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Fourth Circuit Permits Removal after Dismissal of State-court Lawsuit
Practical Law Legal Update 7-522-4478 (Approx. 3 pages)
Fourth Circuit Permits Removal after Dismissal of State-court Lawsuit
by PLC Litigation
| Published on 14 Nov 2012 • USA (National/Federal) |
In Brockway v. Evergreen International Trust, the US Court of Appeals for the Fourth Circuit held that a case may be removed from state court to federal district court even after the state court dismisses the suit.
On November 9, 2012, the US Court of Appeals for the Fourth Circuit issued an opinion in Brockway v. Evergreen International Trust, upholding a district court order administratively closing and terminating the action with prejudice. The Fourth Circuit rejected the plaintiff's argument that, because the defendant removed the action to federal court after the state court had already dismissed the case, the district court therefore lacked subject matter jurisdiction over the lawsuit.
Key Litigated Issue
The key litigated issue in the case was whether the defendant in a state-court action can remove the case to federal court after the state court dismisses the suit.
Background
The Brockway litigation began in 2003, when the plaintiff sued a mutual fund and the fund's investment adviser in Illinois state court for allegedly failing to prevent other investors from engaging in a short-term trading strategy known as "market timing."
Initial Removal Attempts
The defendants removed the case to the US District Court for the Southern District of Illinois twice, arguing the case was removable under, and preempted by, the Securities Litigation Uniform Standards Act (SLUSA). Both times, the case was remanded back to state court.
State-court Litigation Following Second Remand
After the second remand, the defendants moved in state court for judgment on the pleadings, arguing the plaintiff's claims were preempted by SLUSA. The state trial court denied the motion.
On appeal, the state appellate court held that the plaintiff's claims were, indeed, precluded by SLUSA and directed the trial court to dismiss the action. About a week later, the state trial court dismissed the case with prejudice.
Shortly after the dismissal, the plaintiff moved in the state trial court to modify the order to provide that the dismissal was without prejudice and also requested leave to file an amended complaint.
Post-dismissal Removal
Before the state trial court could rule on the plaintiff's motions to modify the dismissal order and to amend the complaint, the defendants removed the case to the Southern District of Illinois for a third time. According to the defendants, the Illinois appellate court's ruling that the case was preempted by SLUSA created a new basis for removal under 28 U.S.C. Section 1446 that had not previously existed.
The plaintiff then moved to remand the case back to state court. But before the Southern District of Illinois could rule on that motion, the Judicial Panel on Multidistrict Litigation (JPML) transferred the case to the US District Court for the District of Maryland. Following the JPML transfer, the District of Maryland approved a class settlement which settled the plaintiff's claims, and administratively closed the Brockway case. The district court also denied the plaintiff's motion to remand and to amend his complaint.
Following the District of Maryland's order administratively closing Brockway, the plaintiff appealed to the Fourth Circuit. On appeal, the plaintiff argued, among other things, that the third removal was improper because the case had already been dismissed by the Illinois state trial court. According to the plaintiff, because removal was based on allegations in the original complaint, and the original complaint was no longer operative after the Illinois court's dismissal order, the federal court lacked subject matter jurisdiction over his case.
Outcome
The Fourth Circuit held that removal was proper, and that the district court had subject matter jurisdiction, even though the Illinois state court had dismissed the case prior to removal. The Fourth Circuit reasoned that, despite dismissing the case, the Illinois court still had the authority to modify, amend or vacate its dismissal order. In addition, the plaintiff had filed motions in the state court to modify the dismissal order and to amend his complaint. Therefore, according to the Fourth Circuit, the original complaint remained operative at the time of removal, and the case was removable under SLUSA based on the claims made in that complaint.
Practical Implications
The Brockway case shows that it pays to be persistent when seeking removal to federal court. Even if it appears that the state-court litigation has been terminated in the defendant's favor, there still may be good reasons to get the case before a federal judge (assuming there is a valid basis for removal at this stage in the lawsuit). For example, had the Illinois state court granted the Brockway plaintiff's motion to amend his complaint, the plaintiff could have conceivably alleged claims that were not preempted by SLUSA, thereby extending the litigation. However, by diligently removing the lawsuit after the Illinois trial court's dismissal order, the defendants were able to avoid litigating new claims in state court, and bring an end to this nine-year litigation relatively quickly.