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California Dep't of Education v. Indemnity Co. of California

March 31, 2010

CALIFORNIA DEPARTMENT OF EDUCATION, A STATE AGENCY, PLAINTIFF,
v.
INDEMNITY COMPANY OF CALIFORNIA, A CORPORATION AND INSCO INSURANCE SERVICES, INC., A CORPORATION, AND DOES 1-59, DEFENDANTS.



The opinion of the court was delivered by: Frank C. Damrell, Jr. United States District Judge

MEMORANDUM AND ORDER

This matter is before the court on defendant*fn1 Indemnity Company of California's ("defendant" or "Indemnity") motion for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure. Plaintiff California Department of Education ("plaintiff" or "CDE") opposes the motion. On February 22, 2010, following a review of the submissions of the parties, including the Notice of Removal, the complaint, and the briefs related to defendant's motion for summary judgment, the court directed the parties to file supplemental briefing regarding the basis for federal question jurisdiction. Specifically, in light of the sole state law claim for breach of contract alleged in the complaint, the parties were ordered to address whether "plaintiff's right to relief necessarily depends on resolution of a substantial question of federal law." Franchise Tax. Bd. v. Constr. Laborers Vacation Trust, 463 U.S. 1, 28 (1983); see Christianson v. Colt Industries Operating Corp., 486 U.S. 800, 810 (1988) ("[A] claim supported by alternative theories in the complaint may not form the basis for [federal] jurisdiction unless [federal] law is essential to each of those theories."). Indemnity asserts that the exercise of federal jurisdiction is proper. The CDE contends that this action should be remanded to the Superior Court of the State of California in and for the County of Sacramento.*fn2

BACKGROUND

CDE commenced this action against defendants in the California Superior Court, County of Sacramento, stating a single, state-law cause of action for breach of contract, namely for breach of a surety bond issued by defendant Indemnity. In its complaint, CDE alleges that it is a state agency with statutory jurisdiction to administer the Donated Food Program of the United States Department of Agriculture ("USDA") and enforce the program requirements under applicable state and federal statutes and regulations, including 7 C.F.R. Parts 210 and 250. CDE further alleges that Southland Bagel Company, Inc. ("SBC") was a California corporation authorized to process donated food under the USDA's Donated Food Program. CDE entered into a written contract with SBC, called a Master Processing Agreement ("MPA"), for the period July 1, 2003, to June 30, 2004, under which SBC was to process USDA-donated food into specified end products (Articles 5, 35 O(1)) for delivery to eligible recipient agencies ("RA"s). (Compl. ¶¶ 1, 4, 9A, 9D.) The MPA is governed by the laws of California. (MPA, Ex. 1 to Compl., at 31.)

Article 16 of the MPA required SBC to "fully account" for all donated food delivered or carried forward from a previous contract year into its possession, by production and delivery of an appropriate number of end products specified in the MPA to eligible RAs. Under Articles 16 and 18, SBC was financially liable for the value of all donated food inventory for which SBC could not account in accordance with the requirements of the MPA. (Compl. ¶ 9B.) Moreover, Article 19 required SBC to obtain a surety bond to guarantee that SBC "shall faithfully account for, return, or pay for all of the [donated food] received or carried forward" in accordance with the MPA. To satisfy this requirement, SBC provided a bond issued by Indemnity in the initial amount of $100,000, which was later increased to $400,000. (Compl. ¶¶ 9C, 9E.) In the bond, Indemnity specifically recited the existence of the MPA and that the bond was given to secure SBC's obligation to account for, return or pay for "all federally donated foods delivered by [CDE], at the time and in the manner specified in the MPA." (Ex. 2) (emphasis added).

CDE alleges that SBC failed to account for donated food having a total value of $700,737.31. CDE submitted a claim to Indemnity on the surety bond, but Indemnity denied the claim. (Compl. ¶¶ 9F-9L, 10-14.) Subsequently, CDE brought suit for breach of written contract for surety bond. (Compl. ¶¶ 10-14.)

STANDARD

Jurisdiction is a threshold inquiry before the adjudication of any case before the court. See Morongo Band of Mission Indians v. Cal. State Bd. of Equalization, 858 F.2d 1376, 1380 (9th Cir. 1988). Even if no objection is made to removal and the parties stipulate to removal, the district court has an independent obligation to examine whether the exercise of jurisdiction is proper before deciding any issue on the merits. Rains v. Criterion Sys., Inc., 80 F.3d 339, 342 (9th Cir. 1996); see Allstate Ins. Co. v. Hughes, 358 F.3d 1089, 1093 (9th Cir. 2004); Matheson v. Progressive Specialty Ins. Co., 318 F.3d 1089, 1091 (9th Cir. 2003). Moreover, the absence of federal jurisdiction may be raised at any time during the litigation. Rains, 80 F.3d at 342 (examining whether removal was proper for the first time on appeal). "If the district court at any time determines that it lacks jurisdiction over the removed action, it must remedy the improvident grant of removal by remanding the action to state court." California ex rel. Locker v. Dynegy, Inc. ("Dynegy"), 375 F.3d 831, 838 (9th Cir. 2004).

The removal statute is strictly construed against removal jurisdiction. Id. "Federal jurisdiction must be rejected if there is any doubt as to the right of removal in the first instance." Gaus v. Miles, Inc., 980 F.2d 564, 566 (9th Cir. 1992) (citing Libhart v. Santa Monica Dairy Co., 592 F.2d 1062, 1064 (9th Cir. 1979)). The party seeking removal has the burden of establishing grounds for the exercise of federal jurisdiction. Dynegy, 375 F.3d at 838.

ANALYSIS

Defendant asserts that the court has proper removal jurisdiction because plaintiff's claim arises under federal law. Specifically, defendant asserts that the court has original jurisdiction over plaintiff's breach of contract claim because federal law expressly controls and governs the terms of the MPA and because defendant has "derivative liability" for SBC's violations of federal regulations.*fn3

"The presence or absence of federal question jurisdiction is governed by the 'well-pleaded complaint rule,' which provides that federal jurisdiction exists only when a federal question is presented on the face of the plaintiff's properly pleaded complaint." Sacramento Metropolitan Air Quality Management Dist. v. United States, 215 F.3d 1005, 1014 (9th Cir. 2000). Federal jurisdiction may also lie if "it appears that some substantial disputed question of federal law is a necessary element of one of the well-pleaded state claims." Rains v. Criterion Sys., Inc., 80 F.3d 339, 345 (9th Cir. 1996) (quoting Franchise Tax Bd. of California v. Construction Laborers Vacation Trust for Southern California, 463 U.S. 1, 13 (1983). Where federal issues are imbedded in state law claims between non-diverse parties, the determinative questions is whether "a state-law claim necessarily raise[s] a stated federal issue, actually disputed and substantial, which a federal forum may entertain without disturbing any congressionally approved balance of federal and state judicial responsibilities." Grable & Sons Metal Prods., Inc. v. Darue Eng'g & Mfg., 545 U.S. 308, 314 (2005) (emphasis added).

However, "[w]hen a claim can be supported by alternative and independent theories -- one of which is a state law theory and one of which is a federal law theory -- federal question jurisdiction does not attach because federal law is not a necessary element of the claim." Raines, 80 F.3d at 345 (holding that the plaintiff's wrongful discharge claim did not give rise to federal question jurisdiction because it could be supported by violations of the state law constitution, not only violations of a federal statute); Lippit v. Raymond James Fin. Servs., Inc., 340 F.3d 1033, 1043 (9th Cir. 2003) (holding that California unfair competition law claims did not give rise to federal question jurisdiction because such claims are based on unfair or fraudulent conduct generally, and not necessarily violations of federal rules and regulations); Mulcahey v. Columbia Organic Chemicals, 29 F.3d 148. 153 (4th Cir. 1994) (holding that negligence action alleging violations of local, state, and federal environmental laws did not confer federal question jurisdiction). Removal cannot be based on mere reference to federal law. See Berg v. Leason, 32 F.3d 422, 425-26 (9th Cir. 1994) (holding that a state malicious prosecution claim could not be removed to federal court even though the underlying case was a federal RICO cause of action).

Indeed, the United States Supreme Court has determined even if federal law provides an element of a state cause of action, it is insufficient to confer federal removal jurisdiction. Merrell Dow Pharmacy, Inc v. Thompson, 478 U.S. 804, 814 (1986). In Merrell Dow, parents sued a drug manufacturer in state court for their children's birth defects resulting from the mother ingesting the drug while pregnant. The complaint alleged various state causes of action, such as negligence, breach of warranty, and strict liability. The complaint also alleged the drug had been misbranded in violation of the Food Drug and Cosmetic Act, creating a rebuttable presumption of negligence. The Supreme Court held "the presence of the federal issue as an element of the state tort" was not a sufficient basis for ...


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