MG Building Materials, Ltd. v. Paychex, Inc., 2012 WL 201725 (W.D.N.Y. Jan. 23, 2012).
A district court in New York retained jurisdiction over an action, finding that when an amended complaint alters the very nature of a suit and virtually makes it a “new action,” the defendant’s right to remove is “revived.”
The plaintiffs in this action, MG Building Materials, Ltd. and Excellence Mortgage, Ltd., originally filed suit against the defendant, Paychex Inc., in a Texas state court, asserting breach of contract and other claims arising out of a payroll administration contract between the parties. It was undisputed that diversity jurisdiction existed at the time the plaintiffs filed the petition, as both of the plaintiffs were citizens of Texas, the defendant was a citizen of New York, and the petition indicated that the plaintiffs’ damages were in excess of $150,000.
Instead of filing a notice of removal, however, Paychex filed a motion to abate and to compel arbitration. The state court denied the motion and directed that the plaintiffs be allowed to conduct discovery as to whether the arbitration provision was unconscionable.
After some discovery, the plaintiffs filed an amended petition, asserting additional claims of fraud and breach of fiduciary duty. Again, Paychex did not remove the action. The plaintiffs then filed a third amended petition, asserting class claims on behalf of “all major market services clients” for Paychex’s “Taxpay Services” at any time since 2004.
Enough was enough. Paychex timely filed a motion to remove after the third amended petition, and the plaintiffs filed a motion to remand.
After a thorough review, the court held that, although Paychex had lost its right to remove when it did not file a notice of removal within thirty days of receipt of the original petition, that right was “revived” once the plaintiffs filed their third amended petition which alleged an “essentially new lawsuit.” The court noted that the third amended petition “transformed [the case] from a two-plaintiff case involving less than $170,000 in damages, to a class action involving many thousands of putative class members, and billions of dollars in damages.” This significant change afforded Paychex a new opportunity to remove, which it had timely done.
The court was not persuaded by the plaintiffs’ argument that, since this case was originally removable and the third amended petition had not set forth a new basis for removal, Paychex had permanently lost its right to remove. The court noted that a considerable, long standing body of case law holds that an amendment that substantially changes the character of a lawsuit can give rise to a new right to remove, irrespective of whether the legal basis for removal was the same as that alleged in the original petition. The court further noted that the relevant inquiry was not whether the most recent petition had substantially changed the petition immediately preceding it, but whether the litigation had substantially changed as a whole.
Here, the action began as a lawsuit by two plaintiffs who alleged that Paychex’s failure to make timely and adequate tax payments on their behalf had caused them to incur some $162,000 in penalties. But by the third amended petition, it had morphed into a class action involving potentially thousands of class members across the country, and the damage claims had grown to a whopping $15 billion, an increase of over nine million percent.
Finally, the court dismissed the plaintiffs’ argument that Paychex had waived its right to remove by seeking to compel arbitration in state court, noting that Paychex had moved to compel arbitration before the plaintiffs had filed their third amended petition. The court noted that “even if the motion to compel arbitration could be interpreted as a sign of Paychex’s ‘willingness … to remain in’ state court, then, that should not bar Paychex from later seeking removal based upon an amended pleading that so substantially changed the character of this action as to render [it] an effectively new lawsuit.”
Accordingly, the Court denied the plaintiffs’ motion to remand and retained jurisdiction under CAFA.