Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_11-cv-02286/USCOURTS-azd-2_11-cv-02286-1/pdf.json

Nature of Suit Code: 140
Nature of Suit: Negotiable Instruments
Cause of Action: 28:1441 Petition for Removal- Breach of Contract

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WO

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

Haresh Mirchandani; Indra Mirchandani,

Plaintiffs, 

vs.

BMO Harris Bank NA; TradeCor Desert

Sky II LLC, 

Defendants. 

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No. CV-11-2286-PHX-GMS

ORDER

Pending before the Court is Plaintiffs’ Motion for Remand (Doc. 9). For the reasons

stated below, the motion is granted.

BACKGROUND

On November 14, 2011, Plaintiffs Haresh and Indra Mirchandani filed this suit in

Superior Court in Maricopa County. (Doc. 1, Ex. B). The dispute arises out of three 2007

loans that a predecessor to Defendant BMO Harris Bank (“BMO”) issued to SS Quality

Fuels, LLC (“Quality”), an LLC of which Plaintiffs are the sole members. Plaintiffs were the

Guarantors on the three loans (collectively “the loans”), and the loans were secured with

deeds of trust to a piece of property owned by Quality (“the property”). Defendant TradeCor

Desert Sky II, LLC (“TradeCor”), later acquired the bank’s interest in the deeds of trust

securing the loans, which are now in default, and scheduled a trustee’s sale for November

29, 2011. Plaintiffs allege that Defendant BMO entered the loan terms incorrectly,

Case 2:11-cv-02286-GMS Document 17 Filed 12/05/11 Page 1 of 9
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overcharged loan fees, and sold Plaintiffs an additional “swap” loan that Plaintiffs did not

understand. (Id.). They allege that BMO and TradeCor conspired to sell the Deeds of Trust

to TradeCor so that TradeCor could foreclose upon the property, which is adjacent to other

property owned by TradeCor. (Id.). 

M & I Marshall Bank (“M & I”), predecessor to BMO, issued a term loan to Quality

in the amount of $1,960,000 and a Revolving Line of Credit (“RLOC”) of $150,000 on

December 11, 2007. (Doc. 7, Ex. B). The next day, the bank sold Quality a “swap

agreement,” whereby it could swap its interest obligations with a counter-party on a similar

amount of indebtedness. (Doc. 1, Ex. B(3)). On December 23, 2008, Quality fell behind on

its loans, and on September 1, 2009, entered into a forbearance agreement with M &I. (Doc.

7, Ex. B). In the agreement, M & I agreed to forbear its right to foreclose on the property, and

Quality released “Lender and Lender’s . . . partners, predecessors, successors and assigns,”

from “any and all actions and causes of action . . . of any and every character, known or

unknown, direct and/or indirect, at law or in equity, of whatsoever kind or nature, whether

heretofore or hereafter arising, . . . including but not limited to matters in any way directly

or indirectly arising out of or in any way connected to this Agreement, the Notes, the Deeds

of Trust, the Loan Agreement, the Guarantee Document and/or any related documents.”

(Doc. 7, Ex. B). 

On April 19, 2010, TradeCor purchased the Lender’s position in the Notes; on April

20, their attorney wrote Plaintiffs to notify them that Quality was in default. (Doc. 7, Ex. D).

TradeCor then sued Quality and Plaintiffs in Maricopa County Superior Court for breach of

contract. Neither Quality, which had filed for bankruptcy protection in August of 2010, nor

Plaintiffs responded to TradeCor’s motion for summary judgment, and judgment was entered

against them on January 20, 2011. (Doc. 7, Ex. 4). On November 7, 2011, the bankruptcy

court denied Quality’s reorganization plan and lifted the automatic stay, allowing TradeCor

to exercise its rights in the property. (Doc. 7, Ex. 7). See In re SS Quality Fuels, LLC,

2:10-bk-25372-GBN (Bankr. D. Ariz. 2010).

The trustee’s sale had been scheduled for November 16, 2011, but was moved to

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November 29 when Plaintiffs filed for a TRO in state court. The state court set a preliminary

injunction hearing for November 22. On November 21, the evening before the scheduled

hearing and three days before Thanksgiving, BMO removed the case to federal court,

claiming that diversity jurisdiction was proper because TradeCor, the only Arizona

defendant, was fraudulently joined, and that federal question jurisdiction was proper because

the state-law claims in the complaint “implicate significant federal issues.” (Doc. 1).

Plaintiffs filed an emergency motion in this Court to prevent the sale of the property. This

Court held a hearing on November 28. Because Quality, rather than Plaintiffs, was the owner

of the property, Plaintiffs could not show that selling the property would personally cause

them “irreparable harm,” and the motion for a TRO was denied. (Doc. 13).

DISCUSSION

1. Legal Standard

“The party asserting jurisdiction has the burden of proving all jurisdictional facts.”

Tectonics, Inc. v. Aero Alloy, 912 F.2d 1090, 1092 (9th Cir. 1990) (citing McNutt v. Gen.

Motors Acceptance Corp., 298 U.S. 178, 189 (1936)). A case may be properly removed from

state court if the district court could have exercised original jurisdiction. 28 U.S.C. § 1441(a)

(2006). Federal jurisdiction is proper in all cases that present a federal question on the face

of the complaint. 28 U.S.C. § 1331 (2006). In addition, federal question jurisdiction will lie

when claims are filed under state law but nevertheless “turn on substantial questions of

federal law, and thus justify resort to the experience, solicitude, and hope of uniformity that

a federal forum offers on federal issues.” Grable & Sons Metal Products, Inc. v. Darue Eng’g

& Mfg., 545 U.S. 308, 312 (2005).The question of federal law must be substantial, however,

and “the mere presence of a federal issue in a state cause of action does not automatically

confer federal-question jurisdiction.” Merrell Dow Pharms. Inc. v. Thompson, 478 U.S 804,

813 (1986).

In addition, the Court has subject-matter jurisdiction to rule on cases in which

defendants and plaintiffs are citizens of different states and the amount in controversy is

greater than $75,000. 28 U.S.C. § 1332 (2006). The Supreme Court has interpreted § 1332

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to require complete diversity between parties, where “the citizenship of each plaintiff is

diverse from the citizenship of each defendant.” Caterpillar Inc. v. Lewis, 519 U.S. 61, 68

(1996). However, if a plaintiff “fails to state a cause of action against a resident defendant,

and the failure is obvious according to the settled rules of the state,” the district court may

claim that the party is fraudulently joined, and assert jurisdiction. McCabe v. General Foods

Corp., 811 F.2d 1336, 1339 (9th Cir. 1987).

Although ordinarily courts determine federal jurisdiction “solely by an examination

of the plaintiff’s case, without recourse to the defendant’s pleadings,” when “fraudulent

joinder is an issue, we will go somewhat further.” Ritchey v. Upjohn Drug Co., 139 F.3d

1313, 1318 (9th Cir. 1998). In Ritchey, the Ninth Circuit was asked to find that a defendant

was fraudulently joined because claims filed against that defendant had been filed after the

appropriate statute of limitations. Because it found that “the fact that the statute of limitations

is a kind of procedural bar, and not one which relates to the merits of the case,” it found that

the defendant was fraudulently joined and asserted jurisdiction. Id. at 1319. The Court noted,

importantly, that fraudulent joinder inquiries do not rely on “whether those defendants could

propound defenses to an otherwise valid cause of action,” and cited approvingly a Supreme

Court case that “refused to find fraudulent joinder where a misjoinder of parties was claimed

by the defendant that was trying to remove the action.” Id. at 1318–19 (citing Alabama Great

S. Ry. Co. v. Thompson, 200 U.S 206, 218–19 (1906)). It further noted that joinder is not

fraudulent when “the assertion made by the removing defendant ‘went to the merits of the

action as an entirety, and not to the joinder; that is to say, it indicated that the plaintiff’s case

was ill founded as to all the defendants.’” Ritchey, 139 F.3d at 1318 (quoting Chesapeake &

Ohio Ry. Co. v. Cockrell, 232 U.S. 146, 153 (1914).

In considering whether a defendant is fraudulently joined, “[t]he Court must therefore

walk a very fine line: it must consider the merits of a matter without assuming jurisdiction

over it.” Davis v. Prentiss Props. Ltd., 66 F. Supp. 2d 1112, 1114 (C.D. Cal. 1999). Courts

in the Ninth Circuit have thus concluded “that some room must exist between the standard

for dismissal under Rule 12(b)(6), for example, and a finding of fraudulent joinder.” Id. at

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1115. Even “where it is doubtful whether the complaint states a cause of action against the

resident defendant, the doubt is ordinarily resolved in favor of the retention of the case in

state court.” Ballesteros v. American Standard Ins. Co. of Wisc., 436 F. Supp. 2d 1070, 1072

(D. Ariz. 2006) (quoting Albi v. Street & Smith Publ’ns., 140 F.2d 310, 312 (9th Cir. 1944)).

Even a “‘glimmer of hope’ that plaintiff can establish claim is sufficient to preclude

application of fraudulent joinder doctrine.” Ballesteros, 436 F. Supp. 2d at 1072 (quoting

Gottlieb v. Westin Hotel Co., 990 F.2d 323, 327 (7th Cir. 1993)). In evaluating a number of

decisions on fraudulent joinder from the Ninth Circuit and elsewhere, the district court in the

Central District of California has concluded that “a federal court’s fraudulent-joinder

consideration should be akin to an application of Rule 11.” Davis, 66 F. Supp. 2d at 1115.

This analysis has since been cited approvingly by three other districts within the circuit, and

disagreed with by none. See, e.g., Bellecci v. GTE Spring Commc’n Corp., 2003 WL 151538

(N.D. Cal Jan. 14, 2003), Lujan v. Girardi & Keese, 2009 WL 5216906 (D. Guam Dec. 29,

2009), Jennings-Frye v. NYK Logistics Americas Inc., 2011 WL 642653 (C. D. Cal. Feb. 11,

2011). This Court finds the Rule 11 analogy helpful in determining whether a plaintiff’s

inability to recover is “obvious according to the settled rules of the state.” McCabe, 811 F.2d

at 1339.

2. Analysis

BMO claims that removal is proper because 1) Plaintiffs’s state law claims rely on

substantial questions of federal law, 2) Plaintiffs fraudulently joined TradeCor because the

forbearance agreement precludes them from suing TradeCor, and 3) Plaintiffs’ fraudulently

joined TradeCor because their claims are precluded by the state court judgment in

TradeCor’s favor. For the reasons discussed below, all three claims fail.

A. Federal Question Jurisdiction

Plaintiffs allege that BMO breached the duty of good faith and fair dealing. In support

of this allegation, they claim that BMO breached certain agreements with them, and then

failed to file a Suspicious Activity Report as required by 12 C.F.R. § 21.11 (1989). (Doc. 1,

Ex. B. ¶ 68). The regulation in question requires that banks “file a Suspicious Activity Report

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when they detect a known or suspected violation of Federal law or a suspicious transaction

related to a money laundering activity or a violation of the Bank Secrecy Act.” 12 C.F.R. §

21.11(a). BMO argues that in order to rule on this claim “the Plaintiffs will have to establish

that BMO violated 12 C.F.R. § 21.11, and their claim therefore poses a federal question.”

(Doc. 1 at 8). Additionally, BMO claims that because Plaintiffs reference certain federal

statutes and rules in their claim for a Temporary Restraining Order, that claim presents a

federal question. (Doc 1 at 8). Since the Temporary Restraining Order has already been

denied, only BMO’s claim regarding the good faith and fair dealing claim will be considered.

A state court claim which relies on a defendant’s violation of a federal rule does not

necessarily give rise to federal question jurisdiction. See Merrell Dow, 478 U.S at 813.

Rather, federal question jurisdiction only lies when “the state action discloses a contested and

substantial federal question,” and even then “the federal issue will ultimately qualify for a

federal forum only if federal jurisdiction is consistent with congressional judgment about the

sound division of labor between state and federal courts governing the application of §

1331.” Grable & Sons, 545 U.S. at 313–14. The Ninth Circuit has denied federal jurisdiction

when a party seeking removal has failed to show that a claim “necessarily depends upon

construction of a substantial question of any federal . . . law.” Ultramar America, Ltd. v.

Dwell, 900 F.2d 1412, 1414 (9th Cir. 1990). It has otherwise only found that purported state

claims alleging violation of a federal law are removable when the referenced federal law

“unequivocally confers exclusive jurisdiction on the federal courts” Sparta Surgical Corp.

v. National Ass’n of Sec. Dealers, Inc., 159 F.3d 1209, 1211–12 (9th Cir. 1998) (emphasis

added); see also California ex rel. Lockyer v. Dynergy, Inc., 375 F.3d 831, 841 (9th Cir.

2004).

BMO does not claim that “the meaning of the federal statute is in dispute” at all, let

alone that interpreting the rule involves resolving a contested and substantial federal

question. Grable & Sons, 545 U.S. at 315. It further does not claim that 12 C.F.R. § 21.11

unequivocally confers exclusive federal jurisdiction, and it is not clear from the text of the

regulation that it does so. Federal question jurisdiction is improper.

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1

 BMO identifies a number of “exceptions,” to its statement that all claims against

TradeCor predate the agreement, all of which in fact involve conduct not covered by the

agreement.

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B. Forbearance Agreement

Plaintiffs signed the forbearance agreement with M & I Bank on September 1, 2009,

and amended it on December 1, 2009, then again in February 2010. BMO acknowledges that

the forbearance agreement prohibits only suits complaining of conduct committed before it

was signed. (Doc. 1 at 5). It states that although “the complaint contains allegations

concerning conduct after February 2010, those allegations are aimed at BMO, not TradeCor.”

(Id.). In fact, numerous allegations in the complaint aimed at TradeCor are for conduct it

engaged in after the last amendment of the forbearance agreement. (Doc. 1, Ex. B ¶¶ 46–63,

¶¶ 106–110).1

 The forbearance agreement does not render TradeCor fraudulently joined.

C. Claim Preclusion

Finally, BMO argues that the claims against TradeCor should have been raised as

compulsory counterclaims in a suit TradeCor filed in Arizona state court for breach of

contract, and that they are precluded by the judgment in that case. (Doc. 1 at 6). Plaintiffs

allege that the earlier suit does not preclude their claim. They argue that the judgment was

in effect a default judgment entered after their attorney failed to appear, the claims at issue

were different, and no findings were issued. (Doc. 9).

Parties’ motives are only minimally relevant to a fraudulent joinder inquiry because

fraudulent joinder is “a term of art,” and does not require a finding of actual fraud. McCabe

v. General Foods Corp., 811 F.2d 1336, 1339 (9th Cir. 1987). Nevertheless, here some

discussion of parties’ actions is instructive. BMO removed this matter on November 21, the

evening before a scheduled preliminary injunction hearing in state court, three days before

a national holiday, and one week before the scheduled trustee sale. (Doc. 1). The scheduled

hearing in state court therefore never took place, and Plaintiffs were left to file a motion for

an emergency TRO on Wednesday, November 23, the day before Thanksgiving, in the hopes

of receiving a hearing on Monday to prevent the sale of the property on Tuesday. At that

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hearing, TradeCor’s attorney stated that the sudden removal “caught me a little bit off

guard,” but at the time he had been guarded enough to consent to the removal and to file a

motion to dismiss in federal court the day after the removal was filed. (Doc. 16 at 35; Doc.

7). TradeCor has filed no briefings asserting that it was fraudulently joined, and declined the

opportunity to be heard on the jurisdictional issue at the TRO hearing. (Doc. 16 at 9).

Although fraudulent joinder is usually employed against Plaintiffs who have joined an

improper party solely to keep a federal case in state court, here Defendants, rather than

Plaintiffs, appear to have used procedural tactics to obtain a substantive advantage.

In Arizona, “[t]he defense of claim preclusion has three elements: (1) an identity of

claims in the suit in which judgment was entered and the current litigation, (2) a final

judgment on the merits in the previous litigation, and (3) identity or privity between parties

in the two suits.” In re General Adjudication of All Rights to Use Water in the Gila River

System and Source, 212 Ariz. 64, 69–70, 127 P.3d 882, 887–88 (2006). Compulsory

counterclaims are those that arise from the same transaction or occurrence that is the subject

matter of the opposing party’s claim. Ariz.R.Civ.P. 13(a). Compulsory counterclaims are

subject to the principles of res judicata. Levin v. Hindhaugh, 167 Ariz. 110, 111, 804 P.2d

839, 840 (App.1990). Lansford v. Harris, 174 Ariz. 413, 419, 850 P.2d 126, 132 (App.

1992).

Plaintiffs argue that their claim is not precluded by TradeCor’s breach of contract suit

because it involved different claims, no findings were issued, and the case was not litigated

on the merits. (Doc. 9). Plaintiffs’ complaint alleges that TradeCor conspired with BMO to

transfer the deeds of trust while aware that they had been recorded with numerous

discrepancies that had not been properly reconciled, and despite a mandatory restriction in

the swap that both parties must consent to its transfer. (Doc. 1, Ex. B ¶¶ 42–63). TradeCor

asserted in its claim that Plaintiffs had failed to make payments on the loans. (Doc. 7, Ex. 1).

It is not necessary for this court to determine whether the alleged conspiracy to transfer the

loans fraudulently and the failure to pay those loans back “arises out of the [same] transaction

or occurrence” under Arizona state law. Levin v. Hindhaugh, 167 Ariz. 110, 111, 804 P.2d

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839, 840 (App. 1990). For the purposes of determining whether TradeCor was properly

joined, it is enough to find that Plaintiffs have “a glimmer of hope” that a state court may so

find, and the Court finds that they do. Ballesteros, 436 F. Supp. 2d at 1072. Relying by

analogy on the standards of sanctioning a party under Rule 11, Plaintiffs’ filings against

TradeCor are clearly not “both baseless and made without a reasonable and competent

inquiry.” Townsend v. Holman Consulting Corp., 929 F.2d 1358, 1362 (9th Cir. 1990). It

is the province of the state courts of Arizona to determine whether BMO and TradeCor’s

defenses are adequate to defeat Plaintiffs’ claims, and in a case where the parties are not

completely diverse, this Court lacks the jurisdiction to rule in their stead. See Murakami v.

E.L. DuPont De Nemours and Co. 191 F.3d 460 (table) 1999 WL 701902 (9th Cir. 1999)

(rejecting fraudulent joinder when question of whether a Stipulation agreement applies

“should have been decided by the courts of Hawaii”).

The parties in this case are not completely diverse, and the case is therefore remanded

to state court.

CONCLUSION

The fact that Plaintiffs reference federal rules in their claim for violation of good faith

and fair dealing does not pose a “contested and substantial federal question.” Grable & Sons,

545 U.S. at 313. The forbearance agreement did not bar suits against TradeCor for actions

TradeCor took after the agreement’s final amendment. Plaintiffs have at least “a glimmer of

hope” to succeed against TradeCor’s claim preclusion defense, and therefore TradeCor is not

fraudulently joined. Ballesteros, 436 F. Supp. 2d at 1072. Diversity is not complete and this

Court is therefore without subject-matter jurisdiction to hear the substance of the claim.

IT IS THEREFORE ORDERED that Plaintiff’s Motion to Remand (Doc. 9) is

granted and this matter is remanded to the Superior Court of Maricopa County.

Defendant TradeCor’s Motion to Dismiss (Doc. 7) is therefore dismissed as moot.

DATED this 5th day of December, 2011.

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