Petition for Writ of Certiorari — Sarkisian v. Travelers Indemnity Co.
Supreme Court brief1986
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| | JOSEPH F. SPANIOL, JR,
IN THE CLERK
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Supreme Court of the United States
October Term, 1986
GEORGE SARKISIAN, JOHN SARKISIAN, NORMAN
PRESKITT, SARCO INDUSTRIES, INC., CHARLOTTE
STREET BUILDERS, INC., and SARKISIAN
BROTHERS, INC.,
Petitioners,
against
THE TRAVELERS INDEMNITY COMPANY, as Assignee of
Judgments against Midstate Constructors, Inc. to enforce
certain Judgments,
Respondent.
PETITION FOR WRIT OF CERTIORARI TO THE UNITED STATES
COURT OF APPEALS FOR THE SECOND CIRCUIT.
PETITION FOR WRIT OF CERTIORARI
KEVIN F. MCDONOUGH
Counsel of Record
THOMAS M. CHRISTINA, Of Counsel
BALL & MCDONOUGH, P.C.
Attorneys for Petitioners
8th Floor Centre Plaza
P. O. Box 1740
Binghamton, NY 13902
(607) 772-6070
Questions Presented for Review.
Is a state court action properly removed to federal
district court under the ‘‘artful pleading doctrine’’ and
dismissed on res judicata grcunds, where the state court
pleading alleges all the elements of a cause of action under
the Racketeer Influenced and Corrupt Organizations Act,
alleges transactions and occurrences previously alleged in
a dismissed federal court RICO action, and demands relief
for damages previously alleged in the dismissed RICO ac-
tion?
For a state court action to be removed under the ‘‘artful
pleading doctrine,’’ is it necessary that the elements of the
state court claim be ‘‘virtually identical’’ to the elements
of a previously dismissed federal claim, as held by the Sec-
ond Circuit in this case, or is it sufficiemt that the state
court plaintiff previously brought its claim in federal
court, as held by the Ninth Circuit in Sa/veson v. Western
States Bankcard Association, 731i F.2d 1423 (1984)?
il.
Parties to the Proceeding and Rule 28.1 Statement.
The parties to the proceeding below were Petitioners
George Sarkisian, John Sarkisian, Norman Preskitt,
Sarco Industries, Inc., Charlotte Street Builders, Inc.,
Sarkisian Brothers, Inc., and Respondent, The Travelers
Indemnity Company.
The following corporations are subsidiaries of Peti-
tioner Sarco Industries, Inc.: Midstate Precast Systems,
Inc., Charlotte Street Builders, Inc., Florence Street
Mechanical & Electrical, Inc., C.H. Leavell & Co., Inc.,
JGS Construction Services, Inc. and Midstate Construc-
tors, Inc.
The following corporations are affiliates of Petitioner
Charlotte Street Builders, Inc.: Midstate Precast Systems,
Inc., Florence Street Mechanical & Electrical, Inc., C.H.
Leavell & Co., Inc., JGS Construction Services, Inc. and
Midstate Constructors, Inc.
Petitioner Sarco Industries, Inc. is the parent corpora-
tion of Petitioner Charlotte Street Builders, Inc.
The Corporate Petitioners have no other parent com-
panies, subsidiaries, or affiliates to list under Rule 28.1.
Table of Contents.
Questions Presented............. eee ee ee eeeees
List of Parties and Rule 28.1 Statement...........
Opinions Below............ccceeccescccccceees
ee nk nee ee bee eee sce eeaanes se
DI TIL, . gcc eric ec cnsecsseersovens
Statement of the Case... ......ccccccccccvseses
REASONS FOR GRANTING THE WRIT:
I. The Second Circuit’s opinion misinterprets and is
in conflict with this Court’s decision in
Federated Department Stores, Inc. v. Moitie,
PE PN MEUIED. cect case asecantaess
Il. The Second Circuit’s opinion is in conflict with
an opinion of the Ninth Circuit on the ap-
plication of the artful pleading doctrine to a
state court complaint which realleges matters
previously litigated in federal courts........
Ill. The lower federal courts and leading commen-
tators have expressed confusion over the
scope of the artful pleading doctrine since
Federated Stores. Because district court
orders of remand are generally not review-
able, it is particularly important that this
Court settle the proper application of the art-
ful pleading doctrine...........-..-0-005-
i]
iV.
SINS 5.4: 5058 oa sss HaKS Leo adee es baes
APPENDIX:
I. Opinion of the Court of Appeals i ney kaos
il. Order of the District Cowrt.........0.....00..
TABLE OF AUTHORITIES CITED.
CASES:
Brown v. Federated Department Stores, Inc., 653
feof ee ee ee eee
Federated Department Stores, Inc., v. Moitie, 452
oR Re fs Regine Rieree nae
Gold v. Blinder, Robinson & Co., Inc., 580 F. Supp.
PB BO ooh ch 0k ok oes bedi
Magic Chef, Inc. v. International Molder & Allied
Workers’ Union, 581 F. Supp. 772 (E.D.
Ts. TE ois eee eee
Reid v. Walsh, 620 F. Supp. 930 (M.D. La. 1985)...
Salveson v. Western States Bankcard Association,
525 F. Supp. 566 (N.D. Cal. 1981), aff’d, 731
20 $423 (Sth Cir. 1906). . 0... cc ceccecs
Salveson v. Western States Bankcard Association,
731 F.2¢ 1423 (Sth Cir. 1984)... 0. cence
1
Page
14
la
13
13
i3
11
Page
Sedima S.P.R.L. v. Imrex Co., 741 F.2d 482 (2d
Cir. 1960, rev'd —.. U.S. ow, 1 BC.
Fee COM) bis 6444 Oe a eRe es 6
United States v. Johnson, 713 F.2d 633 (11th Cir.
1983), cert. denied, 465 U.S. 1081 (1984).... 8
STATUTES AND RULES:
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(I | eee er err re Tr ey ee 3
. Sth tote.) Serrererver er erry errr. 13
vil.
New York Civ. Prac. Rule 3014..................
MISCELLANEOUS:
Note, Removal Doctrine Reaffirmed: Franchise Tax
Board v. Construction Laborers Vacation
Trust, 70 Cornell L. Rev. 557 (1985)........
Note, Federated Department Stores v. Moitie: A
Radical Departure from Traditional Removal
Jurisdiction or an Aberration?, 43 U. Pitt. L.
poet. BP Cees sa kis o FRRa se buss eee
C. Wright, The Law of Federal Courts §38 (4th ed.
| ree ere AMe hI. AT a
14A C. Wright, A. Miller & E. Cooper, Federal
Practice and Procedure §3722 (2d ed. 1985). .
14
14
14
14
ee
IN THE
SUPREME COURT OF THE UNITED STATES
OCTOBER TERM, 1986.
GEORGE SARKISIAN, JOHN SARKISIAN, NORMAN
PRESKITT, SARCO INDUSTRIES, INC., CHARLOTTE
STREET BUILDERS, INC., and SARKISIAN BROTHERS,
ee.
Petitioners,
v.
THE TRAVELERS INDEMNITY COMPANY, as Assignee of
Judgments against Midstate Constructors, Inc., to en-
force certain Judgments,
Respondent.
PETITION FOR WRIT OF CERTIORARI TO THE UNITED
STATES COURT OF APPEALS FOR THE SECOND CIRCUIT.
PETITION FOR WRIT OF CERTIORARI.
Petitioners George Sarkisian, John Sarkisian, Norman
Preskitt, Sarco Industries, Inc., Charlotte Street Builders,
Inc. and Sarkisian Brothers, Inc. respectfully pray that a
2
writ of certiorari issue to review the judgment and opinion
of the United States Court of Appeals for the Second Cir-
cuit, entered in the above-entitled proceeding on June 19,
1986.
Opinions Below.
The opinion of the Court of Appeals for the Second Cir-
cuit is not yet reported, and is reprinted in the Appendix
hereto, p. la, infra.
There was no memorandum decision of the United
States District Court for the Northern District of New
York (Munson, Ch.J.). the order of the said Court is
reprinted in the Appendix hereto, p. 19a, infra.
Jurisdiction.
Invoking removal jurisdiction under 28 U.S.C. §§ 1441
and 1351, Petitioners removed this proceeding to the
United States District Court for the Northern District of
New York, which denied Respondent’s motion to remand
and granted summary judgment dismissing Respondent’s
action by order dated November 2, 1985.
On Respondent’s appeals, the Second Circuit on June
19, 1986 entered judgment and rendered an opinion re-
versing the Northern District’s judgment and remanding
with instructions to remand to state court. No rehearing
was sought.
The jurisdiction of this Court is invoked under 28
U.S.C. §1254(1).
Statutes Involved.
28 U.S.C. §1331.
(a) The district courts shall have original
jurisdiction of all civil actions wherein the matter in
controversy exceeds the sum or value of $10,000,
exclusive of interest and costs, and arises under the
Constitution, laws, or treaties of the United States,
except that no such sum or value shall be required
in any such action brought against the United
States, any agency thereof, or any officer or
employee thereof in his official capacity.
28 U.S.C. §1441.
(a) Except as otherwise expressly provided by
Act of Congress, any civil action brought in a State
court of which the district courts of the United
States have original jurisdiction, may be removed
by the defendant or the defendants, to the district
court of the United States for the district and divi-
sion embracing the place where such action is pend-
ing.
(b) Any civil action of which the district courts
have original jurisdiction founded on a claim or
right arising under the Constitution, treaties or
laws of the United States shall be removable with-
out regard to the citizenship or residence of the par-
ties. Any other such action shall be removable only
if none of the parties in interest properly joined and
served as defendants is a citizen of the State in
which such action is brought.
4
(c) Whenever a separate and independent claim
or cause of action, which would be removable if
sued upon alone, is joined with one or more other-
wise nonremovable claims or causes of action, the
entire case may be removed and the district court
may determine all issues therein, or, in its discre-
tion, may remand all matters not otherwise within
its original jurisdiction.
(d) Any civil action brought in a State court
against a foreign state as defined in section 1603(a)
of this title may be removed by the foreign state to
the district court of the United States for the
district and division embracing the place where
such action is pending. Upon removal the action
shall be tried by the court without jury. Where
removal is based upon this subsection, the time
limitations of section 1446(b) of this chapter may
be enlarged at any time for cause shown.
Statement of the Case.
Respondent, a bonding company, commenced an action
against certain of its bonding clients' under the Racketeer
Infiuenced and Corrupt Organizations Act, i8 U.S.C.
§1961 et seq. (1970), in the United States District Court for
the Northern District of New York.’
'The RICO defendants included Petitioners George Sarkisian,
John Sarkisian, Norman Preskitt, Sarkisian Brothers, Inc. and Sarco
Industries, Inc. Respondent alleged in the RICO complaint that Sarki-
sian Brothers, Inc. had changed its name to Charlotte Street Builders,
Inc. It is submitted that Charlotte St. Builders, Inc. was also a RICO
defendant.
*Respondent’s RICO action and the instant action are two in a
series of attempts by Respondent to recover for portions of the same
claim.
(Footnote continued on following page.)
Respondent’s RICO complaint alleged that its damages
‘tarose from bankrupty fraud,’’ partly in connection with
the bankruptcy of Midstate Constructors, Inc., a Texas
corporation alleged to be controlled by the RICO defend-
ants.
The RICO complaint claimed that the RICO defendants
had ‘‘entered into a scheme and conspiracy to defraud
creditors by use of the Bankruptcy Code.’’ The complaint
alleged that Midstate was incorporated with ‘‘substantially
no assets,’’ that Midstate undertook construction con-
tracts without sufficient capital or equipment to perform
the work, and that prior to Midstate’s bankruptcy, all or
substantially all monies owed to or received by Midstate
were deposited to the credit of Petitioner Sarco Industries,
Inc.
The RICO complaint went on to allege that the deposits
resulted in transfers of funds to ‘‘affiliated companies”’
(Footnote continued.)
In August 1981, Respondent removed an action brought by some
of the Petitioners to the District Court for the Northern District of
New York, and commenced its own diversity action in that court
against the same parties. These two actions were consolidated.
In February 1983, Respondent unsuccessfully moved for partiai
summary judgment in the consolidated cases, seeking to recover for a
portion of its claim in the instant action.
In August 1983, Respondent commenced its RICO action, which
was dismissed on November 5, 1984.
Within a few weeks, Respondent moved in the consolidated cases
for leave to amend its complaint there to add Petitioner Norman
Preskitt as a party and to assert claims Respondent characterized as
arising under New York’s Debtor and Creditor law, New York and
Texas statutes prohibiting ‘‘illegal payments by a corporation’’ and
the doctrine of ‘‘piercing the corporate veil’’. Respondent’s motion to
amend was denied on the basis that the proposed amendments were ef-
fectively the same allegations as the dismissed RICO action.
Following this string of failures in federal court, Respondent
subsequently commenced the instant action in state court.
6
and rendered Midstate unable to complete its projects,
leading to claims on Respondent as surety, including
claims by project owners.’
The damages alleged by Respondent in the RICO action
were said to result from Midstate’s failure to complete
projects and pay suppliers on construction projects for
which Respondent had issued performance and payment
surety bonds.
The RICO defendants successfully moved for summary
judgment dismissing the amended RICO complaint. The
Northern District’s judgment dismissing the RICO action
was affirmed by the Second Circuit in an unpublished
opinion relying principally on its opinion in Sedima,
S.P.R.L. v. Imrex Co., 741 F.2d 482 (1984), which had
not yet been overruled by this Court.
Rather than petitioning for certiorari, Respondent com-
menced the instant action against some of the RICO
defendants in New York Supreme Court, alleging that
‘*the Sarkisians’’ incorporated Midstate Constructors,
Inc. with $1000.00 in capital, that Midstate owned
substantially no physical assets, that Midstate entered into
$20 million in construction contracts, and that checks
payable to Midstate were transferred to Sarco Industries,
Inc. or deposited to Sarkisian Brothers, Inc., with the in-
*Respondent’s Amended RICO compiaint alleged both bank-
ruptcy fraud and mail fraud and set forth substantially the same
allegations regarding Midstate Constuctor, Inc., including allegations
that it was incorporated with $1000.00 in capital, that it entered into
contracts for millions of dollars of construction work, that it had
neither sufficient capital nor sufficient equipment to complete the
work, that prior to its bankruptcy, monies owed to or received by it
were deposited to the account of Sarco, with the result that it was
unable to complete project, causing claims to be made on
Respondent’s surety bonds.
Se et oe een ee
7
tent to defraud creditors, rendering Midstate insolvent.
Respondent’s state court pleading further alleged
Midstate’s bankruptcy. Respondent’s state court pleading
also alleged that judgments had been rendered against
Midstate and assigned to Respondent. It appears from at-
tachments to Respondent’s state court petition that the
most substantial of these judgments were rendered in
favor of construction project owners.‘
Petitioners removed the instant action to the District
Court and successfully moved for summary judgment on
res judicata grounds. Respondent’s motion to remand was
denied by the District Court.
On appeal, the Second Circuit held that removal
jurisdiction was lacking, based on its interpretation of this
Court’s opinion in Federated Department Stores, Inc., v.
Moitie, 452 U.S. 494 (1981).
The Second Circuit read the last two paragraphs of the
Federated Stores opinion as establishing that the unfair
competition, fraud and restitution claims in that case were
state law claims, leaving only the civil conspiracy claim as
the federal claim on which removal was based. 12a, infra.
Reasoning from its conclusion that only the civil con-
spiracy claim was federal, the Second Circuit then derived
a two part test to determine when a claim purporting to
rely on state law is an artfully pleaded federal claim. 13a,
infra. The first criterion identified by the Second Circuit is
that ‘‘the elements of the claim [are] virtually identical to
those of a claim expressly grounded on federal iaw.’’ 13a,
infra. The second criterion identified by the Second Cir-
‘Attachments to pleadings become part of the pleadings ‘‘for all
purposes’’ under New York practice. N.Y. Civ. Prac. Rule 3014.
Am othe
8
cuit is that the state court plaintiff ‘‘had previously elected
-@ proceed in federal court.’’ 13a, infra.
In applying its two part test to this case, the Second Cir-
cuit stated that it had ‘‘no doubt that [Respondent’s] state
court complaint satisfied the second criterion since the
complaint was filed after [Respondent] had previously
elected to bring a similar claim in federai court under
RICO.”’ 14a, infra.
However, the Second Circuit held that the first criterion
was not met because ‘‘the elements of the state law claims
are not virtually identical to those previously pled under
RICO.”’ 14a, infra. In particular, the Second Circuit held
that the elements of Respondent’s claims did not include
‘*a pattern of racketeering activity’’’ or operation of an
‘*enterprise.’’® 15a, infra.
***Racketeering activity’’ is defined to inciude ‘‘any act which is
indictable under . . . [18 U.S.C.] section 1343 (relating to wire fraud)’’
and ‘‘any offense involving bankruptcy fraud.’’ 18 U.S.C.
§1961(1)(B) and (D). Two such acts constitute a ‘‘pattern’’. 18 U.S.C.
§1961(5).
Respondent’s state court pleading alleges numerous transfers of
funds from Midstate which ‘‘rendered Midstate insolvent’’ and which
were made ‘‘with actual intent to defraud creditors.’’ The state court
pleading alleges that Petitioners controlled Midstate and that Midstate
has been adjudicated a bankrupt. Accordingly, Respondent’s pleading
in the instant action does allege offenses involving bankruptcy fraud.
Cf. 18 U.S.C. §152.
Two of the transfers were alleged to be ‘‘wire transfers’’. Cf. 18
U.S.C. §1343. A wire transfer of funds is sufficient to indict under 18
U.S.C. §1343. United States v. Johnson, 713 F.2d 633 (11th Cir.
1983), cert. denied, 465 U.S. 1081 (1984).
Further, Respondent’s allegations of transfers of checks from a
Texas corporation to a New York corporation, deposited into a New
York bank, can fairly be read as alleging mail fraud, another predicate
act under RICO. 18 U.S.C. §1961(1)(B).
*An enterprise is defined to include any corporation and any ;
‘‘union or group of the individuals associated in fact’’. 18 U.S.C.
annie, au a
(Footnote continued on following page.)
a ee: wee |
Ace ote
9
Reasons for Granting the Writ.
I, The Second Circuit’s opinion misinterprets this
Court’s opinion in Federated Stores and is in conflict with
it.
The Second Circuit derived its two-part test based on its
conclusion that this Court had held only one of the claims
in Federated Stores sufficiently federal to support re-
moval. 12a, infra.
In fact, this Court clearly indicated that more than one
of the claims in Federated Stores were federal claims, suf-
ficient *o support removal. Federated Stores, supra, 452
U.S. at 397 n.2, 402.’
Thus, the Second Circuit’s two-part test, which it calls
‘“*the test of Federated Stores,’’ is in fact based on a
misinterpretation of Federated Stores. 15 a, infra.
(Footnote continued.)
§1961(4). Three of the Petitioners are corporations. The three in-
dividual Petitioners are alleged to serve together as members of the
boards of directors and as officers of the corporate Petitioners and of
Midstate.
Since the state court complaint alleged that Midstate’s activities
in Texas were controlled by Petitioners from their offices in New
York, thereby supplying the interstate commerce element, the Re-
spondent did plead a RICO cause of action.
"The Second Circuit’s conclusion that only one claim was
‘*necessarily identified’’ as federal is apparently based on the last
sentence of the next-to-last paragraph of the Federated Stores opin-
ion. 12a and 11.7, infra. It seems clear that the sentence in question
was a recitation of the Respondent’s view, not this Court’s view, that
three of the four claims in Federated Stores were state law claims.
Certainly, the Ninth Circuit understood that this Court had not
held that three of the four Federated Stores claims were state law
claims. On remand, the Ninth Circuit held that it was the law of the
case that all of the claims were federal claims. Brown v. Federated
Department Stores, Inc., 653 F.2d 1266, 1267 (1981).
10
The Second Circuit’s opinion is in conflict with Fed-
erated Stores as a result of this misinterpretation.
In Fedzrated Stores, this Court held that where the
allegations in a state court complaint are ‘‘similar’’ to
those in a previously dismissed federal court complaint,
and where review and analysis of the ‘‘origins and
substance’’ of the two complaints showed that the plain-
tiff had tried to avoid removal by artfully pleading essen-
tially federal claims as state law claims, the finding of a
district court that a plaintiff has attempted to avoid
removal jurisdiction through artful pleading would not be
questioned. 452 U.S. at 397 and n.2.
In this case, the Second Circuit acknowledged that
Respondent had previously brought ‘‘a similar claim in
federal court under RICO.”’ 14a, infra. The Second Cir-
cuit also acknowledged that this action ‘‘contains claims
related to the claim in the dismissed RICO suit.’’ 3a-4a, in-
fra. The Second Circuit’s recitation of the background of
this action leaves no doubt that the origins and substance
of Respondent’s claims in the RICO action and this action
are identical. 3a-6a, infra.
Nonetheless, the Second Circuit reversed the District
Court’s order denying remand.’
*It is unclear whether the Second Circuit reversed on the law or on
the facts. In a footnote, Second Circuit did state that ‘‘. . . even if the
clearly erroneous standard applies,’’ it was left with a definite and
firm conviction that a mistake had been committed. 14a-15a n.9, in-
fra. However, from the body of the opinion, it seems that the
‘*mistake’’ about which the Second Circuit had its conviction was a
mistake of law, not a mistake of fact. Since the Second Circuit ap-
parently reversed on the law, its opinion would seem to be obvious
and irreconcilable conflict with Federated Stores, supra, 352 U.S. at
397 n.2.
1]
The opinion below cannot be reconciled with Federated
Stores given the Second Circuit’s acknowledgment that the
claims were ‘‘similar’’ and ‘‘related,’’ and given the clear
identity of the origins and substance of the claims.
Il. The Second Circuit’s opinion is in conflict with an
opinion of the Ninth Circuit on the application of the art-
ful pleading doctrine to a state court complaint which
realleges matters previously litigated in federal courts.
There is a clear conflict between the Second Circuit’s
opinion in this case and the Ninth Circuit’s opinion in
Salveson v. Western States Bankcard Association, 731
F.2d 1423 (1984), regarding application of the artful
pleading doctrine to state court complaints which reallege
matters previously litigated in federal courts.
In Salveson, the Ninth Circuit held that ‘‘the conclusion
of artful pleading is properly drawn when the plaintiff ‘by
his own conduct, either by filing originally in federal court
or by acceding to federal jurisdiction after removal, has
made his claim a federal one.’ ’’ Sa/veson, supra, 731 F.2d
at 1429, quoting Sa/veson v. Western States Bankcard
Association, 525 F. Supp. 566, 577 (N.D. Cal. 1981). In
short, the Ninth Circuit has held that once a Plaintiff has
sued a claim in federal court, that claim is then ‘‘federal-
ized’’ for removai purposes.
By contrast, the Second Circuit has held that the prior
filing of a similar and related claim in federal court, based
on the same transactions and occurrences as a subsequent
state court complaint, is not a sufficient condition for
removal under the artful pleading doctrine. The Second
Circuit requires, in addition to prior filing of a federal
court compiaint, that the elements of the state law claims
12
be ‘‘virtually identical’’ to those previously pled in the
federal action. 13a, infra.
Further, there is no question that the Ninth Circuit con-
siders a ‘‘claim’’ for purposes of the artful pleading doc-
trine, as identical with a ‘‘claim’’ for preclusion purposes.
Justice Rehnquist’s opinion in Moitie was
primarily concerned with the res judicata aspect
rather than with the jurisdictional elements which
confront us as a consequence of the district court’s
treatment of Salveson’s case. However, critical in
both res judicata and artful pleading considerations
was the fact that appellant Brown had previously
filed the claims as federal claims in federal court.
Having done so, he could not be permitted to recast
the same claims as state claims to the prejudice and
detriment of the defendant. Avoidance of such un-
toward results is the proper function of the doctrine
of res judicata. Salveson, supra, 731 F.2d at 1429.
By contrast, as the Second Circuit itself acknowledged,
the Second Circuit has defined a claim for artful pleading
purposes more narrowly than for preclusion purposes.
15a, n.10, infra. As a result, a state court complaint sub-
ject to dismissal on res judicata grounds based on a prior
federal court judgment is removable in the Ninth Circuit,
but not in the Second.
Further, the Ninth Circuit in Sa/veson clearly treated the
artful pleading inquiry as factual in nature. 731 F.2d at
1429. As shown in n. 8, supra, the Second Circuit appears
to treat the artful pleading inquiry as a legal rather that a
factual question. 14a-15a, n.9, infra.
13
Ill. The lower federal courts and leading commentators
have expressed confusion over the scope of the artful
pleading doctrine since Federated Stores. Because district
court orders of remand are generally not reviewable, it is
particularly important that this Court settle the proper ap-
plication of the artful pleading doctrine.
It is apparent that the lower federal courts need
guidance in interpreting and applying the artful pleading
doctrine in the light of footnote 2 of the Federated Stores
opinion. The Second Circuit’s opinion in this case
acknowledges that the scope of the artful pleading doc-
trine was ‘‘rendered uncertain’’ by the decision in
Federated Stores. 10a, infra.
Three federal district courts have also indicated that
uncertainty exists over the scope of the artful pleading
doctrine after Federated Stores. Reid v. Walsh, 620 F.
Supp. 930, 933 (M.D. La. 1985); Gold v. Blinder, Robin-
son & Co., Inc., 580 F. Supp. 50, 53 n. 1 (S.D.N.Y. 1984);
Magic Chef, Inc. v. International Molders & Allied
Worker’s Union, 581 F. Supp. 772, 776 n. 4 (E.D. Tenn.
1983). In fact, one court has stated that ‘‘it seems proper,
absent more direct and fuller consideration of the issue by
the Court, to view the result {in Federated stores] as an
aberration .. .”’ Gold, supra, 580 F. Supp. at 43 n.1.
This uncertainty among the district courts presents a
particularly compelling reason for granting the writ, since
non-final orders denying remand are not immediately ap-
pealable, and orders granting remand are generally not
reviewable at all. 28 U.S.C. §§ 1291, 1292 and 1447(d).
For practical purposes, the district courts may often have
the last say on the inportant jurisdictional issue presented
here.
14
The need for clarification from this Court is under-
scored by the inability of leading commentators to explain
the scope of the artful pleading doctrine after Federated
Stores. One treatise has called the decision ‘‘anamolous.’’
14A C. Wright, A. Miller & E. Cooper, Federal Practice
and Procedure §3722, at 305 n.108 (2d ed. 1985). Another
has called it ‘‘mystifying’’ and has stated explicitly that it
has caused ‘‘uncertainties’’ about the law of removal. C.
Wright, The Law of Federal Courts §38 at 212 n.19 and
215 n.41 (4th ed. 1983).°
Conclusion.
For the reasons set forth above, the Petition should be
granted. ,
Respectfully submitted,
KEVIN F. MCDONOUGH,
Counsel! of Record
THOMAS M. CHRISTINA, of Counsel
BALL & MCDONOUGH, P.C.
Attorneys for Petitioners
8th Floor, Centre Plaza
P. O. Box 1740
Binghamton, NY 13902
(607) 772-6070
*See also Note, Removal Doctrine Reaffirmed: Franchise Tax
Board v. Construction Laborers Vacation Trust, 70 Cornell L. Rev.
557, 561 n. 27 (1985) (Federated Stores opinion ‘‘provides little
guidance’”’ as to the scope of the artful pleading doctrine) and Note,
Federated Department Stores v. Moitie: A Radical Departure From
Traditional Removal Jurisdiction or an Aberration, 43 U. Pitt. L.
Rev. 1165, 117415 (1982).
ote Yon tet Cate otal,
ION Nit hs, AS AO lt Bar nt,
la
Appendix I—Opinion of the Court of Appeals.
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
+
Nos. 777, 796, 818—August Term 1985
Argued: January 29, 1986 Decided: June 19, 1986
Docket Nos. 85-7935, -7937, -7939
a
THE TRAVELERS INDEMNITY COMPANY,
Plaintiff-Appellant,
—_VvV—_—
GEORGE K. SARKISIAN, JOHN SARKISIAN, NORMAN
PRESKITT, IVY MECHANICAL & ELECTRICAL ASSO-
CIATES, INC., SARKISIAN BROTHERS, INC., SARCO
INDUSTRIES, INC., SARBRO EQUIPMENT CORP, and
JOHN DOE and RICHARD ROE, said names being
fictitious but meant to designate the officers, employ-
ees and/or agents of the aforesaid defendants, pres-
ently unknown to the Plaintiff, who participated in
the acts set forth herein,
Defendants-Appellees.
4155
2a
THE TRAVELERS INDEMNITY COMPANY, as Assignee of
Judgments Against MIDSTATE CONSTRUCTORS, INC.,
to Enforce Certain Judgments,
Petitioner-Appellant,
—_—VvV.—
GEORGE SARKISIAN, JOHN SARKISIAN, NORMAN
PRESKITT, SARCO INDUSTRIES, INC., CHARLOTTE
STREET BUILDERS, INC., and SARKISIAN BROTHERS,
INC.,
Respondents-A ppellees.
Before:
NEWMAN, KEARSE, and MINER,
Circuit Judges.
+
Appeals from an order (No. 85-7935) and a judgment
(Nos. 85-7937 and 85-7939) of the District Court for the
Northern District of New York (Howard G. Munson,
Chief Judge). The order denied a Rule 60(b) motion to
vacate dismissal of a RICO claim; the judgment sustained
a res judicata defense to claims allegedly based on state
law and removed to federal court under the doctrine of
“artful pleading.”
Order denying the Rule 60(b) motion affirmed. Judg-
ment reversed and case remanded with directions to
remand to state court.
4156
3a
LESLIE COUCH, Albany, N.Y. (Sharon Couch
DeBonis, Couch and Howard, Albany,
N.Y., on the brief), for plaintiff-peti-
tioner-appellant.
ALAN J. POPE, Binghamton, N.Y. (Thomas
M. Christina, Ball & McDonough,
Binghamton, N.Y., on the briet), for de-
fendants-respondents-appellees.
JON O. NEWMAN, Circuit Judge:
These related but unconsolidated appeals primarily
concern the esoteric doctrine of “artful pleading.” Specif-
ically, we consider whether the circumstances permit a
state court defendant to remove a case to federal court on
the theory that a complaint purporting to rely solely on
state law in reality contains federal claims artfully pled.
In No. 85-7935, Travelers Indemnity Company (“Trav-
elers”) appeals from an order of the District Court for the
Northern District of New York (Howard G. Munson,
Chief Judge) denying its Rule 60(b)(6) motion for relief
from a 1984 judgment that dismissed a civil RICO suit.'
In No. 85-7937, Travelers appeals from a 1985 judgment
of the Northern District that dismissed on res judicata
grounds a suit, removed from state court, that contains
i Defendants-appellees in No. 85-7935 are George K. Sarkisian, John
Sarkisian, Norman Preskitt, Ivy Mechanical & Electrical Associates,
Inc., Sarkisian Brothers, Inc., Sarco Industries, Inc., Sarbro Equip-
ment Corp., and John Doe and Richard Roe (fictitious names desig-
nating officers, employees, and agents of the above defendants
unknown to plaintiff).
4157
da
claims related to the claim in the dismissed RICO suit.*
For reasons that follow, the order in No. 85-7935 is
affirmed, and the judgment in No. 85-7937 is reversed
and remanded with instructions to remand the case to
state court.
1, Background
Travelers was the surety on certain payment and per-
formance bonds issued on behalf of Midstate Construc-
tors, Inc. (‘“Midstate”), a Texas corporation that
performed construction work in the Southwest. Midstate
defaulted on obligations to owners and contractors. The
Texas state courts rendered three judgments against Mid- \
state totalling $3,236,588.20. Travelers satisfied these |
judgments as surety, and the prevailing plaintiffs assigned
their claims against Midstate to Travelers. Because Mid-
state was the subject of a Chapter VII bankruptcy pro-
ceeding, Travelers sought others it could hold liable for
Midstate’s debts.
On August 4, 1981, certain parties who had agreed to
indemnify Travelers against liabilities arising from the
Midstate payment and performance bonds commenced an
action in the New York courts to have the indemnity
agreement declared void. On August 18, 1981, Travelers
responded by commencing a diversity action in the
Northern District of New York for breach of the indem-
nity agreement. Travelers subsequently removed the state
declaratory judgment action to the Northern District of
New York, and the actions were consolidated (the “con-
solidated actions”).
2 Defendants-appellees in No. 85-7937 are George Sarkisian, John
Sarkisian, Norman Preskitt, Sarco Industries, Inc., Charlotte Street
Builders, Inc., and Sarkisian Brothers, Inc.
4158
ee eT eT
Ja
On August 15, 1983, Travelers filed a complaint in the
Northern District, seeking relief under the Racketeer
Influenced Corrupt Organizations Act (“RICO”), 18
U.S.C. § 1961 ef seq. (1982), against some but not all of
the defendants it had sued in the consolidated actions.
Travelers sought damages resulting from bankruptcy
fraud and mail fraud. The first, third, fourth, and fifth
causes of action alleged that defendants had fraudulently
diverted assets from two insolvent corporations, Midstate
and Ivy Mechanical & Electrical Associates, Inc. (“Ivy”),
for whom Travelers was surety. The second cause of
action alleged mail fraud based on false representations
made by Midstate to obtain payments from owners. The
sixth cause of action alleged fraud in connection with the
filing of Ivy’s bankruptcy petition. The District Court
dismissed the RICO compiaint on the authority of
Sedima, S.PR.L. v. Imrex Co., 741 F.2d 482 (2d Cir.
1984), and this Court affirmed by order on April 12,
1985. Travelers did not petition for certiorari. After the
Supreme Court reversed Sedima, 105 S. Ct. 3275 (1985),
Travelers moved in the District Court, pursuant to Fed.
R. Civ. P. 60(b)(6), for relief from the judgment. The
District Court denied the motion. No. 85-7935 is Trav-
elers’ appeal from this denial.
In August 1983, Travelers filed a complaint (“petition”
in New York practice) in a special proceeding in New York
Supreme Court against some but not all of the defendants
in the civil RICO action. Travelers sought to hold defen-
dants liable for Midstate’s debts to it on state law theories
of fraudulent conveyance, piercing the corporate veil,
unlawful payment of dividends, and unlawful salary pay-
ments. Travelers also sought attorney’s fees. Defendants
removed this action to federal court on federal question
4159
6a
grounds on the theory that the state law claims were in
substance a RICO claim, artfully pled. Travelers moved
for a remand to state court, and defendants moved for
summary judgment on the ground that the dismissal of
the prior RICO action was res judicata. The District
Court denied Travelers’ motion to remand and granted
defendants’ summary judgment motion. In No. 85-7937
Travelers seeks review of both rulings of the District
Court.’
II. Rule 60(b)(6)
A district court may grant relief from an otherwise
finai judgment for any of five enumerated reasons or for
“any other reason justifying relief from the operation of
the judgment.” Fed. R. Civ. P. 60(b)(6). Travelers argues
that it is entitled to relief from the RICO judgment based
on the Supreme Court’s reversal of Sedima. However, it is
well settled that a change in decisional! law is not grounds
for relief under Rule 60(b)(6). Ackermann v. United
States, 340 U.S. 193 (1950); Loucke v. United States, 21
F.R.D. 305 (S.D.N.Y. 1957).* Ackermann affirmed the
3 Travelers needlessly filed two notices of appeal, attempting to appeal
issue by issue. In No. 85-7937, it challenges the District Court’s
remand ruling. In No. 85-7939, it challenges the District Court’s res
judicata ruling. Since only one appeal! will lie from the final judgment,
the appeal in No. 85-7939 is dismissed, and Travelers’ challenge to the
res judicata ruling is incorporated into the appeal in No. 85-7937.
4 Travelers might have based its motion for relief on the third clause
of Rule 60(b)(5) on the ground that “it is no longer equitable that the
judgment should have prospective application.” A change in decisional
law is cognizable under Rule 60(b)(5). United States v. Georgia Power
Co., 634 F.2d 929 (Sth Cir. 1981), vacated on other grounds, 456 U.S.
952 (1982); Jordan v. Erie School District, 548 F.2d 117 (3d Cir. 1977);
Theriault v. Smith, 523 F.2d 601 (1st Cir. 1975). However, it is doubtful
that the preclusive nature of a dismissal with prejudice is a prospective
effect under the rule. See Gibbs v. Maxwell House, 738 F.2d 1153 (11th
4160
ee ee ee
7a
denial of Rule 60(b)(6) relief to a party who failed to
appeal an adverse judgment and then relied on the rever-
sal of a similar judgment in a related case. Since Acker-
mann squarely governs the instant controversy, the order
in No. 85-7935 is affirmed.
III. Removal!
A. Artful Pleading
In No. 85-7937, Travelers argues that its state court suit
relies solely on state law for relief and therefore does not
“aris[e] under the Constitution, laws, or treaties of the
United States,” 28 U.S.C. § 1331 (1982), and is not
removable under 28 U.S.C. § 1441(a) (1982).° Normally,
removal based on federal question jurisdiction is im-
proper unless a federal claim appears on the face of a
well-pleaded complaint. Franchise Tax Board v. Con-
struction Laborers Vacation Trust, 463 U.S. 1 (1983);
Gully v. First National Bank, 299 U.S. 109 (1936); Louis-
ville & Nashville Railroad Co. v. Mottley, 211 U.S. 149
(1908). It has been the law for decades that “the party
who brings a suit is master to decide what law he will rely
upon. . ..” The Fair v. Kohler Die & Specialty Co., 228
U.S. 22, 25 (1913). “[W]here plaintiff’s claim involves
Cir. 1984). But see Kirksey v. City of Jackson, 714 F.2d 42 (Sth Cir.
1983). In any event, if Travelers had filed a timely petition for
certiorari, the petition surely would have been granted and the case
summarily remanded to this Court for reconsideration in light of
Sedima. See Hoffman v. Eti-Quette Assaf Lid., 106 S. Ct. $17 (1985);
Joel v. Cirrito, 105 S. Ct. 3550 (1985). Since Travelers had ample
opportunity to protect itself on direct review, it is not inequitable for
the judgment to continue to have prospective application.
5 Although there is complete diversity among the parties, defendants
are citizens of New York, the forum state, and therefore cannot
remove the case on diversity grounds. 28 U.S.C. § 1441(b) (1982).
4161
8a
both a federal ground and a state ground, the plaintiff is
free to ignore the federal question and pitch his claim on
the state ground” to defeat removal. 1A J. Moore & B.
Ringle, Moore’s Federal Practice 4 0.160, at 185 (2d ed.
1979); see Vitarroz Corp. v. Borden, Inc., 644 F.2d 960,
964 (2d Cir. 1981).
However, in certain limited circumstances a plaintiff
may not defeat removal by clothing a federal claim in
state garb, or, as it is said, by use of “artful pleading.” In
the words of a leading treatise,
[O]ccasionally the removal court will seek to deter-
mine whether the real nature of the claim is federal,
regardless of plaintiff’s characterization. For in-
stance, in many contexts plaintiff’s claim may be one
that is exclusively governed by federal law, so that
the plaintiff necessarily is stating a federal cause of
action, whether he chooses to articulate it that way
or not. If the only remedy available to plaintiff is
federal, because of preemption or otherwise, and the
state court must necessarily look to federal law in
passing on the claim, the case is removable regardless
of what is in the pleading.
14A C. Wright, A. Miller & E. Cooper, Federal Practice
and Procedure § 3722, at 268-75 (2d ed. 1985) (citations
omitted). The ciassic application of the artful pleading
doctrine occurs in the context of federal preemption of
state law. In that circumstance a plaintiff purporting to
plead a claim based on state law is necessarily relying on
federal law for relief. See Avco Corp. v. Aero Lodge, 390
U.S. 557 (1968) (claim for breach of collective bargaining
agreement cognizable only under federal Labor-Manage-
ment Relations Act); American Synthetic Rubber Corp.
4162
Pare
9a
v. Louisville & Nashville Railroad Co., 422 F.2d 462 (6th
Cir. 1970) (claim for negligent delivery of goods cogniza-
ble only under Carmack Amendment to Interstate Com-
merce Act). In its pristine form, the artful pleading
doctrine is not a departure from the rule that the plaintiff
is master of his complaint. If a plaintiff has pled what
must necessarily be a federal claim, he has no state law
available to choose as the basis for his suit. A similar but
procedurally distinguishable instance of artful pieading
occurs when a defendant argues not only that federal law
preempts the state law on which a plaintiff relies but also
that federal law provides no relief on the facts the
plaintiff has alleged. In such circumstances, federal law is
interposed solely as a defense, and removal jurisdiction
will not lie. The plaintiff has mo available bodies of law
from which to choose. Franchise Tax Board v. Construc-
tion Laborers Vacation Trust, supra; Long Island Rail-
road Co. v. United Transportation Union, 484 F. Supp.
1290 (S.D.N.Y. 1980).°
6 It is not immediately apparent why federal preemption, where
arguable, is not always simply a defense to a complaint containing only
state law claims, rather than a basis of removal on federal question
grounds. See 1A J. Moore & B. Ringle, Moore's Federal Practice and
Procedure 4 0.160(4] (2d ed. 1985). If plaintiff's state law claims are
preempted, it would seem that a motion to dismiss would be granted.
If the dismissal is without prejudice to amend, plaintiff may then
assert the federal claims upon which he is entitled to relief, and
defendant can then remove the case to federal court. Perhaps removal
based on preemption is justified because the state court will usually
have concurrent jurisdiction over the latent federal claims. For exam-
ple, a state court would have concurrent jurisdiction over the Labor-
Management Relations Act claim that supported removal in Avco
Corp. v. Aero Lodge, supra. See Amalgamated Association of Street,
Electric, Railway, and Motor Coach Employees v. Lockridge, 403 U.S.
274, 298 (1971). If the facts alleged in the complaint necessarily entitle
the plaintiff to relief under either federal or state law and the state
court has concurrent jurisdiction over the federal claim, the state court
might feel no obligation to decide the preemption question. Or the
state court might defer resolving the preemption question until it is
4163
10a
The vitality of the master-of-the-complaint rule and the
limited scope of the doctrine of artful pleading were both
rendered uncertain by the Supreme Court’s decision in
Federated Department Stores, Inc. v. Moitie, 452 U.S.
394 (1981). In Federated Stores, seven plaintiffs brought
parallel actions under section 4 of the Clayton Act, 15
U.S.C. § 15 (1982), alleging retail price-fixing in the
women’s clothing industry. The District Court dismissed
all seven actions on the ground that the plaintiffs had not
alleged an “injury” to their “business or property” within
the meaning of that section. Five of the seven plaintiffs
appealed to the Ninth Circuit. Plaintiff Brown chose not
to appeal and instead relied on the same facts to assert in
the California state court state law claims of civil con-
spiracy, unfair competition, fraud, and restitution.
Brown’s case was removed to federal court, and the
District Court, applying the artful pleading doctrine,
denied Brown’s motion to remand. The District Court
considered Brown’s state law claims “federal in nature.”
See Federated Stores, supra, 452 U.S. at 397 n.2. On the
merits, the District Court held that the removed com-
plaint was barred by res judicata as a result of the
dismissal with prejudice of the prior Clayton Act lawsuit.
Brown appealed the dismissal of. the removed com-
plaint to the Ninth Circuit. While this appeal was pend-
satisfied that plaintiff has proved his claim. If the state claim is
preempted, the state court can then deem the pleadings amended to
assert a federal claim and render judgment for plaintiff. If the state
court defers deciding the preemption question in this fashion, assertion
of any federal claim will come too late to allow removal. However, the
artful pleading doctrine has been extended to claims which, once
deemed federal, are within the exclusive jurisdiction >f federal courts.
See Federated Department Stores, inc. v. Moitie, 452 U.S. 394 (1981)
(antitrust claim); /n re Snap-On Tools Corp., 720 F.2d 654 (Fed. Cir.
1983) (patent claim).
4164
lla
ing, the Supreme Court held, in Reiter v. Sonotone
Corp., 442 U.S. 330 (1979), that retail purchasers may sue
under section 4 of the Clayton Act for injury to their
business or property. In light of Reiter, the Ninth Circuit
reversed and remanded the five Clayton Act cases that
had been appealed. In deciding Brown’s appeal, the
Ninth Circuit held that Brown’s second lawsuit was prop-
erly removed but that, despite his failure to appeal dis-
missal of his Clayton Act suit, res judicata should not be
applied in light of the reversals in the five companion
cases in which appeals were successfully taken. The Su-
preme Court reversed the res judicata holding and de-
voted most of its opinion to that issue. The Court
approved the removal in footnote 2, noting without
elaboration that “at least some of the claims had a
sufficient federal character to support removal” under the
artful pleading doctrine. Federated Department Stores,
Inc. v. Moitie, supra, 452 U.S. at 397 n.2.
Unquestionably, Federated Stores made so e alteration
of the master-of-the-complaint rule. Even t ough Brown
had pled in state court claims grounded on state law that
were not preempted by federal law, cf. Exxon Corp. v.
Governor of Maryland, 437 U.S. 117 (1978), the Supreme
Court considered at least some of his claims to be federal
claims, artfully pled. How far beyond the preemption
context the Court intended to extend the artful pleading
doctrine depends upon its rationale for deeming Brown’s
state law claims to be in reality federal claims. Unfortu-
nately, the footnote approving the removal provides little
illumination. Two questions need to be answered: (1)
which of Brown’s state law claims were sufficiently fed-
eral to permit removal, and (2) what was the reason for
considering them to be federal?
4165
12a
The first question was pointedly asked in Justice Bren-
nan’s dissenting opinion, 452 U.S. at 409, and evoked no
explicit response in the majority opinion. The question
was pertinent in determining the scope of the holding,
since the Court ruled that the “federal” claims, whichever
they were, were barred by res judicata. It seems clear that
the Court did not consider all of Brown’s state law claims
to be federalized since it left to the Ninth Circuit on
remand the task of deciding whether or not res judicata
also barred the unfederalized state law claims.
The strongest indication of which claims the majority
thought were federal is found in the last two paragraphs
of the Court’s opinion. The majority there identified
Brown’s contention that the dismissal of his prior federal
court suit cannot preclude the “additional state-law
claims” not decided in that suit “such as unfair competi-
tion, fraud, and restitution.” 452 U.S. at 402. The Court
declined to rule on this contention, leaving it for consider-
ation by the Ninth Circuit on remand. A reasonable
inference is that the claims of unfair competition, fraud,
and restitution, even if ultimately determined by the
Ninth Circuit to be barred by res judicata, were not the
“federal” claims that justified removal. That leaves only
Brown’s claim of civil conspiracy, which must necessarily
have been the “federal” claim that justified removai.’
7 We note that on remand in Federated Stores, the Ninth Circuit read
the Supreme Court's opinion to leave to the Court of Appeals the task
of determining which claims were sufficiently federal to have justified
removal and hence to be barred by res judicata under the Supreme
Court’s holding. Brown v. Federated Department Stores, Inc., 653
F.2d 1266 (9th Cir. 1981). The Ninth Circuit concluded that all four
claims were federal claims, artfully pled. For the reasons stated above,
we think the Supreme Court necessarily identified only Brown’s civil
conspiracy claim as the “federal” claim that justified removal. More-
over, we think it unlikely that the Court would have upheld removal!
jurisdiction without having in mind a specific claim that justified
4166
13a
Since the civil conspiracy claim was the artfully pled
claim, we can identify two criteria that will help us to
understand why that claim was considered to be federal.
First, the elements of the claim were virtually identical to
those of a claim expressly grounded on federal law. The
civil price-fixing conspiracy Brown alleged was a con-
spiracy to violate California’s antitrust laws, Cal. Bus. &
Prof. Code §§ 16720, 16726 (West 1964), which parallel
federal laws in pertinent respects. Oakland-Alameda
County Builders’ Exchange v. F-P. Lathrop Construction
Co., 4 Cal. 3d 354, 482 P.2d 226, 93 Cal. Rptr. 602 (1971)
(in banc); Rosack v. Volvo of America Corp., 131 Cal.
App. 3d 741, 182 Cal. Rptr. 800 (1982). However, if
substantial identity between the elements of a state and a
federal claim sufficed to deny a pleader the right to pitch
his claim on state law and remain in state court, then
Federated Stores would overrule The Fair v. Kohler Die &
Specialty Co., supra, and its progeny, a result unlikely to
have been intended by the brief discussion of removal in
footnote 2. A far more narrow reading of Federated
Stores results if we identify as the second criterion that
rendered Brown’s claim “federal” the fact that he had
previously elected to proceed in federal court. Brown had
an initial opportunity to be master of his price-fixing
claim and elected to assert it under the Clayton Act in
federal court. Having done so and having forgone the
opportunity to plead a pendent state law claim, he was
removal. We also note that the Ninth Circuit apparently recognized the
possibility that only the civil conspiracy claim was the federal claim
artfully pied, since it ruled, alternatively, that any of Brown’s claims
that remained as state law claims were in .y event barred by res
judicata, notwithstanding that these claims, if pleaded as pendent
claims in the original federal lawsuit, might have been dismissed
without adjudication upon the dismissal of the federal claim. /d. at
1267.
4167
l4da
not free to abuse the dual court system by filing in state
court a second lawsuit and resubmitting his claim as one
based solely on state law. This interpretation of Federated
Stores limits but does not abolish the master-of-the-
complaint rule and has found favor elsewhere. See Sa/ve-
son v. Western States Bankcard Association, 525 F. Supp.
566 (N.D. Cal. 1981), aff'd on this ground, 731 F.2d 1423
(9th Cir. 1984).*
Applying the foregoing criteria in reverse order, we
have no doubt that Travelers’ state court complaint satis-
fies the second criterion since the complaint was filed
after Travelers had previously elected to bring a similar
claim in federal court under RICO. However, we con-
clude that the state court complaint does not satisfy the
first criterion since the elements of the state law claims
are not virtually identical to those previously pled under
RICO.° Even though both the federal and state suits
8 Salveson also suggested, as an additional! rationale for removal in
Federated Stores, that “the effect of permitting Brown to prosecute the
same claims under state law in the second action would have been to
impair the ability of defendants to assert the federal res judicata
defense against those claims.” Sal/lveson v. Western States Bankcard
Association, supra, 525 F. Supp. at 575. However, if Brown’s case had
been remanded to state court, the res judicata effect of the prior
federal question suit would still have been governed by federal law. See
Limbach v. Hoover & Allison Co., 466 U.S. 353, 361-62 (1984); Srol/
v. Gottlieb, 305 U.S. 165, 170-71 (1938); Deposit Bank v. Frankfort,
191 U.S. 499 (1903); 8 C. Wright, A. Miller & E. Cooper, Federal
Practice and Procedure § 4468 (1981); see also Restatement (Second)
of Judgments § 87 (1981) (federal law governs res judicata effect of all
federal judgments, including those in diversity cases).
9 The Supreme Court has suggested that the artful pleading inquiry is
factual in nature, see Federated Department Stores, Inc. v. Moitie,
supra, 452 U.S. at 397 n.2, and one Circuit has applied the clearly
erroneous standard to review of such an inquiry, see Salveson v.
Western States Bankcard Association, 742 F.2d 1423, 1429 (9th Cir.
1984). Although it would seem that characterization of a plaintiff's
claims presents a purely legal question, see Federated Department
4168
1Sa
sought to hold certain defendants liable for Midstate’s
debts as a consequence of illegal diversion of Midstate’s
assets, the elements of Travelers’ state law claims do not
include “a pattern of racketeering activity” or operation
of an “enterprise,” which are elements of the RICO
claim, 18 U.S.C. § 1962. A federal jurisdictional element,
such as effect on interstate commerce, would not serve to
distinguish state and federal claims for purposes of re-
moval under Federated Stores, but the RICO elements
not required for claims that suffice under New York law
have significant substantive content. Though the state
and federal claims arose out of the same nucleus of
operative facts, that circumstance does not satisfy the test
of Federated Stores, since it was true of all the claims in
that litigation, and three of them were deemed to be
properly pled state law claims.'® The doctrine of artful
pleading may therefore not be invoked to deem Travelers’
state law claims to be “federal” claims and thereby justify
removal.
B. Other Grounds for Removal
Appellees seek to defend the judgment in No. 85-7937
on the alternative ground that Travelers’ state court
Stores, Inc. v. Moitie, supra, 452 U.S. at 409 & n.S (Brennan, J.,
dissenting), we reverse the District Court because, even if the clearly
erroneous standard applies, we are “left with the definite and firm
conviction that a mistake has been committed.” United States v.
United States Gypsum Co., 333 U.S. 364, 395 (1948).
10 We recognize that our holding has the effect of defining a “claim”
more narrowly for artful pleading purposes than for preclusion pur-
poses. However, to hold that a plaintiff's state law claim will be
recharacterized as a federal claim whenever it arises out of the same
transaction as a prior federal claim would lead to the anomalous result
that a case is removable under Federated Stores only if the defendant
has a successful res judicata defense under federal law. This approach
would seem to violate the well-established rule that removal jurisdic-
tion may not rest on a federal defense.
4169
l6a
compiaint is removable because there are federal ingre-
dients to Travelers’ state law claims. To prevail on its
state law claims, Travelers must establish that Midstate is
liable to it and that defendants, by unlawfully diverting
Midstate’s assets, are responsible for Midstate’s debts.
Appellees argue that Travelers’ state claims contain three
federal ingredients: (1) New York law grants Travelers an
action on the Texas judgments against Midstate only to
the extent that the Texas judgments are entitled to full
faith and credit under the Constitution, (2) federal law
dictates the law New York must apply in determining
defendants’ liability for Midstate’s debts, and (3) the Due
Process Clause of the Fourteenth Amendment limits
Travelers’ ability to enforce the Texas judgments.
Normally, a case “arises under” federal law, 18 U.S.C.
§ 1331 (1982), if federal law creates plaintiff’s cause of
action. See American Well Works Co. v. Layne & Bowler
Co., 241 U.S. 257, 260 (1916). The Supreme Court has
also allowed federal jurisdiction for state-created claims
that involve construction of federal law, see Smith v.
Kansas Title & Trust Co., 255 U.S. 180 (1921); Hopkins
v. Walker, 244 U.S. 486 (1917), but only if the federal
element is substantial. See Gully v. First National Bank,
supra; Shulthis v. McDougal, 225 U.S. 561 (1912). The
Court has excluded state-created claims with only a
minor, technical federal element. For example, an action
to establish title to land does not arise under federal law
merely because, as part of his case, plaintiff must trace
his title back to an undisputed federal grant. See Shulthis
v. McDougal, supra; Joy v. City of St. Louis, 201 U.S.
332 (1906). To hold otherwise would federalize “every
action to establish title to real estate (at least in the newer
States) . . . , aS all titles in those states come from the
4170
17a
United States or by virtue of its laws.” Shoshone Mining
Co. v. Rutter, 177 U.S. 502, 507 (1900). Because it would
be equally anomalous to federalize every action seeking to
enforce an out-of-state judgment, Travelers’ state court
complaint is not removable simply because the plaintiff
expects compliance with the Full Faith and Credit Clause.
New York law explicitly provides that foreign judgments
are enforceable only to the extent required by the Full
Faith and Credit Clause, N.Y. Civ. Prac. Law & R.
§§ 5401, 5402 (McKinney 1972). To whatever extent New
York has thereby made observance of the Full Faith aud
Credit Clause an element of plaintiff’s cause of action,
this “federal” element is too insubstantial to support
federal question jurisdiction.
We also reject appellees’ argument that the bearing of
federal law on the choice of law issue allows remova.
Appellees are incorrect when they assert that federal law
determines the law New York must apply in determining
their liability for Midstate’s debts. New York is free to
apply its own choice of law rule, subject only to the full
faith and credit and due process limitations that it may
not apply the law of a jurisdiction lacking a significant
relation to the litigation. See Phillips Petroleum Co. v.
Shutts, 105 S. Ct. 2965 (1985); Allstate Insurance Co. v.
Hague, 449 U.S. 302 (1981) (plurality opinion); Clay v.
Sun Insurance Office, Ltd., 377 U.S. 179 (1964); Watson
v. Employers Liability Assurance Corp., 348 U.S. 66
(1954); Home Insurance Co. v. Dick, 281 U.S. 397
(1930). The constitutional limitations form no part of
Travelers’ affirmative claims, and the case does not arise
under federal law merely because federal law defines the
“operative limits” of a state rule. Gully v. First National
Bank, supra, 299 U.S. at 118.
4171
18a
Finally, appellees argue that Travelers may not enforce
the Texas judgments unless such enforcement is consistent
with due process. However, the due process issue forms
no part of Travelers’ affirmative claims and is properly
raised as a defense to Travelers’ complaint. A federal
issue raised by way of defense will not support removal
jurisdiction. See, e.g., Franchise Tax Board v. Construc-
tion Laborers Vacation Trust, supra.
IV. Res Judicata
In light of our holding that the District court lacked
jurisdiction over the subject matter of the complaint in
No. 85-7937, we express no opinion on the res judicata
issue."
V. Conclusion
The order in No. 85-7935 is affirmed. The judgment in
No. 85-7937 is reversed, and the case is remanded to the
District Court with instructions to remand the case to
State court.
i After remand, the state court, in resolving the res judicata issue, will
need to decide the legal significance, if any, of the iack of identity
among the defendants in the RICO and the state court actions.
4172
19a
Appendix I1—Order of the District Court.
UNITED STATES DISTRICT COURT,
NORTHERN DISTRICT OF NEW YORK.
&
THE TRAVELERS INDEMNITY COMPANY,
Plaintiff,
against
GEORGE SARKISIAN, JOHN SARKISIAN, NORMAN
PRESKITT, SARCO INDUSTRIES, INC., CHARLOTTE
ST. BUILDERS, INC., and SARKISIAN BROTHERS,
INC.,
Defendants.
Civil Action No.: 85-CV-1181
HON. HOWARD G. MUNSON
The Plaintiff, The Travelers Indemnity Company, hav-
ing moved this Court to remand the above-entitled action
to Supreme Court of the State of New York; and the
Defendants, George Sarkisian, John Sarkisian, Norman
Preskitt, Sarco Industries, Inc., Charlotte St. Builders,
Inc., and Sarkisian Brothers, Inc., having moved this
Court to dismiss the pleadings herein of the Plaintiff pur-
suant to F.R.C.P. 12(b)(6) and for Summary Judgment on
20a
behalf of said Defendants against the Plaintiff pursuant to
F.R.C.P. 56; and said Motions having come on to be
heard before this Court on October 7, 1985, in Syracuse,
New York; and the Court having duly considered the Peti-
tion for Removal of Civil Action, with attachments, dated
August 29, 1985, the Plaintiff’s Motion to Remand, dated
September 16, 1985, and supporting affidavit, with at-
tachments, of Leslie F. Couch, Esq., sworn to September
16, 1985, the Defendants’ Motion to Dismiss, dated
September 3, 1985, and supporting affidavit, with attach-
ment, of Alan J. Pope, Esq., sworn to September 3, 1985,
the affidavit of Leslie F. Couch, Esq., sworn to September
17, 1985, in opposition to Motion to Dismiss, the af-
fidavit, with attachment, of Alan J. Pope, Esq., sworn to
September 26, 1985, in support of dismissal and opposing
remand, the respective Memoranda of Law in support and
in opposition to said Motions, and the respective argu-
ment of counsel, and good cause appearing, and the Court
finding that the action was properly removed to this Court
by said Defendants, and that the Plaintiff is barred as a
matter of law from asserting the claims herein against the
Defendants, and that the Defendants are entitled to a
Judgment as a matter of law, it is
ORDERED AND-ADJUDGED that the Plaintiff’s Motion
to Remand be and the same hereby is denied in all
respects; and it is
ORDERED AND ADJUDGED that the Defendants’ Mo-
tion to Dismiss and for Summary Judgment be and the
same hereby is granted, and that the Petition and
pleadings of the Plaintiff herein be and the same hereby
are dismissed with prejudice; and it is
————— << 8 |
2la
ORDERED AND ADJUDGED that the above-entitled ac-
tion be and hereby is dismissed with prejudice, and that
the Clerk of this Court be and hereby is directed to enter
judgment in favor of Defendants and against the Plaintiff
in accordance with this Order.
Dated: November 2, 1985
Syracuse, New York
HOWARD G. MUNSON, C.J.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.