Worth reading: the First Circuit finally takes a stance on the fraudulent joinder test

Fraudulent joinder is a term of art referring to the doctrine that allows district courts to disregard for removal purposes the presence of a diversity-defeating defendant in a complaint. The issue comes up almost routinely in Law 75 cases where the defendant, usually the principal in Law 75 or 21 cases, seeks to remove the case filed in local court to federal court and the dealer has joined as a co-defendant a diversity-defeating Puerto Rico distributor.

Is the standard of fraudulent joinder the same as for a Rule 12(b)(6) motion to dismiss? They are similar standards to be sure but not necessarily identical. Both tests present challenges to the insubstantiality of the local law claims against the diversity-defeating defendant. In Universal Truck v. Southworth-Milton, Inc., 2014 WL 4290458 (1st Cir. Sept. 2, 2014), the First Circuit concurred with the Seventh and Ninth Circuits and held that fraudulent joinder exists where "there is no reasonable possibility that the state's highest court would find that the complaint states a claim upon which relief may be granted against the non-diverse defendant."

This sounds like the familiar Rule 12(b)(6) standard but since the Seventh Circuit's decision requires the district court to construe all issues of fact and law in the defendant's favor, and the First Circuit remained silent, I am not so sure that the standards are identical. Let's leave that for another day.

Removal and remand of Law 75 cases: is there “fraudulent joinder”?

The dilemma as to which court, federal or local, is the most appropriate venue for Law 75 or Law 21 cases continues in 2009.

In Interamerican Builders Agencies Co. v. Sta-Rite Industries, Inc., 602 F. Supp. 306 (D.P.R. Feb. 19, 2009), plaintiff, an exclusive distributor of industrial equipment, sued both the principal under Law 75 and the appointed distributors for tortious interference. After removal to federal court, the court allowed plaintiff’s motion to remand reasoning that, although the diversity defeating distributors were dispensable parties, plaintiff would be prejudiced by litigating in two different forums and the federal court has no significant interest in deciding issues of Law 75.Thus, the court remanded the case to local court to promote the efficient use of judicial resources.

Going the other way is Renaissance Marketing, Inc. v. Monitronics International, Inc., 606 F. Supp. 2d 201 (D.P.R. March 31, 2009). There, the court held that diversity-defeating Puerto Rico distributors were fraudulently joined as defendants to defeat removal jurisdiction. Plaintiff, an alleged exclusive distributor of alarm equipment services, joined the newly-appointed distributors as parties in the federal case despite the fact that a prior lawsuit for tortious interference against them had been filed in the local court. However, the federal complaint for declaratory judgment and breach of contract under Law 21 or Law 75 was directed solely against the principal. “Courts cannot allow a party to litigate simultaneously against the same defendants, in different suits, arising from the same facts.” The court then granted defendant’s motion to dismiss holding that a Texas forum selection clause was enforceable despite the strong public policy in Puerto Rico behind Laws 75 and 21.