WIENER, Circuit Judge:
This panel originally issued an opinion in this case on August 21, 2015.
Plaintiff-Appellant International Energy Ventures Management, L.L.C. ("IEVM") appeals the district court's (1) denial of its motion to remand, (2) grant of a motion by Defendant-Appellee Sean Mueller ("Mueller") to dismiss for failure to state a claim, and (3) grant of a motion by Defendant-Appellee United Energy Group, Limited ("UEG") for lack of personal jurisdiction and for insufficient service of process.
These facts are drawn from IEVM's allegations, which we must accept as true. In July 2010, BP announced that it wanted to sell its Pakistan subsidiaries and those subsidiaries' assets, which included oil and gas fields. IEVM had expertise regarding the assets in Pakistan, and one of its members mentioned the sale of those assets to Mueller, a broker and investment banker. Soon after, Mueller contacted BP, stating that IEVM had retained him and that it was interested in acquiring BP's assets in Pakistan. Using a slide presentation that IEVM created and he rebranded, Mueller approached investors. He told those investors, as well, that IEVM had retained him with regard to the acquisition of BP's assets.
An associate of Mueller translated the presentation into Chinese and presented it to UEG, a Chinese petroleum company. In September 2010, UEG sent a letter of interest, drafted by Mueller, to BP. The letter mentioned that IEVM was the expert that had introduced UEG to the sale. Through Mueller, UEG also sent IEVM a proposed compensation agreement for IEVM's services. Under the final agreement between IEVM and UEG, IEVM contracted to provide consulting services to UEG during its acquisition of BP's assets in Pakistan. In consideration, UEG contracted to pay IEVM $750,000 per year for its services and its expenses. Subsequently, in consideration for services not covered by the compensation agreement, UEG agreed to pay IEVM and Mueller a commission of six percent of the acquisition price of the assets and, in addition, agreed to employ IEVM's members after the acquisition.
In November 2010, Mueller informed IEVM that BP had accepted UEG's offer to acquire the assets for $775 million. In January 2011, UEG confirmed its agreement with IEVM. IEVM performed its obligations to UEG under the compensation agreement until September 2011, when the sale of the BP assets to UEG closed. Throughout the remainder of 2011, IEVM attempted to collect from UEG under their agreement. In March 2012, UEG requested that IEVM provide further services to UEG, but IEVM refused to do so unless UEG acknowledged that IEVM had not been paid and unless UEG indemnified IEVM for liability arising from its past services. UEG did so, and also paid IEVM for the services rendered after March 2012. It has not paid IEVM for services rendered before then or the six percent commission.
IEVM sued UEG and Mueller in Texas court. IEVM's petition asserted causes of action for breach of contract, promissory estoppel, and quantum meruit. Its petition also asserted a cause of action for fraud "because [UEG and Mueller] never intended to pay IEVM its consulting fees or its finder's fee equity, and thereby deceived IEVM into working on the BP Pakistan project without compensation."
Mueller and UEG removed, asserting that Mueller had been improperly joined to defeat subject matter jurisdiction based on diversity. Mueller then moved to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6), and simultaneously, UEG moved to dismiss for lack of personal jurisdiction under Rule 12(b)(2) and for insufficient service of process under Rule 12(b)(5). Soon thereafter, IEVM moved to remand. IEVM also requested leave to amend its petition,
Without explanation, the district court denied IEVM's motion to remand in a one-page order. IEVM then moved to compel arbitration and to stay the litigation. The district court initially granted the motion in another one-page order, but it later withdrew that order. It then granted both Mueller's and UEG's motions to dismiss. In so doing, it stated that Mueller "has 60 days to seek and effect proper service of process on UEG," before the dismissal would "become[] final."
On appeal, IEVM challenges the district court's decisions to (1) deny IEVM's motion to remand, (2) grant Mueller's motion to dismiss for failure to state a claim, and (3) grant UEG's motion to dismiss for lack of personal jurisdiction. We consider these challenges sequentially.
In denying IEVM's motion to remand, the district court determined that IEVM had improperly joined Mueller for the purpose of defeating subject matter jurisdiction based on diversity.
Under the federal removal statute, a civil action may be removed from a state court to a federal court on the basis of diversity. This is so because the federal court has original subject matter jurisdiction over such cases.
A defendant is improperly joined if the moving party establishes that (1) the plaintiff has stated a claim against a diverse defendant that he fraudulently alleges is nondiverse, or (2) the plaintiff has not stated a claim against a defendant that he properly alleges is nondiverse.
When deciding whether a nondiverse defendant has been improperly joined because the plaintiff has failed to state a claim against him, the court must apply the analysis articulated in our en banc opinion in Smallwood v. Illinois Central Railroad Co.: "[W]hether the defendant has demonstrated that there is no possibility of recovery by the plaintiff against an in-state defendant ...."
It is well-established, of course, that the Rule 12(b)(6) analysis necessarily incorporates the federal pleading standard articulated in Bell Atlantic Corp. v. Twombly: "To pass muster under Rule 12(b)(6), [a] complaint must have contained `enough facts to state a claim to relief that is plausible on its face.'"
Despite this, several of our unpublished opinions have inadvertently confused, or perhaps merely overlooked, that directive of the Smallwood opinion by assuming that the state pleading standard governs. In the earliest of these unpublished decisions, De La Hoya v. Coldwell Banker Mexico, Inc.,
In the next of these unpublished opinions, Akerblom v. Ezra Holdings Ltd.,
The De La Hoya, Akerblom, and Michels opinions do not articulate any reason for applying the state pleading standard. To the extent that they hold the state pleading standard must be applied, we believe such a holding is neither consistent with our precedent in the Smallwood opinion nor, as unpublished decisions, do they constitute precedent. Yet, because they are inconsistent with our Smallwood opinion, they have also engendered confusion in our district courts. As one district court explained:
To add to the confusion, the De La Hoya, Akerblom, and Michels opinions are inconsistent with many other unpublished, post-Smallwood opinions, which apply the federal pleading standard.
Thus, in this context, defining the test for improper joinder must begin with the scope of diversity jurisdiction itself, to wit: If there is at least one nondiverse defendant, there is no federal diversity jurisdiction; if there is no nondiverse defendant, there is federal diversity jurisdiction. So, in a case that has been removed to federal court on the basis of diversity, the determinative question is whether — under federal law — a nondiverse defendant was improperly joined.
For the specific purposes of improper joinder, a nondiverse defendant has been improperly joined if the plaintiff has failed to state a claim against that defendant on which relief may be granted. Conversely, if the plaintiff has stated a claim against a nondiverse defendant on which relief may be granted, a federal court is without jurisdiction — more precisely, without diversity jurisdiction — over that claim and, by extension, over any claims. It follows, then, that if the plaintiff has proffered a claim against a nondiverse defendant on which the federal court may not grant relief, that court only has jurisdiction over claims asserted against the diverse defendants.
Our properly parsed precedent therefore requires that decisions about removal must be made on the basis of federal law, not state law. As we observed decades ago in Paxton v. Weaver, a court "need not decide niceties of [state] procedure, since although state substantive law determines the nature of rights and liabilities asserted, [removal] is a question of federal law."
In fact, our pre-Smallwood opinions expressly required use of the federal, not a state, pleading standard when testing for improper joinder. (This background precedent, against which the dispute in Smallwood was decided, binds us because the Smallwood opinion did nothing to displace it.) In Bobby Jones Garden Apartments, Inc. v. Suleski, we held that, to determine whether "there [was] a reasonably good chance that [the state] would hold [the nondiverse defendant] to some liability,"
This reliance on Conley is determinative here. Although Rule 8 and — in specific circumstances — Rule 9 provide the statutory component of the federal pleading standard, Rule 12(b)(6) provides the one and only method for testing whether that standard has been met. Thus, the jurisprudential component of the standard has been developed in the context of the Conley opinion and others interpreting Rule 12(b)(6), not Rule 8 and 9. Accordingly, the so-called Rule 12(b)(6)-type analysis, which incorporates both components, is shorthand for the federal pleading standard itself. Although the Conley opinion verbalized this federal pleading standard (and this Rule 12(b)(6)-type analysis) as it existed at the time that the dispute in Smallwood was decided, that standard (or that analysis) has since been supplanted by the one promulgated by the Supreme Court in in the Bell Atlantic Corp. v. Twombly and Ashcroft v. Iqbal opinions.
As the Iqbal opinion explained, the decision in Twombly "was based on [the] interpretation and application of Rule 8,"
The Smallwood opinion instructs us to apply the Rule 12(b)(6)-type analysis, which must mean the entirety of that analysis.
Again, as there is no "actual fraud" at issue here, we address only the second "way."
The Smallwood opinion states that a moving party must show "inability of the plaintiff to establish a cause of action against the nondiverse party in state court."
In concluding that a plaintiff has not stated a claim against a nondiverse defendant under a Rule 12(b)(6)-type analysis in this context, the federal court decides only that it has jurisdiction over the plaintiff's claims against the diverse defendants — not that the plaintiff does not have a claim at all against the nondiverse defendant. This is because the federal court never has diversity jurisdiction over a claim against a nondiverse defendant. Nothing in our Smallwood opinion even approaches a clear statement that we should — much less must — apply the state pleading standard. This is made crystal clear by Smallwood's unconditional directive to employ the Rule 12(b)(6)-type analysis, which is part and parcel with the federal pleading standard.
Immediately after stating the test for improper joinder, i.e., "that there is no reasonable basis for the district court to predict that the plaintiff might be able to recover against an in-state defendant," Smallwood expressly specifies the required analysis for that test. Smallwood's directive that "[a] court may conduct a Rule 12(b)(6)-type analysis" is not a mere suggestion or option. Taken in context, the Smallwood opinion's use of "may"
Certainly a court may choose to use either one of these two analyses, but it must use one and only one of them, not neither or both. Because the second one — piercing the veil — is obviously inapplicable here, we must use the first. And overarching this truism is the realization that both tests are federal tests.
In resolving the dispute in Smallwood, we — en banc — unambiguously undertook to resolve the "uncertainty over the proper means for predicting whether a plaintiff has a reasonable basis of recovery under state law."
As subsequent opinions have noted, "this court's decision in Smallwood ... resolv[ed] issues surrounding removal based on improper joinder" and "provides the procedural framework for deciding whether remand [is] required."
Our precedent is clear: A federal court must apply the federal pleading standard. And there are good practical reasons for federal courts to use a federal test, chief among which is that our district courts are intimately familiar with that test. They are able to apply it uniformly, and we are able to review their applications of it uniformly. Conversely, identifying and applying the appropriate state pleading standard is not something that federal courts are accustomed to doing. At best, it is incredibly time consuming; at worst, there is good reason to think that federal courts might get it wrong (or apply it in name only, while actually applying the federal pleading standard with which we are familiar).
Having determined that the federal pleading standard is applicable, we must now measure IEVM's claims against Mueller under that standard to determine whether Mueller was improperly joined. Specifically, we must consider whether IEVM pleaded "enough facts to state a claim to relief that is plausible on its face."
IEVM contends that it has stated the following causes of action against Mueller under Texas law: breach of contract, promissory estoppel, quantum meruit, and fraud. IEVM has not alleged that Mueller contracted with it; instead, IEVM has merely stated that Mueller held himself out to be retained by IEVM. Neither has IEVM alleged that Mueller was responsible for the compensation agreement by which UEG would pay IEVM or that Mueller would pay IEVM under that agreement. Instead, IEVM alleges only that Mueller sent UEG's proposed agreement to IEVM. Finally, IEVM alleges that it made efforts to recover from UEG, but makes no mention that it sought to recover from UEG. Given these allegations, we hold that IEVM's claims against Mueller do not survive a Rule 12(b)(6)-type analysis and, therefore, were not properly joined.
Specifically, a claim under Texas law for breach of contract is not stated because IEVM never alleges the existence of a contract between it and Mueller.
When, as here, a court determines that a nondiverse party has been improperly joined to defeat diversity, that party must be dismissed without prejudice. If subject matter jurisdiction is based on diversity, a court never has jurisdiction over a nondiverse party. "[T]he presence in the action of a single plaintiff from the same State as a single defendant deprives the district court of original diversity jurisdiction over the entire action."
Therefore, as long as a nondiverse party remains joined, the only issue the court may consider is that of jurisdiction itself. This is because "a federal court always has jurisdiction to determine its own jurisdiction."
The Smallwood inquiry just considers whether the claims against the nondiverse party would have survived if jurisdiction were not a bar, not whether such claims did survive. If the claims would not have survived, Smallwood only instructs that a court not consider them in determining jurisdiction. If such claims would have survived, the Smallwood decision instructs us to consider them in determining jurisdiction. To repeat, the Smallwood inquiry — including its Rule 12(b)(6)-type analysis — is used to resolve the issue of jurisdiction, not merits.
Thus, the only ground for dismissing any improperly joined, nondiverse party is lack of subject matter jurisdiction. (To dismiss on any other basis would require the presence of jurisdiction that does not exist.) The court has ample authority to dismiss for lack of jurisdiction under the Federal Rules of Civil Procedure,
After denying IEVM's motion to remand (on the basis that Mueller was improperly joined), the district court nonetheless granted Mueller's Rule 12(b)(6) motion to dismiss, which "operate[d] as an adjudication on the merits."
IEVM brought the instant action to recover payment allegedly owed under an unwritten agreement that UEG would pay IEVM for its consulting services on the BP deal. However, after that deal closed, IEVM performed services for UEG under a supplemental agreement. In that agreement, UEG acknowledged IEVM's previous services and that UEG had not yet paid IEVM for those services. The supplemental agreement also indicates that, since the BP deal closed, "UEG ha[d] reason to believe the reserves associated with such properties are significantly less than what it had believed them to be[.]" In consideration for further IEVM services, UEG agreed to pay IEVM as outlined in the supplemental agreement. It also
IEVM advances two distinct reasons that the district court had personal jurisdiction over UEG. IEVM first contends that the supplemental agreement extends to the original, unwritten agreement between it and UEG, and that its arbitration provision therefore signifies implied consent to jurisdiction in Texas for any cause of action related to the former agreement. And, second, IEVM asserts that UEG has sufficient contacts with Texas that personal jurisdiction over UEG would comport with traditional notions of fair play and substantial justice. The district court addressed only the first of IEVM's arguments and determined that the supplemental agreement did not act as a waiver of personal jurisdiction as to claims arising from the earlier agreement.
As a preliminary matter, "[a] district court's dismissal of a suit for lack of personal jurisdiction where the facts are not disputed is a question of law, which is reviewed de novo."
We begin by considering whether the arbitration clause in the supplemental agreement applies to the parties' original, unwritten agreement and, if so, whether it confers personal jurisdiction. "Whether a contract is ambiguous is a question of law for the court to decide by looking at the contract as a whole in light of the circumstances present when the contract was entered."
In setting forth its argument to the contrary, IEVM analogizes an arbitration clause to a forum-selection clause.
Nevertheless, the district court could possibly have had personal jurisdiction over UEG by virtue of the ordinary personal jurisdiction analysis. "A federal court may exercise personal jurisdiction over a nonresident defendant if (1) the forum state's long-arm statute confers personal jurisdiction over that defendant, and (2) the exercise of personal jurisdiction comports with the [d]ue [p]rocess clause of the Fourteenth Amendment."
The due process clause requires that a court exercise personal jurisdiction over a nonresident defendant only if the defendant has "certain minimum contacts with [the forum state] such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice."
IEVM argues that there is personal jurisdiction because (1) UEG hired agents in Texas, including IEVM, (2) UEG principals traveled to Texas to close the BP deal, and (3) UEG entered into an agreement with IEVM that includes a Texas choice-of-law clause. These contacts, however, are not related to this action. The contacts arose from UEG's acquisition of BP's assets and are therefore unrelated to "the relationship among the [UEG], the forum, and the litigation" over the unwritten, original agreement between UEG and IEVM.
UEG had no presence in Texas as a result of the unwritten, original agreement because (1) UEG did not negotiate the agreement in Texas, (2) UEG did not travel to Texas because of that agreement, and (3) the unwritten agreement did not require performance in Texas. Instead, the unwritten, original agreement was between Chinese and Texas entities regarding services performed in Pakistan. That IEVM happened to provide those consulting services from Texas is not sufficient to establish jurisdiction.
The unwritten, original agreement is not sufficient to subject UEG to jurisdiction in Texas. IEVM has failed to show that UEG had minimum contacts with Texas stemming from the unwritten, original agreement. Accordingly, we affirm the district court's grant of UEG's motion to dismiss for lack of personal jurisdiction under Rule 12(b)(2).
For the foregoing reasons, we AFFIRM the district court's denial of IEVM's motion to remand and the grant of UEG's motion to dismiss for lack of jurisdiction, and REMAND to the district court with instructions to VACATE its grant of Mueller's motion to dismiss for failure to state a claim. Because the court lacks subject matter jurisdiction over Mueller and personal jurisdiction over UEG, each of the claims must be dismissed without prejudice.
Even if the Smallwood opinion had intended to adopt the quotation from the Travis opinion as the test for improper joinder under the second "way," it offers no guidance as to whether the federal or a state pleading standard should apply. It neither states that a federal court must consider the viability of the claim in state court applying the state pleading standard, nor that a federal court must consider the viability of such a claim in state court applying the federal pleading standard. The reference to "state court" merely means under state law. This simply acknowledges Erie's division of labor between state substantive law and federal procedural law. The "law of a State that would be controlling in an action upon the same claim by the same parties in a State court" only applies in federal court if disregarding such a law would "significantly affect the result of a litigation." Guar. Trust Co. of N.Y. v. York, 326 U.S. 99, 109, 65 S.Ct. 1464, 89 L.Ed. 2079 (1945) (emphasis added). This language, which is very close to the "in state court" language from the Travis opinion quoted in the Smallwood opinion, merely provides that a state law — such as a state pleading standard — applies only if it is substantive.
In the typical diversity case, the federal court applies the federal pleading standard embodied in the Rule 12(b)(6)-type analysis to test the sufficiency of a plaintiff's state law claims. Even though the Rule 12(b)(6)-type analysis might have a substantive effect — that is, the claims against the defendant might be dismissed with prejudice — it is still a procedural law. In the context of improper joinder, however, application of the Rule 12(b)(6)-type analysis has no substantive effect. This is because any claim against an improperly joined nondiverse defendant must be dismissed without prejudice. Such an analysis only "provides an alternative forum for the adjudication of state-created rights, but it does not carry with it generation of rules of substantive law." Gasperini v. Ctr. for Humanities, Inc., 518 U.S. 415, 426, 116 S.Ct. 2211, 135 L.Ed.2d 659 (1996). It changes the procedure, not the outcome. The plaintiff's state law claims against the diverse defendants will be resolved in federal court; if his state law claims against the nondiverse defendant are resolved at all, they will be resolved separately in state court.