Martin v. Franklin Capital Corp. (04-1140)

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LII note: The U.S. Supreme Court has now decided Martin v. Franklin Capital Corp. (04-1140).

Appealed from: United States Court of Appeals for the Tenth Circuit

Oral argument: November 8, 2005


Under 28 U.S.C. § 1447(c), a federal court "may" award attorney's fees against the removing party when remanding a case back to a state court.  However, the circuit courts are currently split on the question of what legal standard applies to determine whether such an award is given.  In this case, the Supreme Court will resolve the split and decide whether an award is presumptively granted, is given according to a balancing test that weighs the interests of the parties, or is reserved for exceptional circumstances — such as when the defendant lacks a reasonable basis for removing.  The standard that is chosen by the Court will affect how aggressively defendants file motions to remove to federal courts, and in turn, affect the number of cases on the federal court dockets.  In deciding which standard to apply, the Court must weigh the interest of the federal courts in reducing the number of cases on their dockets against the right of defendants to have their cases heard by federal courts.

[Question(s) presented] | [Issue(s)] | [Facts] | [Discussion] | [Analysis]

Questions Presented

What legal standard governs the decision whether to award fees and expenses under 28 U.S.C. ? 1447(c) upon remanding a removed case to state court?



In remanding a case back down to the state court, when "may" a federal court award attorney's fees against the party who attempted to remove the case?  Does 28 U.S.C. ? 1447(c) require the court to award fees presumptively, apply a balancing test that weighs the interests of the parties, or reserve an award for exceptional circumstances?



Plaintiffs Gerald T. and Juana M. Martin started a class action lawsuit in a New Mexico state court against their car financing company, Franklin Capital Corp. ("Franklin"), and their car insurance company, Century National Insurance Corp. ("Century"), alleging illegalities in contracts they offered.  See Brief for Petitioners at 2, Martin v. Franklin Capital Corp., No. 04-1140 (U.S. 2005).  Franklin and Century removed the case to the New Mexico District Court, as federal courts may hear a dispute between parties of different states on the basis of diversity jurisdiction.  See Id. at 3.  Franklin and Century argued that the claims for punitive damages and attorneys fees of all members in the class action should be summed up so that the total claim exceeds the minimum required for federal diversity jurisdiction.  See Id.  The Martins argued to the contrary and sought to remand the case back down to the state court.  See Id.

The District Court ruled for Franklin and Century and denied the Martins' motion to remand.  See Id. at 4.  The Martins then appealed to the 10th Circuit Court of Appeals, which reversed and held that neither punitive damages nor attorneys fees could be aggregated to meet the $50,000 minimum, sending the case back down to state court.  See Id.; Martin v. Franklin, 251 F.3d 1284, 1293 (10th Cir. 2001).

With the 10th Circuit's reversal, the Martins went to the District Court and sought attorneys fees and expenses from Franklin and Century for their efforts in defending against the attempt to bring the case up to the federal courts, an award that is provided for by 28 U.S.C. ? 1447(c)See Brief for Petitioners, supra, at 5.  In Martin v. Franklin, 393 F.3d 1143 (10th Cir. 2004), the District Court denied Martin's request, stating that Franklin and Century had "legitimate grounds" for removing the case to federal court.  See Id. at 5–6.  The Martins appealed to the 10th Circuit on this matter of attorneys fees, but the 10th Circuit affirmed and held that the District Court did not abuse its discretion by denying the Martins' request for an award.  See Id. at 6.  The Supreme Court will now review the 10th Circuit's ruling.



The legal issue to be resolved by the Supreme Court in this case is far-removed from the Martins' original claims of illegal contracts against Franklin and Capital.  Here, the Court will decide the broader question of what legal standard applies when determining whether to award attorneys fees against parties who unsuccessfully attempt to bring cases up to the federal courts.

Defendants in a state court dispute may elect to have their cases heard in federal court by filing motions to remove if certain criteria are met.  Under 28 U.S.C. ? 1332, if the defendants and plaintiffs are from different states, defendants may properly remove if the amount in controversy exceeds $75,000.  The requirement of a minimum amount in controversy was established to prevent parties from removing petty cases to the federal courts that crowd their dockets — as congestion of the federal dockets is an ever-present concern.  While some basic rules for doing the arithmetic to calculate the amount in controversy have been established, there are still open questions, especially in complex situations involving multiple claims, parties, and attorneys fees.  Therefore, much litigation is spent over the amount in controversy when plaintiffs challenge the removal of their case to federal courts by filing a motion to remand. 

If a plaintiff is successful in his attempt to remand the case back to the state courts, 28 U.S.C. ? 1447(c) provides that the federal court "may require payment of just costs and any actual expenses, including attorney fees, incurred as a result of the removal." The Supreme Court in the present case will clarify the meaning of the word "may" — a word that has been given various interpretations by lower courts in different circuits. 

At one end of the spectrum, "may" has been interpreted to mean attorneys fees are presumed to be awarded except in exceptional circumstances.  Such an interpretation, in effect, makes 28 U.S.C. ? 1447(c) a fee shifting statute that assigns the costs for bringing a successful motion to remand to the opposing party.  In theory, making 28 U.S.C. ? 1447(c) a fee shifting statute incentivizes motions to remand, and conversely, disincentivizes removals to federal court.  At the other extreme is the interpretation that allows for fees only when the removal was frivolous.  Adopting such a standard would mean that defendants would more freely file motions to remove to federal courts.  In the middle is the interpretation of 28 U.S.C. ? 1447(c) that calls for a balancing approach that compares the interests of the two parties. 

As to the parties in this case, it is unclear whether Gerald and Juana Martin, the original plaintiffs, have anything left at stake in the litigation before the Court.  The Martin's attorneys are likely taking contingency fees in pursuing the class action suit and the Martins would not be responsible for the extra expense of moving to remand. 

The decision here may have large ramifications on the federal court system as a whole.  Interpreting 28 U.S.C. ? 1447(c) as a fee-shifting statute will force all defendants to be more conservative in filing removal actions and will lead to a lighter caseload for the federal courts. 

Beyond concerns of an overcrowded docket, the Court may make note of recent studies that find an increase in removal abuse by defendants seeking to avoid trial in state courts.  The Court may have trouble imputing a motive to Congress to prevent such abuse dating back to the passage of  28 U.S.C. ? 1447(c) in its current form (1988), since such studies do not date back that far.  See, e.g. Theodore Eisenberg and Trevor W. Morrison[CSN4] , Overlooked in the Tort Reform Debate:  The Growth of Erroneous Removal, 2 J. Empircal Legal Studies, 551 – 576 (2005) However, should the Court find the actual legislative history insufficient to detail Congressional intent for the wording of the statute, a more purposive approach focusing on what Congress may have intended could include such considerations.  Concerns over removal abuse would then become an additional factor the Supreme Court must weigh in determining whether defendants should be dissuaded from attempting removal in "close cases" by awarding fees and costs to plaintiffs should those removal attempts fail.



28 U.S.C. ? 1447(c) says, in part, "If at any time before final judgment it appears that the district court lacks subject matter jurisdiction, the case shall be remanded. An order remanding the case may require payment of just costs and any actual expenses, including attorney fees, incurred as a result of the removal."

The Supreme Court will review the Tenth Circuit's ruling in Martin v. Franklin Capital Corp.., 393 F.3d 1193 (2004) to resolve a split among the circuits regarding the appropriate method for awarding attorneys' fees and costs in a remand order when the defendant improperly removes a case from a state court to federal district court.  In Martin, The Tenth Circuit noted that the Seventh and Ninth Circuits, for example, have awarded fees even when the defendant had a reasonable belief as to removability.  Id. (citing Sirotzky v. New York Stock Exchange, 347  F.3d 985, 987 (7th Cir. 2003) and Hofler v. Aetna US Healthcare of Ca., 296 F.3d 764 (9th Cir. 2002)).  On the contrary, the Tenth Circuit in Martin left the decision whether or not to award fees to the discretion of the trial judge, who did not award fees and costs where he found that Defendant had a reasonable belief of removability.  See Id.

A.  IS 28 U.S.C. ? 1447(c) A FEE-SHIFTING STATUTE?

Petitioner Martin contends that the applicable portion of the federal removal statute, 28 U.S.C. ? 1447(c), shifts costs and fees to a party who improperly removes a case to federal district court.  Brief for Petitioners at 9, Martin v. Franklin Capital Corp., No. 04-1140 (U.S. 2005).  Martin cites Congress' desire to prevent unnecessary congestion in the federal docket as the underlying incentive for creating not just a fee-shifting provision, but an aggressive one that shifts fees in almost all circumstances as means of encouraging defendants to refrain from availing themselves of the federal courts when federal jurisdiction is at all in doubt.  Id. at 11.  Martin further notes an increase in documented instances of removal abuse identified in recent scholarship as further reason to interpret ? 1447(c) as presumptively shifting fees.  Reply Brief for Petitioners at 1 – 2, Martin v. Franklin Capital Corp., No. 04-1140 (U.S. 2005) (citing Theodore Eisenberg and Trevor W. Morrison, Overlooked in the Tort Reform Debate:  The Growth of Erroneous Removal, 2 J. Empirical Legal Studies, 551 – 576 (2005)).

Before arguing over the nature of the standard to be applied to the fee shifting, Respondent Franklin Capital Corporation ("Franklin") argues that ? 1447(c) does not mandate a shifting of fees at all, but merely acknowledges that a judge may shift fees.  Respondents' Brief on the Merits at 7, Martin v. Franklin Capital Corp., No. 04-1140 (U.S. 2005).  The statute, Franklin argues, grew out of concern under the common law that a court lacking subject matter jurisdiction was powerless to do anything more than decree its lack of jurisdiction and therefore could not award costs of any kind.  Id.  Thus, defendants seeking removal were statutorily required by 18 Stat. 40 ? 3 (1875) to post bond when requesting removal to pay for costs should the suit be "wrongfully or improperly removed."  Id. at 8.  A concurrent statute, 18 Stat 41 ? 5 (1875), directed judges to award costs in such circumstances "as shall be just."  Id. at 8.  This language was interpreted after the Federal Rules of Civil Procedure were introduced as authorizing a "discretionary rather than mandatory" award.  Gorman v. Abbot Labs 629 F. Supp 1196, 1204 (D. Del 1986).

The 1988 Amendment to 28 U.S.C. ? 1447(c) (its current form) changed ".may order the payment of just costs" to "an order remanding the case may require payment of just costs and any actual expenses including attorney fees incurred as a result of the removal."  Id. at 14.  Franklin asserts that the sole purpose of this wording was to preserve the court's authority to authorize fees and costs as it did away with the bond provisions required by the earlier statutes.  Id. at 15.  Franklin therefore concludes that the 1988 amendment did not create a fee shifting statute but instead merely laid out the permissible elements of a remand order and added "fees" to existing language to resolve a then-existing split in the federal circuits on whether fees could be awarded under the old language.  Id. at 16, 19–20.

Martin cites case law refuting these arguments.  Reply Brief for Petitioners, supra, at 2–3.  Bartholemew v. Town of Collierville refers to the 1988 amendment of ? 1447(c) as creating a fee-shifting statute.  409 F.3d 684 (6th Cir. 2005).  As to the addition of fees in the Amendment, Martin maintains that a 1985 Supreme Court decision, Marek v. Chesney, obviated the need for Congress to clarify the wording of the earlier statutes.  473 U.S. 1.


Should the Supreme Court conclude that 28 U.S.C. ? 1447(c) is indeed a fee-shifting statute, it must still resolve what standard courts must apply in awarding fees and costs.  Not surprisingly, Martin argues for a standard that presumptively awards fees.  Brief for Petitioners, supra, at 16.  Martin finds a similar standard in Neman v. Piggie Park Enterprises, 390 U.S. 400 (1968).  Id. at 13.  But Franklin point out that Piggie Park was a civil rights case where Congress had elected to use the general public as the chosen tool to enforce a right Congress viewed with "the highest priority." Respondents' Brief on the Merits, supra, at 22.  Franklin questions whether such a standard is equally applicable to a less-pressing Congressional interest.  Id.

On the other end of the spectrum, the Court might adopt a standard similar to that it applied in a line of cases dealing with Title VII of the Civil Rights Act of 1964 (now 42 U.S.C. 21 ?2000e), beginning with Christiansburg Garment Co. v EEOC.  434 US 412 (1978).  This standard calls for the award of fees only when the losing party's claim was frivolous and without merit.  Brief for Petitioners, supra, at 13.  Neither side pays this standard much attention in its brief, as it seems to be a clear winner for Franklin and loser for Martin should the Court choose to apply it.

What is perhaps most likely is a balancing standard like that applied by the Court in Fogarty v. Fantasy Inc.  510 U.S. 517 (1994).  Martin argues against such a balancing test as undermining clear Congressional intent to shift fees with

? 1447(c)Brief for Petitioners, supra, at 28–31.  Should Franklin's argument that ? 1447(c) is not a fee-shifting statute fail, Franklin seems to support a balancing standard.  Franklin calls such balancing "party-neutral" and argues it would be favorable here because Franklin's interest in pursuing a good-faith question of whether or not federal diversity jurisdiction existed in this case—thus potentially preserving Franklin's important right to be heard in federal court—outweighs the Congressional interest of minimizing the federal case load.  Respondents' Brief on the Merits, supra, at 23.  Unsurprisingly, Martin insists that the dual Congressional interests of federal docket management and prevention of removal abuse would force the balance to come out in favor of shifting fees in this case.  Reply Brief for Petitioners, supra, at 18.



In deciding this case, the Supreme Court will attempt to strike a balance between reducing docket congestion in the federal court system and preserving the right of defendants to file motions to remove their cases to the federal courts.  Adopting a standard that presumptively awards attorneys fees may dissuade defendants from filing to remove even in cases where there is a close question of whether federal jurisdiction exists.  However, a presumptive standard may also have the positive effects of curbing the increasing trend of removal abuse and reducing the cases on the federal court dockets.  Should the Court adopt a party-neutral balancing standard instead, defendants may more freely remove cases to the federal courts, but such a standard may be contrary to the intent of Congress in creating a fee-shifting statute.  Congress' intent also makes it unlikely that the Court will adopt the conservative standard that awards fees only in exceptional circumstances.



Prepared by: Euwyn Poon, Craig Newton

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