Kenneth Wolf v. Ford Kennelly

In the

United States Court of Appeals

For the Seventh Circuit

No. 08-2203

K ENNETH J. W OLF and KJW, LLC,

Plaintiffs-Appellants,

v.

F ORD K ENNELLY, R OSENTHAL C OLLINS

G ROUP, LLC and L AWRENCE S PAIN,

Defendants-Appellees.

Appeal from the United States District Court

for the Northern District of Illinois, Eastern Division.

No. 1:07-cv-02218—Rebecca R. Pallmeyer, Judge.

A RGUED M AY 28, 2009—D ECIDED JULY 23, 2009

Before B AUER, F LAUM, and K ANNE, Circuit Judges.

F LAUM, Circuit Judge. Ford Kennelly prevailed in a

National Futures Association arbitration against several

commodities brokers with whom Kennelly had accounts

and who, he alleged, ran “boiler room” operations that

caused him to incur severe losses. Those brokers then

filed separate petitions to vacate in Illinois state court

and the Northern District of Illinois. Kennelly sought,

2 No. 08-2203

unsuccessfully but over a period of several months, to

remove the state court case to federal court; and while he

was unsuccessful in getting the case into federal court he

did persuade the district court to bar KJW, LLC, one of the

commodities brokers, from seeking attorneys’ fees for his

attempted removal. KJW now appeals that ruling.

For the following reasons, we conclude that clearly

established law foreclosed Kennelly’s attempts to remove

the state court case to federal court and accordingly we

reverse the district court’s minute order barring the

petition for attorneys’ fees.

I. Background

Ford Kennelly, an Indiana citizen, sued Ken Wolf, KJW

(his broker), Lawrence Spain (another broker) and the

Rosenthal Collins Group, LLC (“RCG”) in a National

Futures Association (“NFA”) arbitration. The arbitra-

tion panel found in Kennelly’s favor, awarding him $1.3

million in damages, with RCG and Wolf jointly and

severally liable for $543,386.12, plus interest. RCG filed a

petition to vacate that award in the Northern District of

Illinois, posting bond in the amount of the entire joint

and several award pursuant to NFA rules before doing

so. According to Wolf, they also made demands on him

to indemnify RCG under an agreement between RCG

and KJW. Wolf was not a party to RCG’s petition.

On March 25, 2007, Wolf and KJW filed their own

petition to vacate in Cook County Circuit Court. Wolf

included in his state court petition a count for declara-

No. 08-2203 3

tory relief against RCG under Illinois state law, seeking

a declaration that RCG did not have a valid claim for

indemnification.

Kennelly responded by seeking to remove Wolf’s petition

to federal court. Wolf’s counsel, in a letter sent to

Kennelly’s counsel, warned that RCG was an Illinois

citizen for purposes of jurisdiction and that 28 U.S.C.

§ 1441(b), the “forum defendant rule,” prevented removal

to federal court. Kennelly nonetheless sought to remove

the case in a motion filed on April 23, 2007. To cure

the removal problems presented by the forum defendant

rule, Kennelly asked the district court to realign RCG as

a petitioner (instead of a respondent) “according to their

actual interests in the litigation.” Kennelly also claimed

that Wolf’s declaratory judgment action against RCG

was premature because, if the arbitration award were

vacated, “there would be no need for a court to deter-

mine whether KJW and Wolf are legally obligated to

indemnify RCG.” Kennelly also expressed his concern

that if the state case were not removed, there was a possi-

bility of inconsistent decisions.

On May 21, 2007, Wolf moved to remand. Wolf argued

that because RCG was a respondent, Kennelly’s removal

violated § 1441(b)’s forum defendant rule and that

RCG had not consented to removal. Wolf also opposed

realignment as the petitioner in the Illinois state court

case. Wolf’s motion opposing removal cited American

Motorists Ins. Co. v. Trane Co., 657 F.2d 146, 151 (7th Cir.

1981), which holds that realignment is only proper “where

there is no actual, substantial conflict between the

4 No. 08-2203

parties that would justify placing them on opposite sides

of the lawsuit.” Wolf emphasized in his motion that

there was a live controversy with RCG over the issue of

indemnification. Kennelly opposed the motion to

remand the case back to the Illinois state court.

At a status conference on June 25, 2007, the district

court appeared persuaded by Kennelly’s opposition. The

district court stated that “it does seem to me that the

real dispute here is between the party that prevailed at

the arbitration and the parties that were found by the

arbitrator to have violated . . . Mr. Kennelly’s rights. So

with that understanding, I do think removal was

proper.” The district court said that it was “concerned”

about Wolf’s argument regarding a substantial dispute

about indemnification but suggested that she saw

another problem, that Kennelly had not raised in his

motion to remove, regarding whether “complete justice

can be done in the absence of the Wolf and KJW parties”

in RCG’s federal case. However, RCG indicated its inten-

tion to dismiss its federal petition and litigate in state

court if the district court remanded Wolf’s case. Wolf

and RCG filed a supplemental brief restating that inten-

tion on July 12, 2007.

On August 14, 2007, Kennelly argued that Wolf’s declara-

tory judgment action against RCG should be severed

and that the district court should regard that part of the

case as a “sham orchestrated by Wolf and RCG jointly to

keep Kennelly out of federal court.” The parties went

through mediation without success. The district court

held another hearing on September 19, 2007 in which the

No. 08-2203 5

court signaled once again its intention to deny the

motion for remand. Two more months then elapsed. On

November 27, 2007, the district court ordered Wolf to

respond to the arguments Kennelly had raised in his

August 14 brief regarding severance of the indemnifica-

tion issue.

At some point in late November or early December 2007,

it emerged that one of RCG’s limited partners was an

Indiana citizen. It thus now appeared that RCG could not

be realigned as a petitioner because Kennelly was an

Indiana citizen and placing the two on opposite sides

would destroy the diversity of the suit.

On December 13, 2007, Wolf submitted another brief

arguing that American Motorists still applied but that it did

not matter whether the district court realigned RCG or

not. As RCG stated, sending RCG (an Indiana resident) to

the plaintiff’s side against Kennelly (also an Indiana

resident) would destroy diversity. Wolf also cited case

law holding that mere “misjoinder” of a defendant could

not cure removal defects, as the standard was the much

more imposing “fraudulent joinder.” Wolf pointed out

that even if misjoinder standards applied, there was no

pending motion to sever RCG from the case. Kennelly,

in response to Wolf, made such a motion to sever on

January 10, 2008.

On February 12, 2008, the district court issued a twelve-

page memorandum granting the motion to remand. The

district court first found that it must remand if RCG was

a respondent in the case. As the district court stated,

since jurisdiction did not rest on a federal question, under

§ 1441(b) the case was “removable only if none of the

6 No. 08-2203

parties in interest properly joined and served as defen-

dants is a citizen of the state in which such action is

brought.” RCG was a citizen of Illinois, so this criterion

was not met. The district court also found that removal

was improper, assuming RCG as a respondent, because

courts have interpreted the statutory language providing

for removal “by the defendant or the defendants,”

28 U.S.C. § 1441(a), as requiring that all defendants

consent to removal. RCG was not willing to consent to

removal. Next, the district court explained that RCG’s

realignment as a petitioner was not possible because it

would destroy diversity between the parties. The district

court also stated that, even if RCG was not a resident of

Indiana, realignment would not be proper because of

the substantial controversy between Wolf and RCG

regarding indemnification. Finally, the district court held

that severance of the indemnification dispute was not

proper without a showing of fraudulent misjoinder or

procedural misjoinder, neither of which Kennelly could

prove. Accordingly, the district court remanded the

case back to state court.

Wolf then tried to recover attorneys’ fees for Kennelly’s

attempted removal. Wolf mailed Kennelly an offer to

confer along with detailed invoices. Receiving no

response from Kennelly, Wolf moved the district court

for instructions to set a schedule for conferring under

Local Rule 54.3(b). Kennelly cross-moved to bar Wolf

from filing any motion for fees and costs.

The district court held a status conference on April 14,

2008. The district court granted Kennelly’s cross-motion

to bar Wolf from filing for fees and costs, stating:

No. 08-2203 7

Without reaching that question, I don’t think—I think

even if we were to view fee shifting as the norm,

I think this case is exceptional. It’s not one where

removal was clear. Had that been—removal was

clearly improper. Had that been the case, it would

certainly not have taken me months to resolve the

dispute that I think was an unfortunately costly one

for both sides.

I am not inclined to shift fees in this case. So my

instructions would be that you proceed with state

court.

In a minute order following the status conference, the

district court stated that: “[T]he court directs the parties to

proceed with litigation in State court. Fee-shifting is not

warranted in this case. Motion to bar therefore also

granted.”

Wolf now appeals the denial of attorneys’ fees.

II. Discussion

In general, we review a district court’s decision to

award attorneys’ fees for abuse of discretion. King v. Ill.

State Bd. of Elections, 410 F.3d 404, 411 (7th Cir. 2005). As

the Supreme Court has pointed out, however, “[a] district

court would necessarily abuse its discretion if it based

its ruling on an erroneous view of the law or on a

clearly erroneous assessment of the evidence.” Cooter &

Gell v. Hartmarx Corp., 496 U.S. 384, 405 (1990). Our

review of the legal issues underlying the claim for attor-

neys’ fees is de novo. See Dupuy v. Samuels, 423 F.3d 714,

718 (7th Cir. 2005).

8 No. 08-2203

Wolf makes two arguments against the district court’s

ruling. First, he argues that the district court’s ruling on

the attorneys’ fees issue—and here he focuses on the

minute order—was too summary to assure a reviewing

court that the district court in fact exercised its discretion.

We disagree. While the district court’s written ruling

was indeed very summary, the minute order was essen-

tially only memorialized what had occurred on the record

during the earlier status hearing. In that hearing, the

district court found that the present case was “not [a case]

where . . . removal was clearly improper” and therefore

denied fees. At the time that the district court made

its ruling, it had issued a thorough opinion on the

removal issue, noting both parties’ positions on that

issue. It also had before it both Wolf’s motion for sched-

uling instructions and Kennelly’s motion to bar fees.

Kennelly’s motion to bar fees cited the appropriate cases

in this area (including both Martin v. Franklin Corp., 546

U.S. 132 (2005) and Lott v. Pfizer, Inc., 492 F.3d 789 (7th

Cir. 2007)). The district court was thus aware of the

proper standard for fees and appeared to use it in

reaching its decision. Moreover, the district court cited

reasons for its decision, including the fact that the case

was “exceptional” and not one where removal was

clearly improper, and the unusual amount of time it

took the court to resolve the dispute. Because the

district court’s reasons were supported by the record, the

more summary minute order does not constitute an

abuse of discretion. See Dugan v. Smerwick Sewerage Co.,

142 F.3d 398, 408 (7th Cir. 1998) (noting that we

have “affirmed decisions refusing sanctions without

No. 08-2203 9

elaboration when the reasons for doing so are clear

from the record”).

Wolf’s second argument is that the district court abused

its discretion because clearly established law foreclosed

removal in this case. We agree that at the time of

Kennelly’s attempted removal the forum defendant

rule barred any attempt to remove the case without

realigning RCG as a petitioner, and that this circuit’s case

law foreclosed any attempt to realign RCG.

“An order remanding [a] case may require payment of

just costs and any actual expenses, including attorney fees,

incurred as a result of the removal.” 28 U.S.C. § 1447(c). In

Martin v. Franklin Capital, the Supreme Court held that a

district court may award attorneys’ fees under § 1447(c)

only where the removing party lacked an “objectively

reasonable basis” for seeking removal. Martin, 546 U.S. at

141. Martin resolved a circuit split over the correct stan-

dard for such situations. Compare Hornbuckle v. State Farm

Lloyds, 385 F.3d 538, 541 (5th Cir. 2004) (“Fees should be

awarded only if the removing defendant lacked ‘objec-

tively reasonable grounds to believe that removal was

legally proper.’ ”) with Sirotzky v. N.Y. Stock Exch., 347 F.3d

985, 987 (7th Cir. 2003) (“[P]rovided removal was im-

proper, the plaintiff is presumptively entitled to an award of

fees.”) (emphasis in original). The Supreme Court adopted

the Fifth Circuit’s approach and pointed out that “[i]f fee

shifting were automatic, defendants might choose to

exercise this right only in cases where the right to remove

was obvious.” Martin, 546 U.S. at 140. The Court noted

that Congress would not have conferred a right to

10 No. 08-2203

remove and then discouraged its exercise in all but the

obvious cases. Id.

The Supreme Court did not define what sorts of beliefs

are “objectively reasonable” in its Martin opinion be-

cause the parties in that case agreed that the defendant’s

basis for removal was reasonable. In Lott v. Pfizer, Inc., 492

F.3d 789 (7th Cir. 2007), we decided that “qualified immu-

nity jurisprudence provides appropriate guidance for

determining whether a defendant had an objectively

reasonable basis for removal.” Id. at 793. As we discussed

in Lott, the qualified immunity doctrine assumes that

state officials are aware of existing case law and holds

officials liable only if they violate clearly established and

particularized rights. See id. at 792 (citing Brosseau v.

Haugen, 543 U.S. 194, 199 (2004)). We reasoned that just

as the qualified immunity doctrine attempts to protect

zealous law enforcement, the removal statute encourages

litigants to make liberal use of federal courts, so long as the

right to remove is not abused. Id. at 793. We then an-

nounced the “general rule” to govern such cases:

if, at the time the defendant filed his notice in federal

court, clearly established law demonstrated that he

had no basis for removal, then a district court should

award a plaintiff his attorneys’ fees. By contrast, if

clearly established law did not foreclose a defendant’s

basis for removal, then a district court should not

award attorneys’ fees.

Id. at 793. Wolf argues that this court’s decision in

American Motorists foreclosed Kennelly’s attempts at

removal. In American Motorists we held that “[r]ealign-

No. 08-2203 11

ment is proper when the court finds that no actual, sub-

stantial controversy exists between the parties on one

side of the dispute and their named opponents . . .” Am.

Motorists, 657 F.2d at 149 (citing Indianapolis v. Chase Nat’l

Bank, 314 U.S. 63 (1941)). We stated that in determining

whether realignment is proper, courts must focus on “the

points of substantial antagonism, not agreement.” Id. at

151. This held true even if the parties shared an interest

in avoiding liability in the suit altogether. “[A] mere

mutuality of interest in escaping liability” does not man-

date realignment. Id. We ultimately concluded that re-

alignment was not proper in that case because while the

plaintiff insurance company and a defendant insurance

company both had an interest in escaping liability for

any claims, the dispute over their respective duties to

defend was a real and substantial controversy that

justified placing the parties on opposite sides of the

dispute. Id.

We have subsequently held on the basis of American

Motorists that it is “undoubtedly improper” to realign

parties for the purpose of preserving jurisdiction if “an

actual, substantial controversy exists between a party

on one side of the dispute and its named opponent.”

Krueger v. Cartwright, 996 F.2d 928, 932 n.5 (7th Cir. 1993)

(citing Am. Motorists, 657 F.2d at 149). At the time that

Kennelly sought to remove KJW’s suit to federal court,

then, this circuit had a long-standing precedent that

realignment is not proper where an “actual, substantial”

controversy exists between the parties, even if the

parties share an interest in avoiding liability in the suit.

12 No. 08-2203

Kennelly counters by alleging, as he did throughout

the district court proceedings, that the indemnification

dispute was a “sham” fabricated by Wolf and RCG in

order to keep the case out of federal court. He alleges,

among other factors, that the dispute is dubious because

the parties have never produced a written indemnifica-

tion agreement, RCG has never demanded payment, and

the parties have been, in Kennelly’s view, less than vigor-

ous in pursuing the indemnification issue. It is true that

the two parties ultimately agreed to dismiss the declara-

tory action, and while this may have given Kennelly some

basis to believe, at the time he removed the case, that the

indemnification dispute was not a “real” dispute, the

district court’s opinion on the removal issue ultimately

found that the indemnification dispute was “actual” and

“substantial” and the merits of that ruling are not

on appeal.1

Moreover, we stated in American Motorists that “the

facts which form the basis for realignment must have

been in existence at the time the action was commenced.”

Am. Motorists, 657 F.2d at 149. Thus, the decision to

dismiss the declaratory action at a later stage would not

1

Kennelly also alleges that Wolf’s Illinois state court pleadings

were deficient because they failed to include a copy of the

supposed indemnity agreement and because the pleadings

failed to satisfy Illinois’ fact-pleading requirements. Again,

however, we note that the district court found that the dispute

between RCG and Wolf was an “actual, substantial” contro-

versy, and the validity of that decision or the adequacy of the

pleadings is not an issue before us in an attorneys’ fees petition.

No. 08-2203 13

justify the attempt to remove the case at the start of the

litigation.

Kennelly also argues that his desired realignment was

not foreclosed by law because, even assuming that the

dispute between Wolf and RCG for indemnification

was concrete, it was insubstantial in relation to their

“ultimate interest” in the outcome of the litigation over

the arbitration award. In support of this position

Kennelly cites Indianapolis v. Chase Nat’l Bank, 314 U.S. 63

(1941), a case in which the Supreme Court held that

parties should be aligned according to their “ultimate

interests.” In that case, the Supreme Court realigned a

defendant as a plaintiff despite a million-dollar contro-

versy between them because the million-dollar dispute

was “frivolous” and the parties were “colloquially speak-

ing, partners in the litigation.” Id. at 74. Kennelly

ignores, however, that American Motorists interpreted

Chase National Bank and foreclosed his desired realign-

ment. Specifically, American Motorists held that “a mere

mutuality of interest in escaping liability is not of itself

sufficient to justify realignment.” American Motorists, 657

F.2d at 151 (citations omitted). Realignment is only

proper where there is no actual, substantial conflict

between the parties that would justify placing them on

opposite sides of the suit. Id.

Kennelly attempts to distinguish the case but his argu-

ments essentially amount to arguments against the Ameri-

can Motorists test. As the district court recognized,

Kennelly ultimately wants this court to abandon American

Motorists and join the majority of circuits in adopting the

14 No. 08-2203

“primary purpose” test, which would have allowed him

to realign RCG as a petitioner. American Motorists is a

minority view among the circuits. See, e.g., 13B Charles

Alan Wright, et al., Federal Practice & Procedure § 3607 (2007

Supp. at 417-18) (describing circuit split and noting that

this circuit’s decision in American Motorists places it in

the minority of circuits which have adopted the “actual

and substantial conflict” test). Whatever the merits of

Kennelly’s desire for this circuit to revisit the realign-

ment test, however, during this attorneys’ fee petition

we are only concerned with the state of the law at the

time Kennelly sought removal, when American Motorists

governed his realignment argument.2

Kennelly’s final argument that removal was not fore-

closed by clearly established law is that when he

2

Kennelly also cites this circuit’s decision in Naiditch v. Banque

de Gestion Privee-SIB, No. 92 C 5290, 1993 U.S. Dist. Lexis 14681,

1993 WL 424248 (N.D. Ill. Oct. 19, 1993), to support his belief

that American Motorists did not foreclose realignment. The

Naiditch court cited American Motorists but ultimately departed

from its holding. The district court there found that an “actual

and substantial” conflict between defendant and another entity

rendered “insubstantial in comparison” the conflict between

plaintiff and that entity. 1993 U.S. Dist. L EXIS 14681 at *5.

Thus, the court realigned the entity as a plaintiff and character-

ized its realignment as being supported by American Motorists.

1993 U.S. Dist. L EXIS 14681 at *4. Apparently, Naiditch read

American Motors as endorsing a “primary purpose” test, which

is not its test for realignment. At any rate, as we noted in Lott,

“[d]istrict court decisions . . . do not render the law clearly

established.” Lott, 492 F.3d at 793.

No. 08-2203 15

removed the case he labored under the erroneous impres-

sion that RCG was only a resident of Illinois for pur-

poses of jurisdiction. In other words, he argues that but-

for RCG’s mistake regarding its citizenship he would not

have removed the case at all. Kennelly’s representation

in this regard is plausible, because if he had known

RCG was also a citizen of Indiana he would not have

pursued removal under the suggested realignment. But

the argument is irrelevant if, taking the facts as Kennelly

saw them at the time, he did not have an objectively

reasonable basis for seeking removal in the first place.

Even if RCG was only an Illinois citizen, realignment

still would have been foreclosed by American Motors.

III. Conclusion

For the foregoing reasons, we R EVERSE the district

court’s order barring a petition for fees and remand for

proceedings in light of this opinion.

7-23-09