Isaacs v. Group Health, Inc.

Citation668 F. Supp. 306
Decision Date04 September 1987
Docket NumberNo. 87 Civ. 3614 (RJW).,87 Civ. 3614 (RJW).
PartiesJeffrey ISAACS, Paul Weber, M. Richard Eschle, Victor San Filippo, John Scarfi and Richard Hubert, as Trustees of the District No. 15 Machinists Pension Fund, Plaintiffs, v. GROUP HEALTH, INC. and Martin E. Segal Company, Defendants.
CourtU.S. District Court — Southern District of New York

Meyer, Suozzi, English & Klein, P.C., Mineola, N.Y., for plaintiffs; Jeffrey G. Stark, Robert M. Archer, Michael A. Ciaffa, of counsel.

Simpson Thacher & Bartlett, New York City, for defendant Martin E. Segal Co.; David W. Sussman, Sharon O. Thompson, of counsel.

Solomon & Rosenbaum, Drechsler & Leff, New York City, for defendant Group Health, Inc.

OPINION

ROBERT J. WARD, District Judge.

Plaintiffs Jeffrey Isaacs, Paul Weber, M. Richard Eschle, Victor San Filippo, John Scarfi, and Richard Hubert, as Trustees of the District No. 15 Machinists Pension Fund (the "Fund"), filed this motion to remand the instant action to state court on two separate grounds. First, they allege that defendant Martin E. Segal Company ("MESCO") waived its right to removal by filing cross-claims and counterclaims in the state court action. Second, they allege that the complaint raises only state law claims that are not preempted by federal law. For the reasons to follow, the Court grants plaintiffs' motion to remand the action to state court.

BACKGROUND

On or about April 24, 1987, plaintiffs, as trustees of the Fund, instituted an action against MESCO and Group Health Incorporated ("GHI") in New York Supreme Court. During the relevant time, MESCO was the actuary of the Fund and GHI was the computer services provider for the Fund. Plaintiffs allege in their complaint that, as a result of a computer programming error by GHI, reports GHI furnished to MESCO understated the average years of service of plan participants by 40%, and consequently, MESCO's annual actuarial valuation reports were incorrect. Subsequent to GHI's error, MESCO allegedly advised the trustees to seek funding waivers of the minimum funding requirements of the Employee Retirement Income Security Act, 29 U.S.C. §§ 1001 et seq., ("ERISA") from the United States Internal Revenue Service ("IRS"), but did not advise the trustees to pursue other specific courses of action that would have remedied, in whole or in part, the underfunding of the Fund. The IRS, as a condition to the granting of funding waivers, required the Fund to obtain contribution rate increases from employers of 65% effective July 1, 1986. The Fund has been unable to meet the condition of the funding waivers since the employers are not legally obligated to contribute such sums and have not been willing to do so voluntarily. Plaintiffs assert that MESCO is responsible to the trustees for breach of contract and negligence.

On May 14, 1987, MESCO served its answer containing two counterclaims against plaintiffs and three cross-claims against co-defendant GHI. As against GHI, it alleged claims of negligence, breach of duty, contribution, indemnification, and breach of contract. As against plaintiffs, it alleged bad faith termination of its contract, and a claim for punitive damages.

On May 26, 1987, MESCO removed this action pursuant to 28 U.S.C. § 1441 by filing a verified petition for removal stating that plaintiffs' complaint is based on allegations with respect to services defendants provided to plaintiffs to enable the Fund to comply with provisions of the Labor Management Relations Act, 29 U.S.C. § 141 et seq., ("LMRA") and ERISA.

Plaintiffs, in the instant action, move to remand the case to New York state court. Plaintiffs set forth two independent grounds for remand. They allege both that defendant MESCO waived its right to removal by filing cross-claims and counterclaims in the state court action and that plaintiffs' complaint does not arise under federal law.

DISCUSSION
I. Waiver by Defendant of Right to Remove

"A party who voluntarily submits to the jurisdiction of a state court by filing a permissive counterclaim thereby waives the right to removal." Harris v. Brooklyn Dressing Corp., 560 F.Supp. 940, 942 (S.D. N.Y.1983); accord 1A Moore's Federal Practice ¶ 0.1579 at p. 154 ("where, however, the defendant files a permissive counterclaim, the right to remove is waived."). The rationale for this long-standing policy is that a defendant who asserts a permissive counterclaim in a state court becomes a plaintiff in turn, invoking the jurisdiction of the court in the same action, and, by invoking it, submits to it.1 Wilcheck v. Haney, 38 F.Supp. 345, 354 (W.D.Va.1941) (citing Merchants Heat & L. Co. v. James B. Clow & Sons, 204 U.S. 286, 27 S.Ct. 285, 51 L.Ed. 488 (1907)).2

Similarly, a defendant's cross-claim against a co-defendant while a case is pending in state court, asserted before a petition for removal to federal court is filed, constitutes a waiver of the right to removal. Baldwin v. Perdue, Inc., 451 F.Supp. 373 (E.D.Va.1978).

Since prior to service and filing of its removal petition, MESCO chose to assert in its answer in state court counterclaims against plaintiffs and cross-claims against co-defendant GHI, it consequently waived its right of removal. Moreover, even absent a finding that MESCO waived its right to remove, this Court would, nevertheless, remand the case to state court, as there is no basis for finding that federal law creates plaintiffs' cause of action or that the plaintiffs' right to relief necessarily depends on a substantial question of federal law.

II. Federal-Question Jurisdiction

Article III of the United States Constitution gives the federal courts power to hear cases "arising under" federal statutes.3 That grant of power, however, is not self-executing, and it was not until the Judiciary Act of 1875 that Congress gave the federal courts general federal-question jurisdiction.4 While the constitutional meaning of "arising under" may extend to all cases in which a federal question is "an ingredient" of the action, Osborn v. Bank of the United States, 9 Wheat. 738, 823, 6 L.Ed. 204 (1824), the statutory grant of federal-question jurisdiction has long been construed as conferring a more limited power. Verlinden B.V. v. Central Bank of Nigeria, 461 U.S. 480, 494-495, 103 S.Ct. 1962, 1971-1972, 76 L.Ed.2d 81 (1983). Its exact reach has perplexed the federal judiciary for many years. Rogers v. Platt, 814 F.2d 683, 687 (D.C.Cir.1987).

There are presently two tests under which an action may present a federal question. The first asks whether federal law creates the cause of action. If so, federal question jurisdiction exists. West 14th St. Comm. Corp. v. 5 West 14th Owner's Corp., 815 F.2d 188, 192 (2d Cir.1987). If state law creates the cause of action, the second test asks whether the plaintiff's right to relief "necessarily depends on resolution of a substantial question of federal law." Franchise Tax Board v. Construction Laborers Vacation Trust, 463 U.S. 1, 28, 103 S.Ct. 2841, 2856, 77 L.Ed.2d 420 (1983); Republic of Philippines v. Marcos, 806 F.2d 344, 352 (2d Cir.1986), cert. denied, ___ U.S. ___, 107 S.Ct. 2178, 95 L.Ed.2d 835 (1987).

In determining whether the complaint presents a federal question, the court must evaluate it in accordance with the well-pleaded complaint rule. West 14th St. Comm. Corp. v. 5 West 14th Owner's Corp., supra, 815 F.2d at 192. This "powerful doctrine" states that whether a claim "arises under" federal law must be determined from what necessarily appears in the plaintiff's statement of his own claim. Franchise Tax Board v. Construction Laborers Vacation Trust, supra, 463 U.S. at 9-10, 103 S.Ct. at 2846. See The Fair v. Kohler Die & Specialty Co., 228 U.S. 22, 25, 33 S.Ct. 410, 411, 57 L.Ed. 716 (1913) ("The party who brings a suit is master to decide what law he will rely on ...") A defense that raises a federal question is insufficient to confer federal jurisdiction. Louisville & Nashville R. Co. v. Mottley, 211 U.S. 149, 29 S.Ct. 42, 53 L.Ed. 126 (1908). Since a defendant may remove a case from state court only if a claim could have been brought originally in federal court, 28 U.S.C. § 1441(b), the question of removal jurisdiction must also be determined by reference to the "well-pleaded complaint." Merrell Dow Pharmaceuticals v. Thompson, ___ U.S. ___, 106 S.Ct. 3229, 3232, 92 L.Ed.2d 650 (1986).5

Thus, the propriety of the removal in the instant case turns on whether the case falls within the original "federal question" jurisdiction of the federal courts. Discussing this concept in Merrell Dow Pharmaceuticals, the Supreme Court stated that "there is no single, precise definition of ... the phrase `arising under,'" rather it "masks a welter of issues regarding the interrelation of federal and state authority and the proper management of the federal judicial system." Id. (citing Franchise Tax Board v. Construction Laborers Vacation Trust, supra, 463 U.S. at 8, 103 S.Ct. at 2845-2846). However, the vast majority of cases that fall within "arising under" jurisdiction fit into the rule formulated by Justice Holmes that "a suit arises under the law that creates the cause of action." American Well Works Co. v. Layne & Bowler Co., 241 U.S. 257, 260, 36 S.Ct. 585, 586, 60 L.Ed. 987 (1916).6 This is not to say that the powers of federal jurisdiction are implicated merely because, as in this case, federal laws are mentioned in the complaint. See Hearst Corp. v. Shopping Center Network, Inc., 307 F.Supp. 551, 556 (S.D.N.Y.1969) (action does not implicate the powers of federal jurisdiction merely because a trademark was mentioned in one of the claims).

Although a non-federal cause of action may arise under federal law "where the vindication of a right under state law necessarily turns on some construction of federal law," the Supreme Court has emphasized that the federal issue raised must be really substantial. Franchise Tax Board v. Construction Laborers Vacation Trust, supra, 463 U.S. at 9, ...

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