Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_06-cv-02058/USCOURTS-cand-3_06-cv-02058-2/pdf.json

Nature of Suit Code: 430
Nature of Suit: Banks and Banking
Cause of Action: 28:1441 Petition for Removal

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United States District Court

For the Northern District of California

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UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

PEOPLE OF THE STATE OF CALIFORNIA,

Plaintiff,

 v.

H&R BLOCK, INC., a foreign

corporation; H&R BLOCK SERVICES,

INC., a foreign corporation; BLOCK

FINANCIAL CORPORATION; BLOCK

FINANCIAL CORPORATION, a foreign

corporation; HRB ROYALTY, INC., a

foreign corporation; and DOES 1

through 50, inclusive,

Defendants. 

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No. C 06-2058 SC

ORDER REMANDING

ACTION TO STATE COURT

I. INTRODUCTION

Before the Court is a Motion to Remand by Plaintiff

California Attorney General on behalf of the People of California

("Plaintiff" or "AG"). Defendants H&R Block, Inc. et al.

("Defendants" or "Block") have opposed the Motion. For the

reasons stated herein, the Court GRANTS the Motion to Remand.

II. BACKGROUND

On February 15, 2006, the AG filed a Complaint against

Defendants in the Superior Court of California for the City and

County of San Francisco. See Not. of Remov., Ex. A. The twentypage Complaint alleges a pattern of misconduct by Block in their

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provision of tax preparation services related to Block's sale and

marketing of Refund Anticipation Loans ("RAL"). See Id. The

complained of conduct includes inter alia: 

-Binding RAL applicants to participation in debt collection

scheme related to past loans without properly disclosing the

nature of the arrangement and misleadingly portraying it. see

Compl., ¶ ¶ 31-36.

-Failing to make proper "no purchase necessary" disclosures

in a lottery-type promotion. Id., ¶ 51. 

-Improperly handling tax-payer information. Id., ¶ ¶47-49.

-Failing to advise their poor clients of the relative

advantages of other options to borrowing against their tax

refund, in violation of their fiduciary duties. Id., ¶ ¶ 25-

28. 

-Making deceptive and misleading statements to consumers

regarding RALs as an inducement for consumers to purchase

them. Id., ¶ ¶ 37-45. 

-Steering clients to expensive check-cashing businesses

without adequately disclosing Blocks' financial interest in

clients using the services of these businesses. Id., ¶ 50. 

-Failing to make proper disclosure of fees charged for

deferring service charges in violation of the Truth-inLending Act ("TILA"), 15 U.S.C. §§ 1631, 1632, and related

regulation. Id., ¶ ¶ 29, 56(g) 

In alleging the complained of conduct, the Complaint

describes the high costs associated with the RALs and other

related products offered by Block, but does not specifically

allege that these costs constituted wrongful conduct in-and-ofthemselves. See, e.g., id., ¶ ¶ 24, 41, 44. For example, in an

early section of the Complaint in which the RAL program is

outlined, the Complaint describes RALs as "very short-term, very

expensive loans" and states that those who purchase them

"typically pay interest, depending on the size of the loan, at an

Annual Percentage Rate (APR) of from 40% to well over 100% APR,"

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and that if associated fees are included "the rate could be in

excess of 500%." Id., ¶ 24.

On the basis of the alleged wrongful conduct, the Complaint

makes two state law claims: a violation of California Business and

Professional Code Section 17500 and a violation of California

Business Code Section 17200. Id., ¶ ¶ 52-56. Section 17500

prohibits inter alia the making of "[f]alse or misleading

statements" in an attempt to induce the public of California to

enter into an obligation to purchase goods or services. Cal. Bus.

& Prof. Code § 17500. Section 17200 prohibits "[u]nfair

competition," including inter alia an "unlawful, unfair or

fraudulent business act or practice and unfair, deceptive, untrue

or misleading advertising." Cal. Bus. & Prof. Code § 17200. The

Complaint requests various types of relief available under the

Business and Professional Code, including civil penalties,

restitution, and an order enjoining any of the activities found to

be in violation of Sections 17200 and 17500. Comp. at 19-20. 

On March 17, 2006, Defendants removed the case to this Court. 

See Not. of Remov. On May 16, 2006, the AG moved to remand the

case to state court. See Mot. to Remand. 

III. LEGAL STANDARD

A complaint originally filed in state court may be removed to

federal court pursuant to 28 U.S.C. § 1441 within thirty days of

service on the defendant. 28 U.S.C. § 1446(b). 

On a motion by a plaintiff to remand to state court, a

defendant bears the burden of showing that a federal court would

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have jurisdiction from the outset; in other words, that removal

was proper. Gaus v. Miles, Inc., 980 F.2d 564, 566 (9th Cir.

1992). To meet this burden, a defendant must overcome a "strong

presumption" against removal. Id. Courts "strictly construe the

removal statute against removal jurisdiction[, and] federal

jurisdiction must be rejected if there is any doubt as to the

right of removal in the first instance." Id., see also Plute v.

Roadway Package Sys., Inc., 141 F.Supp.2d 1005, 1008 (N.D. Cal.

2001)("any doubt is resolved in favor of remand"). The bar is

further raised when the removal in question is of an action

brought originally by a State in a State court. Franchise Tax

Board of the State of California v. Construction Laborers Vacation

Trust for Southern California et al., 103 S Ct. 2841, 2853, n. 22

(1983) ("[C]onsiderations of comity make us reluctant to snatch

cases which a State has brought from the courts of that State,

unless some clear rule demands it."). As the language of these

standards makes clear, a district court's subject matter

jurisdiction is determined on the basis of the complaint at time

of removal, not as subsequently amended. Sparta Surgical Corp. v.

National Ass'n of Sec. Dealers, Inc., 159 F.3d 1209, 1213 (9th

Cir. 1998).

IV. DISCUSSION

Defendant presents two basic arguments in favor of removal

(and in opposition to remand), both premised on the Court's

federal question jurisdiction under 28 U.S.C. § 1331: 1) the AG's

suit is preempted by the National Bank Act ("NBA"), 12 U.S.C. §§

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21 et seq.; and, somewhat alternatively, 2) the AG's state law

claim presents a substantial federal question which justifies

removal. See Defs' Opp. Neither is persuasive.

A. The AG's Suit is Not Preempted

The core of the Defendants' preemption argument is that the

AG's suit is really about usury and so the actions of Block's

partner in the disputed business, HSBC, and, as such, is

completely preempted by the NBA. See Defs' Opp. This argument

fails.

What is known as the "well-pleaded complaint" rule provides

the basic guidelines for determining whether a district court has

subject matter jurisdiction grounded on the existence of a federal

question. Franchise Tax Board, 103 S Ct. at 2846. Under this

rule, a district court looks exclusively to the plaintiff's

complaint to determine "whether a case is one arising under the

Constitution or a law or treaty of the United States, in the sense

of the jurisdictional statute." Id. (internal quotation omitted). 

Under this "more-or-less automatic[]" rule, if the complaint on

its face presents no federal question, no subject matter

jurisdiction exists. Id. "In addition, the plaintiff is the

'master' of her case, and if she can maintain her claims on both

state and federal grounds, she may ignore the federal question,

assert only state claims, and defeat removal." Duncan v.

Stuetzle, 76 F.3d 1480, 1485 (9th Cir. 1996). 

Defendants implicitly concede that the AG's complaint meets

this standard, but argue that Defendants should be allowed to

avoid remand nonetheless on the basis of an exception to the rule

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articulated by the Supreme Court in Beneficial Nat. Bank v.

Anderson, 123 S. Ct. 2058 (2003). See Opp. at 4. Specifically,

Defendants point to the exception which the Supreme Court found to

exist "when a federal statute wholly displaces the state law cause

of action." Anderson, 123 S. Ct. at 2063; see Opp. at 4. 

According to Defendants, because the Complaint mentions the high

cost of the RALs, it is actually a usury case and pre-empted by

the NBA. Id. 

The Court need not examine whether such a usury claim would

be pre-empted by the NBA because the AG makes no usury claim. 

Rather, the AG's two causes of action are as the AG's Complaint

states them: claims that Block violated provisions of

California's Business and Professional Code which prohibit

misleading advertising and unfair business practices. See Comp. 

The Complaint nowhere states that the alleged high cost of the

RALs form the basis of the complained of violations, but rather

makes clear that the problem with the RALs is the way Block

markets and sells them. See id. The Complaint's statements

regarding the RALs' costs are contextual, meant to inform the

court about the consequences of Block's alleged malfeasance and

thus impress upon the court AG's need for relief. They certainly

do not form a basis for this Court to snatch the case from the

state court in which the state of California brought it. See

Franchise Tax Board, 103 S. Ct. at 2853, n. 22. 

B. The AG's Suit Does Not Present Substantial Federal

Questions Mandating Removal

Somewhat alternatively, Defendants argue the Court

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1Defendants also state in a footnote that the Court can base

its subject matter jurisdiction under this doctrine on the basis of

the AG's allegation that Block has violated sections of the

Internal Revenue Code, 26 U.S.C. § 7216, by disclosing certain

taxpayer information and "the AG's argument predicated on Fair Debt

Collection Practices Act, 15 U.S.C. §§ 1692e-g." Opp. at 13. 

These un-argued statements fail to satisfy Defendants' burden in

opposing the AG's Motion. 

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"independently has jurisdiction over this action under 28 U.S.C.

§§ 1441 and 1331 because the AG's demand for relief depends on a

substantial federal question." Defs' Opp. at 11. Specifically,

Defendants argue that the AG's request for an order enjoining

"defendants from '[d]oing any of the acts set forth in this

complaint'" necessarily raises substantial and disputed federal

issues because a single violation of the TILA is among the many

allegations of malfeasance on which the Complaint predicates its

Section 7200 unfair competition cause of action. Id. at 14-15

(quoting Compl. at 19).1 This argument is equally unavailing. 

In Grable & Sons Metal Products, Inc. v. Darue Engineering &

Manufacturing, the Supreme Court stated the following basic

standard for removal on these grounds: 

[T]he question is, does a state law claim necessarily

raise a stated federal issue, actually disputed and

substantial, which a federal forum may entertain without

disturbing any congressionally approved balance of

federal and state judicial responsibility.

125 S. Ct. 2363, 2368 (2005)(emphasis added). Thus, to prevail,

Defendants must show: 1) that the AG's state law claim

necessarily raises the federal issues they claim it does; 2) that

these issues are actually disputed and substantial; and 3)

assuming conditions 1 and 2 are met, that it is appropriate, from

a state-federal balance of responsibility perspective, for this

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2The federal issue allegedly raised must also be legal, as

opposed to factual, going to "validity, construction, or effect" of

an element of federal law. Id. at 2369 n. 3. (internal quotations

omitted). And the issue must be both "actually disputed and

substantial." Id. at 2368; see also McVeigh, 126 S. Ct. at 2137

("Grable presented a nearly 'pure issue of law,' one 'that could be

settled once and for all and thereafter would govern numerous tax

and sale cases.'") (internal citation omitted).

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Court to take this case from a state court and hear it. In light

of this demanding standard, it is no surprise that the Supreme

Court has recently described the category of cases which meet it

as "slim[,] . . . special and small." Empire Healthchoice

Assurance, Inc. v. McVeigh, 126 S. Ct. 2121, 2137 (2006).

To meet the first part of this standard, a removing party

must show that resolution of the state law claim necessitates

addressing an issue of federal law that is both disputed and

substantial. Grable, 125 S. Ct. at 2368. It is not sufficient to

show that a state law claim simply touches upon or implicates a

federal issue, but rather determination of the federal issue must

be necessary to resolve the claim. Id. In other words, the

elements of the state claim which involve a federal issue must be

"essential parts of the plaintiffs' cause of action." Id., at

2368-69.2

The AG's allegation that Block has violated the TILA does not

form an "essential part[]" of the AG's Section 17200 cause of

action against Block. Grable, 125 S. Ct. at 2368. Rather, it is

but one of eight basic predicate violations (many containing subviolations) on which the AG bases its Section 17200 cause of

action. See Compl., ¶ 56. If the AG successfully proves any one

of these predicate acts it will prevail on its Section 17200 cause

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of action. See Cal. Bus. & Prof. Code § 17200. The TILA

violation predicate, therefore is not, and cannot be characterized

as, an essential part of that cause of action. Compare Grable 125

S. Ct. at 2368 ("Whether Grable was given notice within the

meaning of the federal statute is thus an essential element of

this quiet title case . . .; it appears to be the only legal or

factual issue contested in the case.").

Defendants' argument that, should the AG prevail, the State

Court will have to determine whether Block has violated the TILA

in making its decision whether to order part of the relief

requested is unavailing. There are many instances in which a

state court is called upon to determine an issue of federal law

that do not provide a basis for removal jurisdiction. For

example, removal is not appropriate when an answer to a state law

cause of action is based on a federal law defense. See Franchise

Tax Board, 103 S. Ct. at 2848. If upon remand the state court

commits an error in dealing with this minor part of the AG's

claims against Block, Defendants, like any litigants, can seek

remedy "through the state appellate courts and ultimately [the

Supreme] Court." Atlantic Coast Line R.R. Co. v. Brotherhood of

Locomotive Engineers, 398 U.S. 281, 287 (1970).

Finally, even if the Court were to accept Defendants'

strained reading of this standard and find that the AG's predicate

allegation that Defendants violated the TILA necessarily raises a

federal law issue (which it does not), went through the second

part of analysis (which it won't) and determined this issue was

substantial and disputed, the Court would still decline to take

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the case from state court. "[T]he presence of a disputed issue

and the ostensible importance of a federal forum are never

necessarily dispositive; there must always be an assessment of any

disruptive portent in exercising federal jurisdiction." Grable,

125 S. Ct. at 2368. In this case, brought by the state of

California in a California state court to enforce California laws

for conduct which occurred in California and which allegedly

victimized California citizens, the "disruptive portent" is

particularly stark. Id.; see Franchise Tax Board, 103 S Ct. at

2853, n. 22; State of Arkansas v. Kansas & Texas Coal Co., 183

U.S. 185, 189 (1901); Barry Friedman, Under the Law of Federal

Jurisdiction: Allocating Cases Between Federal and State Courts,

104 Colum. L. Rev. 1211, 1242 (2004)("A sovereign's interest in

enforcement encompasses defining the laws or rules that govern

society, seeing that those laws and rules are obeyed, and

punishing those who transgress them. This enforcement interest is

a quintessential aspect of sovereignty. . . . The principle that a

state's enforcement interest may justify litigation in state court

encounters virtually no dissent.")

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V. CONCLUSION 

For the foregoing reasons, the AG's motion to remand is

GRANTED and this cases is hereby REMANDED to the Superior Court of

California for the City and County of San Francisco.

IT IS SO ORDERED.

Dated: September 18, 2006

 

UNITED STATES DISTRICT JUDGE

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