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Wolf v. Kennelly

July 23, 2009


Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 1:07-cv-02218-Rebecca R. Pallmeyer, Judge.

The opinion of the court was delivered by: Flaum, Circuit Judge

ARGUED MAY 28, 2009

Before BAUER, FLAUM, and KANNE, Circuit Judges.

Ford Kennelly prevailed in a National Futures Association arbitration against several commodities brokers with whom Kennelly had accounts and who, he alleged, ran "boiler room" operations that caused him to incur severe losses. Those brokers then filed separate petitions to vacate in Illinois state court and the Northern District of Illinois. Kennelly sought, unsuccessfully but over a period of several months, to remove the state court case to federal court; and while he was unsuccessful in getting the case into federal court he did persuade the district court to bar KJW, LLC, one of the commodities brokers, from seeking attorneys' fees for his attempted removal. KJW now appeals that ruling.

For the following reasons, we conclude that clearly established law foreclosed Kennelly's attempts to remove the state court case to federal court and accordingly we reverse the district court's minute order barring the petition for attorneys' fees.

I. Background

Ford Kennelly, an Indiana citizen, sued Ken Wolf, KJW (his broker), Lawrence Spain (another broker) and the Rosenthal Collins Group, LLC ("RCG") in a National Futures Association ("NFA") arbitration. The arbitration panel found in Kennelly's favor, awarding him $1.3 million in damages, with RCG and Wolf jointly and severally liable for $543,386.12, plus interest. RCG filed a petition to vacate that award in the Northern District of Illinois, posting bond in the amount of the entire joint and several award pursuant to NFA rules before doing so. According to Wolf, they also made demands on him to indemnify RCG under an agreement between RCG and KJW. Wolf was not a party to RCG's petition.

On March 25, 2007, Wolf and KJW filed their own petition to vacate in Cook County Circuit Court. Wolf included in his state court petition a count for declaratory relief against RCG under Illinois state law, seeking a declaration that RCG did not have a valid claim for indemnification.

Kennelly responded by seeking to remove Wolf's petition to federal court. Wolf's counsel, in a letter sent to Kennelly's counsel, warned that RCG was an Illinois citizen for purposes of jurisdiction and that 28 U.S.C. § 1441(b), the "forum defendant rule," prevented removal to federal court. Kennelly nonetheless sought to remove the case in a motion filed on April 23, 2007. To cure the removal problems presented by the forum defendant rule, Kennelly asked the district court to realign RCG as a petitioner (instead of a respondent) "according to their actual interests in the litigation." Kennelly also claimed that Wolf's declaratory judgment action against RCG was premature because, if the arbitration award were vacated, "there would be no need for a court to determine whether KJW and Wolf are legally obligated to indemnify RCG." Kennelly also expressed his concern that if the state case were not removed, there was a possibility of inconsistent decisions.

On May 21, 2007, Wolf moved to remand. Wolf argued that because RCG was a respondent, Kennelly's removal violated § 1441(b)'s forum defendant rule and that RCG had not consented to removal. Wolf also opposed realignment as the petitioner in the Illinois state court case. Wolf's motion opposing removal cited American Motorists Ins. Co. v. Trane Co., 657 F.2d 146, 151 (7th Cir. 1981), which holds that realignment is only proper "where there is no actual, substantial conflict between the parties that would justify placing them on opposite sides of the lawsuit." Wolf emphasized in his motion that there was a live controversy with RCG over the issue of indemnification. Kennelly opposed the motion to remand the case back to the Illinois state court.

At a status conference on June 25, 2007, the district court appeared persuaded by Kennelly's opposition. The district court stated that "it does seem to me that the real dispute here is between the party that prevailed at the arbitration and the parties that were found by the arbitrator to have violated . . . Mr. Kennelly's rights. So with that understanding, I do think removal was proper." The district court said that it was "concerned" about Wolf's argument regarding a substantial dispute about indemnification but suggested that she saw another problem, that Kennelly had not raised in his motion to remove, regarding whether "complete justice can be done in the absence of the Wolf and KJW parties" in RCG's federal case. However, RCG indicated its intention to dismiss its federal petition and litigate in state court if the district court remanded Wolf's case. Wolf and RCG filed a supplemental brief restating that intention on July 12, 2007.

On August 14, 2007, Kennelly argued that Wolf's declaratory judgment action against RCG should be severed and that the district court should regard that part of the case as a "sham orchestrated by Wolf and RCG jointly to keep Kennelly out of federal court." The parties went through mediation without success. The district court held another hearing on September 19, 2007 in which the court signaled once again its intention to deny the motion for remand. Two more months then elapsed. On November 27, 2007, the district court ordered Wolf to respond to the arguments Kennelly had raised in his August 14 brief regarding severance of the indemnification issue.

At some point in late November or early December 2007, it emerged that one of RCG's limited partners was an Indiana citizen. It thus now appeared that RCG could not be realigned as a petitioner because Kennelly was an Indiana citizen and placing the two on opposite sides would destroy the diversity of the suit.

On December 13, 2007, Wolf submitted another brief arguing that American Motorists still applied but that it did not matter whether the district court realigned RCG or not. As RCG stated, sending RCG (an Indiana resident) to the plaintiff's side against Kennelly (also an Indiana resident) would destroy diversity. Wolf also cited case law holding that mere "misjoinder" of a defendant could not cure removal defects, as the standard was the much more imposing "fraudulent joinder." Wolf pointed out that even if misjoinder standards ...

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