Texas v. Real Parties in Interest

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

_____________________

No. 00-40999

_____________________

STATE OF TEXAS,

Petitioner-Appellant,

versus

REAL PARTIES In Interest, Including

Walter Umphrey, John O’Quinn, John Eddie

Williams, Wayne Reaud and Harold Nix,

Respondents-Appellees.

_________________________________________________________________

Appeal from the United States District Court for the

Eastern District of Texas, Texarkana

_________________________________________________________________

July 23, 2001

Before GARWOOD, JOLLY, and DeMOSS, Circuit Judges.

E. GRADY JOLLY, Circuit Judge:

The district court entered a final judgment, incorporating a

settlement agreement that supposedly ended the litigation between

the State of Texas and the tobacco industry. It should have been

expected that, when attorney’s fees are in the billions, a string

of disputes would follow. This appeal arises from the post-

settlement controversy questioning the legitimacy of the

contingency fees awarded to counsel representing the state

1

(“Private Counsel”). Texas instituted this pre-litigation

discovery proceeding in state court for the purpose of

investigating possible fraud and breach of fiduciary duty claims

against Private Counsel. Private Counsel removed the action to

federal court, claiming federal jurisdiction on the basis of the

settlement agreement and further arguing that the All Writs Act, 28

U.S.C. § 1651, was applicable to protect the integrity of the

court’s judgment from a collateral assault. Texas moved to remand,

asserting, inter alia, the absence of federal jurisdiction based on

the Eleventh Amendment. The district court, concluding that Texas

had submitted itself to the jurisdiction of the federal court,

denied the motion and Texas has appealed. We find no basis in this

case for removal jurisdiction under the All Writs Act. We further

conclude that the Texas Rule 202 discovery proceeding presents a

premature basis for asserting the district court’s jurisdiction to

protect the settlement agreement. We therefore reverse with

instructions to remand this action to the state court from whence

it came.

I

Taking a cue from sister states that targeted the tobacco

industry, the State of Texas hired Private Counsel to file suit in

federal court against several tobacco companies to recover medical

costs and other expenditures associated with tobacco use. See

Texas v. American Tobacco Co., No. 5:96-CV-91 (E.D.Tex. 1996).

2

Suit was filed in March 1996. After 18 months of pre-trial

activities, the State and the tobacco companies entered into a

Comprehensive Settlement and Release Agreement in January 1998.

Under the settlement, Texas agreed to dismiss its claims and the

tobacco companies agreed to pay $15.3 billion in damages. The

district court entered a final judgment incorporating prior orders.

The paragraphs relevant to this appeal state that the district

court would retain exclusive jurisdiction over the provisions of

the settlement and final judgment.1 The final judgment

specifically stated that all persons “who seek to raise any

objections or challenges in any forum to any provision of this

judgment are hereby enjoined from proceeding in any other state or

federal court.” The settlement agreement also stated that “[t]he

settlement negotiations resulting in this Settlement Agreement have

been undertaken by the parties hereto in good faith.” Finally, the

settlement provided for the payment of attorney’s fees by the

defendants to Private Counsel upon presentation of Private

1

The first paragraph of the comprehensive settlement states:

Settling Defendants and the State of Texas acknowledge

that this Court has jurisdiction over the subject matter

of this action and over each of the parties hereto, and

this Court shall retain jurisdiction for the purposes of

implementing and enforcing this Settlement Agreement.

The parties hereto agree to present any disputes under

this Settlement Agreement, including without limitation

any claims for breach or enforcement of this Settlement

Agreement, exclusively to this Court.

3

Counsel’s estimate of reasonable costs and expenses.2 Ruling on

Private Counsel’s motion for approval of their attorney’s fees, the

district court determined that the 15 percent contingency fee--

provided for by contract between the Attorney General and Private

Counsel at the outset of the litigation and totaling $2.3 billion--

was reasonable.

Thereafter, on January 30, 1998, several Texas legislators

filed a mandamus action in Texas state court, which was removed by

Private Counsel and then-Attorney General Dan Morales to federal

court. This mandamus action challenged Morales’s authority to bind

the State to a contingency fee arrangement. Once removed to

federal court, the legislators asserted that the fee agreement

dispute could not be heard by the federal court because of Texas’s

Eleventh Amendment immunity.3 See In re Senator Troy Fraser, No.

5:98-CV-45 (E.D. Tex 1998).

In June 1998, the parties to the fee arrangement dispute

2

That portion of the settlement agreement reads:

Settling Defendants will reimburse . . . Private Counsel

for reasonable costs and expenses incurred in connection

with this litigation. . . . In addition, within 30 days

after the date of this Settlement Agreement, Settling

Defendants shall . . . pay to [Private Counsel] an amount

equivalent to Private Counsel’s best estimate of their

reasonable costs and expenses. . . . Private Counsel

shall provide Settling Defendants with an approximately

documented statement of their costs and expenses.

3

Then-Governor George W. Bush also intervened to challenge the

contingency fee arrangement and the district court’s jurisdiction

under the Eleventh Amendment.

4

reached a Severance and Standstill Agreement. The agreement gave

Private Counsel the choice of either attempting to enforce the

original contingency fee arrangement or accepting a fee to be

determined by an arbitration panel. The agreement, adopted by the

court, severed the fee dispute from the tobacco litigation. See In

re Private Counsel Fee Agreement, No. 5:98-CV-270 (E.D. Tex. 1998).

In December 1998, the arbitration panel upped the ante when it

awarded Private Counsel nearly $3.3 billion in fees. In the

meantime, the Texas political stage was being rearranged. The

following month, before Private Counsel had accepted the panel’s

award, the new Texas Attorney General, John Cornyn, moved to

dismiss In re Private Counsel and moved to remand In re Fraser

based on the State’s Eleventh Amendment immunity.4 On November 5,

1999, the district court ruled on several outstanding motions and

issued a memorandum opinion. See In re Fraser, 75 F.Supp.2d 572

(E.D. Tex. Nov. 5, 1999). The court denied the State’s motion to

dismiss and the legislators’ motion to remand, finding that Texas

waived its Eleventh Amendment immunity from claims regarding the

attorney’s fees agreement by filing the initial tobacco litigation

in federal court. See also In re Private Counsel, 1999 WL 1022131

(E.D. Tex. Nov. 5, 1999).

Two weeks later, Private Counsel deftly elected to accept the

4

Texas asserts that Cornyn also initiated an investigation

into the fiduciary conduct of Private Counsel during the tobacco

litigation at this time.

5

arbitration award and, under the agreement, waived their right to

sue under the initial fee arrangement. Texas soon appealed the

district court’s November 5 jurisdictional rulings to the Fifth

Circuit, and this court granted Private Counsel’s motion to dismiss

for mootness and vacated the district court’s underlying

jurisdictional decisions. Fraser v. Real Parties, Nos. 00-40024,

00-40036, 00-40038 (5th Cir. July 10, 2000).

On April 27, 2000, the State filed the instant Rule 202

proceeding5 in state court seeking to depose Private Counsel to

“investigate potential claims it believes it may possess for

conversion and breach of fiduciary duty.”6 Private Counsel

immediately removed the action to federal court and filed a motion

for summary judgment.7 Texas filed an emergency motion to remand,

5

Rule 202 allows a party to petition a state court for

depositions in order to investigate potential claims. It reads:

A person may petition the court for an order authorizing

the taking of a deposition on oral examination or written

questions either:

(a) to perpetuate or obtain the person’s own testimony or

that of any other person for use in an anticipated suit;

or

(b) to investigate a potential claim or suit.

Tex. R. Civ. P. 202.1.

6

Specifically, the State sought to discover whether Private

Counsel should have known that the fee agreement was unenforceable,

whether Private Counsel improperly sought to benefit themselves at

the State’s expense, whether tobacco litigation documents were

withheld from the State, and whether documentation supports the

expenditure of $40 million in legal expenses on the case.

7

Because removal is properly accomplished under 28 U.S.C. §

1441, and because the district court did not base its denial of the

6

arguing that the Eleventh Amendment barred adjudication of the Rule

202 proceeding in federal court. On August 15, 2000, the district

court, in a very thorough and well-considered opinion, denied the

motion to remand and, treating the case as removed from state

court, found specifically that (a) the Rule 202 proceeding was a

“civil action” for removal purposes under 28 U.S.C. § 1441; (b) the

issues in the petition, however, were not supplemental or ancillary

to the tobacco litigation;8 (c) but nevertheless the court could

exercise jurisdiction over the Rule 202 petition under the All

Writs Act, 28 U.S.C. § 1651, to protect its judgment; because,

inter alia, (d) the Eleventh Amendment was no bar to the proceeding

State’s motion to remand on provisions of that statute, the Rule

202 proceeding was not actually “removed” in any procedurally

cognizable way. Nevertheless, we use the term “removal” to

describe the assertion of federal jurisdiction over this case for

the sake of clarity.

8

While “[t]he doctrine of ancillary jurisdiction can hardly be

criticized for being overly rigid or precise,” Kokkonen v Guardian

Life Insurance Co., 511 U.S. 375, 379 (1994), the district court

properly refused to assert ancillary jurisdiction over the Rule 202

proceeding. In a case like this, the exercise of ancillary

jurisdiction over a claim with no independent basis for

jurisdiction is improper “once judgment [is] entered in the

original [suit].” Peacock v. Thomas, 516 U.S. 349, 355 (1996).

Some cases suggest, however, that ancillary jurisdiction could

exist over a subsequent claim when a federal court expressly

retains jurisdiction over a final judgment or settlement agreement

and the two claims are “factually interdependent” or the subsequent

state court action would “effectively nullify” the federal

judgment. Kokkonen, 511 U.S. at 379; Royal Ins. Co. of America v.

Quinn-L Capital Corp., 960 F.2d 1286, 1292 (5th Cir. 1992).

However, as explained in this opinion, the Rule 202 proceeding is

not factually interdependent with the original tobacco litigation

and does not threaten to “effectively nullify” the federal

settlement.

7

because the State had waived its immunity as to the tobacco

litigation and “all of its outgrowths.” The district court

therefore denied Texas’s motion to remand. This appeal of the

order denying the remand followed.

II

Ordinarily, we have appellate jurisdiction only over final

judgments, which the district court’s order denying remand is not.

We therefore must first address this court’s authority to hear this

appeal of a non-final ruling. Private Counsel argues that we lack

jurisdiction over this appeal because a district court’s remand

order is not appealable. B., Inc. v. Miller Brewing Co., 663 F.2d

545, 548 (5th Cir. 1981) (“Ordinarily, a district court’s refusal

to remand an action is not in and of itself a final order and

cannot be reviewed unless and until a final judgment has been

entered.”). However, the Supreme Court held in Puerto Rico

Aqueduct & Sewer Authority v. Metcalf & Eddy, Inc., 506 U.S. 139,

143-45 (1993), that States “may take advantage of the collateral

order doctrine to appeal a district court order denying a claim of

Eleventh Amendment immunity.” Given that the denial of Texas’s

Eleventh Amendment immunity is a non-frivolous issue in this case,

Puerto Rico Aqueduct fully supports this court’s jurisdiction over

the present appeal.

With appellate jurisdiction established, we now turn to

address the primary jurisdictional inquiry in this appeal: whether

8

the district court erred by exercising removal jurisdiction over

this state court action under the All Writs Act.

III

The All Writs Act, 28 U.S.C. § 1651 (a), provides:

The Supreme Court and all courts established by Act of

Congress may issue all writs necessary or appropriate in

aid of their respective jurisdictions and agreeable to

the usages and principles of law.

After acknowledging that it could not assert supplemental or

ancillary jurisdiction over the Rule 202 proceeding, the district

court found that the All Writs Act authorized it to assert

jurisdiction over the Rule 202 state proceeding, despite no

independent basis for federal jurisdiction over that proceeding.

The court reasoned that, particularly because it had retained

jurisdiction over the settlement agreement, it could assert its

jurisdiction under the All Writs Act in order to protect and

effectuate its final judgment, which incorporated the settlement

agreement. The State of Texas, however, argues that the All Writs

Act can provide no removal jurisdiction over a matter not otherwise

removable and, even if it could, the Rule 202 petition is a

separate and distinct proceeding from the original tobacco

litigation and in no way threatens the settlement agreement.

Although the Supreme Court has held that the All Writs Act may

authorize a court to issue commands “as may be necessary or

appropriate to effectuate and prevent the frustration of orders it

9

has previously issued in its exercise of jurisdiction otherwise

obtained,” United States v. New York Telephone, 434 U.S. 159, 172

(1977), almost 200 years of Supreme Court precedent establishes

that the Act, originally enacted as part of the Judiciary Act of

1789, cannot serve as an independent basis of jurisdiction. See,

e.g., Clinton v. Goldsmith, 526 U.S. 529, 534-35 (1999); Rosenbaum

v. Bauer, 120 U.S. 450, 458 (1887); McIntire v. Wood, 11 U.S.

(Cranch) 504, 506 (1813). Accordingly, this court has similarly

held that “section 1651(a) is not an independent grant of

jurisdiction.” In re McBryde, 117 F.3d 208, 220 (5th Cir. 1997).

Considering these hoary precedents of the Supreme Court, some

circuits have come to the conclusion that § 1651 may not be used as

a removal statute to allow a federal court to assert jurisdiction

over a purely state court action. These circuits have applied the

Act to enjoin state court proceedings when those state actions

threatened to disrupt prior orders of the court but have refused to

authorize “removal” under the Act. See Pacheco de Perez v. AT&T

Co., 139 F.3d 1368, 1379-80 (11th Cir. 1998); Hillman v. Webley,

115 F.3d 1461, 1468 (10th Cir. 1997); Westinghouse Electric Corp.

v. Newman & Holtzinger, P.C., 992 F.2d 932, 937 (9th Cir. 1993);

Telecommunications Research and Action Ctr. v. FCC, 750 F.2d 70, 76

(D.C. Cir. 1984)(citation omitted)(finding that, while the Act is

not an independent source of jurisdiction, it can be utilized in a

mandamus action to “aid” a court if it has jurisdiction over a

10

“past, present, or future” action).9 Several of these courts have

held that, when a federal court has jurisdiction over an action,

the All Writs Act grants jurisdiction to issue writs “necessary or

appropriate in aid of” that jurisdiction. Such power would permit

a district court to enjoin actions in state court but only where

necessary to prevent relitigation of an existing federal judgment

or otherwise to protect federal court orders.

On the other hand, some courts have given the All Writs Act a

considerably more expansive reading to permit removal of a state

court action to the federal court for adjudication even though the

action was otherwise non-removable. See, e.g., NAACP v.

Metropolitan Council, 144 F.3d 1168, 1170-71 (8th Cir. 1998); Davis

v. Glanton, 107 F.3d 1044, 1047 n.4 (3d Cir. 1997); Sable v.

General Motors Corp., 90 F.3d 171, 175 (6th Cir. 1996) (finding

removal jurisdiction proper under the Act where necessary to

protect federal judgments from state proceedings that would

“seriously interfere with” federal consent agreements); In the

Matter of VMS Sec. Litig., 103 F.3d 1317, 1323 (7th Cir. 1996); In

re Agent Orange Prod. Liab. Litig., 996 F.2d 1425, 1431 (2d Cir.

1993)(explicitly authorizing “[a] district court, in exceptional

circumstances, [to] use its All Writs authority to remove an

otherwise unremovable state court case in order to effectuate and

9

While none of these circuits has yet to authorize removal

under the All Writs Act, only the Tenth Circuit has categorically

held that the Act can never facilitate removal, regardless of the

circumstances.

11

prevent the frustration of orders it has previously issued.”).

Agent Orange is perhaps the most familiar of this genre.

There, a group of plaintiffs attempted to revive tort litigation in

state court that involved virtually identical claims addressed in

a federal court-approved settlement--a settlement that expressly

barred those prior class members from instituting such an action

against defendants. The defendants removed the actions to federal

court and the court dismissed those claims barred by the prior

settlement. The Second Circuit upheld the district court’s

exercise of jurisdiction under the All Writs Act, noting that

“exceptional circumstances” existed that authorized the removal of

the otherwise unremovable state action. Id. at 1431.

VMS Securities is also a noteworthy case permitting removal

under the All Writs Act. There, a federal court approved a

settlement in a securities fraud class action suit that provided

for the release of all further related claims by the class

plaintiffs. Thereafter, a group of class plaintiffs filed suit in

state court asserting fraud and breach of fiduciary duty claims

against the same defendants, claiming that they were wrongfully

induced to join the prior class settlement. The Seventh Circuit,

citing Agent Orange, held that the district court could assert

removal jurisdiction over the state law actions under the All Writs

Act for the purpose of dismissing those claims because the court

explicitly had retained jurisdiction over the initial class action

12

settlement. Id. at 1323.

Yet, the principle reflected in both Agent Orange and VMS

Securities--that an otherwise non-removable action is removable

under the All Writs Act--must be questioned in the light of the

Supreme Court’s decision in Rivet v. Regions Bank of Louisiana

(Rivet I), 522 U.S. 470 (1998). In Rivet I, a Bankruptcy Court

approved the sale of a leasehold estate to a Bank and, after

acquiring the entire property, the Bank sold the land to

Fountainbleau Storage Associates (FSA). The holders of a second

mortgage on the land sued in state court, alleging that the

property had been transferred in the bankruptcy proceeding without

satisfying their rights as mortgage holders. FSA removed the state

action to federal court, arguing that the Bankruptcy Court’s orders

had resolved the petitioners’ rights and that the All Writs Act

provided federal-question jurisdiction for the case to be removed

for federal court resolution.

The Supreme Court thought the argument a poor one; it held

that claim preclusion based on a prior federal judgment is a

defensive plea that provides no basis for removal. Id. at 476. In

so holding, the Court embraced a strict reading of 28 U.S.C. § 1441

(the removal statute) and reemphasized the limited circumstances

under which an action in state court can properly be removed to

federal court.10 With Rivet standing as sentry, it would be bold

10

Rivet also calls into doubt the holding of Baccus v. Parrish,

45 F.3d 958 (5th Cir. 1995). In Baccus, a federal settlement

13

indeed to read the All Writs Act as authorizing removal of an

otherwise unremovable action.11

Even accepting the remote proposition that removal still can

be proper under the All Writs Act in the face of “extraordinary

agreement ended a suit involving Texas schools for the mentally

retarded. Baccus, the parent of a mentally retarded child, later

filed suit in state court challenging the implementation of the

settlement agreement. The action was removed to federal court.

Removal, however, was not based on the All Writs Act, but instead

on the general removal statute, 28 U.S.C. § 1441. We concluded

that removal was proper where a claim brought in state court “seeks

to attack or undermine an order of a federal district court.” Id.

at 960. The court reasoned that, although the cause of action was

brought under the laws of Texas, “courts will typically look beyond

the face of a complaint to determine whether removal is proper.”

Id. at 960. Given Rivet’s clear instruction that it is improper to

look beyond the face of a well-pleaded complaint to determine the

propriety of removal, 522 U.S. at 475, and given that the Baccus

defendant chose--either wittingly or unwittingly--not to rely on

the All Writs Act as support for removal, our decision in Baccus

retains little precedential value and is, in any event, not

applicable to the issues we address in this appeal.

11

Significantly, on remand in Rivet this court illustrated how

a federal court’s injunctive powers--as contrasted with removal--

under the All Writs Act can be used to prevent the frustration of

its orders in later state court proceedings. Following the Supreme

Court’s decision in Rivet I, FSA filed suit in federal court under

the All Writs Act, seeking injunctions against further proceedings

in state court by the petitioners. The petitioners, meanwhile,

proceeded with their case in state court. The district court

enjoined any litigation in state court regarding the second

mortgage that had been decided by the Bankruptcy Court. The

petitioners challenged the district court’s jurisdiction to issue

the injunction, and this court held that, while the All Writs Act

is not jurisdictional, the injunction was authorized because

“jurisdiction is based on the original case” and “it is not

necessary for the district court to have jurisdiction over the

second suit as an original action.” Regions Bank of Louisiana v.

Rivet (Rivet II), 224 F.3d 483, 493 (5th Cir. 2000).

14

circumstances,”12 and further accepting that the procedural

requirements for removal under § 1441 pose no barrier to the use of

the All Writs Act to bring a state court matter into federal

court,13 the Rule 202 proceeding in this case clearly does not

present such facts or circumstances. The proceeding is only an

investigatory tool. Both the State and Private Counsel can only

speculate as to the eventual outcome of the probe. This pending

state court action over which the district court exercised § 1651

12

The breadth and specificity of the removal statutes, found

at 28 U.S.C. § 1441, et seq., suggests that federal courts should

not read other statutes as providing additional, ad hoc avenues for

removal. The Supreme Court’s characterization of the All Writs Act

as “filling the interstices of federal judicial power” in

Pennsylvania Bureau of Correction v. United States Marshals

Service, 474 U.S. 34, 41 (1985), gives credence to the argument

that the Act should never be used to supplement the removal

statutes:

The All Writs Act is a residual source of authority to

issue writs that are not otherwise covered by statute.

Where a statute specifically addresses the particular

issue at hand, it is that authority, and not the All

Writs Act, that is controlling.

Id. at 43 (emphasis added). See also Joan Steinman, The Newest

Frontier of Judicial Activism: Removal Under the All Writs Act, 80

B.U. L. Rev. 773 (2000).

13

The explicit and detailed procedural guidelines for removal

outlined by Congress support a finding that removal under the All

Writs Act, particularly in this case, is inappropriate. 28 U.S.C.

§ 1446(a) requires that any claim filed in state court and

thereafter removed “shall” be removed to the federal district court

“for the district and division within which such action is

pending.” Texas filed its Rule 202 proceeding in Harris County

state court, located in the Southern District of Texas. In order

to bring the proceeding before the court that had issued the final

judgment in this case, however, Private Counsel “removed” the

proceeding directly to the Eastern District of Texas, Texarkana

Division.

15

jurisdiction ultimately may or may not pose an actual threat to the

federal tobacco settlement. The investigation could lead to no

further action, or it could result in a cause of action not

contemplated or covered by the settlement agreement; or, indeed, it

may lead to the institution of a cause of action for which the

invocation of, at least, the injunctive powers of the All Writs Act

would be timely and appropriate. In any event, the federal courts

cannot preclude the State of Texas from investigating potential

claims in the milieu of the Texas courts--pursuant to Texas law--

unless and until such investigation poses an actual threat to the

settlement agreement. Private Counsel’s claim that such a threat

exists is premature.

We recognize that if, at some point in the future, the State

attempts explicitly to upset provisions of the settlement agreement

in state court, circumstances may well dictate that the proceeding

be enjoined. Indeed, we will not decide today whether, under

“extraordinary circumstances,” the case may be “removed” to federal

court under the All Writs Act. In the absence of such

extraordinary circumstances, however, that indisputably demand such

a course of action as absolutely necessary to vouchsafe the central

integrity of the federal court judgment, we hold that the All Writs

Act cannot be employed as a vehicle for removal.14

14

Because we find no basis for federal jurisdiction in this

case, we need not address the other issues raised in this appeal--

the scope of Texas’s Eleventh Amendment immunity and whether the

Rule 202 proceeding was a “civil action” for removal purposes.

16

IV

In sum, we hold that the district court erred in exercising

its jurisdiction under the All Writs Act and in denying the State’s

motion to remand. We therefore reverse and remand to the district

court with instructions to remand the Rule 202 proceeding to the

Texas state court from which it was removed.

REVERSED AND REMANDED.

17