Mirchandani et al v. BMO Harris Bank NA et al

Filing 17

ORDER that Plaintiff's Motion to Remand Doc. 9 is granted and this matter is remanded to the Superior Court of Maricopa County. Defendant TradeCor's Motion to Dismiss Doc. 7 is therefore dismissed as moot. Signed by Judge G Murray Snow on 12/5/2011. (Attachments: # 1 Remand Letter)(KMG)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE DISTRICT OF ARIZONA

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Haresh Mirchandani; Indra Mirchandani,)
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Plaintiffs,
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vs.
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BMO Harris Bank NA; TradeCor Desert)
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Sky II LLC,
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Defendants.
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No. CV-11-2286-PHX-GMS
ORDER

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Pending before the Court is Plaintiffs’ Motion for Remand (Doc. 9). For the reasons
stated below, the motion is granted.
BACKGROUND

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On November 14, 2011, Plaintiffs Haresh and Indra Mirchandani filed this suit in

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Superior Court in Maricopa County. (Doc. 1, Ex. B). The dispute arises out of three 2007

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loans that a predecessor to Defendant BMO Harris Bank (“BMO”) issued to SS Quality

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Fuels, LLC (“Quality”), an LLC of which Plaintiffs are the sole members. Plaintiffs were the

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Guarantors on the three loans (collectively “the loans”), and the loans were secured with

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deeds of trust to a piece of property owned by Quality (“the property”). Defendant TradeCor

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Desert Sky II, LLC (“TradeCor”), later acquired the bank’s interest in the deeds of trust

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securing the loans, which are now in default, and scheduled a trustee’s sale for November

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29, 2011. Plaintiffs allege that Defendant BMO entered the loan terms incorrectly,

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overcharged loan fees, and sold Plaintiffs an additional “swap” loan that Plaintiffs did not

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understand. (Id.). They allege that BMO and TradeCor conspired to sell the Deeds of Trust

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to TradeCor so that TradeCor could foreclose upon the property, which is adjacent to other

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property owned by TradeCor. (Id.).

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M & I Marshall Bank (“M & I”), predecessor to BMO, issued a term loan to Quality

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in the amount of $1,960,000 and a Revolving Line of Credit (“RLOC”) of $150,000 on

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December 11, 2007. (Doc. 7, Ex. B). The next day, the bank sold Quality a “swap

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agreement,” whereby it could swap its interest obligations with a counter-party on a similar

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amount of indebtedness. (Doc. 1, Ex. B(3)). On December 23, 2008, Quality fell behind on

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its loans, and on September 1, 2009, entered into a forbearance agreement with M &I. (Doc.

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7, Ex. B). In the agreement, M & I agreed to forbear its right to foreclose on the property, and

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Quality released “Lender and Lender’s . . . partners, predecessors, successors and assigns,”

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from “any and all actions and causes of action . . . of any and every character, known or

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unknown, direct and/or indirect, at law or in equity, of whatsoever kind or nature, whether

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heretofore or hereafter arising, . . . including but not limited to matters in any way directly

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or indirectly arising out of or in any way connected to this Agreement, the Notes, the Deeds

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of Trust, the Loan Agreement, the Guarantee Document and/or any related documents.”

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(Doc. 7, Ex. B).

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On April 19, 2010, TradeCor purchased the Lender’s position in the Notes; on April

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20, their attorney wrote Plaintiffs to notify them that Quality was in default. (Doc. 7, Ex. D).

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TradeCor then sued Quality and Plaintiffs in Maricopa County Superior Court for breach of

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contract. Neither Quality, which had filed for bankruptcy protection in August of 2010, nor

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Plaintiffs responded to TradeCor’s motion for summary judgment, and judgment was entered

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against them on January 20, 2011. (Doc. 7, Ex. 4). On November 7, 2011, the bankruptcy

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court denied Quality’s reorganization plan and lifted the automatic stay, allowing TradeCor

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to exercise its rights in the property. (Doc. 7, Ex. 7). See In re SS Quality Fuels, LLC,

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2:10-bk-25372-GBN (Bankr. D. Ariz. 2010).

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The trustee’s sale had been scheduled for November 16, 2011, but was moved to
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November 29 when Plaintiffs filed for a TRO in state court. The state court set a preliminary

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injunction hearing for November 22. On November 21, the evening before the scheduled

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hearing and three days before Thanksgiving, BMO removed the case to federal court,

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claiming that diversity jurisdiction was proper because TradeCor, the only Arizona

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defendant, was fraudulently joined, and that federal question jurisdiction was proper because

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the state-law claims in the complaint “implicate significant federal issues.” (Doc. 1).

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Plaintiffs filed an emergency motion in this Court to prevent the sale of the property. This

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Court held a hearing on November 28. Because Quality, rather than Plaintiffs, was the owner

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of the property, Plaintiffs could not show that selling the property would personally cause

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them “irreparable harm,” and the motion for a TRO was denied. (Doc. 13).

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DISCUSSION
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Legal Standard

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“The party asserting jurisdiction has the burden of proving all jurisdictional facts.”

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Tectonics, Inc. v. Aero Alloy, 912 F.2d 1090, 1092 (9th Cir. 1990) (citing McNutt v. Gen.

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Motors Acceptance Corp., 298 U.S. 178, 189 (1936)). A case may be properly removed from

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state court if the district court could have exercised original jurisdiction. 28 U.S.C. § 1441(a)

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(2006). Federal jurisdiction is proper in all cases that present a federal question on the face

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of the complaint. 28 U.S.C. § 1331 (2006). In addition, federal question jurisdiction will lie

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when claims are filed under state law but nevertheless “turn on substantial questions of

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federal law, and thus justify resort to the experience, solicitude, and hope of uniformity that

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a federal forum offers on federal issues.” Grable & Sons Metal Products, Inc. v. Darue Eng’g

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& Mfg., 545 U.S. 308, 312 (2005).The question of federal law must be substantial, however,

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and “the mere presence of a federal issue in a state cause of action does not automatically

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confer federal-question jurisdiction.” Merrell Dow Pharms. Inc. v. Thompson, 478 U.S 804,

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813 (1986).

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In addition, the Court has subject-matter jurisdiction to rule on cases in which

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defendants and plaintiffs are citizens of different states and the amount in controversy is

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greater than $75,000. 28 U.S.C. § 1332 (2006). The Supreme Court has interpreted § 1332
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to require complete diversity between parties, where “the citizenship of each plaintiff is

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diverse from the citizenship of each defendant.” Caterpillar Inc. v. Lewis, 519 U.S. 61, 68

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(1996). However, if a plaintiff “fails to state a cause of action against a resident defendant,

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and the failure is obvious according to the settled rules of the state,” the district court may

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claim that the party is fraudulently joined, and assert jurisdiction. McCabe v. General Foods

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Corp., 811 F.2d 1336, 1339 (9th Cir. 1987).

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Although ordinarily courts determine federal jurisdiction “solely by an examination

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of the plaintiff’s case, without recourse to the defendant’s pleadings,” when “fraudulent

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joinder is an issue, we will go somewhat further.” Ritchey v. Upjohn Drug Co., 139 F.3d

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1313, 1318 (9th Cir. 1998). In Ritchey, the Ninth Circuit was asked to find that a defendant

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was fraudulently joined because claims filed against that defendant had been filed after the

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appropriate statute of limitations. Because it found that “the fact that the statute of limitations

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is a kind of procedural bar, and not one which relates to the merits of the case,” it found that

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the defendant was fraudulently joined and asserted jurisdiction. Id. at 1319. The Court noted,

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importantly, that fraudulent joinder inquiries do not rely on “whether those defendants could

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propound defenses to an otherwise valid cause of action,” and cited approvingly a Supreme

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Court case that “refused to find fraudulent joinder where a misjoinder of parties was claimed

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by the defendant that was trying to remove the action.” Id. at 1318–19 (citing Alabama Great

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S. Ry. Co. v. Thompson, 200 U.S 206, 218–19 (1906)). It further noted that joinder is not

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fraudulent when “the assertion made by the removing defendant ‘went to the merits of the

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action as an entirety, and not to the joinder; that is to say, it indicated that the plaintiff’s case

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was ill founded as to all the defendants.’” Ritchey, 139 F.3d at 1318 (quoting Chesapeake &

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Ohio Ry. Co. v. Cockrell, 232 U.S. 146, 153 (1914).

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In considering whether a defendant is fraudulently joined, “[t]he Court must therefore

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walk a very fine line: it must consider the merits of a matter without assuming jurisdiction

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over it.” Davis v. Prentiss Props. Ltd., 66 F. Supp. 2d 1112, 1114 (C.D. Cal. 1999). Courts

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in the Ninth Circuit have thus concluded “that some room must exist between the standard

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for dismissal under Rule 12(b)(6), for example, and a finding of fraudulent joinder.” Id. at
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1115. Even “where it is doubtful whether the complaint states a cause of action against the

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resident defendant, the doubt is ordinarily resolved in favor of the retention of the case in

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state court.” Ballesteros v. American Standard Ins. Co. of Wisc., 436 F. Supp. 2d 1070, 1072

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(D. Ariz. 2006) (quoting Albi v. Street & Smith Publ’ns., 140 F.2d 310, 312 (9th Cir. 1944)).

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Even a “‘glimmer of hope’ that plaintiff can establish claim is sufficient to preclude

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application of fraudulent joinder doctrine.” Ballesteros, 436 F. Supp. 2d at 1072 (quoting

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Gottlieb v. Westin Hotel Co., 990 F.2d 323, 327 (7th Cir. 1993)). In evaluating a number of

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decisions on fraudulent joinder from the Ninth Circuit and elsewhere, the district court in the

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Central District of California has concluded that “a federal court’s fraudulent-joinder

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consideration should be akin to an application of Rule 11.” Davis, 66 F. Supp. 2d at 1115.

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This analysis has since been cited approvingly by three other districts within the circuit, and

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disagreed with by none. See, e.g., Bellecci v. GTE Spring Commc’n Corp., 2003 WL 151538

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(N.D. Cal Jan. 14, 2003), Lujan v. Girardi & Keese, 2009 WL 5216906 (D. Guam Dec. 29,

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2009), Jennings-Frye v. NYK Logistics Americas Inc., 2011 WL 642653 (C. D. Cal. Feb. 11,

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2011). This Court finds the Rule 11 analogy helpful in determining whether a plaintiff’s

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inability to recover is “obvious according to the settled rules of the state.” McCabe, 811 F.2d

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at 1339.

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2.

Analysis

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BMO claims that removal is proper because 1) Plaintiffs’s state law claims rely on

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substantial questions of federal law, 2) Plaintiffs fraudulently joined TradeCor because the

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forbearance agreement precludes them from suing TradeCor, and 3) Plaintiffs’ fraudulently

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joined TradeCor because their claims are precluded by the state court judgment in

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TradeCor’s favor. For the reasons discussed below, all three claims fail.

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A.

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Plaintiffs allege that BMO breached the duty of good faith and fair dealing. In support

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of this allegation, they claim that BMO breached certain agreements with them, and then

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failed to file a Suspicious Activity Report as required by 12 C.F.R. § 21.11 (1989). (Doc. 1,

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Ex. B. ¶ 68). The regulation in question requires that banks “file a Suspicious Activity Report

Federal Question Jurisdiction

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when they detect a known or suspected violation of Federal law or a suspicious transaction

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related to a money laundering activity or a violation of the Bank Secrecy Act.” 12 C.F.R. §

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21.11(a). BMO argues that in order to rule on this claim “the Plaintiffs will have to establish

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that BMO violated 12 C.F.R. § 21.11, and their claim therefore poses a federal question.”

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(Doc. 1 at 8). Additionally, BMO claims that because Plaintiffs reference certain federal

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statutes and rules in their claim for a Temporary Restraining Order, that claim presents a

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federal question. (Doc 1 at 8). Since the Temporary Restraining Order has already been

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denied, only BMO’s claim regarding the good faith and fair dealing claim will be considered.

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A state court claim which relies on a defendant’s violation of a federal rule does not

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necessarily give rise to federal question jurisdiction. See Merrell Dow, 478 U.S at 813.

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Rather, federal question jurisdiction only lies when “the state action discloses a contested and

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substantial federal question,” and even then “the federal issue will ultimately qualify for a

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federal forum only if federal jurisdiction is consistent with congressional judgment about the

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sound division of labor between state and federal courts governing the application of §

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1331.” Grable & Sons, 545 U.S. at 313–14. The Ninth Circuit has denied federal jurisdiction

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when a party seeking removal has failed to show that a claim “necessarily depends upon

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construction of a substantial question of any federal . . . law.” Ultramar America, Ltd. v.

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Dwell, 900 F.2d 1412, 1414 (9th Cir. 1990). It has otherwise only found that purported state

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claims alleging violation of a federal law are removable when the referenced federal law

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“unequivocally confers exclusive jurisdiction on the federal courts” Sparta Surgical Corp.

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v. National Ass’n of Sec. Dealers, Inc., 159 F.3d 1209, 1211–12 (9th Cir. 1998) (emphasis

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added); see also California ex rel. Lockyer v. Dynergy, Inc., 375 F.3d 831, 841 (9th Cir.

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2004).

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BMO does not claim that “the meaning of the federal statute is in dispute” at all, let

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alone that interpreting the rule involves resolving a contested and substantial federal

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question. Grable & Sons, 545 U.S. at 315. It further does not claim that 12 C.F.R. § 21.11

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unequivocally confers exclusive federal jurisdiction, and it is not clear from the text of the

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regulation that it does so. Federal question jurisdiction is improper.
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B.

Forbearance Agreement

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Plaintiffs signed the forbearance agreement with M & I Bank on September 1, 2009,

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and amended it on December 1, 2009, then again in February 2010. BMO acknowledges that

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the forbearance agreement prohibits only suits complaining of conduct committed before it

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was signed. (Doc. 1 at 5). It states that although “the complaint contains allegations

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concerning conduct after February 2010, those allegations are aimed at BMO, not TradeCor.”

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(Id.). In fact, numerous allegations in the complaint aimed at TradeCor are for conduct it

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engaged in after the last amendment of the forbearance agreement. (Doc. 1, Ex. B ¶¶ 46–63,

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¶¶ 106–110).1 The forbearance agreement does not render TradeCor fraudulently joined.

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C.

Claim Preclusion

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Finally, BMO argues that the claims against TradeCor should have been raised as

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compulsory counterclaims in a suit TradeCor filed in Arizona state court for breach of

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contract, and that they are precluded by the judgment in that case. (Doc. 1 at 6). Plaintiffs

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allege that the earlier suit does not preclude their claim. They argue that the judgment was

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in effect a default judgment entered after their attorney failed to appear, the claims at issue

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were different, and no findings were issued. (Doc. 9).

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Parties’ motives are only minimally relevant to a fraudulent joinder inquiry because

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fraudulent joinder is “a term of art,” and does not require a finding of actual fraud. McCabe

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v. General Foods Corp., 811 F.2d 1336, 1339 (9th Cir. 1987). Nevertheless, here some

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discussion of parties’ actions is instructive. BMO removed this matter on November 21, the

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evening before a scheduled preliminary injunction hearing in state court, three days before

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a national holiday, and one week before the scheduled trustee sale. (Doc. 1). The scheduled

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hearing in state court therefore never took place, and Plaintiffs were left to file a motion for

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an emergency TRO on Wednesday, November 23, the day before Thanksgiving, in the hopes

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of receiving a hearing on Monday to prevent the sale of the property on Tuesday. At that

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BMO identifies a number of “exceptions,” to its statement that all claims against
TradeCor predate the agreement, all of which in fact involve conduct not covered by the
agreement.
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hearing, TradeCor’s attorney stated that the sudden removal “caught me a little bit off

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guard,” but at the time he had been guarded enough to consent to the removal and to file a

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motion to dismiss in federal court the day after the removal was filed. (Doc. 16 at 35; Doc.

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7). TradeCor has filed no briefings asserting that it was fraudulently joined, and declined the

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opportunity to be heard on the jurisdictional issue at the TRO hearing. (Doc. 16 at 9).

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Although fraudulent joinder is usually employed against Plaintiffs who have joined an

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improper party solely to keep a federal case in state court, here Defendants, rather than

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Plaintiffs, appear to have used procedural tactics to obtain a substantive advantage.

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In Arizona, “[t]he defense of claim preclusion has three elements: (1) an identity of

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claims in the suit in which judgment was entered and the current litigation, (2) a final

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judgment on the merits in the previous litigation, and (3) identity or privity between parties

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in the two suits.” In re General Adjudication of All Rights to Use Water in the Gila River

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System and Source, 212 Ariz. 64, 69–70, 127 P.3d 882, 887–88 (2006). Compulsory

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counterclaims are those that arise from the same transaction or occurrence that is the subject

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matter of the opposing party’s claim. Ariz.R.Civ.P. 13(a). Compulsory counterclaims are

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subject to the principles of res judicata. Levin v. Hindhaugh, 167 Ariz. 110, 111, 804 P.2d

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839, 840 (App.1990). Lansford v. Harris, 174 Ariz. 413, 419, 850 P.2d 126, 132 (App.

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1992).

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Plaintiffs argue that their claim is not precluded by TradeCor’s breach of contract suit

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because it involved different claims, no findings were issued, and the case was not litigated

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on the merits. (Doc. 9). Plaintiffs’ complaint alleges that TradeCor conspired with BMO to

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transfer the deeds of trust while aware that they had been recorded with numerous

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discrepancies that had not been properly reconciled, and despite a mandatory restriction in

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the swap that both parties must consent to its transfer. (Doc. 1, Ex. B ¶¶ 42–63). TradeCor

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asserted in its claim that Plaintiffs had failed to make payments on the loans. (Doc. 7, Ex. 1).

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It is not necessary for this court to determine whether the alleged conspiracy to transfer the

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loans fraudulently and the failure to pay those loans back “arises out of the [same] transaction

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or occurrence” under Arizona state law. Levin v. Hindhaugh, 167 Ariz. 110, 111, 804 P.2d
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839, 840 (App. 1990). For the purposes of determining whether TradeCor was properly

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joined, it is enough to find that Plaintiffs have “a glimmer of hope” that a state court may so

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find, and the Court finds that they do. Ballesteros, 436 F. Supp. 2d at 1072. Relying by

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analogy on the standards of sanctioning a party under Rule 11, Plaintiffs’ filings against

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TradeCor are clearly not “both baseless and made without a reasonable and competent

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inquiry.” Townsend v. Holman Consulting Corp., 929 F.2d 1358, 1362 (9th Cir. 1990). It

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is the province of the state courts of Arizona to determine whether BMO and TradeCor’s

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defenses are adequate to defeat Plaintiffs’ claims, and in a case where the parties are not

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completely diverse, this Court lacks the jurisdiction to rule in their stead. See Murakami v.

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E.L. DuPont De Nemours and Co. 191 F.3d 460 (table) 1999 WL 701902 (9th Cir. 1999)

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(rejecting fraudulent joinder when question of whether a Stipulation agreement applies

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“should have been decided by the courts of Hawaii”).

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The parties in this case are not completely diverse, and the case is therefore remanded
to state court.
CONCLUSION

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The fact that Plaintiffs reference federal rules in their claim for violation of good faith

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and fair dealing does not pose a “contested and substantial federal question.” Grable & Sons,

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545 U.S. at 313. The forbearance agreement did not bar suits against TradeCor for actions

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TradeCor took after the agreement’s final amendment. Plaintiffs have at least “a glimmer of

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hope” to succeed against TradeCor’s claim preclusion defense, and therefore TradeCor is not

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fraudulently joined. Ballesteros, 436 F. Supp. 2d at 1072. Diversity is not complete and this

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Court is therefore without subject-matter jurisdiction to hear the substance of the claim.

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IT IS THEREFORE ORDERED that Plaintiff’s Motion to Remand (Doc. 9) is

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granted and this matter is remanded to the Superior Court of Maricopa County.

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Defendant TradeCor’s Motion to Dismiss (Doc. 7) is therefore dismissed as moot.

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DATED this 5th day of December, 2011.

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