Pennsylvania Higher Education Assistance Agency v. NC Owners, LLC et al
Filing
34
MEMORANDUM (Order to follow as separate docket entry) re: 22 MOTION to Remand to the Commonwealth Court of Pennsylvania, filed by Pennsylvania Higher Education Assistance Agency. (See memo for complete details.) Signed by Chief Judge Christopher C. Conner on 6/9/17. (ki)
IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF PENNSYLVANIA
PENNSYLVANIA HIGHER
EDUCATION ASSISTANCE
AGENCY,
:
:
:
:
Plaintiff
:
:
v.
:
:
NC OWNERS, LLC; NC RESIDUALS :
OWNERS TRUST; VCG SECURITIES, :
LLC; ODYSSEY EDUCATION
:
RESOURCES, INC.; BOSTON
:
PORTFOLIO ADVISORS, INC.;
:
and COOK & SADORF,
:
:
Defendants
:
CIVIL ACTION NO. 1:16-CV-1826
(Chief Judge Conner)
MEMORANDUM
Plaintiff Pennsylvania Higher Education Assistance Agency (“PHEAA”)
commenced this action against the collective defendants in the Commonwealth
Court of Pennsylvania. Before the court is PHEAA’s motion (Doc. 22) to remand
pursuant to 28 U.S.C. § 1447(c). PHEAA maintains that it is an “arm of the state”
rather than a citizen thereof, divesting this court of diversity jurisdiction. For the
reasons that follow, the court will deny PHEAA’s motion.
I.
Factual Background & Procedural History
PHEAA is a servicer of student loans established by and organized under the
laws of the Commonwealth. See 24 PA. STAT. & CONS. STAT. ANN. § 5101 et seq.; (see
also Doc. 1 ¶ 4). On August 2, 2016, PHEAA filed a complaint in the Commonwealth
Court of Pennsylvania. (Doc. 1 ¶ 1; Doc. 1-2 at 3-25). Therein, PHEAA advances
state law claims for breach of contract, tortious interference with contract, and
fraudulent inducement against the collective defendants.1 (Doc. 1 ¶ 2; see also Doc.
1-2 at 3-25). Defendants removed the case to this court pursuant to 28 U.S.C. § 1441
on September 2, 2016. (Doc. 1). Defendants assert that the parties are citizens of
different states and that the amount in controversy exceeds $75,000, satisfying the
desiderata for diversity jurisdiction under 28 U.S.C. § 1332(a). (Id. ¶¶ 4-16).
PHEAA timely moved to remand. (Doc. 22). PHEAA submits that it is not a
“citizen” of Pennsylvania as contemplated by the diversity jurisdiction statute but
rather “an arm . . . of the Commonwealth,” such that the court must remand for
lack of jurisdiction. (Id. ¶¶ 11-14). PHEAA requests attorney fees and costs in
connection with its motion pursuant to 28 U.S.C. § 1447(c). (Id. ¶¶ 15-16). The
motion is fully briefed and ripe for disposition.
II.
Legal Standard
Under 28 U.S.C. § 1441, a defendant may remove an action brought in state
court to federal district court when the claims fall within the federal court’s original
jurisdiction. See 28 U.S.C. § 1441(a). A plaintiff may challenge removal for lack of
jurisdiction by moving to remand the matter to state court. See id. § 1447(c). Such
motions may be filed at any time before final judgment is entered. Id. If the district
court indeed lacks subject matter jurisdiction, it must remand to the state court
1
Defendants are NC Owners, LLC, NC Residuals Owners Trust, VCG
Securities, LLC, Odyssey Education Resources, Inc., Boston Portfolio Advisors,
Inc., and Cook & Sadorf (collectively “defendants”). In their notice of removal,
defendants contend that PHEAA has erroneously designated Odyssey Education
Resources as a corporation rather than a limited liability company in its complaint.
(Doc. 1 at 1 n.1; see also Doc. 1-2 at 4 ¶ 5). This dispute does not impact the court’s
jurisdictional assessment; under either designation, Odyssey Education Resources
is a citizen of a state other than Pennsylvania. We task the parties to meet and
confer to resolve this dispute via joint stipulation.
2
from which the action was removed. Id. Statutes permitting removal “are to be
strictly construed against removal and all doubts should be resolved in favor of
remand.” Boyer v. Snap-On Tools Corp., 913 F.2d 108, 111 (3d Cir. 1990) (quoting
Steel Valley Auth. v. Union Switch & Signal Div., 809 F.2d 1006, 1010 (3d Cir. 1987)).
As the party asserting jurisdiction, defendants bear the burden of proving
that the matter is properly before the federal court. See Frederico v. Home Depot,
507 F.3d 188, 193 (3d Cir. 2007) (citations omitted); Steel Valley Auth., 809 F.2d at
1010 (citing Abels v. State Farm Fire & Cas. Co., 770 F.2d 26, 29 (3d Cir. 1985)). In
order to invoke diversity jurisdiction, defendants must establish that the matter is
between citizens of different states and that the amount in controversy, exclusive of
interest and costs, exceeds $75,000. See 28 U.S.C. § 1332(a).
III.
Discussion
The law is well-settled that an agency which is “a mere arm of the State” is
not a “citizen” of that state for diversity jurisdiction purposes. See Moor v. Cty. of
Alameda, 411 U.S. 693, 717-19 (1973). PHEAA attempts to invoke this principle in
its instant motion to remand. (See Doc. 22). PHEAA contends that it is an arm of
the Commonwealth of Pennsylvania and, ipso jure, cannot qualify as a “citizen” of
the state. (Id. ¶¶ 11-12; Doc. 26 at 3-21).
Defendants rejoin that the doctrine of collateral estoppel, also known as
issue preclusion, forestalls PHEAA’s argument. (Doc. 30 at 4-14). Defendants aver
that PHEAA has previously litigated and lost the arm-of-the-state argument raised
sub judice. (Id.) This averment is correct. Federal courts have thrice rebuffed
PHEAA’s theory. First, in United States ex rel. Oberg v. PHEAA (“Oberg III”), the
3
Fourth Circuit Court of Appeals applied its Eleventh Amendment arm-of-the-state
jurisprudence to assess PHEAA’s status as an agent of the state under the False
Claims Act, 31 U.S.C. § 3729. See Oberg III, 804 F.3d 646, 650-77 (4th Cir. 2015), cert.
denied, 137 S. Ct. 617 (2017). Following exhaustive review of a massive factual
record, the court held that PHEAA is an independent political subdivision, not an
arm of the Commonwealth. Id. at 677. Second, in Pele v. PHEAA, the Fourth
Circuit determined that Oberg III applies with equal force to the agency’s claim
to Eleventh Amendment immunity under the Fair Credit Reporting Act, 15 U.S.C.
§ 1681 et seq. Pele, 628 F. App’x 870, 872 (4th Cir. 2015) (per curiam). And third, in
Lang v. PHEAA, our colleague, Judge John E. Jones III, concluded that Oberg III
collaterally estops PHEAA from raising an arm-of-the-state immunity defense
under the Fair Labor Standards Act, 29 U.S.C. § 201 et seq. See Lang, 201 F. Supp.
3d 613, 620-28 (M.D. Pa. 2016).2
Defendants contend that this jurisprudential triptych precludes PHEAA’s
present argument in two ways. Defendants first assert that Lang estops this court
from revisiting the preclusive effect of Oberg III. (See Doc. 30 at 7-8). Defendants
alternatively assert that Oberg III independently precludes PHEAA’s jurisdictional
2
The Fourth Circuit’s decision in Pele relies exclusively on the court’s
reasoning in Oberg III, noting that procedural distinctions between the cases did
not preclude extension of the core arm-of-the-state principle. Pele, 628 F. App’x at
872 (citing Oberg III, 804 F.3d at 646). The court released the two opinions on the
same day. Id. Accordingly, our analysis herein refers primarily to the decisions in
Oberg III and Lang.
4
challenge.3 (See id. at 9-14). Assuming arguendo that the court declines to apply
collateral estoppel, defendants separately maintain that PHEAA cannot establish
itself as an arm of the Commonwealth. (See id. at 14-24). We begin by considering
the preclusive effect of Lang itself.
The Third Circuit Court of Appeals applies the Restatement (Second) of
Judgments to determine the preclusive effect of prior federal rulings. See Nat’l
R.R. Passenger Corp. v. Pa. Pub. Util. Comm’n, 288 F.3d 519, 525 (3d Cir. 2002)
(quoting RESTATEMENT (SECOND) OF JUDGMENTS § 27 (AM. LAW INST. 1980)). Per the
Restatement: “When an issue of fact or law is actually litigated and determined by
a valid and final judgment, and the determination is essential to the judgment, the
determination is conclusive in a subsequent action between the parties, whether on
the same or a different claim.” RESTATEMENT (SECOND) OF JUDGMENTS § 27.
Four factors are prerequisite to application of collateral estoppel: (1) the
issue sub judice must be “the same” as that involved in the antecedent action; (2)
the issue must have been “actually litigated” in that action; (3) the issue must have
been resolved by a “valid and final judgment”; and (4) the issue must have been
“essential” to that judgment. Nat’l R.R. Passenger Corp., 288 F.3d at 525 (quoting
Burlington N. R.R. Co. v. Hyundai Merchant Marine, 63 F.3d 1227, 1231-32 (3d Cir.
3
Defendants further aver that PHEAA has previously claimed to be a citizen
of Pennsylvania for purposes of establishing diversity jurisdiction, and that PHEAA
is judicially estopped from invoking the arm-of-the-state doctrine. (See id. at 2-4,
14-24). Judicial estoppel prevents litigants from assuming inconsistent positions in
the same or different proceedings. See In re Chambers Dev. Co., 148 F.3d 214, 229
(3d Cir. 1998) (quoting Ryan Operations, G.P. v. Santiam-Midwest Lumber Co., 81
F.3d 355, 358 (3d Cir. 1996)). In light of our issue preclusion analysis, we need not
address judicial estoppel.
5
1995)). These factors, in combination, ensure that the party against whom estoppel
is wielded has had a “full and fair” opportunity to litigate the issue. See Peloro
v. United States, 488 F.3d 163, 175 (3d Cir. 2007) (quoting Parklane Hosiery Co.
v. Shore, 439 U.S. 322, 332, 328 (1979); Blonder-Tongue Labs., Inc. v. Univ. of Ill.
Found., 402 U.S. 313, 331, 333 (1971)).4 We evaluate the parties’ arguments against
this backdrop.
A.
Identity of Issues
The instant dispute, distilled to its essentia, rises and falls on the first
factor: whether the issue litigated and resolved in Lang is the same as the issue at
bar. To avoid application of collateral estoppel, any disparity between applicable
legal standards must be “substantial.” Raytech Corp., 54 F.3d at 191. PHEAA
remonstrate that the provenance and substance of this action differ in material
respects from Lang. PHEAA asserts, for example, that its status as defendant in
Lang (and Oberg III) but as plaintiff in this case is a “substantial” distinction for
estoppel purposes. (Doc. 26 at 26; Doc. 32 at 16-18). PHEAA also cites perceived
asymmetries between the Third and Fourth Circuits’ arm-of-the-state analyses,
ostensibly oppugning Lang’s finding of substantial similarity. (Doc. 26 at 26-27).
PHEAA’s arguments task this court to consider Lang in extenso.
4
Even if all factors are satisfied, however, principles of equity counsel against
application of collateral estoppel when “facts essential to the earlier litigated issue
have changed.” Raytech Corp. v. White, 54 F.3d 187, 190 (3d Cir. 1995) (citing
Montana v. United States, 440 U.S. 147 (1979)). PHEAA does not argue that new
factual information undermines the Lang or Oberg III analyses.
6
The Lang court began its analysis by identifying the Third and Fourth
Circuits’ respective arm-of-the-state jurisprudence. See Lang, 201 F. Supp. 3d at
621-24. The court recited elements of the Third Circuit’s test as follows:
(1) Whether the money that would pay the judgment would
come from the state ([including] . . . whether payment
will come from the state’s treasury, whether the agency
has the money to satisfy the judgment, and whether the
sovereign has immunized itself from responsibility for
the agency’s debts);
(2) The status of the agency under state law ([including] . . .
how state law treats the agency generally, whether the
entity is separately incorporated, whether the agency
can sue or be sued in its own right, and whether it is
immune from state taxation); and
(3) What degree of autonomy the agency has.
Id. (quoting Fitchik v. N.J. Transit Rail Operations, Inc., 873 F.2d 655, 659 (3d Cir.
1989)). Although the Third Circuit previously viewed impact on the state treasury
as the “most important” consideration, see Fitchik, 873 F.3d at 659, the appellate
court now ascribes equal weight to each prong. Lang, 201 F. Supp. 3d at 622
(quoting Febres v. Camden Bd. of Educ., 445 F.3d 227, 229 (3d Cir. 2006)).
The Lang court also explored elements of the Fourth Circuit’s nonexhaustive test as employed in Oberg III. Lang, 201 F. Supp. 3d at 622-23. The
Fourth Circuit considers, inter alia:
(1)
whether any judgment against the entity as defendant
will be paid by the State or whether any recovery by the
entity as plaintiff will inure to the benefit of the State;
(2)
the degree of autonomy exercised by the entity,
including such circumstances as who appoints the
entity’s directors or officers, who funds the entity,
7
and whether the State retains a veto over the entity’s
actions;
(3)
whether the entity is involved with state concerns
as distinct from non-state concerns, including local
concerns; and
(4)
how the entity is treated under state law, such as
whether the entity’s relationship with the State is
sufficiently close to make the entity an arm of the
State.
Oberg III, 804 F.3d at 650-51 (citation omitted). Under the first factor, courts in the
Fourth Circuit evaluate both legal and practical effects of a prospective judgment
on the state’s treasury. Id. at 651 (citations omitted).
The Lang court thoroughly addressed many of PHEAA’s instant cavils
concerning perceived distinctions between the two tests. See Lang, 201 F. Supp.
3d at 622-24 (quoting Fitchik, 873 F.2d at 659; Oberg III, 804 F.3d at 650-51). For
example, PHEAA asserts that the two circuits’ tests are wholly disparate because
the Fourth Circuit includes an additional factor, to wit: whether the state agency’s
activities concern state interests as opposed to local interests. (Doc. 26 at 26; Doc.
32 at 18). The Lang court rejected this argument, observing that the law of issue
preclusion does not require “the exact same number of factors.” Lang, 201 F. Supp.
3d at 623. The court carefully examined the letter and the spirit of each test and
resolved that the Third and Fourth Circuits’ analyses are “largely the same” in both
substance and application. Id. The court also noted in dicta that the Fourth
Circuit’s additional factor did not upset the balance in favor of PHEAA in Oberg III.
Id. at 624 (citing Oberg III, 804 F.3d at 676).
8
Lang also answers PHEAA’s attempt to manufacture a substantive
distinction from the circuits’ respective assessments of agency status under state
law. (Doc. 26 at 27). PHEAA asserts that the Third Circuit weighs four factors in
assessing the agency’s legal status—the law’s treatment of the agency, the agency’s
independent corporate status vel non, its ability to sue or be sued in its own right,
and its exposure or immunity to taxation—whereas the Fourth Circuit considers
broadly “how the entity is treated under state law” and “whether [the agency’s”
relationship with the state is sufficiently close . . . .” (Doc. 26 at 27). Lang flatly
rejected this contrived distinction. Lang, 201 F. Supp. 3d at 624. The Lang court
traced the evolution of the Third Circuit’s arm-of-the-state case law, from its retired
nine-factor rubric to a three-factor test with multiple “sub-factors,” and held that
the appellate court intended the sub-factors to guide but not to whelm the primary,
substantive inquiry. See id. Accordingly, the court found no meaningful difference
between the Third and Fourth Circuits’ standards concerning the status of the
subject agency under state law. Id.
PHEAA maintains that the procedural posture of this case—with a state
agency as plaintiff rather than defendant—sets the matter apart from Lang. (See
Doc. 26 at 26; Doc. 32 at 16). Specifically, PHEAA contends that both Lang and its
antecedent, Oberg III, gauged the Commonwealth’s exposure to financial liability
as opposed to recovery. (Doc. 32 at 16-17; see Doc. 26 at 26). PHEAA insists that
“whether a recovery inures to the benefit of the state . . . was not part of the test
before” either the Lang or the Oberg III court. (Doc. 32 at 1). The distinction, if
indeed one exists, is without a difference. As Lang observed, both the Third and
9
Fourth Circuit analyze the “legal and practical/functional” impact of a prospective
judgment on the state treasury. Lang, 201 F. Supp. 3d at 624 (citing Oberg III, 804
F.3d at 651-51; Fitchik, 873 F.2d at 659). That our case concerns PHEAA’s potential
recovery as opposed to liability is not a “substantial” difference sufficient to escape
Lang’s preclusive effect. See Raytech Corp., 54 F.3d at 191 (citation omitted).
Assuming arguendo that Lang did not squarely resolve this issue, Oberg III
separately confutes PHEAA’s argument. The Fourth Circuit measures financial
effect of a prospective judgment on the state agency irrespective of legal posture.
Oberg III, 745 F.3d at 149 (citation omitted). That is, the court examines “whether
any judgment against the entity as defendant will be paid by the State or whether
any recovery by the entity as plaintiff will inure to the benefit of the State.” Id.
(emphasis added) (citation omitted). This articulation confirms that an agency’s
precise role in the litigation is of no moment. Stated differently, the inquiry is
whether, but not necessarily how, a financial judgment may impact the state’s
treasury.5
PHEAA lastly suggests that “broad[]” construction ascribed to cases brought
under the False Claims Act—like Oberg III—is materially different from “strict[]”
construction applied to the removal statute at issue here. (Doc. 26 at 27; Doc. 32 at
19). Nothing in Oberg III suggests that Congress’s intent to “broaden the
availability of the False Claims Act” influenced the court’s separate and distinct
arm-of-the-state analysis. See Harrison v. Westinghouse Savannah River Co., 176
5
PHEAA’s argument, taken to its logical conclusion, would permit a result ad
absurdum, to wit: a finding that an agency is an arm of the state when suing, but not
when sued. Our holding avoids this impracticable result.
10
F.3d 776, 784 (4th Cir. 1999) (citation omitted). In its per curiam opinion in Pele, a
Fourth Circuit panel—comprising two of the three Oberg III jurists—held that its
arm-of-the-state analysis applied with equal force to PHEAA in claims brought
under the Fair Credit Reporting Act, 15 U.S.C. § 1681 et seq. PHEAA’s conjecture
concerning underlying standards of review is a red herring.
We have little difficulty concluding that this case involves precisely the same
issue already settled by our colleague: whether Oberg III precludes PHEAA from
revisiting its status as an arm of the Commonwealth. Lang, 201 F. Supp. 3d at 620.
The court in Lang fully canvassed the Third and Fourth Circuits’ arm-of-the-state
analyses and squarely repudiated the arguments advanced by PHEAA herein.
We find the ratio decidendi of Lang to be both comprehensive and persuasive.
PHEAA’s efforts to raise novel arguments sub judice to evade the preclusive
scope of Lang are without merit. Hence, the first element of our analysis favors
application of collateral estoppel.
B.
Remaining Issue Preclusion Factors
Before applying collateral estoppel, we must also determine whether the
preclusive effect of Oberg III was “actually litigated” in Lang, whether the issue was
resolved by a “valid and final judgment,” and whether resolution of the issue was
“essential” to that judgment. Nat’l R.R. Passenger Corp., 288 F.3d at 525 (quoting
Burlington N. R.R. Co., 63 F.3d at 1231-32). The answer to each of these inquiries is
“yes.” The preclusive effect of Oberg III was the centerpiece of the Lang court’s
disquisition. PHEAA, through able counsel, vigorously advocated its cause. And
resolution of the issue resulted in the denial of PHEAA’s request for immunity
11
under the Eleventh Amendment. See generally Lang, 201 F. Supp. 3d 613. It is
beyond peradventure that PHEAA has had a full and fair opportunity to litigate the
preclusive effect of Oberg III. We conclude that PHEAA is collaterally estopped by
Lang from relitigating its status as an arm of the Commonwealth.
IV.
Conclusion
Defendants have established the elements of diversity jurisdiction pursuant
to 28 U.S.C. § 1332. Accordingly, we will deny PHEAA’s motion (Doc. 22) to remand
the instant matter to the Commonwealth Court of Pennsylvania for want of subject
matter jurisdiction. An appropriate order shall issue.
/S/ CHRISTOPHER C. CONNER
Christopher C. Conner, Chief Judge
United States District Court
Middle District of Pennsylvania
Dated:
June 9, 2017
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