Burda v. M. Ecker Co.
| Decision Date | 21 January 1992 |
| Docket Number | 90-2795,Nos. 90-1514,s. 90-1514 |
| Parties | 92-1 USTC P 50,071, 21 Fed.R.Serv.3d 879 Matthew BURDA, Plaintiff-Appellant, v. M. ECKER COMPANY, Defendant-Appellee. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Elizabeth Dale, Kenneth N. Flaxman (argued), Ruth Stelzman, Cantena & Stelzman, Chicago, Ill., for plaintiff-appellant.
Robert J. Slobig (argued), McDermott, Will & Emery, Chicago, Ill., for defendant-appellee.
Richard A. Kimnach, Anesi, Ozmon & Rodin, Chicago, Ill., for amicus curiae Illinois Trial Lawyers Ass'n.
Gary R. Allen, Robert S. Pomerance, Kenneth L. Rosenberg, Dept. of Justice, Tax Div., Appellate Section, Washington, D.C., for amicus curiae U.S.
Before WOOD, Jr., COFFEY and KANNE, Circuit Judges.
Matthew Burda was injured while working for the M. Ecker Company, and he filed a claim for benefits under the Illinois Worker's Compensation Act, Ill.Rev.Stat. ch. 48, p 138.1, et seq. The parties agreed to settle the claim and executed a Lump Sum Settlement Contract and Order which was approved by the Illinois Industrial Commission. The total dollar amount of the settlement was $8,525.78. From this $1,705.16 was deducted for attorney's fees and $230.00 was deducted for a doctor's report and X-rays. The remainder, entitled "Amount of money Employee will receive," was $6,590.62.
Before issuing payment, M. Ecker's insurance carrier, Liberty Mutual Insurance Co., requested that Burda's attorney, Ruth Stelzman, furnish her taxpayer identification number. She refused. Liberty Mutual then delivered two checks to Stelzman. One check was for $6,590.62, made payable to Burda and Stelzman. The other was for $1,548.12, made payable to Stelzman. The latter amount represented the attorney's fees and the medical reimbursement, less a 20% reduction for federal withholding tax.
Liberty Mutual issued the latter payments in accordance with a private letter ruling it received prior to this case from the Internal Revenue Service. The letter ruling explains that payments of attorney's fees, when "fixed and determinable" and exceeding $600.00 in a single year, are reportable payments under § 6041 of the Internal Revenue Code. 26 U.S.C. § 6041. 26 U.S.C. § 3406 further provides that reportable income under § 6041(a) is subject to a backup withholding unless the payee furnishes a valid taxpayer identification number. See 26 C.F.R. § 1.604.1-1.
Stelzman returned both checks to Liberty Mutual, and requested that a check for full payment be issued to Burda alone. This demand was based on Stelzman's belief that Illinois law prohibited the issuance of separate checks to an injured employee and his attorney. After informing Stelzman that it was obligated to act in accordance with federal tax law, Liberty Mutual issued a check in the amount of $6,590.62 payable solely to Burda, which was accepted. 1 Liberty Mutual issued a check to Stelzman for $1,364.13, and offered to tender a second check to her for $341.03 (the attorney's fees withheld as backup withholding taxes) on receipt of her taxpayer identification number. Stelzman refused to provide her identification number and refused to accept the payments.
Burda filed suit in the Circuit Court of Cook County, by filing an Application for Judgment under Section 19(g) of the Illinois Worker's Compensation Act, Ill.Rev.Stat., ch. 48, p 138.19(g). The complaint alleged that M. Ecker failed to "tender full payment pursuant to the Lump Sum Settlement Order." M. Ecker filed a response in state court and removed the case to federal district court pursuant to 28 U.S.C. §§ 1441(b) and 1446(a), asserting that Burda's purported state claim was in reality an artfully pleaded challenge to federal withholding tax statutes and regulations. M. Ecker moved to dismiss the complaint under Federal Rule of Civil Procedure 12(b)(6), for failure to state a claim upon which relief could be granted under the Internal Revenue Code. Burda moved to remand the case to state court.
The district court denied Burda's motion and determined that the action was a challenge to the withholding of taxes and was therefore removable. See 28 U.S.C. §§ 1441(a), (b), 1446(a). The court further found that the action failed to state a claim upon which relief could be granted because the exclusive remedy provided by the Internal Revenue Code for wrongfully withheld money is an action against the United States. See 26 U.S.C. § 7422. The action was dismissed.
M. Ecker moved for sanctions against Burda and Stelzman pursuant to either Rule 11 of the Federal Rules of Civil Procedure or Illinois Supreme Court Rule 137 (). The district court awarded M. Ecker $9,478.75 in attorney's fees and $505.75 in costs pursuant to Rule 11.
Burda appeals the district court's finding of federal subject matter jurisdiction and dismissal of his action. He also appeals the court's imposition of sanctions and costs. We affirm the dismissal of the action, but remand the issue of sanctions to the district court for its reconsideration.
Burda argues that his action arose under the Illinois Worker's Compensation Act and therefore removal to federal court is barred by 28 U.S.C. § 1445(c). 2
In order to determine whether Burda's claim was removable to federal court, we must examine the nature of the claim as a matter of federal law. Where there is no diversity of citizenship between the parties, the propriety of removal turns on whether the case falls within the original "federal question" jurisdiction of the United States district courts: "The district courts shall have original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States." 28 U.S.C. § 1331; Franchise Tax Board v. Construction Laborers Vacations Trust, 463 U.S. 1, 8, 103 S.Ct. 2841, 2845, 77 L.Ed.2d 420 (1983); Caterpillar Inc. v. Williams, 482 U.S. 386, 392, 107 S.Ct. 2425, 2429, 96 L.Ed.2d 318 (1987); Lister v. Stark, 890 F.2d 941, 943 (7th Cir.1989), cert. denied, --- U.S. ----, 111 S.Ct. 579, 112 L.Ed.2d 584 (1990).
The presence or absence of federal-question jurisdiction is governed by the "well-pleaded complaint rule," which provides that federal jurisdiction exists only when a federal question is presented on the face of the plaintiff's properly pleaded complaint. Caterpillar, 482 U.S. at 392, 107 S.Ct. at 2429. A case may not be removed to federal court on the basis of a federal defense the defendant might raise to defeat the plaintiff's claim. Franchise Tax Board, 463 U.S. at 12, 103 S.Ct. at 2847-48; Caterpillar, 482 U.S. at 393, 107 S.Ct. at 2430; Lister, 890 F.2d at 943; Nelson v. Central Illinois Light Co., 878 F.2d 198, 202-03 (7th Cir.1989).
Although the plaintiff is generally considered the "master of his complaint," Lister, 890 F.2d at 943, this principle is not without limitation. An independent corollary to the "well-pleaded complaint rule" is the "artful pleading doctrine." Franchise Tax Board, 463 U.S. at 22, 103 S.Ct. at 2853. A plaintiff may not frame his action under state law and omit federal questions that are essential to recovery. Id.; Marzuki v. AT & T Technologies, Inc., 878 F.2d 203, 207 (7th Cir.1989). 3 Therefore, a federal court may, in some situations, look beyond the face of the complaint to determine whether a plaintiff has artfully pleaded his suit so as to couch a federal claim in terms of state law. In these cases, we will conclude that a plaintiff's claim actually arose under federal law and is therefore removable.
Burda's complaint alleges that M. Ecker failed to "tender full payment pursuant to the Lump Sum Settlement Order." However, Liberty Mutual tendered full payment to Burda and twice attempted to tender payment of attorney's fees to Stelzman in accordance with an IRS private letter ruling. 4 As the district court noted, the amount actually tendered was only short of the total by the amount withheld for taxes on the attorney's fees. Therefore, Burda's challenge to Liberty Mutual's withholding of attorney's fees is in fact a challenge to federal income tax laws and regulations. As such, the action falls within the district court's original jurisdiction because it "arises under" federal internal revenue statutes. Therefore, 28 U.S.C. § 1445(c) does not bar removal.
In finding Burda's cause of action removable, the district court relied on the "complete preemption doctrine." See Caterpillar, 482 U.S. at 393, 107 S.Ct. at 2430. Without addressing that determination, 5 we find that removal is justified on the basis that Burda artfully pleaded a state-law cause of action. See Schweiker v. Hogan, 457 U.S. 569, 585 n. 24, 102 S.Ct. 2597, 2607 n. 24, 73 L.Ed.2d 227 (1982) (), cert. denied, 478 U.S. 1007, 106 S.Ct. 3301, 92 L.Ed.2d 715 (1986); Martinez v. United Auto., etc., Local 1373, 772 F.2d 348, 353 (7th Cir.1985).
We review a Rule 12(b)(6) dismissal de novo. Lister, 890 F.2d at 946; Corcoran v. Chicago Park District, 875 F.2d 609, 611 (7th Cir.1989). Burda's claim challenges federal income tax withholding regulations. 26 U.S.C. § 7422 provides that the exclusive remedy for a tax refund is an action against the United States. Since the United States is not a party to this action, Burda fails to state a claim upon which relief can be granted. See Edgar v. Inland Steel Co., 744 F.2d 1276 (7th Cir.1984) (); 26 U.S.C. § 3403. The district court properly dismissed Burda's cause of action. 6
The imposition of sanctions pursuant to Federal Rule 11 is reviewed under an abuse of discretion standard. Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 110 S.Ct. 2447, 110 L.Ed.2d 359 (1990);...
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