Poulos v. Naas Foods, Inc.

• Decision Date: 18 March 1992
• Docket Number: No. 90-3837,90-3837
• Parties: Gus POULOS and A.G.P. Marketing, Plaintiffs-Appellants, v. NAAS FOODS, INCORPORATED and Ranks, Hovis, McDougall, PLC Group (RHM Holdings U.S.A. Incorporated), Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 69

959 F.2d 69

22 Fed.R.Serv.3d 499

Gus POULOS and A.G.P. Marketing, Plaintiffs-Appellants, v. NAAS FOODS, INCORPORATED and Ranks, Hovis, McDougall, PLC Group (RHM Holdings U.S.A. Incorporated) Defendants-Appellees.

No. 90-3837.

United States Court of Appeals Seventh Circuit.

Argued Oct. 17, 1991.

Decided March 18, 1992.

Robert Sutton (argued), Sutton & Kelly, Milwaukee, Wis., for plaintiffs-appellants.

Michael E. Husmann, John E. Flanagan (argued), Michael, Best & Friedrich, Milwaukee, Wis., for defendants-appellees.

Before BAUER, Chief Judge, and CUDAHY and EASTERBROOK, Circuit Judges.

CUDAHY, Circuit Judge.

We are faced with an interesting problem regarding our diversity jurisdiction. Gus Poulos, a resident (and citizen) of Illinois, worked as a sales representative for Naas Foods, whose principal place of business is in Indiana. Ranks, Hovis, McDougall, PLC Group (RHM Holdings U.S.A. Inc.) (RHM) owns Naas and has its principal place of business in Illinois. Naas terminated its relationship with Poulos, apparently unhappy with his performance. Soon thereafter Poulos sued both Naas and RHM in Wisconsin state court, alleging violations of the Wisconsin Fair Dealership Law, Wis. Stat. § 135 (1989-90) (WFDL).

After a fair amount of discovery, the Wisconsin court granted summary judgment for RHM, finding that Poulos had failed to present any evidence to support holding RHM liable under the WFDL. Nonetheless, the court gave Poulos leave to reinstate his claim against RHM should relevant evidence turn up. With RHM gone from the case, Naas removed the proceedings to the federal district court for the Eastern District of Wisconsin. Naas alleged that the citizenship of the remaining parties was completely diverse ¹ and that the amount in controversy exceeded $50,000. See 28 U.S.C. § 1332(a) (1988).

Poulos moved to remand the case to state court. He argued that although the state court had dismissed RHM from the case, removal was inappropriate because the dismissal was involuntary. The district court denied the motion, on the ground that RHM had been fraudulently joined. 132 F.R.D. 513, 519 (1990). Later, when Poulos refused to turn over his tax returns in response to a court order, the court dismissed the case with prejudice. Order of Dismissal (Nov. 19, 1990).

Poulos appeals, arguing that the district court should have remanded the case to state court, should not have compelled him to produce his tax returns and should not have dismissed the case with prejudice when he refused. We affirm.

I. Jurisdiction

Broadly speaking, the purpose of federal diversity jurisdiction is to provide a neutral forum for lawsuits between parties from different states. Unsympathetic to the expansion of our jurisdiction, however, and deferential to the prerogatives of state courts, we have traditionally interpreted our diversity jurisdiction narrowly. An example of our strict construction of our jurisdictional statutes is the complete diversity rule of Strawbridge v. Curtiss, 7 U.S. (3 Cranch) 267, 2 L.Ed. 435 (1806). In Strawbridge, the Court held that a statute granting federal jurisdiction over civil actions "between a citizen of a state where the suit is brought, and a citizen of another state" (now 28 U.S.C. § 1332) applied only to cases in which no party shared common citizenship with any party on the other side of the dispute. Id. 7 U.S. at 267. In the case before us, because Poulos and RHM are both Illinois citizens, there could be no federal diversity jurisdiction until RHM dropped out. ²

There are two ways for a diversity suit to wind up in federal court. A plaintiff may bring an action to federal court directly, or a defendant may remove a case to federal court from state court within 30 days of its inception. 28 U.S.C. § 1446 (1988). There is another wrinkle, however. Under some circumstances, a state court dispute that cannot be removed to federal court in its original incarnation may become removable later. In relevant part, 28 U.S.C. § 1446(b) provides:

If the case stated by the initial pleading is not removable, a notice of removal may be filed within thirty days after receipt by the defendant, through service or otherwise, of a copy of an amended pleading, motion, order or other paper from which it may first be ascertained that the case is one which is or has become removable, except that a case may not be removed on the basis of [diversity of citizenship] more than 1 year after commencement of the action.

In this case, Naas filed its notice of removal within 30 days of the entry of summary judgment for RHM, an "order or other paper" from which it ascertained that the parties were now completely diverse and the case was removable.

A. The Voluntary/Involuntary Rule

Before 1949, when the language just quoted was added to the removal statute, the Supreme Court held that cases with non-diverse parties did not become removable just because a non-diverse defendant was dismissed from the case. Whitcomb v. Smithson, 175 U.S. 635, 638, 20 S.Ct. 248, 250, 44 L.Ed. 303 (1900); American Car & Foundry Co. v. Kettelhake, 236 U.S. 311, 316, 35 S.Ct. 355, 356, 59 L.Ed. 594 (1915). Instead, the Court held that such suits were removable only if the plaintiff voluntarily dismissed a non-diverse defendant. Kettelhake, 236 U.S. at 316, 35 S.Ct. at 356; see also Self v. General Motors Corp., 588 F.2d 655, 657-58 (9th Cir.1978) (discussing history and collecting cases). Poulos argues that this lawsuit should have been remanded to state court because the dismissal of RHM was involuntary. Naas argues that the voluntary/involuntary rule has been overruled by section 1446(b). This circuit has never addressed the question.

The voluntary/involuntary rule serves two purposes. First, the rule contributes to judicial economy. Removal following an involuntary dismissal may be only temporary: the plaintiff may appeal the dismissal in state court, and success on appeal would lead to the reinstatement of the non-diverse party, destroying federal jurisdiction and compelling remand to the state court. Quinn v. Aetna Life & Casualty Co., 616 F.2d 38, 40 n. 2 (2d Cir.1980). We are anxious to avoid this sort of yo-yo effect. Second, some courts have invoked a general principle of deference to the plaintiff's choice of forum. See, for example, Self, 588 F.2d at 659; Insinga v. La Bella, 845 F.2d 249, 253 (11th Cir.1988). Allowing removal only when the plaintiff voluntarily dismisses a defendant ensures that the plaintiff will not be forced out of state court without his consent. Of course, this principle of deference is entirely inconsistent with the apparent purpose of the removal statute--to give defendants a means to escape the plaintiff's hometown forum--but it is consistent with our general desire to limit federal jurisdiction. See, for example, Louisville & N.R. Co. v. Mottley, 211 U.S. 149, 152, 29 S.Ct. 42, 43, 53 L.Ed. 126 (1908) (announcing the "well-pleaded complaint" rule: plaintiff may avoid federal jurisdiction by presenting only state law claims, even if defense raises federal question); see also 28 U.S.C. § 1359 (1988) (prohibiting collusive creation of federal jurisdiction, but not prohibiting collusive destruction of jurisdiction).

Every court of appeals that has addressed the voluntary/involuntary rule has held that it survived the enactment of section 1446(b). Weems v. Louis Dreyfus Corp., 380 F.2d 545, 548 (5th Cir.1967); Self, 588 F.2d at 657-60 (assuming that voluntary/involuntary rule applies without discussion of § 1446(b)); De Bry v. Transamerica Corp., 601 F.2d 480, 486-88 (10th Cir.1979); Quinn, 616 F.2d at 40 n. 2 (dictum); In re Iowa Mfg. Co., 747 F.2d 462, 464 (8th Cir.1984); Higgins v. E.I. Du Pont de Nemours & Co., 863 F.2d 1162, 1166 (4th Cir.1988) (dictum); see also 1A James W. Moore, et al., Moore's Federal Practice p 0.168[3.-5-6] at 597 & n. 7 (2d ed. 1991). The district courts in this circuit agree. Ushman v. Sterling Drug, Inc., 681 F.Supp. 1331, 1334-37 (C.D.Ill.1988); Vidmar Buick Co. v. General Motors Corp., 624 F.Supp. 704, 706-07 (N.D.Ill.1985) (dictum). We will not buck the trend, nor will we rehash the legislative history. Suffice it to say that when Congress referred to "a case which is or has become removable," in section 1446(b), Congress apparently intended to incorporate the existing definition of "removable," a definition that included the voluntary/involuntary rule. S.Rep. No. 303, 81st Cong., 1st Sess. (1949), reprinted in 1949 U.S.Code Cong.Serv. 1248, 1268 (amendment is "declaratory of the existing rule laid down by the decisions"); see also Weems, 380 F.2d at 548; and Ushman, 681 F.Supp. at 1336.

In sum, the district court's scholarly analysis of this issue is quite correct. 132 F.R.D. at 519. Absent other considerations, the court should have remanded this case to state court under the voluntary/involuntary rule. ³

B. Fraudulent Joinder

As the discussion to this point indicates, the complete diversity rule and the voluntary/involuntary rule make it difficult for an out-of-state (diverse) defendant to remove a case to federal court if an in-state (non-diverse) defendant has ever been party to the lawsuit. But there is one more route to removal. If Naas can show that the joinder of RHM was fraudulent, then removal will be allowed. Wilson v. Republic Iron & Steel Co., 257 U.S. 92, 97, 42 S.Ct. 35, 37, 66 L.Ed. 144 (1921).

This court has never before addressed fraudulent joinder, and the parties dispute the meaning and application of the doctrine. Poulos argues that he presented his claim against RHM in good faith and that "a parent corporation of a wholly owned subsidiary may be liable to answer for a subsidiary depending upon the factual circumstances." Poulos Br. at 3-4. Naas questions Poulos' intentions but argues that they are irrelevant. It is enough, Naas argues, that Poulos failed to state a viable claim against RHM.

When speaking of jurisdiction, "fraudulent" is...