ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA. (D.C. Civil Action Nos. 90-02132, 90-02175, 90-02971, 90-03856)
Before: Cowen, Nygaard and Weis, Circuit Judges
In these consolidated class actions removed to the district court from the Court of Common Pleas in Philadelphia County, the district court dismissed the action under Fed. R. Civ. P. 12(b)(6), after denying plaintiffs' motions to remand the matter to the state court. The question is whether the district court had subject matter jurisdiction. Since we conclude it did not, we will vacate its dismissal order and remand the cause to the district court for it to further remand these consolidated class actions to the state court.
Plaintiffs are home sellers who asserted state statutory and common law claims against several title insurance companies who provided services in connection with plaintiffs' home sales. Defendant title insurance companies are "real estate reporting persons" as defined in section 6045(e)(2) of the Internal Revenue Code, 26 U.S.C. § 6045. Section 6045 imposes transactional reporting requirements on brokers generally. Section 6045(e)(1) extends these general reporting requirements to real estate transactions and "real estate reporting persons" within the meaning of the statute. Since a title company providing services in a residential real estate settlement is a "real estate reporting person" within the meaning of the statute, see 26 U.S.C. § 6045(e)(2)(A), the title company defendants were obligated to comply with § 6045's information reporting requirements when participating in plaintiffs' home sales. See 26 U.S.C. § 6045(a),(b),(e)(1),(e)(4).
Plaintiffs brought suit in the Pennsylvania court on behalf of themselves and others "who generally can be described as all persons who bought or sold residential real estate and were charged an IRS reporting fee by defendants since November 10, 1988." In essence, the gravamen of plaintiffs' claims is that defendants "separately charged" the homeowners for the information reporting required by § 6045(e)(1), in violation of § 6045(e)(3).
Section 6045(e)(3), which is fundamentally at issue in each of plaintiffs' claims, provides (emphasis added):
It shall be unlawful for any real estate reporting person to separately charge any customer for complying with any requirement of [§ 6045(e)(1)].
Since the parties dispute the meaning of § 6045(e)(3)'s prohibition against "separate charges", each plaintiff claim requires judicial construction of a federal provision -- and a determination of whether the title insurance companies' alleged conduct falls within the statutory prohibition.
Plaintiffs did not assert federal causes of action, but sought recovery of damages on state common law theories of conversion, unjust enrichment, and for money had and received, and for unfair or deceptive acts or practices within the meaning of Pennsylvania's Unfair Trade Practice and Consumer Protection Law, 73 P.S. § 201 et seq. As the district court correctly observed, an essential element of each state cause of action is that defendants violated § 6045(e)(3) of the Internal Revenue Code: each state law theory of recovery necessarily required proof of an unlawful or wrongful act by defendants, and this element was supplied by plaintiffs' allegations that defendants violated the federal statute.
Given the presence of this federal issue within plaintiffs' state law claims, defendants removed the class actions from the state court to district court. Defendants asserted in their Notices of Removal that each of plaintiffs' claims "arise under" federal law within the meaning of 28 U.S.C. §§ 1331 and 1441*fn1 because each state law claim is premised upon alleged violations of the federal statute.
Following removal, plaintiffs moved under 28 U.S.C. § 1447 to remand the cases back to the state court.*fn2 Plaintiffs argued the district court lacked federal subject matter jurisdiction because the Internal Revenue Code does not provide a private federal remedy for a violation of § 6045(e)(3), and plaintiffs' claims are state causes of action.
The district court denied plaintiffs' remand motions, concluding that plaintiffs' claims "arise under" federal law within the meaning of 28 U.S.C. § 1331. The district court reasoned that a violation of § 6045(e)(3) was a necessary element of each of plaintiffs' claims, the parties disputed the meaning of the statute, and there existed a "weighty federal interest" in that dispute. The district court said its jurisdictional decision was supported by the " Smith - Gully - Franchise Tax Board " line of cases, and was not undercut by the outcome in Merrell Dow Pharmaceuticals Inc. v. Thompson, 478 U.S. 804, 106 S. Ct. 3229, 92 L. Ed. 2d 650 (1986). See Smith v. Kansas City Title & Trust Co., 255 U.S. 180, 41 S. Ct. 243, 65 L. Ed. 577 (1921); Gully v. First National Bank, 299 U.S. 109, 57 S. Ct. 96, 81 L. Ed. 70 (1936); Franchise Tax Board v. Construction Laborers Vacation Trust, 463 U.S. 1, 103 S. Ct. 2841, 77 L. Ed. 2d 420 (1983).
After refusing to grant plaintiffs' motions to remand, the district court granted defendants' joint Rule 12(b)(6) motion to dismiss.
Although the district court's dismissal order raises several questions concerning interpretation of § 6045 of the Internal Revenue Code, we cannot reach the merits. We must first be satisfied of both our own and the district court's jurisdiction. Mitchell v. Maurer, 293 U.S. 237, 244, 55 S. Ct. 162, 165, 79 L. Ed. 338 (1934). On this point we agree with plaintiffs that, in light of Merrell Dow, the district court lacked subject matter jurisdiction because plaintiffs' claims do not "arise under" federal law.
In Caterpillar Inc. v. Williams, 482 U.S. 386, 107 S. Ct. 2425, 96 L. Ed. 2d 318, the Supreme Court held that absent diversity of citizenship, federal question jurisdiction is required and "only state-court actions that originally could have been filed in federal court may be removed to federal court by the defendant." 107 S. Ct. at 2429 (citations omitted). Since diversity of citizenship is not alleged here, the propriety of the removal turns, as it did in Merrell Dow, on whether ...