The Fifth Circuit recently reviewed the question of whether, upon dismissal of all federal claims, a finding of diversity jurisdiction would preserve a federal district court’s jurisdiction over the remaining state law claims, even though the defendant had failed to timely assert diversity jurisdiction as an initial ground for removal. Answering the question in the affirmative, the court of appeals then considered whether there existed complete diversity and, in doing so, demonstrated application of the improper joinder rule within the context of loan origination and servicing.

In the case of Cuevas et al v. BAC Home Loans Servicing, LP et al, No. 10-20735, 2011 WL 3112324 (5th Cir. July 27, 2011), the plaintiffs, residents of Texas, filed a Texas state lawsuit against BAC Home Loans Servicing, LP (formerly known as Countrywide Home Loans Servicing, LP); Countrywide Home Loans of Texas, Inc. (“Countrywide Texas”); and Countrywide Home Loans, asserting various state law claims arising out of the defendants’ alleged rejection of the plaintiffs’ timely attempt to cure past due mortgage loan payments and the ensuing foreclosure on the plaintiffs’ home.

Several months later, the plaintiffs amended their complaint to add a claim under the Federal Truth In Lending Act, 15 U.S.C. § 1601 et seq. (“TILA”). As such, the defendants removed the case to federal court citing as grounds both federal question and, for the first time, diversity jurisdiction. The assertion of diversity jurisdiction was based on the defendants’ argument that the only non-diverse Texas defendant, Countrywide Texas, had been improperly joined because plaintiffs had no reasonable likelihood of recovering from the Texas entity: “all of the allegations in the petition arise from the servicing of the loans and Countrywide Home Loans of Texas never serviced the loans.” On January 14, 2010, the defendants moved to dismiss the plaintiffs’ complaint pursuant to Federal Rule 12(b)(6).

While the defendants' motion to dismiss was pending, the plaintiffs filed a motion to remand, arguing that there was no removal jurisdiction. In ruling on that motion, the district court agreed that there was no diversity jurisdiction because the defendants had failed to prove improper joinder of the Texas entity. The court also found diversity jurisdiction to be lacking because the defendants failed to raise it as a ground for removal within 30 days of receiving the initial complaint. The district court did find, however, that federal question jurisdiction existed in light of the TILA claim asserted in the amended pleading. Nevertheless, having granted the defendants’ Rule 12(b)(6) motion as to that sole federal claim, the court declined to exercise discretionary jurisdiction over the remaining state law claims and granted the plaintiffs’ motion to remand. The defendants appealed that ruling.

On appeal, the Fifth Circuit first ruled that, under normal circumstances, a defendant waives removal jurisdiction by failing to assert it within thirty days of receiving the complaint that reflects the basis for removal. However, once a district court has exercised removal jurisdiction on other properly asserted grounds, the “district court's authority to remand the case to state court depends on the nature of the district court's jurisdiction over the claims that comprise the case at the time of the remand.” (emphasis in original). This rule is based on the Fifth Circuit precedent that “[w]hen the district court has original subject matter jurisdiction over state law claims, the exercise of that jurisdiction is mandatory. The parties cannot waive or agree to destroy that original jurisdiction.” (citing Adair v. Lease Partners, Inc., 587 F.3d 238, 240 (5th Cir. 2009).) Accordingly, even though the defendants had not timely removed based on diversity jurisdiction, the valid assertion of federal question jurisdiction meant that the district court should still determine anew the existence of diversity jurisdiction when ruling on a motion to remand. In this case, it became necessary for the district court to rule on diversity once it dismissed the sole federal TILA claim.

The Fifth Circuit then proceeded to review the district court's factual determination that the defendants had failed to establish improper joinder of Countrywide Texas which destroyed complete diversity between the parties. The court first articulated the standard that to establish improper joinder, the removing party must demonstrate either: “(1) actual fraud in the pleading of jurisdictional facts; or (2) inability of the plaintiff to establish a cause of action against the non-diverse party in state court.” Under the second ground (the first was not at issue), the burden is on the removing defendant to demonstrate that “there is no reasonable basis for the district court to predict that the plaintiff might be able to recover against an in-state defendant.”

Reversing the district court, the court of appeals found that the defendants had met that standard by demonstrating that the Texas entity had neither originated nor serviced the loan in question and, therefore, could not be subject to the remaining claims exclusively arising out of either loan origination or servicing. The Fifth Circuit made this determination based on its specific finding that the Texas entity was not listed on the deed of trust as the originating lender. In addition, a declaration from a Bank of America vice-president established that the Texas entity never performed loan servicing for any loan, including the plaintiffs’. The Fifth Circuit also found that the plaintiffs’ own allegations were consistent with the conclusion that the Texas entity did not service the plaintiffs’ loan. Having concluded that it was uninvolved with either servicing or originating the plaintiffs’ loan, the court held that Countrywide Texas could not reasonably be subject to liability for the plaintiffs’ claims and was, therefore, improperly joined.

The Cuevas case is important because it demonstrates a Court of Appeal’s careful analysis of each named defendant’s role in the conduct that gave rise to a plaintiff’s claim in order to determine whether they were appropriately named or, in the alternative, were named as a sham defendant simply to destroy complete diversity. In the realm of consumer financial services, such a careful approach is especially important given the likelihood that a national financial institution would have affiliates or subsidiaries in multiple states that, despite being uninvolved with the transactions at issue, are named as defendants to destroy complete diversity and avoid removal from state court. The case also stands for the notable proposition that, even when all federal claims have been dismissed, a district court considering a motion to remand should still determine whether diversity jurisdiction might preserve federal court jurisdiction, even if it had not been timely asserted previously as a basis for removal.