Baker v. Bdo Seidman, L.L.P.

• Decision Date: 29 September 2005
• Docket Number: No. C-05-2500 EMC.,C-05-2500 EMC.
• Citation: Baker v. Bdo Seidman, L.L.P., 390 F.Supp.2d 919 (N.D. Cal. 2005)
• Court: U.S. District Court — Northern District of California
• Parties: Randall P. BAKER, et al., Plaintiffs, v. BDO SEIDMAN, L.L.P., et al., Defendants.

390 F.Supp.2d 919

Randall P. BAKER, et al., Plaintiffs, v. BDO SEIDMAN, L.L.P., et al., Defendants.

No. C-05-2500 EMC.

United States District Court, N.D. California.

September 29, 2005.

Nancy L. Fineman, Cotchett Pitre Simon & McCarthy, Burlingame, CA, for Plaintiffs.

Cary B. Samowitz, DLA Piper Rudnick Gray Cary U.S. LLP, New York City, Gregory K. Jung, David J. Romanski, DLA Piper Rudnick Gray Cary U.S. LLP, San Francisco, CA, for Defendants.

ORDER GRANTING PLAINTIFFS' MOTION FOR REMAND TO STATE COURT (Docket No. 13)

CHEN, United States Magistrate Judge.

Plaintiffs in this action are six individuals who hired Defendants to provide tax services and investment advice. Plaintiffs initially filed suit against Defendants in state court. Subsequently, Defendants removed the case to federal court on the basis that, even though Plaintiffs pled only state law claims, there was a substantial federal issue involved in the case. Pending before the Court is Plaintiffs' motion to remand the case to state court. Having considered the parties' briefs and accompanying submissions as well as the argument of counsel, the Court hereby GRANTS the motion for remand.

I. FACTUAL & PROCEDURAL BACKGROUND

On May 12, 2005, Plaintiffs filed suit in San Francisco Superior Court, alleging six causes of action against Defendants: (1) professional negligence, (2) breach of fiduciary duty, (3) fraud and deceit, (4) negligent misrepresentation, (5) violation of California Business & Professions Code § 17200, and (6) declaratory relief on an arbitration clause. Basically, there are two allegations underlying the primary claims (i.e., the first five causes of action): first, that Defendants knowingly advised Plaintiffs to invest in illegal tax shelters and, second, that Defendants should have disclosed to Plaintiffs notices and warnings that Defendants received from the IRS regarding illegal tax shelters.

For example, in the claim for fraud and deceit, Plaintiffs claimed that,

[i]n order to induce Plaintiffs to pay [Defendants] millions of dollars in fees [for their services and advice], Defendants knowingly made false affirmative misrepresentations and intentional omissions of material fact including: (1) promising to create legal tax structures that would reduce/eliminate Plaintiffs' federal income tax obligations; (2) representing to Plaintiffs that the tax structure was properly allowable for income tax purposes; and (3) failing to disclose that the IRS deemed the very investment Defendants were promoting to be an abusive tax shelter.

Compl. ¶ 120.

On June 20, 2005, Defendants removed the case to federal court, citing Grable & Sons Metal Products, Inc. v. Darue Engineering & Manufacturing., ___ U.S. ___, 125 S.Ct. 2363, 162 L.Ed.2d 257 (2005). On July 1, 2005, Plaintiffs moved for a remand to state court.

II. DISCUSSION

A defendant may remove to federal court "any civil action brought in a State court of which the district courts of the United States have original jurisdiction." 28 U.S.C. § 1441(a). The removing party bears the burden of establishing that removal is proper. See Emrich v. Touche Ross & Co., 846 F.2d 1190, 1195 (9th Cir.1988). The removal statute is strictly construed, and a court must reject federal jurisdiction if there is any doubt as to the right of removal in the first instance. See Duncan v. Stuetzle, 76 F.3d 1480, 1485 (9th Cir.1996).

Federal jurisdiction is traditionally predicated upon diversity jurisdiction or federal question jurisdiction. "[F]ederal-question jurisdiction is invoked by and large [when] plaintiffs plead[] a cause of action created by federal law (e.g., claims under 42 U.S.C. § 1983). There is, however, another longstanding, if less frequently encountered, variety of federal `arising under' jurisdiction" which the Supreme Court has "recognized for nearly 100 years" § namely, that "in certain cases federal question jurisdiction will lie over state-law claims that implicate significant federal issues." Grable, 125 S.Ct. at 2366-67. The Supreme Court has said that this "doctrine captures the commonsense notion that a federal court ought to be able to hear claims recognized under state law that nonetheless turn on substantial questions of federal law, and thus justify resort to the experience, solicitude, and hope of uniformity that a federal forum offers on federal issues." Id. at 2367. In Grable, a recent opinion issued by the Supreme Court, the test for federal jurisdiction was formulated as follows: "[D]oes 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?" Id. at 2368.

In Grable, the IRS had seized the plaintiff's land to satisfy a federal tax delinquency and had notified him of the seizure by mail. See id. at 2366. Thereafter, the IRS sold the property to the defendant. See id. The plaintiff sued for quiet title in state court, alleging that, by notifying him of the seizure by mail rather than by personal service, the IRS failed to comply with the notice requirement provided for by 26 U.S.C. § 6335. See id. The defendant removed the case to federal court, asserting federal question jurisdiction, and the plaintiff's motion to remand to state court was denied. See id. Applying the above test, the Supreme Court concluded that removal was proper. First, a federal issue was in dispute because the parties disputed the meaning of the notice provision. See id. at 2368. Second, the question of whether the plaintiff was given notice as defined by the federal law was an essential element of the plaintiff's quiet title claim and thus the issue was necessarily raised. See id. Third, as to the substantiality of the federal issue, the Court held that the meaning of the tax provision at issue was an important issue of federal law "sensibly belong[ing] in federal court." Id. The Court reasoned that the "government has a strong interest in the `prompt and certain collection of delinquent taxes.'" Id. Resolution of the notice provision would be important to the IRS's ability to satisfy its claims from the property of delinquents and sell the property to purchasers. See id. The Court referenced the government's interest in a federal forum to satisfy its claims over the property of tax delinquents, and the fact that buyers and delinquents may find it valuable to come before judges accustomed to federal tax matters. See id. Finally, in finding that federal jurisdiction in this case would not upset the federal and state division of labor, the Court reasoned that, since "it will be the rare state title case that raises a contested matter of federal law, federal jurisdiction to resolve genuine disagreement over federal tax title provisions will portend only a microscopic effect on the federal-state division of labor." Id.

The parties do not dispute that whether there is federal jurisdiction in the instant case should be resolved by application of the Grable test, and the Court agrees that the Grable test should be applied as Plaintiffs have pled in their complaint only state law claims. Thus, the question for the Court is whether Plaintiffs' state law claims "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." Id. at 2368. The Court concludes that federal jurisdiction is not proper in the instant case because Plaintiffs' state law claims do not necessarily raise a federal issue.

In Christianson v. Colt Industries Operating Corp., 486 U.S. 800, 108 S.Ct. 2166, 100 L.Ed.2d 811 (1988), the Supreme

Court stated that, "[i]f on the face of a well-pleaded complaint there are reasons completely unrelated to the provisions and purposes of [federal law] why the [plaintiff] may or may not be entitled to the relief it seeks," then the claim does not "arise under" federal law. See id. at 810, 108 S.Ct. 2166 (internal quotation marks omitted). Citing Christianson, the Ninth Circuit has held that, "when a claim can be supported by alternative and independent theories — one of which is state law theory and one of which is a federal law theory — federal question jurisdiction does not attach because federal law is not a necessary element of the claim." Rains v. Criterion Systems, Inc., 80 F.3d 339, 346 (9th Cir.1996); see also Lippitt v. Raymond James Fin. Serv., Inc., 340 F.3d 1033, 1043 (9th Cir.2003) (noting that, under California Business & Professions Code § 17200, a plaintiff must show that a business practice is unlawful or unfair or fraudulent; federal law was not a necessary element of plaintiff's § 17200 claim because he did not "have to rely on a violation of the Exchange Act nor an infraction of an NYSE rule or regulation to bring [the § 17200] claim [—][h]e merely has to allege that Defendants' conduct was either unfair or fraudulent").

As noted above, in the instant case, Plaintiffs' basic state law claims of fraud and deceit are supported by two basic allegations regarding wrongdoing by Defendants: (1) that Defendants knowingly advised Plaintiffs to invest in illegal tax shelters and (2) that Defendants should have disclosed to Plaintiffs notices and warnings that Defendants received from the IRS regarding illegal tax shelters. The first allegation requires interpretation of federal law, namely, federal tax law. However, the second allegation does not. In order to establish that Defendants breached their fiduciary duty to Plaintiffs or acted fraudulently in this regard, Plaintiffs would not have to show that the tax shelters promoted by Defendants were in fact illegal. Rather, Plaintiffs could establish liability by showing that Defendants failed to disclose material facts to Plaintiffs, e.g., that the IRS notices and warnings expressed concern about the tax...