Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_16-cv-00278/USCOURTS-casd-3_16-cv-00278-0/pdf.json

Nature of Suit Code: 220
Nature of Suit: Foreclosure
Cause of Action: 28:1332fc Diversity - Foreclosure

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

DANIEL D. SMOLKO, et al.,

Plaintiffs,

CASE NO. 16cv278-LAB (WVG)

ORDER OF REMAND

vs.

CAPITAL ONE, N.A., et al.,

Defendants.

On February 9, the Court ordered Defendant Capital one, N.A. to show cause why this

action should not be remanded. If it did not show cause by February 22, the Court

cautioned, the action would be remanded. The order noted that Capital One bore the

burden of establishing jurisdiction, and that any doubts would be resolved in favor of remand.

See Gaus v. Miles, 980 F.2d 564, 566 (9th Cir. 1992). Plaintiff Daniel Smolko then filed his

own motion to remand. Capital One has now filed its response. 

The dispute in this case concerns whether proceeds from a foreclosure sale were

properly credited to Plaintiffs Daniel and Linna Smolko. (Compl., ¶¶12–13, 20–21.) Among

other things, the Smolkos contend that because Cal-Western Reconveyance Corporation

misapplied the sale proceeds, they were issued an inaccurate IRS Form 1099-C, resulting

in their overpaying federal income taxes. (Id., ¶¶ 22-23.) 

The order to show cause concluded that the complaint did not present a substantial

federal question, and instead focused on whether the Court could exercise diversity

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jurisdiction. Capital One was given leave to try to show that a substantial federal question

was present, if it thought it could do so, but was directed primarily to address diversity. 

Capital One’s response, however, chose to focus on federal question jurisdiction and

abandoned diversity jurisdiction.

Federal Question

Capital One argues that the method of calculating amounts to be reported on a Form

1099-C is a central question in this case. Even though the complaint identifies only causes

of action arising under state law, Capital One argues a substantial federal question is

present anyway.

In Grable & Sons Metal Products, Inc. v. Darue Engineering & Mfg., 545 U.S. 308

(2005), the Supreme Court held that when federal law does not create a plaintiff’s action,

federal question jurisdiction does not exist except in certain narrow, exceptional

circumstances. State courts are routinely called on to adjudicate state law claims that in

some way implicate federal issues, but which do not involve federal question jurisdiction

under Grable. See Martinez v. Transportation Mgt. LLC, 2008 WL 4951503, at *5 (C.D.Cal.

Nov. 17, 2008).

Here, the central claim is whether proceeds from the foreclosure sale were correctly

applied to the debt, and if so, whether they were accurately reported both to the Smolkos

and on the Form 1099-C. The Smolkos allege they misled by Defendants into believing the

amount of debt canceled was higher than it actually was. The result, and the basis for part

of their claim for damages, is that the inaccuracy caused them to pay more in taxes than

they should have. The proper handling of proceeds from a foreclosure sale and the

cancellation of debt as a result of foreclosure are questions of state law. There is no dispute

that 1099-C’s are supposed to be accurate, and the Smolkos are not relying on some federal

right as the basis for their claim.

Capital One contends that because accurate 1099-Cs affect the collection of taxes,

the federal interest is strong. They contend that the Internal Revenue Service’s rights are

implicated here. But the IRS is not a party, no Defendant collected a tax, and Capital One

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has not argued the Smolkos are not seeking a tax refund from Defendants either directly or

indirectly. See generally Brennan v. Southwest Airlines Co., 134 F.3d 1405 (9 Cir. 1998) th

(holding that suits to recover money wrongfully collected as a tax, however pleaded, are in

fact tax refund suits).

Here, the mention of federal taxation does not create a federal claim, and similar

cases have reached the same conclusion. See, e.g., Booth v. Baldwin, 2009 WL 3756676,

*4–*5 (W.D.Pa., Nov. 9, 2009) (holding that plaintiffs’ claim in the amount of federal tax

liability resulting from professional negligence did not give rise to federal question

jurisdiction); McMaster v. Coca-Cola Bottling Co. of California, 392 F. Supp. 2d 1107, 1114

(N.D.Cal., 2005) (holding that, although claim for improper characterization of payments for

commuting expenses would require court to consult federal tax code, there was no

substantial federal question). See also Jensen v. Mitschele Contracting Co., 630 F.2d 209,

210 (3d Cir. 1980) (where federal consequence of higher taxes was merely collateral to the

underlying claim, federal question jurisdiction was lacking).

Capital One has not cited any cases finding federal question jurisdiction in similar

circumstances. To the contrary, it cites recent orders from two cases from this district

bringing similar claims based on the issuance of inaccurate Form 1099-C’s, in which federal

question jurisdiction was held to be lacking. See Prendergast v. Capital One, et al., No.

15-cv-2777-DMS-JMA (S.D. Cal. Feb. 11, 2016), Docket no. 8, 6:3–8 (“Here, the claims

alleged in the Complaint are clearly based on state law . . . . Accordingly, there is no federal

question jurisdiction in this case.”); Bloomfield v. Capital One, et al, No. 15cv2762-DMS-BGS

(S.D. Cal. Feb. 11, 2016), Docket no. 9, 7:3–8 (same).

In addition, the notice of removal contends that there is no private right of action for

issuance of an inaccurate Form 1099-C. (Docket no. 1, ¶ 8 (citing 26 U.S.C. § 7374(f).) 

When Congress creates no private right of action under a statute, “the presence of a claimed

violation of the statute is insufficiently ‘substantial’ to confer federal question jurisdiction.”

Merrell Dow Pharm., Inc. v. Thompson, 478 U.S. 804, 814 (1986). In other words, accepting

Capital One’s own characterizaiton of the law, because the Smolkos cannot make a claim

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against Cal-Western Reconveyance under federal law, this claim does not raise a substantial

federal question.

Diversity

The Court also directed Capital One to address diversity jurisdiction, which its

response failed to do. The Court therefore deems the issue waived, and construes Capital

One’s non-response as to this issue an admission that diversity jurisdiction is lacking.

Even if the issue were not waived, however, it appears diversity jurisdiction is lacking. 

Capital One’s notice of removal argued that the citizenship of Cal-Western Reconveyance,

which is non-diverse, should be disregarded because it is a sham defendant. But at the

same time, Capital One has taken the position that the Smolkos’ claim against Cal-Western

gave rise to federal question jurisdiction. Obviously, if the claim were as insubstantial as the

notice of removal contended it was, it could not create federal question jurisdiction. In any

event, the Court finds Cal-Western Reconveyance is not a sham defendant for purposes of

diversity jurisdiction. See United Computer Sys. v. AT&T Corp., 298 F.3d 756, 761 (9 Cir. th

2002) (giving standard for identifying a sham defendant). What is more, the amount in

controversy does not appear to be met.

Conclusion and Order

This action is therefore REMANDED to the Superior Court of California for the County

of San Diego, Central Division. Smolko’s motion for remand is DENIED AS MOOT.

IT IS SO ORDERED.

DATED: February 24, 2016

HONORABLE LARRY ALAN BURNS

United States District Judge

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