Purdue Avenue Investors LP et al v. Morgan Keegan & Company Inc et al

Filing 58

ORDER granting 33 Motion to Remand to State Court. Signed by Judge Samuel H. Mays, Jr on 05/31/2013.

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF TENNESSEE
WESTERN DIVISION

IN RE REGIONS MORGAN KEEGAN
SECURITIES, DERIVATIVE, AND
ERISA LITIGATION

This Document Relates To:
Purdue Avenue Investors, LP,
et. al., v. Morgan Keegan &
Co., Inc., et. al.,
No.2:10-cv-02260-SHM-dkv

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ORDER GRANTING PLAINTIFFS’ MOTION TO REMAND

Purdue Avenue Investors, L.P. (“Purdue”), Mary Ann Howard,
and Dana Howard, as Trustee of the Molly A. Howard Trust,
(collectively, “Plaintiffs”) filed suit in Texas state court on
October 23, 2009, alleging that Defendants Morgan Keegan &
Company, Inc. (“Morgan Keegan”), Morgan Asset Management, Inc.
(“MAM”), James C. Kelsoe, Jr. (“Kelsoe”), and Thomas Orr (“Orr”)
failed to disclose and misrepresented material information about
the RMK Advantage Income Fund and the RMK Strategic Income Fund.
(See Pls.’ Original Petition (“Complaint”), ECF No. 1-3.)
Defendants removed the action to the United States District
Court for the Northern District of Texas on November 24, 2009,
asserting that court had jurisdiction under 28 U.S.C. §§ 1331,

1332, and 1441.

(See Notice of Removal of Civil Action (“Notice

of Removal”), ECF No. 1.)

On November 25, 2009, Defendants

filed a motion for temporary stay of proceedings pending a
determination by the Judicial Panel on Multidistrict Litigation
(“JPML”) about whether to transfer the action for consolidated
pretrial proceedings to the Western District of Tennessee
pursuant to 28 U.S.C. § 1407.

(See ECF No. 3.)

On December 15, 2009, Plaintiffs filed a Motion to Remand
the case and a response to Defendants’ motion to stay.
Nos. 6 and 7.)

(See ECF

Plaintiffs filed a Corrected Motion to Remand on

December 23, 2009. (See Pls.’ Corrected Mot. for Remand and Mem.
in Supp. (“Pls.’ Corrected Mot.”), ECF No. 8.)
responded on January 5, 2010.

Defendants

(See Defs.’ Opp. to Pls.’ Mot.

for Remand (“Defs.’ Opp.”), ECF No. 11.)

On March 11, 2010,

Plaintiffs filed a notice to the Court advising it of what
Plaintiffs believed to be a relevant decision (ECF No. 17), and
Defendants filed a response to that notice on March 12, 2010.
(ECF 19).
The United States District Court for the Northern District
of Texas granted Defendants’ motion for temporary stay of
proceedings on March 25, 2010, and on April 5, 2010, the JPML
entered an order transferring the case to the United States
District Court for the Western District of Tennessee.
28.)

(ECF No.

Plaintiffs filed a second Motion to Remand the action on

2

June 17, 2010.

(Pls.’ Mot. for Remand (“Pls.’ Mot. for

Remand”), ECF No. 33.)

Defendants responded on June 30, 2010.

(Opp. to Pls.’ Mot. for Remand (“Opp. to Pls.’ Mot.”), ECF 42.)
For the following reasons, Plaintiffs’ Motions to Remand
are GRANTED.
I. Background
In their Complaint, Plaintiffs allege that Defendants
defrauded their bond fund purchasers when Defendants “omitted,
concealed, failed to disclose and/or misrepresented facts” about
the RMK Advantage Income Fund (“RMA”) and the RMK Strategic
Income Fund (“RSF”) (collectively, the “Funds”).
14-15.)

(Complaint ¶¶

Plaintiffs allege that they purchased shares of the

Funds in the secondary market “in reliance on Defendants’ false
representations and omissions of material fact.”
Corrected Mot. 2.)

(Pls.’

Purdue was a limited partnership organized

under the laws of Texas1 that invested approximately $2,284,059
in the Funds from April 2004 through August 2005.
35.)

(Complaint ¶

Plaintiff Mary Ann Howard (“Howard”) invested

approximately $203,199 in the Funds from April 2004 through
August 2005, and the Molly A. Howard Trust (the “Howard Trust”)

1
The Texas Secretary of State issued a forfeiture notice pursuant to §
171.309 of the Texas Tax Code, effective August 28, 2009. Purdue forfeited
its legal existence and may act through its general partners: Dana K. Howard
and Robert E. Howard IV. (Notice of Removal ¶ 9.) Defendants state, and
Plaintiffs do not contest, that Dana K. Howard and Robert E. Howard IV are
Purdue’s only partners, general or limited.

3

invested approximately $98,148 in the Funds during the same
period.

(Id.)

Plaintiffs allege that Defendants misrepresented or omitted
material facts about the Funds, specifically: (1) the nature and
extent of the risks; (2) the securities’ illiquidity; (3)
improper valuation and pricing; (4) asset values based on false
assumptions; (5) erroneous estimates underlying the Net Asset
Values; (6) high concentrations of investments in the mortgage
industry; (7) overlapping underlying investments eliminating
true diversification between Funds; and (8) the use of principal
rather than interest to pay dividends.

(Complaint ¶ 15.)

Plaintiffs seek “redress for the fraud perpetrated upon them,
for rescission of the purchase of the securities . . . and for
compensation for the injuries and damages suffered by them as a
result of the acts of the Defendants in violation of the Texas
securities laws.”

(Id. ¶ 2.)

Plaintiffs contend that this action should be remanded to
state court because this Court lacks subject-matter
jurisdiction.

(Pls.’ Corrected Mot.)

Plaintiffs assert that

their causes of action do not arise under the Constitution,
treaties, or laws of the United States and that their state-law
claims of common law fraud, blue-sky violations, breach of
contract, breach of fiduciary duty, and negligence are not
subject to the original jurisdiction of this Court.

4

(Id. at 1.)

Plaintiffs argue that Defendants’ removal of this case based on
diversity jurisdiction is not proper because Plaintiffs have
properly joined a non-diverse defendant and there is no
diversity of citizenship.
II.

(Id. at 2.)

Standard of Review

On a motion for remand, the removing parties bear the
burden of establishing federal jurisdiction.

Longo v. Bando

Mfg. of Am., Inc., 201 F.3d 754, 757 (6th Cir. 2000).

Removal

under 28 U.S.C. § 1441 is permitted in “any civil action brought
in a State court of which the district courts of the United
States have original jurisdiction.”

28 U.S.C. §1441(a).

“Only

state-court actions that originally could have been filed in
federal court may be removed to federal court by the defendant.”
Caterpillar, Inc. v. Williams, 482 U.S. 386, 392 (1987).

“[T]he

effect of removal is to deprive the state court of an action
properly before it,” and because such removal “raises
significant federalism concerns,” the federal removal statute is
subject to strict construction.

Carpenter v. Wichita Falls

Indep. Sch. Dist., 44 F.3d 362, 365-66 (5th Cir. 1995); see also
Merrell Dow Pharm., Inc. v. Thompson, 478 U.S. 804, 809 (1986);
Shamrock Oil & Gas Corp. v. Sheets, 313 U.S. 100, 107 (1941).
Removal jurisdiction requires a showing that the federal
court has original jurisdiction over the action, either through:
(1) diversity of citizenship under 28 U.S.C. § 1332; or (2)

5

federal question jurisdiction under 28 U.S.C. §§ 1331 and 1441.
Defendants assert that the Court had both diversity and federal
question jurisdiction over this action at the time of removal.
(Notice of Removal 1.)
III.

Analysis
A. Federal Question Jurisdiction

Where, as here, defendants seek to remove a suit to federal
court based on federal question jurisdiction, they may do so
only where the suit “aris[es] under the Constitution, treaties
or laws of the United States.”
U.S.C. § 1331.

28 U.S.C. § 1441(b); see also 28

To support federal question jurisdiction, one of

three preconditions must exist: 1) federal law creates the
plaintiff’s cause of action; 2) plaintiff’s right to relief
under state law requires resolution of a substantial federal-law
question actually in dispute; or 3) the claim is in substance
one of federal law.

City of Warren v. City of Detroit, 495 F.3d

282, 286 (6th Cir. 2007).
The allegations of a plaintiff’s well-pleaded complaint
will determine whether a cause of action presents a federal
question.

Franchise Tax Bd. v. Const. Laborers Vacation Trust,

463 U.S. 1 (1983).
law claims.

In this case, Plaintiffs assert only state

“[T]he fact that the wrong asserted could be

addressed under either state or federal law does not ordinarily
diminish the plaintiff’s right to choose a state law cause of

6

action.”

Loftis v. United Parcel Service, Inc., 342 F.3d 509,

515 (6th Cir. 2003) (quoting Alexander v. Elec. Data Sys. Corp.,
13 F.3d 940, 943 (6th Cir. 1994)); see also Landers v. Morgan
Asset Management, Inc., No. 08-2260, 2009 U.S. Dist. LEXIS
30891, at *15-17 (W.D. Tenn. Mar. 31, 2009).
A plaintiff is “the master of her complaint,” and when a
plaintiff has a choice between federal and state law claims, she
may choose to defeat a defendant’s opportunity to remove by
proceeding in state court “on the exclusive basis of state law.”
Carpenter, 44 F.3d at 366; see also Loftis, 342 F.3d at 515.

A

defendant may not establish federal question jurisdiction based
on a theory that is not advanced by the plaintiff in her
complaint.

Merrell, 478 U.S. at 809, n.6; see also Brilliard v.

Morgan Asset Management, 2010 U.S. Dist. Lexis 63416 (W.D. Tenn.
2010).

“A defendant may not remove on the basis of an

anticipated or even inevitable federal defense, but instead must
show that a federal right is ‘an element, and an essential one,
of the plaintiff’s cause of action.’”

Carpenter, 44 F.3d at 366

(quoting Gully v. First Nat’l Bank, 299 U.S. 109, 111 (1936)).
Courts have “confined federal-question jurisdiction over statelaw claims to those that ‘really and substantially involv[e] a
dispute or controversy respecting the validity, construction or
effect of [federal] law.’” Grable & Sons Metal Prod., Inc. v.
Darue Eng’g & Mfg., 545 U.S. 308, 313 (2005) (quoting Shulthis

7

v. McDougal, 225 U.S. 561, 569 (1912)).

There is no “single,

precise, all-embracing test” to determine when federal
jurisdiction is triggered by federal-law issues embedded in
state-law claims.

Grable, 545 U.S. at 314 (internal quotation

marks and citation omitted).
Defendants assert that the exercise of federal jurisdiction
is appropriate because Plaintiffs’ claims raise substantial
issues of federal law.

(Defs.’ Opp. 8.)

In their Complaint,

Plaintiffs assert violations of the Texas Securities Act
(“TSA”), common law fraud, breach of contract, control person
liability, and common law negligence.

(Complaint ¶¶ 38-57.)

Defendants argue that “Plaintiffs’ claims arise under and depend
upon the resolution of federal securities law, rules, and
regulations governing the liquidity, concentration and valuation
of the Funds’ assets.” (Id. at 2.)

Defendants contend that,

because the Funds were formed pursuant to the Investment Company
Act of 1940 (the “ICA”), the ICA “will be used to make uniform
determinations about the Funds’ asset valuation, liquidity and
concentration practices.”

(Id. at 2, 3.)

Defendants assert

that the “pervasive regulatory scheme” governing the Funds means
that Plaintiffs must establish liability by evaluating
Defendants’ conduct against federal regulations to succeed on
their state law claims, thus giving this Court federal question
jurisdiction.

(Defs.’ Opp. 10.)

8

As Defendants are aware and readily admit, this Court has
already decided that issues of liquidity, concentration, and
valuation do not raise substantial, disputed federal questions
and that arguments to the contrary are unpersuasive.

See

Brilliard, 2010 U.S. Dist. Lexis 63416; Kramer v. Regions Bank,
No. 09-2408, 2010 U.S. Dist. Lexis 18570 (W.D. Tenn. Mar. 2,
2010); see also Opp. to Pls.’ Mot. 2.

Nevertheless, Defendants

urge the Court to reconsider its ruling in Brilliard and point
to Plaintiffs’ allegations about the Funds’ method of dividend
payment as a basis for invoking federal question jurisdiction.
(Opp. to Pls.’ Mot. 2 (“Plaintiffs specifically allege
violations of the federal law governing an investment company’s
distribution of dividends, namely § 19 of the Investment Company
Act, 15 U.S.C. 80a-19(a), as part of each of their claims.”).)
Defendants also cite this Court’s decision in Landers, where the
Court denied a motion to remand in a case raising claims against
many of the same Defendants2, as a basis for finding federal
question jurisdiction.

See id.; Landers, 2009 U.S. Dist. LEXIS

30891.
Defendants assert that Plaintiffs’ allegation about
dividend payments “provides an entirely independent basis for
this Court to exercise federal question jurisdiction in this

2

All of the Defendants except Orr were named defendants in the Landers

case.

9

action.”

(Defs.’ Opp. 3.)

In the Operative Facts section of

their Complaint, Plaintiffs merely state that, “as time went on,
the [F]unds began using principal rather than interest to pay
dividends, exacerbating the [F]unds’ losses while keeping
investors in the dark.”

(Complaint ¶ 17.)

Plaintiffs allege a

cause and effect, namely, that payment of dividends from
principal compounded the losses the Funds suffered.

Plaintiffs’

allegation about dividend payment does not invoke the dividend
distribution standards under the ICA and does not provide a
basis for the exercise of federal question jurisdiction.
This case is distinguishable from Landers because the
plaintiffs in Landers “explicitly ask[ed] the Court to evaluate
Defendants’ conduct on the basis of federal statutes,
regulations and standards.”

Landers, 2009 U.S. Dist. LEXIS

30891 at *22 (internal quotations omitted).

Plaintiffs there

conceded that “the federal laws referenced in the Complaint
provide[d] standards against which to measure Defendants’
conduct and [were] part of the proof of the elements of the
state law claims.”

Id.

Plaintiffs in the case at bar do not

reference the ICA or any other federal statute, rule, or
regulation.

(Pls.’ Reply to Defs.’ Opp. to Mot. for Remand and

Mem. in Supp. (“Pls.’ Reply”) 2.)
As pled, Plaintiffs’ claims do not raise substantial
questions of federal law.

“[I]t takes more than a federal

10

element ‘to open the “arising under” door.’”

Empire

HealthChoice Assurance, Inc. v. McVeigh, 547 U.S. 677, 701
(2006) (quoting Grable, 545 U.S. at 313).

Plaintiffs assert

that their claims (alleging violations of the TSA, common law
fraud, breach of contract, control person liability, and common
law negligence) may be proven without reliance on the ICA or any
other federal statute.

(Pls.’ Reply 2.)

Plaintiffs’ claims are

based on state or common law and do not directly reference
federal law.
The claims here are similar to those in Brilliard, where
the plaintiffs asserted, inter alia, that the defendants had
violated the Tennessee Consumer Protection Act and the Tennessee
Securities Act and had committed common law fraud.
2010 U.S. Dist Lexis 63416 at 13.

Brilliard,

This Court concluded in

Brilliard that all of the defendants’ arguments were defenses,
and that the plaintiffs could demonstrate the elements of the
claims alleged without reference to federal law.

Defendants in

this case argue that Plaintiffs’ claims “cannot succeed absent a
showing that the Funds did not adhere to . . . federal law
requirements.”

(Defs.’ Opp. 11.)

As in Brilliard, the

Plaintiffs do not need to rely on federal regulatory
requirements to prove their claims.

State law claims cannot

“‘lose their character because it is common knowledge that there
exists a scheme of federal regulation.’”

11

Kramer, 2010 U.S.

Dist. LEXIS 18570, at *11 (quoting Pan Am. Petroleum Corp. v.
Superior Court of Del., 366 U.S. 656, 663 (1961)).

Although a

discussion of the rules and regulations established under
federal statutes may bolster

Plaintiffs’ claims or provide

possible defenses for Defendants, reference to federal law is
not, as Defendants have put it, “unavoidable in deciding the
state law questions presented in the Complaint.”
11.)

(Defs.’ Opp.

As Plaintiffs state, “[t]he case may be tried to verdict

without a discussion of a single federal regulatory
requirement.” (Pls.’ Reply 3.)
As this Court said in Brilliard, “were the Court to accept
Defendants’ assertion that the potential need to apply federal
law to analyze Plaintiffs’ state-law claims triggers federal
jurisdiction, it would be impossible to assert a state-law fraud
claim against a securities dealer and remain in state court.”
2010 U.S. District 63416 at 17.

If Congress had intended the

exercise of federal jurisdiction to include a “a horde of
original filings and removal cases raising . . . state claims
with embedded federal issues,” it would have explicitly provided
for such a significant shift in the relative responsibilities of
the state and federal courts.

Grable, 545 U.S. at 318.

Court lacks federal question jurisdiction.
B. Diversity Jurisdiction

12

The

Defendants assert that this Court has original jurisdiction
under the diversity statute, 28 U.S.C. § 1332.

Section 1332(a)

provides that “district courts shall have original jurisdiction
of all civil actions where the matter in controversy exceeds the
sum or value of $75,000, exclusive of interest and costs, and is
between . . . citizens of different states.”
1332(a).

28 U.S.C. §

There is no dispute about the amount in controversy.

Plaintiffs assert that their individual and cumulative losses
exceed $75,000.

(Complaint ¶ 35; Notice of Removal ¶ 17.)

sole issue is diversity of citizenship.

The

Plaintiffs argue that

diversity is incomplete because both Defendant Orr and two of
the Plaintiffs are citizens of Texas.

Defendants argue that

Plaintiffs joined Orr solely for the purpose of defeating
diversity jurisdiction and that the joinder is improper because
Plaintiffs have not sufficiently alleged a cause of action
against Orr.

(Notice of Removal ¶¶ 12, 18-25, p.5; Defs.’ Opp

19-20.)
“For a removal predicated upon diversity of citizenship, a
proper exercise of federal jurisdiction requires satisfaction of
. . . complete diversity between the parties, that is, every
plaintiff must be of diverse state citizenship from every
defendant.”

In re Briscoe, 448 F.2d 201, 215 (3d Cir. 2006).

When the complaint was filed, Purdue was a Texas limited
partnership organized under the laws of the State of Texas.

13

Purdue was a citizen of Texas for diversity purposes because its
only partners, Dana K. Howard and Robert E. Howard IV, were
residents and citizens of Texas. See Carden v. Arkoma Assoc.,
494 U.S. 185, 192-195 (1990) (holding that a court must consider
the citizenship of all of an entity’s members to determine the
citizenship of an entity for diversity purposes); (see also
Notice of Removal ¶ 9; Complaint ¶ 3.)

Plaintiff Dana K.

Howard, the Trustee of the Howard Trust, resided in and was a
citizen of Texas, as was Molly A. Howard, the beneficiary of the
trust.

See Navarro Sav. Ass’n v. Lee, 446 U.S. 458, 462 (1980)

(“[T]rustees of an express trust are entitled to bring diversity
actions in their own names and upon the basis of their
citizenship.”); (Notice of Removal ¶ 11; Complaint ¶ 6).
Plaintiff Mary Ann Howard resided in and was a citizen of
Oklahoma.

(Notice of Removal ¶ 10; Complaint ¶ 5.)

Defendant

Morgan Keegan was a corporation organized under the laws of
Tennessee and had its principal place of business in Tennessee.
See 28 U.S.C. 1332(c)(1); Notice of Removal ¶ 13.

Defendant MAM

was a corporation organized under the laws of Tennessee and had
is principal place of business in Alabama.
1332(c)(1); (Notice of Removal ¶ 14).
in and was a citizen of Tennessee.

See 28 U.S.C.

Defendant Kelsoe resided

(Notice of Removal ¶ 15.)

Defendant Orr was a resident and citizen of Texas.

14

(Id. ¶ 20.)

If Orr is a proper defendant, the parties are not
completely diverse, the Court does not have subject-matter
jurisdiction, and removal is inappropriate.

If Orr is not a

proper defendant, the parties are completely diverse and the
conditions of subject-matter jurisdiction under 28 U.S.C. § 1332
have been satisfied.

Defendants allege that this Court has

diversity jurisdiction because Plaintiffs cannot state a claim
against Orr and his joinder as a defendant is improper.

(Notice

of Removal ¶ 18.)
1. Fraudulent Joinder
“‘When a non-diverse party has been joined as a defendant,
then in the absence of a substantial federal question the
removing defendant may avoid remand only by demonstrating that
the non-diverse party was fraudulently joined.’” Casias v. WalMart Stores, Inc., 695 F.3d 428, 432 (6th Cir. 2012) (quoting
Jerome-Duncan, Inc. v. Auto-By-Tel, L.L.C., 176 F.3d 904, 907
(6th Cir. 1999)).

To demonstrate fraudulent joinder “‘the

removing party must present sufficient evidence that a plaintiff
could not have established a cause of action against non-diverse
defendants under state law.’”

Kent State Univ. Bd. of Trs. v.

Lexington Ins. Co., No. 11-3601, 2013 U.S. App. LEXIS 1533, at
*10 (6th Cir. Jan. 22, 2013) (quoting Coyne v. Am. Tobacco Co.,
183 F.3d 488, 492-93 (6th Cir. 1999)).

15

In this Circuit:

[I]f there is a colorable basis for predicting that a
plaintiff may recover against non-diverse defendants, [the]
Court must remand the action to state court. The district
court must resolve all disputed questions of fact and
ambiguities in the controlling state law in favor of the
non removing party. All doubts as to the propriety of
removal are resolved in favor of remand.
Id.
A defendant attempting to prove fraudulent joinder “faces a
particularly heavy burden.”

Id. at *11.

A court considering

allegations of fraudulent joinder “appl[ies] a test similar to,
but more lenient than, the analysis applicable to a Rule
12(b)(6) motion to dismiss.”

Casias, 695 F.3d at 433.

The

court can “pierce the pleading” to look at outside materials
“for the limited purpose of determining whether there are
‘undisputed facts that negate the claim.’”

Id. (quoting Walker

v. Phillip Morris USA, Inc., 443 F. App’x 946, 955-56 (6th Cir.
2011))
2. Plaintiffs’ Allegations Against Orr
Plaintiffs allege that Orr is “an Executive Managing
Director of [Morgan Keegan], manager of the firm’s Houston
branch and is also the regional manager over [Morgan Keegan’s]
West Region offices.”

(Complaint ¶ 10.)

They allege that Orr

“made numerous misrepresentations and omissions of material
facts necessary in order to make the statements that were made
in light of the circumstances under which they were made not
misleading.”

(Complaint ¶ 36.)

Plaintiffs allege that “public

16

statements of the Defendants, including Kelsoe and Orr”
constitute “statements and omissions” of material fact for
purposes of the TSA.

(Id. ¶ 39.)

Plaintiffs also allege that

Orr is a “control person” within the meaning of the TSA.
55.)

(Id. ¶

They allege that Orr “rendered assistance in the face of a

perceived risk that his assistance would facilitate untruthful
or unlawful activity by the primary violator(s) and...possessed
a general awareness that his role was part of an overall
activity that is improper.”

(Id.)

Plaintiffs acknowledge that

Orr did not have “direct contact with the Plaintiffs” but argue
that the TSA does not require such contact to establish control
person liability for the fraudulent offer, sale, or delivery of
securities.

(Id.)

The burden is on the Defendants to show that there is no
possibility of recovery against Orr, and the Court evaluates all
factual allegations in the light most favorable to the
Plaintiffs.

Defendants argue that the Plaintiffs have alleged

only Orr’s title and have failed to allege any facts that
demonstrate Orr’s involvement in the investment decisions.
(Opp. To Pls.’ Mot. 6.)

Defendants argue that the Plaintiffs

have not alleged how Orr was “involved in the management of the
Funds or the issuance of any official statements or disclosures
about the Funds.”

(Id.)

Defendants claim that Plaintiffs’

Complaint contains no allegations that Orr interacted with

17

Plaintffs or directly managed the Funds or Fund disclosures, and
that the Complaint is “devoid of allegations concerning any
action by Mr. Orr that would give rise to liability.”

(Id.)

3. Choice of Law – Substantive Law
As a presumptive diversity action, the substantive law
governing this case is state rather than federal law.
Co. v. Tompkins, 304 U.S. 64 (1938).

Erie R.R.

Under Klaxon Co. v.

Stentor Elect. Mfg. Co., this Court ordinarily applies the
choice of law rules of Tennessee, the state in which it sits.
313 U.S. 487, 496 (1941).

In this case, however, the choice of

law rules of Texas must apply because the case was originally
filed in state court in Texas and removed to the district court
in Texas before it was transferred to this Court by the JPML.
See In re Nucorp Energy Sec. Litig., 772 F.2d 1486, 1492 (9th
Cir. 1985);

17 Georgene Vairo, Moore’s Federal Practice §112.07

(3d. ed. 2010) (“In multidistrict litigation that has been
transferred to a central forum for coordinated or consolidated
pretrial proceedings, the transferee federal district court must
apply the substantive state law of the transferor district,
including its choice of law rules.”)

For civil claims, Texas

follows the “most significant relationship” test stated in
sections 6 and 145 of the Restatement (Second) of Conflicts.3

3

Section 6 of the Restatement provides that, absent a statutory
directive of its own state on choice of law, the factors relevant to the

18

Alert 24 Sec., LLC v. Tyco Int’l Ltd., 823 F.Supp.2d 589, 595
(S.D. Tex. 2011).

Texas courts consider “the qualitative nature

of the particular contacts” with a state and the “state policies
underlying the particular substantive issues.”

Duncan v. Cessna

Aircraft Co., 665 S.W.2d 414, 421 (Tex. 1984).
The substantive issue at bar is whether Plaintiffs have
asserted a cause of action against Orr.
citizen of Texas.

(Complaint ¶ 10.)

Orr resides in and is a

He is an Executive

Managing Director of Morgan Keegan and manages both the firm’s
Houston branch and its West Region offices.

(Id.)

Plaintiffs

allege multiple violations of the TSA that arise from injurious
activities occurring, in part, while Orr worked in Texas.
at ¶¶ 10, 40, 45, 55.)

(Id.

No party alleges that another state has

a more significant relationship to the litigation against Orr.
Both Defendants and Plaintiffs assume that Texas substantive law
applies.

Both cite only cases from the Supreme Court, the Fifth

applicable rule of law include: (a) the needs of the interstate and
international systems; (b) the relevant policies of the forum; (c) the
relevant policies of other interested states and the relative interests of
those states in the determination of the particular issue; (d) the protection
of justified expectations; (e) the basic policies underlying the particular
field of law; (f) certainty, predictability and uniformity of result; and (g)
ease in the determination and application of the law to be applied.
RESTATEMENT (SECOND) OF CONFLICT OF LAWS §6 (1971)
Section 145 of the Restatement provides that the factual matters to be
considered when applying the principles of Section 6 to a given case include:
(a) the place where the injury occurred; (b) the place where the conduct
causing the injury occurred; (c) the domicile, residence, nationality, place
of incorporation and place of business of the parties; and (d) the place
where the relationship, if any, between the parties is centered. These
contacts are to be evaluated according to their relative importance with
respect to the particular issue. Id. at § 145.

19

Circuit Court of Appeals, and the courts of the state of Texas.
(See e.g., Defs.’ Opp. 20 nn.64-68, 21 nn.69-73, 22 nn.75-78, 23
nn.82-84 & 24 nn.85; Pls.’ Corrected Mot. 8 n.41 & 9 nn.42-45.)
The Court will apply the substantive law of Texas.
4. Choice of Law – Procedural Rules
Although the parties do not address the choice of
procedural law in their submissions, the Court cannot proceed
until it determines which jurisdiction’s procedural rules apply.
This case has proceeded before the District Court of Dallas
County, Texas, the Federal District Court for the Northern
District of Texas, and the Federal District Court for the
Western District of Tennessee.

Three sets of procedural rules

are potentially applicable.
When a federal court sits in diversity it applies the
“substantive law of the state in which it sits.”

Shaffer v. CSX

Transp., Inc., 462 F. App’x 597, 599 (6th Cir. 2012).

“Federal

courts, however, may apply their own procedural rules.”

Id.

(emphasis added); see also Nye v. CSX Transp., Inc., 437 F.3d
556, 563 (6th Cir. 2006); Belcher v. Great Lakes Steel Corp.,
843 F.2d 1390, 1390 (6th Cir. 1988) (“Federal courts, however,
generally follow their own procedural rules.” (emphasis added)).
The Sixth Circuit has articulated a test to determine “whether a
federal court should apply a state rule when it is enforcing
rights created by state law”:

20

1. If the state provision is the substantive right or
obligation being asserted, the federal court must apply
it.
2. If the state provision is a procedural rule which is
intimately bound up with the substantive right or
obligation being asserted, the federal court must apply
it.
3. If the state provision is a procedural rule which is not
intimately bound up with the substantive right or
obligation being asserted, but its application might
substantially change the outcome of the litigation, the
federal court should determine whether state interests in
favor of applying the state rule outweigh countervailing
federal considerations against application of the rule.
If the state interests predominate, the state rule should
be adopted.
Miller v. Davis, 507 F.2d 308, 314 (6th Cir. 1974).
For the reasons discussed above, the substantive law of
Texas, rather than the substantive law of Tennessee, applies.
Therefore, the Court would be enforcing rights created by Texas
law, and the test in Miller governs in deciding whether to apply
Texas procedural rules.
Under the fraudulent joinder standard, a defendant has a
heavy burden to show that the plaintiff has no reasonable
possibility of recovery against a non-diverse defendant.

The

Court’s analysis is structured as a “12(b)(6)-type” inquiry.

In

practice, the question of jurisdiction essentially turns on the
sufficiency of the plaintiff’s pleadings.
App’x at 952-54.

See Walker, 443 F.

“‘Ordinarily if a plaintiff can survive a Rule

12(b)(6) challenge, there is no improper joinder.’”

Id.

(quoting Smallwood v. Illinois Cent. R.R. Co., 385 F.3d 568, 573

21

(5th Cir. 2004)).

The applicable pleading standard, which is a

procedural rather than substantive issue, see Fed. R. Civ. P.
8(a), can be dispositive of the question of diversity
jurisdiction.
This case was initially filed in the District Court for the
101st Judicial District of Dallas County, Texas.

(Compl.)

Texas courts follow a “fair notice” pleading standard.
Henry, 221 S.W.3d 609, 612 (Tex. 2007).

Low v.

Under a fair notice

standard, “courts assess the sufficiency of pleadings by
determining whether an opposing party can ascertain from the
pleading the nature, basic issues, and the type of evidence that
might be relevant to the controversy.”

Id.

Texas Rules of

Civil Procedure “45 and 47 require that the original pleadings
give a short statement of the cause of action sufficient to give
the opposing party fair notice of the claim involved....Rule 45
does not require that the plaintiff set out in his pleadings the
evidence upon which he relies to establish his asserted cause of
action.”

Texas Dep’t of Parks & Wildlife v. Miranda, 133 S.W.3d

217, 230 (Tex. 2004).

In Texas courts, “an opposing party

should identify defects in a pleading using special exceptions
so that a party may cure a defect by amendment if possible....In
the absence of special exceptions, [the court] construe[s] the
petition liberally in the pleader’s favor.”

Vann v. Conner, No.

01-12-00621-CV, 2013 Tex. App. LEXIS 381, at *3 (Tex. Ct. App.

22

Jan. 17, 2013).

“A state court petition is to be liberally

construed and is adequately pleaded if one can reasonably infer
a cause of action from what is stated in the petition, even if
the pleading party fails to allege specifically one of the
elements of a claim.”

Durable Specialties, Inc. v. Liberty Ins.

Corp., No. 3:11-CV-739-L, 2011 U.S. Dist. LEXIS 1150298, at *1112 (N.D. Tex. Dec. 30, 2011) (emphasis added).
Federal

courts

follow

a

far

stricter

pleading

standard.

Under Federal Rule of Civil Procedure 8(a), “[a] pleading that
states a claim for relief must contain:...a short and plain
statement of the claim showing that the pleader is entitled to
relief; and a demand for the relief sought.”
further
showing

requirements.
“facts

complaint.”
(2007).

A

plaintiff

consistent

with

must
the

support

a

allegations

claim

by

in

the

Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 563

This standard requires more than bare assertions of

legal conclusions.

Bovee v. Coopers & Lybrand C.P.A., 272 F.3d

356, 361 (6th Cir. 2001).

“[A] formulaic recitation of the

elements of a cause of action will not do.”
at 555.

Case law imposes

Twombly, 550 U.S.

A complaint must contain sufficient facts “to ‘state a

claim to relief that is plausible on its face’” to survive a
motion to dismiss.

Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)

(quoting Twombly, 550 U.S. at 570).

“The plausibility standard

is not akin to a ‘probability requirement,’ but it asks for more

23

than a sheer possibility that a defendant has acted unlawfully.”
Id. (citing Twombly, 550 U.S. at 556).

“Threadbare recitals of

the elements of a cause of action, supported by mere conclusory
statements, do not suffice.”
plaintiff

with

no

facts

and

Id. at 678 (citation omitted).
“armed

with

nothing

more

conclusions” cannot “unlock the doors of discovery.”

A

than

Id. at

679.
A

more

stringent

sounding in fraud.
“[i]n

alleging

pleading

standard

applies

to

claims

Under Federal Rule of Civil Procedure 9(b),

fraud

or

mistake,

a

party

must

state

with

particularity the circumstances constituting fraud or mistake.”
In the Sixth Circuit, “[t]o plead fraud with particularity, the
plaintiff must allege (1) the time, place, and content of the
alleged misrepresentation, (2) the fraudulent scheme, (3) the
defendant's fraudulent intent, and (4) the resulting injury.”
Chesbrough v. VPA, P.C., 655 F.3d 461, 467 (6th Cir. 2011).
Because the Western District of Tennessee and the Northern
District of Texas are both subject to the Federal Rules of Civil
Procedure,

they

standard.

On

would
the

typically

issue

of

apply

removal,

the

however,

same

pleading

the

Northern

District of Texas has routinely chosen to apply the Texas state
procedural rule rather than the federal procedural rule.

See,

e.g., Fantroy v. Dallas ART, No. 3:13-CV-0345-K, 2013 U.S. Dist.
LEXIS

73013,

at

*9-10

(N.D.

Tex.

24

May

23,

2013);

Yeldell

v.

Geovera Specialty Ins. Co., No. 3:12-cv-1908-M, 2012 U.S. Dist.
LEXIS 160499, at *6-8 (N.D. Tex. Nov. 8, 2012); Delaney v. Geo
Group, Inc., No. SA-12-Cv-541-XR, 2012 U.S. Dist. Lexis 114432,
at *6-7 (N.D. Tex. Aug 14, 2012); Durable Specialties, 2011 U.S.
Dist. LEXIS 150298, at *15-16 (“The Court does not believe that
a pleader in state court should be so hapless that he or she is
put in the untenable position of having to anticipate removal to
a federal court system that applies a more exacting pleading
standard.

Fundamental

fairness

compels

that

the

standard

applicable at the time the initial lawsuit was filed in state
court should govern.”). These courts rely on the Fifth Circuit’s
application

of

the

Texas

pleading

standard

to

a

Motion

for

Remand in an unpublished opinion, De La Hoya v. Coldwell Banker
Mexico, Inc., 125 F. App’x 533 (5th Cir. 2005).
District courts in this Circuit have applied more lenient
state pleading standards when considering fraudulent joinder.
Kentucky

continues

to

use

a

lenient

notice-pleading

that is similar to the Texas fair notice standard.

standard

Williams v.

Altman, McGuire, McClellan & Crum, No. 12-131-ART, 2013 U.S.
Dist. LEXIS 281, at *7 (E.D. Ky. Jan. 2, 2013) (“Kentucky courts
may dismiss plaintiffs’ complaints only where they would not be
entitled to relief under any set of facts which could be proved
under the complaint.” (internal quotations omitted)).

A court

in the Eastern District of Kentucky has decided that because the

25

test

for

fraudulent

joinder

is

“whether

a

reasonable

basis

exists for predicting that the plaintiff’s claims against the
non-diverse defendant could succeed under state law...it makes
little sense to measure the state-law viability of such claims,
which were originally filed in state court, by federal pleading
standards.”

In re Darvocet, Davron and Propoxyphene Products

Liability Litigation v. McKesson Corp., No. 2:12-50-DCR, 2012
U.S.

Dist.

LEXIS

101955,

(emphasis in original).

at

*20

(E.D.

Ky.

July

27,

2012)

There is a growing body of law in the

Eastern District of Kentucky applying state pleading standards
to

determine

whether

plaintiffs

have

defendants allege fraudulent joinder.

colorable

claims

when

See Combs v. ICG Hazard,

LLC, No. 6:12-CV-230-DLB-HAI, 2013 U.S. Dist. LEXIS 43292, at
*10-12 (E.D. Ky. March 1, 2013) (applying the Kentucky pleading
standard);

Williams,

2013

U.S.

Dist.

LEXIS

281,

at

*7-8

(applying the Kentucky pleading standard); In re Darvocet, 2012
U.S.

Dist.

LEXIS

101955,

at

*20-22

(applying

the

California

pleading standard).
Plaintiffs’ allegations against Orr as stated in the
Complaint are conclusory.

They would be insufficient to satisfy

the federal pleading standard under Rules 8(a) and 9(b).
However, the Plaintiffs do allege all of the elements of their
causes of action against Orr.

Those allegations are sufficient

to give Orr fair notice of the nature of the claims against him

26

and the type of evidence that might be necessary to prove those
claims.

See, e.g., Durable Specialties, 2011 U.S. Dist. LEXIS

150298, at *16 (“the pleadings [are] ‘bare-bones’....Texas
courts, however, do not require much as to the sufficiency of
pleadings....The allegations, taken as a whole, provide
sufficient information from which one could reasonably infer a
cause of action....Accordingly the court cannot find that there
is no reasonable possibility of recovery...in state court
and...has no basis to conclude that [defendant] was improperly
joined.”)
Application of the federal pleading standard would, in this
case, produce the opposite result from application of the Texas
pleading standard.

In such circumstances, a balancing of

federal and state interests under the third section of the
Miller test is appropriate.

Miller, 507 F.2d at 315.

The Court

must determine “whether state interests in favor of applying the
state rule outweigh countervailing federal considerations
against application of the rule.”

Id.

Texas has an interest in allowing liberal pleading and
permitting cases to go forward on the basis of sufficient notice
to defendants.

See, e.g., Low, 221 S.W.3d at 612.

Here, the

countervailing federal interest is in consolidation and
efficiency through the multidistrict litigation mechanism.
JPML may transfer cases “to any district for coordinated or

27

The

consolidated pretrial proceedings” when “civil actions involving
one or more common questions of fact are pending in different
districts.”

28 U.S.C. § 1407(a).

The purpose of those

transfers is to promote “the convenience of parties and
witnesses” and “the just and efficient conduct of such actions.”
Id.

Thus, in “federal multidistrict litigation there is a

preference for applying the law of the transferee district,”
rather than the laws of the various transferor districts, for
purposes of efficiency and fairness.

Louisiana Wholesale Drug

Co. v. Hoechst Marion Roussel, Inc., 332 F.3d 896, 911 n.17 (6th
Cir. 2003).
Not only state considerations, but important federal
concerns favor applying the state procedural rule in this case.
First, the issue here is, at bottom, whether the Court has
subject-matter jurisdiction.

Under the circumstances of the

case as presented, if federal procedural rules apply, removal
was proper and the Court has jurisdiction.

If the state

procedural rules apply, the Court does not have jurisdiction and
remand is necessary.
jurisdiction.’”

“‘Federal courts are courts of limited

Freeland v. Liberty Mut. Fire Ins. Co., 632

F.3d 250, 255 (6th Cir. 2011) (quoting Kokkonen v. Guardian Life
Ins. Co. of Am., 511 U.S. 375, 377 (1994)).

Federal

jurisdiction exists only where it is granted by statute, and
“‘[a]ll doubts as to the propriety of removal are resolved in

28

favor of remand.’”

Walker, 443 F. App’x at 952 (quoting Coyne,

183 F.3d at 493).

So, although “there is a federal interest in

having federal courts adjudicate all cases properly brought
under a jurisdictional grant from Congress,” there is an equally
strong interest in not overstepping the bounds of jurisdiction
and not deciding, without authority, cases that are properly
before state courts.

Miller, 507 F.2d at 317.

Second, there is a fundamental federal interest in
“‘discouragement of forum-shopping and avoidance of inequitable
administration of the laws’” in diversity cases.

Preferred

Capital, Inc. v. Sarasota Kennel Club, Inc., 489 F.3d 303, 308
(6th Cir. 2007) (quoting Hanna v. Plumer, 380 U.S. 460, 468
(1965)).

These foundational aims of diversity jurisdiction

doctrine counsel against application of the federal pleading
standard in this case.

The Northern District of Texas applies

the Texas pleading standard to claims of fraudulent joinder.

If

the Court were to apply the federal pleading standard in this
case, it would not only reach a different result from the Texas
state court, it would also reach a different result from the
Northern District of Texas.

It is self-evidently contrary to

federal interests in preventing forum-shopping and inequitable
administration for different federal courts to reach different
substantive outcomes on the basis of federal procedural rules.

29

In the circumstances of this case, the combined state and
federal interests in favor of applying the state pleading
standard outweigh the general federal interest in uniformly
applying the same procedural rules to all cases in a
multidistrict litigation.

Applying the Texas pleading standard,

the Court cannot find that the Defendants have shown the
Plaintiffs have no reasonable possibility of recovery on their
claims against Orr under Texas law.

Because Orr is a properly

joined defendant, the parties are not completely diverse and the
Court does not have subject-matter jurisdiction over this case
under 28 U.S.C. § 1332.
IV. Conclusion
For the foregoing reasons, Plaintiffs’ Motions to Remand
are GRANTED.

The Court lacks both federal question jurisdiction

and diversity jurisdiction.

Orr is a properly joined defendant,

and the parties are not completely diverse.

Remand is required.

This case is REMANDED to the District Court for the 101st
Judicial District of Dallas County, Texas.

So ordered on this 31st day of May, 2013.

s/ Samuel H. Mays, Jr.___
SAMUEL H. MAYS, JR.
UNITED STATES DISTRICT JUDGE

30