In Texas Brine Co., L.L.C. v. American Arbitration Association, the United States Court of Appeals for the Fifth Circuit recently addressed a question of first impression involving an interesting twist on removal jurisdiction.
Texas Brine sold products to a customer (Occidental Chemical Corporation). When a dispute arose, the parties agreed to resolve their dispute in arbitration. The dispute was administered by the American Arbitration Association, and was conducted in Louisiana. Following American Arbitration Association procedure, the parties selected three arbitrators, who then conducted an arbitration pursuant to the Federal Arbitration Act. The panel eventually issued an award in favor of Occidental.
Texas Brine learned what it considered to be information demonstrating a failure of two of the arbitrators to disclose information that Texas Brine characterized as conflicts of interest. After an award was issued, Texas Brine filed a motion in a Louisiana state court seeking to vacate the award, which was successful.
Thereafter, Texas Brine filed a second lawsuit in state court in New Orleans against the two disqualified arbitrators (both Louisiana citizens) and against the American Arbitration Association (a citizen of New York). This lawsuit sought to recover damages against all the parties for what Texas Brine contended was intentional and wrongful fraudulent conduct in connection with the arbitration process. The AAA was served with this lawsuit first, before the other two defendants were served. It immediately filed a notice of removal of the lawsuit to federal court, and sought dismissal of the claims. The two individual defendants then each filed an answer in the removed case, and joined in seeking dismissal.
Texas Brine (a Texas corporate citizen) challenged the removal on the basis of a prohibition against diversity removal by the two Louisiana defendants. In this case, there was complete diversity between the Plaintiff and the Defendants. However, the diversity removal statute has a companion provision which prevents a defendant from removing a case to federal court if that defendant is a citizen of the State where the action is brought, that is, a “forum defendant.”
The District Court denied Texas Brine’s motion to remand the case and then granted the Defendants’ motion to dismiss the claims on the basis of immunity and on the basis of the exclusive remedial provisions of the Federal Arbitration Act.
On appeal, the Fifth Circuit framed the procedural question as follows: May a non-forum defendant remove a case where another defendant is a citizen of the forum state but has not yet been served with the lawsuit?
Characterizing this type of removal as “snap” removal, and recognizing that it had never ruled specifically on this issue before, the Fifth Circuit turned for guidance to two recent decisions by the Second and Third Circuits (Gibbons v. Bristol-Myers Squibb Co., 919 F.3d 699 (2019); Encompass Ins. Co. v. Stone Mansion Rest. Inc., 902 F.3d 147 (2018)).
The Court then proceeded to address the question presented. It first acknowledged that the “forum defendant” prohibition was a procedural rule, not a jurisdictional one. It then determined that because the two Louisiana defendants had not been properly joined and served at the time of removal, the bar prohibiting a forum defendant’s removal of a diversity case did not apply. It ruled that the plain language of the removal statute reasonably reflected Congress’ intent to limit gamesmanship in the removal process while shining a bright light on the importance of the role of service of the lawsuit.
As a result, the Fifth Circuit affirmed the District Court’s denial of remand.
This case starkly demonstrates the importance to practitioners of effecting prompt service of process on any forum defendant when initiating a state court lawsuit so as to inoculate that proceeding from becoming removable; it also highlights the importance of alertly representing the interests of a non-forum defendant in such a lawsuit where removal is potentially an option.
