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Scharnweber v. Dakota

September 20, 2010

STEVEN O. SCHARNWEBER, PLAINTIFF,
v.
DAKOTA, MINNESOTA & EASTERN RAILROAD CORPORATION, DEFENDANT.



The opinion of the court was delivered by: Karen E. Schreier Chief Judge

ORDER REMANDING TO STATE COURT BECAUSE OF LACK OF JURISDICTION

Plaintiff, Steven Scharnweber, moves for partial summary judgment with regard to several claims alleged in the complaint. Defendant, Dakota, Minnesota & Eastern Railroad Corp., (DM&E), opposes Scharnweber's motion for summary judgment and moves to amend its answer to include an affirmative defense. Because subject matter jurisdiction does not exist, the case is remanded to state court.

BACKGROUND

On May 26, 2007, Scharnweber signed an employment security agreement with DM&E because of an upcoming change in control over the business. Under the employment security agreement with DM&E, Scharnweber was entitled to various benefits in the event that he was terminated without good cause within two years after a change in control over the business. In exchange, Scharnweber was required to execute a release that was reasonably satisfactory to DM&E.

On December 18, 2008, DM&E fired Scharnweber without good cause. DM&E offered Scharnweber $584,823.44 in return for executing a release proposed by DM&E. Scharnweber refused to sign the release because he believed that it was too broad and that the compensation was not in accordance with the terms of the employment security agreement. DM&E revised the release document and offered $639,823.44 to Scharnweber. Scharnweber rejected the revised offer because he still believed that the offer was not in accordance with the employment security agreement. Scharnweber instead signed his own version of a release and offered it to DM&E for purposes of satisfying his obligations under the employment security agreement. DM&E rejected Scharnweber's proposed release.

On March 4, 2009, Scharnweber brought suit against DM&E in state court asserting various claims under state contract law and state wage laws. On March 5, 2009, DM&E removed the case to federal court on the theory that federal jurisdiction existed because Scharnweber would be exposed to a federal tax penalty.*fn1 On March 13, 2009, DM&E paid Scharnweber $584,823.44 to avoid looming federal taxation penalties if Scharnweber was paid at a later date. After the deadline to amend the pleadings and to complete discovery passed, Scharnweber moved for partial summary judgment. In response, DM&E asserted the affirmative defense of ERISA preemption and moved to amend its answer to add the affirmative defense of ERISA preemption.

DISCUSSION

Removal to federal court is proper "only if the claims could have been originally filed in federal court." Cent. Iowa Power Coop. v. Midwest Indep. Transmission Sys. Operator, Inc., 561 F.3d 904, 912 (8th Cir. 2009) (citations omitted). "[T]he party seeking removal has the burden to establish federal subject matter jurisdiction." Id. at 912 (citation omitted). "All doubts about federal jurisdiction should be resolved in favor of remand to state court." In re Prempro Prods. Liab. Litig., 591 F.3d 613, 620 (8th Cir. 2010) (citation omitted).

This case is not before the court on the basis of diversity. Instead, federal jurisdiction is premised on two variations of what is generally known as "arising under" jurisdiction: (1) federal jurisdiction exists because the state-law claims "implicate significant federal issues," Cent. Iowa Power Coop., 561 F.3d at 912 (quoting Grable & Sons Metal Prods., Inc. v. Darue Eng'g & Mfg., 545 U.S. 308, 312 (2005)); or (2) federal jurisdiction exists because the claims arise "under the civil enforcement provision of . . . ERISA . . . including a claim to recover benefits or enforce rights under the terms of an ERISA plan." Prudential Ins. Co. of Am. v. Nat'l Park Med. Ctr., Inc., 413 F.3d 897, 907 (8th Cir. 2005) (internal quotations and citation omitted).

I. Federal Jurisdiction Based on a Significant Federal Issue

The Supreme Court explained in Grable & Sons Metal Products., Inc. v. Darue Engineering & Manufacturing, 545 U.S. 308 (2005), that "in certain cases federal-question jurisdiction will lie over state-law claims that implicate significant federal issues." Id. at 312 (citations omitted). "To determine whether a case fits 'within th[is] special and small category,' . . . 'the question is, does a state-law claim necessarily raise 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.' " Cent. Iowa Power Coop., 561 F.3d at 912 (citations omitted). Stated differently, "[i]f [Scharnweber's] right to relief necessarily depends on the resolution of a disputed and substantial question of federal law," then the case was properly removed to federal court. See id.

Here, the parties assert that the "question of federal law" stems from the possibility that Scharnweber would have to pay a tax penalty under section 409A of the Internal Revenue Code if DM&E did not pay him before a certain date.*fn2 The parties claim that a "significant federal issue" was implicated because the potential $100,000 tax penalty satisfied the "irreparable harm" element that is needed for injunctive relief.

There appears to be no dispute that Scharnweber would have been subjected to a penalty under section 409A in the event that he did not receive the payments before March 15, 2009. In fact, DM&E admits that it informed Scharnweber of the possibility that he would be subjected to a tax penalty. Docket 37 at 6-7. This lack of an actual dispute as to whether Scharnweber would be subjected to a tax penalty demonstrates that the "variety of federal 'arising under' jurisdiction" discussed in Grable is not present. Grable & Sons Metal Prods., Inc., 545 U.S. at 314 ("[T]he question is, does a state-law claim necessarily raise a state federal issue, actually disputed and substantial[.]" (emphasis added)).

Furthermore, the complaint mentions the possibility of a tax penalty twice. The first instance is under the section entitled "FACTS COMMON TO ALL COUNTS," and reads as follows: "If DM&E fails to pay the sum of $500,000.00, one of the payments due under Exhibit A, before March 15, 2009, Plaintiff may be subject to a tax penalty of $100,000.00. DM&E has used this deadline oppressively as a means to coerce Plaintiff into executing Exhibit A."*fn3 Docket 1, Ex. A. at 6-7. The second instance is found in Count 1, a breach of contract claim, and reads as follows: "As a proximate result of such breaches, Plaintiff has and will incur damage and detriment in the amounts of the Severance Benefits and, if applicable, the tax penalty assessable against Plaintiff in the amount of $100,000.00." Docket 1, Ex. A at 7. These two brief references to a potential federal tax penalty do not support the position that the issue was substantial. Rather, after ...


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