Elmira Teachers' Assoc. v. Elmira City School Dist

Full title: ELMIRA TEACHERS' ASSOCIATION, et al., Plaintiffs, v. ELMIRA CITY SCHOOL…

Court: United States District Court, W.D. New York

Date published: Jan 27, 2006

05-CV-6513 CJS (W.D.N.Y. Jan. 27, 2006)

Opinion

05-CV-6513 CJS.

January 27, 2006

James D. Bilik, Esq., New York State United Teachers, Office of General Counsel, Latham, NY, for plaintiffs.

Jeremy A. Colby, Esq., Webster Szanyi, LLP, Buffalo, NY, for defendants.

DECISION AND ORDER

CHARLES SIRAGUSA, District Judge

INTRODUCTION

Defendants removed plaintiffs' state court action to this Court, alleging "arising from" federal jurisdiction. The matter is now before the Court on plaintiffs' application for an order remanding the action to state court for lack of subject matter jurisdiction and for costs and attorney fees. For the reasons stated below, the Court grants plaintiffs' motion to remand, but denies their request for costs and attorney's fees.

BACKGROUND

Plaintiffs are current and former employees of the Elmira City School District and two unions representing their bargaining units. They commenced this action in New York State Supreme Court, Chemung County, by filing a five-count complaint against the Elmira City School District and board of education.¹ The five causes of action alleged are: (1) breach of contract and breach of the implied covenant of good faith and fair dealing; (2) breach of fiduciary duty; (3) negligent retention; (4) negligent supervision; and (5) negligent representation. Plaintiffs contend that all five causes of action aise solely under New York law and that none raises a federal question.² Defendants, on the other hand, argue that federal question jurisdiction applies, since the complaint implicates a federal statute, the interpretation of which is required to resolve the lawsuit.

Plaintiffs' complaint relates to salary reduction agreements entered into between plaintiffs and defendants. In exchange for plaintiffs agreeing to salary reductions, defendants or their authorized agent were required to purchase annuity contracts or mutual fund shares in a tax-deferred retirement investment plan. Employee contributions to the plan would be tax deferred provided that the plan met the requirements of Internal Revenue Code § 403(b), 26 U.S.C. § 403(b) (2005), and the regulations adopted thereunder. The school district subsequently entered into an agreement with Horizon Benefit Administration, Inc., not a defendant in this lawsuit. Under the agreement, Horizon undertook to exclusively perform the duties of administering the plan. Defendants eventually learned that Horizon was being prosecuted in Ohio for misappropriation of funds, and defendants then transferred management of the plan to another entity, but not before plaintiff employees sustained a loss in the value of their investments. Plaintiffs sued defendants alleging, essentially, that they were negligent in choosing Horizon and negligent in supervising Horizon, and that they breached the salary reduction agreement.

Defendants removed the action to this Court on September 30, 2005, and on October 24, 2005 plaintiffs moved to remand it to state court. Thereafter, on November 14, 2005, defendants filed a motion to dismiss the complaint, pursuant to Federal Rule of Civil Procedure 12(c), as against the two union plaintiffs for lack of standing. Plaintiffs applied to hold the motion to dismiss in abeyance, and the Court granted that application. Thus, only the motion to remand is under consideration at this time.

SUBJECT MATTER JURISDICTION

In its Notice of Removal, defendant alleged the existence of federal question jurisdiction. In that regard, 28 U.S.C. § 1331 provides district court with jurisdiction of all civil actions "arising under the Constitution, laws, or treaties of the United States." A case "arises under" federal law two different ways. Either way can provide the Court with subject matter jurisdiction. First, a cause of action may be created by federal law and, if so, then federal jurisdiction exists. American Well Works Co. v. Layne Bowler Co., 241 U.S. 257 (1916); West 14 ^th Street Commercial Corp. v. 5 West 14 ^th Owners Corp., 815 F.2d 188, 192 (2d Cir. 1987). Here, neither party contends that Internal Revenue Code § 403(b) provides for a private right of action.

Second, if state law creates the cause of action, federal jurisdiction may arise if the cause of action poses a substantial federal question. Smith v. Kansas City Title Trust Co., 255 U.S. 180, 201 (1921); West 14 ^th Street Commercial Corp., 815 F.2d at 192. The Second Circuit has recently addressed the latest Supreme Court case construing federal question jurisdiction in a state law claim context. In Broder v. Cablevision Sys. Corp., 418 F.3d 187 (2d Cir. 2005), the Second Circuit held that the Supreme Court's decision in

Grable Sons Metal Prods. v. Darue Eng'g Mfg., ___ U.S ___, 125 S. Ct. 2363 (2005), establishes that the existence of "a cause of action created by federal law" is not a necessary condition for federal-question jurisdiction under 28 U.S.C. § 1331 or removal jurisdiction under 28 U.S.C. § 1441(a). "Instead, the question is, does a state-law claim necessarily raise a stated federal issue, actually disputed and substantial, which a federal forum may entertain without disturbing any congressionally approved balance of federal and state judicial responsibilities."

Broder, 418 F.3d at ( quoting Grable Sons Metal Prods. v. Darue Eng'g Mfg., ___ U.S ___, 125 S. Ct. 2363, 2366-67, 2368 (2005)).

In analyzing whether this basis for federal jurisdiction exists, a court must examine the complaint in accordance with the well-pleaded complaint rule. West 14 ^th Street Commercial Corp. v. 5 West 14 ^th Owners Corp., 815 F.2d 188, 192 (2d Cir. 1987). The well-pleaded complaint rule, first defined in Metcalf v. Watertown, 128 U.S. 586 (1888), states that federal jurisdiction must be found from "what necessarily appears in the plaintiff's statement of his own claim . . ., unaided by anything alleged in anticipation of avoidance of defenses which it is thought the defendant may interpose." Taylor v. Anderson, 234 U.S. 74, 75-76 (1914).

COSTS AND ATTORNEY'S FEES

Plaintiffs also seek costs and attorney's fees in the event they are successful in obtaining remand. In that regard, 28 U.S.C. § 1447(c) provides, in pertinent part, that, "[a]n order remanding the case may require payment of just costs and any actual expenses, including attorney fees, incurred as a result of the removal." As the district court observed in Casale v. Metro. Transp. Auth., No. 05 Civ. 4232 (MBM), 2005 U.S. Dist. LEXIS 34637 (S.D.N.Y. Dec. 19, 2005),

The purpose of this statute is to prevent the "abuse, unnecessary expense and harassment" suffered by a plaintiff as a result of improper removal. Circle Indus. USA v. Parke Constr. Group., 183 F.3d 105, 109 (2d Cir. 1999). Bad faith is not a prerequisite to requiring payment. Nemazee v. Premier, Inc., 232 F. Supp. 2d 172, 181 (S.D.N.Y. 2002). Rather, the decision to award costs and attorney fees demands "a test of overall fairness given the nature of the case, the circumstances of the remand, and the effect on the parties." Morgan Guar. Trust Co. of N.Y. v. Republic of Palau, 767 F. Supp. 561, 563 (S.D.N.Y 1991), aff'd 971 F.2d 917 (2d Cir. 1992).

Id., 2005 U.S. Dist. LEXIS 34637, at 34-35.

ANALYSIS

Defendants argue in their memorandum of law opposing remand that plaintiffs' complaint³ makes interpretation of Internal Revenue Code § 403(b) necessary to a determination of plaintiffs' state law claims. Consequently, they maintain that, under the holding in Grable, this Court has subject matter jurisdiction and the case should not be remanded. Plaintiffs, however, maintain that resolution of their causes of action does not require adjudication of any substantial and disputed questions of federal law. Therefore, they contend that their causes of action do not "arise under" federal law, and that, pursuant to Merrell Dow Pharmaceuticals, Inc. v. Thompson, 478 U.S. 804, 817 (1986), this Court lacks jurisdiction. The Court agrees with plaintiffs.

3 "[I]t is now settled law that a case may not be removed to federal court on the basis of a federal defense, including the defense of pre-em ption, even if the defense is anticipated in the plaintiff's com plaint, and even if both parties concede that the federal defense is the only question truly at issue." Caterpillar, Inc. v. Williams, 482 U.S. 386, 393 (1987); see also Roddy v. Grand Trunk W.R.R. Inc., 395 F.3d 318, 322 (6th Cir. 2005); Marcus v. ATT Corp., 138 F.3d 46, 53 (2d Cir. 1998).

In Merrell Dow, the Supreme Court held that "a complaint alleging a violation of a federal statute as an element of a state cause of action, when Congress has determined that there should be no private, federal cause of action for the violation, does not state a claim `arising under the Constitution, laws, or treaties of the United States.' 28 U.S.C. § 1331." Merrell Dow Pharmaceuticals, Inc., 478 U.S. at 817. That holding was significantly reinterpreted by the Court in Grable. There, petitioner Grable brought a state action to quiet title, claiming that the respondent's title to a piece of land was invalid because the Internal Revenue Service had failed to notify him of its seizure in the exact manner required by 26 U.S.C. § 6335. In upholding the lower court's determination that federal question jurisdiction applied, the Supreme Court wrote,

[w]hether Grable was given notice within the meaning of the federal statute is thus an essential element of its quiet title claim, and the meaning of the federal statute is actually in dispute; it appears to be the only legal or factual issue contested in the case. The meaning of the federal tax provision is an important issue of federal law that sensibly belongs in a federal court.

Grable, ___ U.S. at ___, 125 S. Ct. at 2368. That the federal statute in Grable did not create a private cause of action was not controlling. The Court distinguished older quiet title precedent holding there was no federal subject matter jurisdiction by stating:

In Shulthis v. McDougal, 225 U.S. 561 (1912), this Court found that there was no federal question jurisdiction to hear a plaintiff's quiet title claim in part because the federal statutes on which title depended were not subject to "any controversy respecting their validity, construction, or effect." Id., at 570.

Grable, ___ U.S. at ___, 125 S. Ct. at 2369. The Court also found that its holding in Merrell Dow did not limit federal jurisdiction, even in the absence of a private cause of action under the federal statute at issue, by stating:

Merrell Dow considered a state tort claim resting in part on the allegation that the defendant drug company had violated a federal misbranding prohibition, and was thus presumptively negligent under Ohio law. Id., at 806. The Court assumed that federal law would have to be applied to resolve the claim, but after closely examining the strength of the federal interest at stake and the implications of opening the federal forum, held federal jurisdiction unavail-able. Congress had not provided a private federal cause of action for violation of the federal branding requirement, and the Court found "it would . . . flout, or at least undermine, congressional intent to conclude that federal courts might nevertheless exercise federal-question jurisdiction and provide remedies for violations of that federal statute solely because the violation . . . is said to be a . . . `proximate cause' under state law." Id., at 812, 92 L. Ed. ad 650, 106 S. Ct. 3229.

Grable, ___ U.S. at ___, 125 S. Ct. at 2369. The Court noted that Grable was relying on this language in Merrell Dow to support his argument against federal jurisdiction:

Grable argues that there can be no federal jurisdiction here, stressing some broad language in Merrell Dow (including the passage just quoted) that on its face supports Grable's position, see Note, Mr. Smith Goes to Federal Court: Federal Question Jurisdiction over State Law Claims Post-Merrell Dow, 115 Harv. L. Rev. 2272, 2280-82 (2002) (discussing split in Circuit

Courts over private right of action requirement after Merrell Dow). Grable, ___ U.S. at ___, 125 S. Ct. at 2369. However, rather than overruling the holding in Merrell Dow, the Court interpreted it as follows:

Accordingly, Merrell Dow should be read in its entirety as treating the absence of a federal private right of action as evidence relevant to, but not dispositive of, the "sensitive judgments about congressional intent" that § 1331 requires. The absence of any federal cause of action affected Merrell Dow's result two ways. The Court saw the fact as worth some consideration in the assessment of substantiality. But its primary importance emerged when the Court treated the combination of no federal cause of action and no preemption of state remedies for misbranding as an important clue to Congress's conception of the scope of jurisdiction to be exercised under § 1331. The Court saw the missing cause of action not as a missing federal door key, always required, but as a missing welcome mat, required in the circumstances, when exercising federal jurisdiction over a state misbranding action would have attracted a horde of original filings and removal cases raising other state claims with embedded federal issues. For if the federal labeling standard without a federal cause of action could get a state claim into federal court, so could any other federal standard without a federal cause of action. And that would have meant a tremendous number of cases.

Grable, ___ U.S. at ___, 125 S. Ct. at 2370. The Court went on to determine that allowing Grable's state quiet title action to remain in district court,

would not materially affect, or threaten to affect, the normal currents of litigation. Given the absence of threatening structural consequences and the clear interest the Government, its buyers, and its delinquents have in the availability of a federal forum, there is no good reason to shirk from federal jurisdiction over the dispositive and contested federal issue at the heart of the state-law title claim.

Grable, ___ U.S. at ___, 125 S. Ct. at 2371 (citations and footnote omitted). In his concurring opinion, Justice Thomas added that,

In this case, no one has asked us to overrule those precedents and adopt the rule Justice Holmes set forth in American Well Works Co. v. Layne Bowler Co., 241 U.S. 257 (1916), limiting § 1331 jurisdiction to cases in which federal law creates the cause of action pleaded on the face of the plaintiff's complaint. Id., at 260. In an appropriate case, and perhaps with the benefit of better evidence as to the original meaning of § 1331's text, I would be willing to consider that course.

Grable, ___ U.S. at ___, 125 S. Ct. at 2371 (Thomas, J., concurring).

In the case at bar, defendants argue that the complaint itself requires interpretation of § 403(b), since it consistently refers to defendants' improper management of § 403(b) assets and their failure to comply with § 403(b). ( See Defs.' Mem. of Law at 3.) Further, defendants contend that any court or jury hearing plaintiffs' lawsuit will have to interpret § 403(b) on the issue of damages.⁴ ( Id., at 4.) In addition, defendants point to the portions of the complaint alleging that plaintiffs will incur certain federal tax consequences as a result of Horizon's "failure to invest Plaintiffs' 403(b) funds in accordance with the requirements of 403(b) of the Internal Revenue Code and the regulations thereunder." (Defs.' Mem. of Law at 4, n. 3 ( quoting Ver. Am. Compl. ¶ 94).)

4 To the extent defendants rely on the necessity to interpret § 403(b) on the issue of damages as a basis for federal jurisdiction, the Court concludes that their reliance is misplaced. The jurisdictional statute specifically refers to " civil actions arising under the Constitution, laws, or treaties of the United States," not dam ages. 28 U.S.C. § 1331 (em phasis added).

Defendants also rely on the Second Circuit's decision in Broder v. Cabelvision Systems Corp., 418 F.3d 187 (2d Cir. 2005). In that case,

Broder alleged that by extending a reduced "Winter Season" rate to certain customers without offering or even disclosing it to others, Cablevision had violated the uniform rate requirement of 47 U.S.C. § 543(d) and the disclosure requirement of Section 224-a(4) of the New York Public Service Law, and thereby incurred liability pursuant to various state-law causes of action. Cablevision removed the action on the ground that Broder's claims raised a federal question, to wit, whether Cablevision had violated 47 U.S.C. § 543(d).

Broder, 418 F.3d at 191 (footnote omitted). The Second Circuit affirmed the district court's determination that it had subject matter jurisdiction having determined that, "[t]he question is whether at least one federal aspect of Broder's complaint is a logically separate claim, rather than merely a separate theory that is part of the same claim as a state-law theory." Id., at 194. Having determined that Broder's federal claim was a separate one, the Circuit went on to state that,

[t]he requirement that the federal issue be "actually disputed and substantial," Grable, ___ U.S. at ___, 125 S. Ct. at 2368, is also met. Cablevision maintains that its provision of Winter Season rates did not violate the § 543(d) uniform rate requirement. Cablevision contests, inter alia, whether Broder and the class members subscribed in areas that lacked "effective competition," and whether the Winter Season rates are exempt from the § 543(d) uniformity requirement as promotional rates. These questions involve aspects of the complex federal regulatory scheme applicable to cable television rates, as to which there is "a serious federal interest in claiming the advantages thought to be inherent in a federal forum," Grable, ___ U.S. at ___, 125 S. Ct. at 2367. These federal issues are not clearly insubstantial, and Broder does not now contend that their merits would be easily resolved in his favor.

Broder, 418 F.3d at 195.

Here, however, the "the only legal or factual issue contested in the case" is whether defendants violated duties imposed upon them by state law and by their agreement with plaintiffs to create and manage a retirement plan.⁵ Unlike Grable and Merrell Dow, the Court in this case concludes that plaintiffs' action does not depend on an interpretation of a federal statute that is subject to "any controversy respecting [its] validity, construction, or effect." Id., at 570. Shulthis v. McDougal, 225 U.S. at 570. This lawsuit, simply put, is a state breach of contract and negligence case in which § 403(b), like the federal labeling statute at issue in Merrell Dow, merely provides the standard of care. Moreover, unlike Grable, where the Supreme Court determined that the quiet title action "would not materially affect, or threaten to affect, the normal currents of litigation," Grable, ___ U.S. at ___, 125 S. Ct. at 2371, in this case, allowing this state negligence and breach of contract case to remain before the Court would be tantamount to opening the floodgates⁶ for removal of similar litigation. Therefore, the Court determines that plaintiffs' application to remand must be granted.

5 It should be noted that both parties agree that the Em ployee Retirement Income Security Act of 1974 does not apply here. See 29 U.S.C. § 1003(b)(1) ("The provisions of this title shall not apply to any em ployee benefit plan if — such plan is a governm ental plan. . . .").

6 E.O. 13369 (Jan. 7, 2005) established the President's Advisory Panel on Federal Tax Reform ("Advisory Panel"), which then invited comments from interested parties. See http:// comments.taxreform panel.gov/(Jan. 25, 2006). Among the comments received were those from a self-described ad hoc group pertaining to "The Importance of Retaining the Successful Retirement Plans that Serve our Nation's Educational, Non-Profit, Governmental, and Small Business Employees." Letter from ad hoc group to Advisory Panel (Jun. 10, 2005), available at http://comments.taxreform panel.gov/index.cfm?FuseAction=Home. ViewTopic_id=4FellowType_id=4 (Jan. 25, 2006). In its comments, the ad hoc group wrote, "6.8 million educational and non-profit employees participate in more than 34,000 403(b) arrangements. . . ." Id.

As to plaintiffs' request for costs and attorney's fees, the Court, in an exercise of its discretion, finds that equity does not require such assessment and the application is therefore denied. In this regard, the Court is especially persuaded by the unpublished⁷ decision of the Fifth Circuit in Gillespie v. University of Texas Health Science Center, No. 01-20062, 32 Fed. Appx. 127 (5th Cir. Feb. 20, 2002). There, the Fifth Circuit determined that, "Gillespie's allegations questioning whether the plan provided by appellant complied with Section 403(b) of the Internal Revenue Code ( 26 U.S.C. § 403(b)) were sufficient to provide appellant with reasonable grounds to believe that a substantial federal question was presented." Id., 2002 WL 334748, *1. As a result of that determination, the Fifth Circuit reversed the district court's award of costs and attorney's fees, which it had imposed upon the sua sponte remand of the case to state court. Additionally, a Southern District of New York court has stated on this question,

7 Fifth Circuit Rule 47.5.4 states, in pertinent part (footnote omitted), "[u]npublished opinions issued on or after January 1, 1996, are not precedent, except under the doctrine of res judicata, collateral estoppel or law of the case (or similarly to show double jeopardy, abuse of the writ, notice, sanctionable conduct, entitlement to attorney's fees, or the like). An unpublished opinion may, however, be persuasive."

While bad faith removal by a defendant is not a precondition to a plaintiff's recovery under this section, see Morgan Guaranty Trust Co. of New York v. Republic of Palau, 971 F.2d 917, 923-24 (2d Cir. 1992), the absence of bad faith, as well as the existence of a colorable question as to whether removal is proper, weighs against the award of costs and fees. See, e.g., United Mutual Houses, L.P. v. Andujar, 230 F. Supp. 2d 349, 354 (S.D.N.Y. 2002). Although the defendants' contention that there is federal question jurisdiction here did not prevail, it was far from a frivolous argument.

Caggiano v. Pfizer Inc., 384 F. Supp. 2d 689, 692 (S.D.N.Y. 2005)

CONCLUSION

Accordingly, the Court grants plaintiffs' motion⁸ to remand (## 5 7) pursuant to 28 U.S.C. § 1447(c), but declines to award costs and attorney's fees.⁹

8 Plaintiffs original docketed the motion as docket # 5, which the Clerk corrected and re-docketed as docket # 7. Both docket numbers are shown in the "pending motions" report of the Court's electronic docketing system.

9 Having granted plaintiffs' application to rem and, the Court does not rule on defendants' motion to dismiss (# 17).

IT IS SO ORDERED.