Salman v. Arthur Andersen Llp

• Decision Date: 31 January 2005
• Docket Number: No. CIV. 04-1199 JBACT.,CIV. 04-1199 JBACT.
• Citation: 375 F.Supp.2d 1233
• Parties: William SALMAN, David Salman, Francis Koenig and related entities, Plaintiffs, v. ARTHUR ANDERSEN LLP, a Colorado limited liability partnership, and Arthur Andersen LLP, an Illinois limited liability partnership (collectively referred to as "Andersen"), Defendants.
• Court: U.S. District Court — District of New Mexico

375 F.Supp.2d 1233

William SALMAN, David Salman, Francis Koenig and related entities, Plaintiffs, v. ARTHUR ANDERSEN LLP, a Colorado limited liability partnership, and Arthur Andersen LLP, an Illinois limited liability partnership (collectively referred to as "Andersen"), Defendants.

No. CIV. 04-1199 JBACT.

United States District Court, D. New Mexico.

January 31, 2005.

Mark Sheridan, Bradford C. Berge, Ocean Munds Dry, Holland & Hart, LLP, Santa Fe, NM, for Plaintiff.

Gregory D. Huffaker, Jr., Huffaker & Moffett, LLC, Santa Fe, NM, Karen M. Asner, Danielle M. Smith, White & Case LLP, New York City, for Defendants.

MEMORANDUM OPINION AND ORDER

BROWNING, District Judge.

THIS MATTER comes before the Court on the Plaintiffs' Motion to Remand to State District Court and Request for Expedited Hearing, filed November 19, 2004 (Doc. 8).¹ The Court held a hearing on this motion on January 27, 2005. The primary issue is whether the Defendants, two Arthur Andersen LLP's ("Andersen"), have shown that the Court has federal question jurisdiction from the face of the Plaintiffs' Complaint. Because the potential federal issue in this case — sovereignty of a federal court order over a state court injunction — does not appear on the Complaint's face, and will only arise by way of defense, the Court will grant the Plaintiffs' motion and remand the case to state court.

PROCEDURAL BACKGROUND

Andersen entered an agreement and professional relationship with Plaintiffs William Salman, David Salman, Francis Koenig, and related entities (the "Salmans"). In September of 2002, the Internal Revenue Service ("IRS") filed a petition in the United States District Court for the Northern District of Illinois to enforce nineteen summonses based on its belief that Anderson was promoting potentially abusive tax shelters and not registering such transactions in violation of internal revenue laws and regulations. In response, the IRS and Andersen entered into a stipulated order that required Andersen to produce a privilege log. The privilege log listed documents related to the Salmans. Andersen also indicated that it might, in the future, have to produce documents on the privilege log.

The Salmans contend that Andersen breached its duties to the Salmans under the professional agreement and relationship it had with them, and that it threatens to breach it in the future. To remedy past wrongs, and to prevent future disclosures, the Salmans filed their Complaint and Request for Injunctive Relief on September 30, 2004, in the District Court for Santa Fe County, State of New Mexico. The Salmans have brought this case to seek a remedy for past and future breaches of an agreement and the professional relationship. The IRS is not a party to this New Mexico state court action.

In the Complaint, the Salmans seek relief based on breach of contract, a declaratory judgment that the Salmans' documents which Andersen holds are privileged and that Andersen should not disclose them, and injunctive relief enjoining Andersen from releasing the Salmans' privileged documents. Specifically, the Salmans' first claim of relief is for breach of contract based on state law because Anderson allegedly breached its duty to preserve the Salmans' confidential documents.² The Salmans' second claim requests a declaratory judgment based on state common law and statutory privileges. See Stroud v. Arthur Andersen & Co., 37 P.3d 783, 789 (Okla.2001) ("The scope of Andersen's duty of care owed as a provider of professional accounting services is established not only by the formalized standards adopted by the American Institute of Certified Public Accounts — i.e., GAAS and GAAP — but also by the Oklahoma statutory and regulatory provisions which govern the field.").³ The Salmans' third claim for relief is for an injunction to prevent Anderson from further releasing privileged and confidential documents.

In its attempt to show a federal question on the face of the Complaint, Andersen primarily relies on one paragraph in the Complaint: "52. Plaintiffs request a judicial declaration from this Court that the documents listed on Plaintiffs' privileged logs are privileged documents and should not be disclosed to the IRS." Complaint ¶ 52, at 12. See Transcript of Hearing at 41:14-18.⁴ Andersen also points to one clause in the Prayer for Relief seeking "a permanent injunction enjoining Andersen enjoining Andersen from releasing Plaintiffs' privileged documents to the IRS absent a ruling by the Court that the documents are not privileged." Complaint, Prayer for Relief ¶ 5, at 13.

The Complaint was served on Arthur Andersen L.L.P., on or about October 4, 2004, and again on its registered agent for service of process on or about October 15, 2004. On October 13, 2004, the state district court granted the Salmans' request for a temporary restraining order and ordered Andersen enjoined from taking any action with regard to the Salmans' files to any person, for a period of ten days or until hearing on the Salmans' motion for preliminary injunction. The state court set the hearing on the motion for preliminary injunction for October 21, 2004.

The day before the hearing, October 20, 2004, the Salmans filed a Notice of Removal, removing the case from state district court to this Court. Andersen thereby canceled the hearing set for October 21, 2004 in the state court proceeding. Andersen has not sought to reschedule the hearing. The October 13, 2004 Order remains in effect by its terms.

Anderson, in its Notice of Removal, asserts that this action involves questions of federal law as grounds for removal. The Salmans move to remand this matter to state district court.

LAW ON FEDERAL QUESTION JURISDICTION AND REMOVAL

Federal courts are of limited jurisdiction, and there is a presumption against the existence of federal jurisdiction. See Basso v. Utah Power & Light Co., 495 F.2d 906, 909 (10th Cir.1974). Removal statutes are therefore strictly construed, and ambiguities are resolved in favor of remand. See Martin v. Franklin Capital Corp., 251 F.3d 1284, 1289-90 (10th Cir.2001). "If jurisdiction is challenged, the burden is on the party claiming jurisdiction to show it by a preponderance of the evidence," and federal courts will "presume no jurisdiction exists absent an adequate showing by the party invoking federal jurisdiction." Karnes v. Boeing Co., 335 F.3d 1189, 1193, 1194 (10th Cir.2003).

A court may remand a case sua sponte or at the request of a party. See, e.g., Laughlin v. Kmart Corp., 50 F.3d 871, 873 (10th Cir.), cert. denied, 516 U.S. 863, 116 S.Ct. 174, 133 L.Ed.2d 114 (1995). Indeed, the removal statute provides that a case "shall" be remanded "[i]f at any time before final judgment it appears that the district court lacks subject matter jurisdiction." 28 U.S.C. § 1447(c).

Under the removal statute, "any civil action brought in a State court of which the district courts of the United States have original jurisdiction, may be removed by the defendant...." 28 U.S.C. § 1441(a). There is a federal question if the case arises under the Constitution, laws, or treatises of the United States. See 28 U.S.C. § 1331.

Whether a case arises under a federal law is determined by the "well-pleaded complaint rule." Franchise Tax Bd. of Cal. v. Construction Laborers Vacation Trust for Southern Cal., 463 U.S. 1, 9, 103 S.Ct. 2841, 77 L.Ed.2d 420 (1983). This determination is made by examining the plaintiff's complaint, "unaided by anything alleged in anticipation of avoidance of defenses which it is thought the defendant may interpose." Id. at 10, 103 S.Ct. 2841. The Supreme Court of the United States has further limited subject matter jurisdiction by requiring that the federal law relied on in the plaintiff's complaint creates a private cause of action. See id. at 25-26, 103 S.Ct. 2841. Additionally, "the mere presence of a federal issue in a state cause of action does not automatically confer federal-question jurisdiction." Merrell Dow Pharmaceuticals Inc. v. Thompson, 478 U.S. 804, 813, 106 S.Ct. 3229, 92 L.Ed.2d 650 (1986). See Sandoval v. New Mexico Technology Group, L.L.C., 174 F.Supp.2d 1224, 1232 n. 5 (D.N.M.2001)(Smith, J.) ("Merrell Dow is the controlling law when invoking subject matter jurisdiction" when a right under state law turns on construing federal law). The federal question must be "substantial" to meet the jurisdictional test. See Merrell Dow Pharmaceuticals Inc. v. Thompson, 478 U.S. at 813, 106 S.Ct. 3229.

The plaintiff's mere citation to a federal statute does not create a federal question. In Sandoval v. New Mexico Technology Group, L.L.C., the plaintiff's wrongful discharge claim cited to various labor-related federal statutes, which the defendant used to base its federal question removal. Magistrate Judge Smith found that, although the wrongful discharge claim was alleging violation of federal law, there was not a federal private cause of action under or related to the federal statutes that the plaintiff cited. See 174 F.Supp.2d at 1229. Magistrate Judge Smith also held that there was no "substantial, disputed questions of federal law" because the right under state law did not turn on construction of federal law. Id. at 1230.

26 U.S.C. § 7402

26 U.S.C. § 7602 provides the IRS with authority to examine books and witnesses. Section 7602(a)(2) authorizes the IRS "[t]o summon ... any person having possession ... of books... to produce such books, papers, records or other data ..." 26 U.S.C. § 7602(a)(2).

Section 7402 permits a federal district court to enforce IRS summonses. Section 7402(b) provides jurisdiction to district courts to enforce summons:

If any person is summoned under the internal revenue laws to appear, to testify, or to produce books, papers, or other data, the district court of the United States for the district in which such person resides or may be found shall have jurisdiction by appropriate process to compel such attendance, testimony, or...