Opinion
CIVIL ACTION NO. 3:02CV-282-H
August 13, 2002
MEMORANDUM OPINION
Plaintiff's state court action asserted claims of fraud, breach of good faith and fair dealing, breach of fiduciary duty and misrepresentation under Kentucky law. Defendant Louisville Community Development Bank (the "Bank") removed to this Court, on the grounds that the dispute concerns a loan agreement governed by federal law. Plaintiff Anthony Fields moves now to remand this action to Jefferson Circuit Court. For the reasons that follow, the Court concludes that the case was removed improperly and should be remanded.
I.
In the spring of 2000, the Bank contacted Fields and two partners, the owners of Infinity Strategies Group, LLC ("Infinity"), about a business loan. The Infinity partners entered into discussions with an agent for the Bank, Kathy Pleasant. Pleasant proposed that Fields offer a mortgage on his home in order to secure the loan. Initially, Fields demurred. Allegedly, Pleasant then assured Fields that such a transaction would be a mere formality and that the Bank would never foreclose on his home. Ultimately, after Fields consented to a mortgage in the amount of $82,000, the parties reached an agreement, and the Bank awarded the partnership a loan of $191,000, guaranteed by the federal Small Business Administration ("SBA").
Due to a downturn in business, Infinity's venture failed. The business was liquidated. About the same time Fields arranged to sell his home. An agent of the Bank told him that the Bank expected to receive $82,000 from the proceeds of the sale. Fields then filed this action in state court, seeking damages and rescission of the mortgage.
The Bank removed to this Court, arguing that because the SBA-coordinated loan and mortgage agreements state explicitly that they are to be governed by federal law, this Court has federal question jurisdiction for removal purposes. After removing this action, the Bank subsequently asserted a counterclaim to recover on the mortgage.
The Bank has submitted the various documents which govern the parties' transaction. An SBA Form 147 promissory note bearing Fields' signature states:
WHEN FEDERAL LAW APPLIES:
When SBA is the holder, this Note will be interpreted and enforced under federal law, including SBA regulations. Lender or SBA may use state or local procedures for filing papers, recording documents, giving notice, foreclosing liens, and other purposes. By using such procedures, SBA does not waive any federal immunity from state or local control, penalty, tax, or liability. As to this Note, Borrower may not claim or assert against SBA any local or state law to deny any obligation, defeat any claim of SBA, or preempt federal law.
This provision is recited in an SBA "Unconditional Guaranty" form which also bears Fields' signature, with the words "and this Guaranty" placed after "this Note." An SBA Form 928, for the mortgage, provides:
Said promissory note was given to secure a loan in which the Small Business Administration, an agency of the United States of America, has participated. In compliance with section 101.1(d) of the Rules and Regulations of the Small Business Administration [13 C.F.R. § 101.(d)], this instrument is to be construed and enforced in accordance with applicable federal law.
The SBA Form 928, which dates to 1985, does not reflect that the identified regulation has been recodified at 13 C.F.R. § 101.106(d):
No person, corporation, or organization that applies for and receives any benefit or assistance from SBA, or that offers any assurance or security upon which SBA relies for the granting of such benefit or assistance, is entitled to claim or assert any local or state law to defeat the obligation incurred in obtaining or assuring such Federal benefit or assistance.
In addition, the business loan agreement between the Infinity partners and the Bank provides:
Governing Law. This Agreement will be governed by, construed and enforced in accordance with federal law and the laws of the Commonwealth of Kentucky. This Agreement has been accepted by Lender in the Commonwealth of Kentucky.
This same provision is present in both the promissory note and the commercial guaranty executed between the Infinity partners and the Bank.
II.
"Under 28 U.S.C. § 1441, removal of an action from state to federal court is allowed when the federal court has `original jurisdiction' over the action because it is `founded on a claim or right arising' under federal law." Warner v. Ford Motor Co., 46 F.3d 531, 532 (6th Cir. 1995). Here, Plaintiff has asserted only state law claims. Under the well-pleaded complaint rule, "federal jurisdiction exists only when a federal question is presented on the plaintiff's properly pleaded complaint." Caterpillar, Inc. v. Williams, 482 U.S. 386, 392 (1987) (citation omitted). Thus, "[t]he rule makes the plaintiff the master of the claim; he or she may avoid federal jurisdiction by exclusive reliance on state law." Id. (citations omitted). This is not to say, however, that a plaintiff may "artfully plead" a federal law claim in the guise of state law in order to escape federal jurisdiction.
The Bank argues that Plaintiff is guilty of such artful pleading. It says that because federal law governs the parties' agreement, Plaintiff's claims arising out of that agreement are actually federal claims. However, Plaintiff merely pled several straightforward state law claims, certain aspects of which may be governed by federal law. Plaintiff's claims are preempted only if they are "necessarily federal in character." Metropolitan Life Ins. Co. v. Taylor, 481 U.S. 58, 63-64 (1987). That is not so here. In fact, it appears unlikely that Plaintiff could have brought these claims against the Bank in federal court. See, e. g., Victor Foods, Inc. v. Crossroads Econ. Dev. of St. Charles County, Inc., 977 F.2d 1224, 1227 (8th Cir. 1992) (federal SBA statute "allows the SBA to be sued in any federal district court but does not create a federal question sufficient to confer subject matter jurisdiction over private parties . . ."); Benson v. Small Bus. Admin., 644 F.2d 1366, 1367 (9th Cir. 1981) (same); Ricks v. United States, 434 F. Supp. 1262, 1273 (S.D.Ga. 1976) (dismissing borrower's fraud claim against bank for lack of subject matter jurisdiction in context of SBA loan). Clearly, federal jurisdiction does not exist for removal purposes if Fields could not have brought this action to federal court.
Congress may enact a statutory scheme which preempts an entire field of state law. However, the Sixth Circuit has reasoned that "the congressional intent necessary to confer removal jurisdiction upon the federal district courts through complete preemption is expressed through the creation of a parallel federal cause of action that would `convert' a state cause of action into the federal action for purposes of the well-pleaded complaint rule." Strong v. Telectronics Pacing Sys., Inc., 78 F.3d 256, 260 (6th Cir. 1996) (citation omitted). The Court is unaware of — and the Bank has not cited — any parallel federal claims into which Plaintiff's claims might be transformed. Therefore, Plaintiff's state common law claims are not completely preempted.
The Supreme Court has narrowly limited the complete preemption doctrine's reach. Presently, it encompasses only three types of claims: state contract and tort law claims preempted by §§ 502(a)(1)(B) and 502(f) of the Employee Retirement Income Security Act of 1974; state law claims that allege a right to possession of Indian tribal lands, a federal law matter; and state law claims preempted by § 301 of the Labor Management Relations Act of 1947. See Caterpillar, 482 U.S. at 393 n. 8.
Federal law may well govern the interpretation of some SBA loan documents. However, in these circumstances federal courts have always trusted state courts to apply federal law in appropriate circumstances.
The Court will enter an Order consistent with this Memorandum Opinion.
ORDER
Plaintiff has moved the Court to remand this action pursuant to 28 U.S.C. § 1447. The Court being otherwise sufficiently advised,
IT IS HEREBY ORDERED that Plaintiff's motion to remand is SUSTAINED and this action is remanded to Jefferson Circuit Court.