clearly an argument to be made for wider acceptance of the minority view of section 1441(c), it is significant that Ryan did not even attempt to articulate it — and in fact did not appear to be cognizant of the issue at all — until he was prompted by the Court. Moreover, section 1447(c) does not condition an award of fees and costs on a finding that the removal is "frivolous" or that it lacks "an objectively reasonable basis." Schwarzer, Tashima Wagstaffe, Federal Civil Procedure Before Trial § 2:1110 (2002). The statute itself makes no reference to the removing party's intent or state of mind, but instead focuses solely on the mere absence of subject matter jurisdiction. Moore 981 F.2d at 446 (citation omitted). As the Court has discussed at length, it lacks jurisdiction over this action.
Though it cannot be said with certainty, the Court is concerned that the removal of this case is also undermined by two procedural flaws, both of which bolster the Court's conclusion that an award of fees and costs is appropriate. First, the time line that Liberty sets out in his declaration indicates that Hawley failed to file the Notice of Petition to Remove within 30 days of service of the Cross-Complaint. See 28 U.S.C. § 1446(b) (requiring a notice of removal to be filed no more than 30 days after receipt by the defendant of the initial pleading setting forth the claim for relief). Liberty states that Hawley informed him on February 10, 2003, that he had been served with Ryan's Cross-Complaint. Thus, under section 1446(b), Hawley had until March 12, 2003, to file his removal papers. However, the petition for removal was not filed until April 1, 2003. While Ryan points to Ciolino's failure to submit a proof of service to conclusively establish the date on which Hawley was served, it is Ryan who has the burden of persuading the Court that this case was properly removed. Emrich v. Touche Ross Co., 846 F.2d 1190, 1195 (9th Cir. 1988).
Second, the documentation Liberty attaches to his declaration suggests that not all third-party defendants who have been served with the Cross-Complaint have joined in Hawley's removal petition. See Parrino v. FHP, Inc., 146 F.3d 699, 703 (9th Cir. 1998) (stating that all defendants are required to join a notice of removal). Because there is evidence that this requirement has not been satisfied, section 1446(a) imposes on Ryan the burden "to explain affirmatively the absence of any co-defendants in the notice of removal." Prize Frize Inc. v. Matrix, 167 F.3d 1261, 1266 (9th Cir. 1999). Ryan — who, it should be reiterated, has assumed Hawley's role in opposing Ciolino's motion to remand — asserts that "defendants" should be understood to refer only to those parties joined by the plaintiff, a position that is totally inconsistent with that he has taken in arguing that removal by a thirdparty defendant is permissible. Ryan cannot have it both ways, however, as the adoption of the minority approach to removal by third-party defendants would necessarily entail requiring all third-party defendants to join in a removal premised on a "separate and independent" cause of action.Schmidt, 780 F. Supp. at 704.
Ironically, the case to which Ryan cites for this proposition,Folts v. City of Richmond, 480 F. Supp. 621, 625 (E.D. Va. 1979), concludes that section 1441(c) does not authorize removal by third-party defendants — the very grounds on which this Court finds that remanding this case is appropriate.
The Schmidt court found that because the removing party was the sole fourth-party defendant, the unanimity rule was not violated.Id.
Furthermore, Franecke's tactics in securing removal of this case are indicative of bad faith. After removal of the underlying Complaint filed against Ryan in state court became impossible (both because he missed the 30-day deadline for removal and because he sought affirmative relief in the state court in the form of a cross-complaint), Franecke approached an unrepresented third-party defendant — someone whom his client had just sued — and persuaded him to seek removal. Franecke convinced Hawley to take action by offering to draft the requisite papers and allegedly promising that Hawley would not have to travel to California for his deposition. Liberty opines that Franecke, who represented Ryan in the consolidated state court actions, encouraged and facilitated the removal of this case to federal court in order to delay the trial that was scheduled to begin in San Mateo Superior Court on July 28, 2003. See Pl.'s Reply Brief in Supp. of Mot. to Remand ("Reply"), Ex. A. Though the Court can only speculate as to Franecke's intent, the improper removal undoubtedly has had the effect of postponing the trial of this action in state court, a fact on which at least one court has based an award of fees and costs under section 1447(c). See Elsis, 581 F. Supp. at 608 (finding that the "eve of trial removal served to delay timely litigation of this matter").
Ryan asks the Court to "look through [Ciolino's] sham argument and understand the complexity and the nature of this case and its high [f]ederal nature." Opp'n at 14. However, it is Ryan who throughout this proceeding has consistently failed to comprehend that state courts are entitled to adjudicate cases properly before them "free from litigants yanking the rug from under those courts." Walton, 776 F. Supp. at 1404. Ryan and his attorney have hijacked the state court process for their own purposes, and an award of attorney's fees in this case is required to reimburse Ciolino for the "wholly unnecessary litigation costs" that the improvident removal of this action caused him to incur. Moore, 981 F.2d at 447 (citation omitted); see Wisconsin v. Hotline Industries, Inc., 236 F.3d 363, 367 (7th Cir. 2000) (describing section 1447(c) as a remedy for improper removal, which "prolongs litigation (and jacks up fees)").
Liberty estimates that he has spent approximately 24 hours reviewing the removal petition, preparing his remand motion and reply papers, drafting his declaration, gathering supporting documentation, and performing related tasks. His billing rate is $275 per hour, and thus he requests that Ciolino be awarded $6,600 in attorney's fees and costs. Liberty Decl. at ¶ 17. The Court is satisfied that both Liberty's hourly rate and the number of hours expended are reasonable, and thus will not instruct counsel to submit detailed billing records. See Gibson v. Chrysler Corp., 261 F.3d 927, 950 (9th Cir. 2001) (concluding that the district court did not abuse its discretion by awarding fees and costs under section 1447(c) without requiring the fee applicant to file a more detailed accounting). However, in light of the fact that the legal grounds for removal by a third-party are not untenable, the Court is not prepared to award Ciolino the full amount of fees and costs he requests. Instead, the Court orders Ryan to reimburse Ciolino in the amount of $4,400, which it believes properly takes account of the legally insufficient assertion of subject matter jurisdiction, the apparent procedural defects in the removal petition, Franecke's questionable tactics in facilitating removal by an unrepresented third-party defendant, and the financial loss Ciolino has suffered.
While Ciolino moves for sanctions against both Franecke and Hawley, his arguments are focused primarily, if not exclusively, on Franecke. It does not appear that Hawley, who did not have an attorney during the period in question, should have to bear the costs of Ciolino's attorney's fees. On the other hand, though Franecke did not technically remove this case, he drafted the papers, signed the joinder, and appeared before this Court to defend the removal for which he was primarily responsible.
This Court is deeply troubled about the manner in which this case was removed from state court, as Franecke seems to have engaged in highly inappropriate conduct that exceeds the bounds of ethical lawyering. Because this sort of egregious conduct, if proven to be true, calls out for some sort of punitive response, the Court will consider referring this matter to a magistrate judge to determine whether Rule 11 sanctions are warranted. The Court will further consider the possibility of reporting the magistrate's factual findings to the State Bar of California for whatever action it deems appropriate.
IV. CONCLUSION
For the reasons discussed herein, the Court finds that this action was improvidently removed, and accordingly GRANTS Ciolino's Motion to Remand under 28 U.S.C. § 1447(c). Furthermore, the Court ORDERS Ryan to pay Ciolino $4,400 in attorney's fees and costs he expended in seeking remand of this case.