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Choice of Law in Fraudulent Joinder Litigation

The grant of subject matter jurisdiction to federal courts based on diversity of citizenship has, for centuries, required complete diversity between parties to the litigation. If a case is brought in state court and complete diversity exists between the parties, the defendant has the statutory right to remove the case to federal court. Absent another basis for federal jurisdiction, the lack of complete diversity strips the federal court of subject matter jurisdiction, and the court is required to remand the case to state court. Therefore, the presence of a single nondiverse defendant is sufficient to defeat diversity jurisdiction.

The doctrine of fraudulent joinder has arisen in response to plaintiffs’ efforts to take advantage of this complete diversity requirement and thereby control whether a state or federal court hears their case. Fraudulent joinder refers to a plaintiff’s attempt to defeat complete diversity and generally occurs in one of two ways: (1) a plaintiff commits actual fraud by inaccurately pleading the citizenship of the parties to the lawsuit or (2) a plaintiff sues a nondiverse defendant against whom the plaintiff cannot establish a cause of action. This Comment focuses only on the second method, which is litigated with much greater frequency than the first. In this context, the diverse defendant will generally remove the case to federal court and argue that the judge should ignore the citizenship of the nondiverse co-defendant because the plain-tiff has no chance of stating a claim against that defendant.

If the federal court determines that the plaintiff has no cause of action against the nondiverse defendant, the court is permitted to ignore that defendant’s citizenship and thereby establish complete diversity. However, if the court determines that the nondiverse defendant is properly joined, then complete diversity is absent and the case must be remanded to state court. The result of a fraudulent joinder dispute therefore determines whether a suit will be heard in state or federal court—an important consideration for litigants.

To resolve the fraudulent joinder question, the federal judge must look to a source of law to determine whether the plaintiff has established a cause of action against the nondiverse defendant. In many cases, all parties agree on which law applies to the case; in those circumstances, the judge will conduct the fraudulent joinder inquiry using the agreed-upon legal standards. In some cases, however, the events giving rise to the litigation have connections to multiple jurisdictions and therefore multiple laws could potentially apply. In these cases, the judge must decide which state’s law to use to determine whether the plaintiff has stated a claim against the nondiverse defendant.

In such a case, it is not clear how a judge should approach this choice of law determination or whether the judge is even permitted to make a choice of law determination at all. On the one hand, if the nondiverse defendant is properly joined, the federal court does not have subject matter jurisdiction and arguably cannot make a choice of law determination. On the other hand, there may be cases in which the plaintiff can state a claim against the non-diverse defendant under one state’s substantive standard, but not under another state’s standard. In these cases, the court cannot resolve the fraudulent joinder dispute without making a choice of law determination.

This Comment takes the position that a court must perform a choice of law analysis as part of its fraudulent joinder inquiry. This determination is necessary to decide whether a law could apply to the case that would sustain the action against the nondiverse defendant. Further, the court should give the same deference to the plaintiff’s choice of law as it gives to the plaintiff’s choice of forum under the jurisdiction’s fraudulent joinder standard. This conclusion draws upon the idea that choice of law is fundamentally a merits-based inquiry and that a decision on the merits re-quires reference to an applicable law. Therefore, a court cannot properly make a determination about whether the suit against the nondiverse defendant has merit, or is merely “fraudulent,” without selecting and applying an appropriate law.