Sullivan v. First Affiliated Securities, Inc.

Citation813 F.2d 1368
Decision Date20 April 1987
Docket NumberNo. 85-2961,85-2961
PartiesMary Lou SULLIVAN, Daniel T. Sullivan, William T. Sullivan, Jr., Kenneth C. Martin, Perry Kenny, Calvin F. Robinson, Catherine D. Robinson, Sydney Krogstad, Beverly Krogstad, Joseph S. Wand, Robert G. Mesires, William E. Coyle, Diane H. Coyle, Dan Boyd, Roxana Boyd, Thomas D. Adamson, Mark Adamson, Thomas C. Miller, Brian J. Miller, Robert E. Richardson, Raymond D. Sussman, Anjali Sussman, and Cerena Wong, all individuals; Malm Metal Products, Inc., a California corporation, Malm Metal Products, Inc. Defined Benefit Plan, Pine Creek Development Corporation Pension Plan and Trust, Pine Creek Properties, a California limited partnership, Robert E. Richardson, M.D., P.C., Defined Benefit Pension Plan and Trust, Joseph S. Wand, M.D., Inc., Pension and Profit Sharing Plan and Able Fence Co., Inc., a California corporation, Plaintiffs- Appellants, v. FIRST AFFILIATED SECURITIES, INC., a California corporation, Larry Gibson, Harold E. Card, Ronald R. Walker, Carl E. Wright, Wright Herfordt & Sanders, Raymond Jallow, Thomas Tierney, Tierney & Ernst, Ira W. Palmer, William H. Palmer, John P. Redd, Tim D. Compton, Paul J. Keil, Financial Communications Group, Ltd., Peat, Marwick, Mitchell & Co., Process Management Co., Inc. and Does One through Twenty, Doe Corporations Twenty-One through Forty, and Doe Partnerships Forty-One through Sixty, Defendants-Appellees.
CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)

Bruce R. MacLeod, San Francisco, Cal., for plaintiffs-appellants.

Michael F. Perlis and Sharon L. O'Grady, San Francisco, Cal., for defendants-appellees.

Appeal from the United States District Court for the Northern District of California.

Before SCHROEDER, WIGGINS and THOMPSON, Circuit Judges.

WIGGINS, Circuit Judge:

This is an interlocutory appeal from the district court's order denying plaintiffs' motion to remand plaintiffs' state claims to state court. Plaintiffs filed two parallel securities actions, one in federal court under federal law and one in state court under state law. Defendants removed the state claims to federal court. In its order denying remand, the district court based its decision on its analysis of the "artful pleading" doctrine as articulated in Federated Department Stores, Inc. v. Moitie, 452 U.S. 394, 101 S.Ct. 2424, 69 L.Ed.2d 103 (1981), and Salveson v. Western States Bankcard Association, 731 F.2d 1423 (9th Cir.1984). Moitie and Salveson, however, involved the res judicata effect previously adjudicated federal claims had upon state claims. Because the filing of the federal claims in this case has no res judicata effect upon the state claims, we reverse.


The plaintiffs (collectively "Investors") are thirty-four mostly California residents who purchased stock of a Missouri based corporation, Midwestern Companies (Midwestern). Defendants (collectively "FAS-Midwestern") are: First Affiliated Securities, Inc. (FAS), a California stock brokerage firm; Larry Gibson, its broker; and insiders of Midwestern (its former officers, directors, accountants and attorneys).

In February 1985, the Investors filed suit in the California Superior Court for Sonoma County against FAS-Midwestern (the "state action"), 1 alleging, among other claims, fraud, negligent misrepresentation, and breach of fiduciary duty under California common law, and violations of California's "blue sky" securities laws, Cal.Corp.Code Secs. 1507(a), 2254, 25401 and 25402. The Investors alleged in part that the Midwestern insiders misrepresented the amount of the company's assets, and that FAS and Gibson misrepresented its income potential.

In March 1985, before serving summons in the state action, the Investors sued FAS-Midwestern in the United States District Court for the Northern District of California (the "federal action"), alleging substantially the same facts and asserting claims under the Securities Exchange Act of 1934 (the "1934 Securities Act"), as amended, 15 U.S.C. Secs. 78a-78 lll, and the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. Secs. 1961-1968.

Other Midwestern shareholders brought three federal securities class actions against the Midwestern insiders. The three class actions were consolidated in the United States District Court for the Western District of Missouri. The Investors have opted out of the consolidated class action. 2

In June 1985, FAS-Midwestern removed the state action to the United States District Court for the Northern District of California, then moved to transfer the state and federal actions to the Missouri federal court. The Investors did not contest the transfer of the federal action to Missouri, but moved to remand the state action to the state court for lack of removal jurisdiction. The district court denied the motion to remand, concluding:

Plaintiffs filed their Federal Action shortly after the filing of their State Action and prior to defendants' removal of the State Action. Further, plaintiffs have evidenced their intention to utilize affirmatively the processes of the federal court to redress the identical claimed injury alleged in their State Action.

In these circumstances, this Court finds that the authorities in this Circuit support defendants' removal of plaintiffs' State Action [citing Moitie and Salveson ]. Plaintiffs' contemporaneous filing of their Federal Action precludes them from defeating removal by the "artful pleading" of the same operative facts as state law claims.

The court denied the Investors' motion for reconsideration of the denial of remand, but certified the remand issue for interlocutory appeal. The Investors timely filed a petition for leave to file an interlocutory appeal, which we granted under 28 U.S.C. Sec. 1292(b).


Generally, the denial of a motion to remand an action removed from state to federal court under the artful pleading doctrine is a question of federal subject matter jurisdiction which we review de novo. Bright v. Bechtel Petroleum, Inc., 780 F.2d 766, 768 (9th Cir.1986). The Supreme Court has suggested, however, that the artful pleading inquiry involves a "factual finding," Moitie, 452 U.S. at 397 n. 2, 101 S.Ct. at 2427 n. 2, and in Salveson we applied the clearly erroneous standard to the district court's finding of artful pleading, 731 F.2d at 1429 (citing Fed.R.Civ.P. 52(a)). As the question whether plaintiffs' claims are federal or not would seem to be a legal question, see Moitie, 452 U.S. at 409 & n. 5, 101 S.Ct. at 2433 and n. 5 (Brennan, J., dissenting); Travelers Indem. Co. v. Sarkisian, 794 F.2d 754, 761 n. 9 (2d Cir.), cert. denied, --- U.S. ----, 107 S.Ct. 277, 93 L.Ed.2d 253 (1986), and there are no disputed facts, we review de novo. See Bright, 780 F.2d at 768. The burden of establishing jurisdiction falls on the party invoking the removal statute, Hunter v. United Van Lines, 746 F.2d 635, 639 (9th Cir.1984), cert. denied, --- U.S. ----, 106 S.Ct. 180, 88 L.Ed.2d 150 (1985), which is strictly construed against removal, Salveson, 731 F.2d at 1426.


The Investors contend that removal is improper because the state action relies solely on state law for relief. A suit may be removed to federal court under 28 U.S.C. Sec. 1441(a) only if it could have been brought there originally. See Franchise Tax Bd. v. Construction Laborers Vacation Trust, 463 U.S. 1, 10, 103 S.Ct. 2841, 2846, 77 L.Ed.2d 420 (1983). Federal district courts have original federal question jurisdiction of actions "arising under the Constitution, laws, or treaties of the United States." 28 U.S.C. Sec. 1331. 3

We begin our analysis with a fundamental tenet of federal jurisdiction--the "well-pleaded complaint" rule. A case "arises under" federal law within the meaning of section 1331 only if a federal question appears on the face of plaintiff's well-pleaded complaint; original jurisdiction is lacking even if a defense is alleged to be based exclusively on federal law. Louisville & Nashville R.R. Co. v. Mottley, 211 U.S. 149, 152, 29 S.Ct. 42, 43, 53 L.Ed. 126 (1908); Hunter, 746 F.2d at 639. The defendant cannot obtain removal jurisdiction merely by asserting a federal defense. Hunter, 746 F.2d at 639. The plaintiff is "master to decide what law he will rely upon," The Fair v. Kohler Die & Specialty Co., 228 U.S. 22, 25, 33 S.Ct. 410, 411, 57 L.Ed. 716 (1913), and, if he can maintain his claim on both state and federal grounds, he may ignore the federal question and assert only a state law claim and defeat removal, Hunter, 746 F.2d at 641; 1 A J. Moore & B. Ringle, Moore's Federal Practice p 0.160[3.-3], at 231-32 (2d ed. 1986). 4

However, the plaintiff cannot defeat removal by masking or "artfully pleading" a federal claim as a state claim:

[O]ccasionally the removal court will seek to determine whether the real nature of the claim is federal, regardless of plaintiff's characterization. For instance, in many contexts plaintiff's claim may be one that is exclusively governed by federal law, so that the plaintiff necessarily is stating a federal cause of action, whether he chooses to articulate it that way or not. If the only remedy available to plaintiff is federal, because of preemption or otherwise, and the state court necessarily must look to federal law in passing on the claim, the case is removable regardless of what is in the pleading.

14A C. Wright, A. Miller & E. Cooper, Federal Practice & Procedure Sec. 3722, at 268-75 (2d ed. 1985) (citations omitted). The "artful pleading" doctrine is a narrow exception to the straightforward rules of removal jurisdiction, which we will apply only if "the particular conduct complained of [is] governed exclusively by federal law." Hunter, 746 F.2d at 640. Further, we will invoke the doctrine "only in exceptional circumstances as it raises difficult issues of state and federal relationships and often yields unsatisfactory results." Salveson, 731...

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