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Mg Building Materials, Ltd., Excellence Mortgage, Ltd v. Paychex

January 23, 2012


The opinion of the court was delivered by: David G. Larimer United States District Judge



This action was commenced in state court in Texas in December 2008 by MG Building Materials, Ltd. ("MG") and ExcellenceMortgage, Ltd. ("EML") (collectively "plaintiffs"), against Paychex, Inc. The original complaint asserted breach of contract and other claims against Paychex, arising out of a payroll administration contract ("contract") between plaintiffs and Paychex.

At the time that they filed the original pleading, which, in accordance with Texas civil procedure was denominated a "petition" (Dkt. #51-1), see Tex. R. Civ. P. 22, both plaintiffs were citizens of Texas, and Paychex was a citizen of New York. The original petition also indicated that plaintiffs' damages exceeded $100,000; although it did not expressly seek a specific amount of damages, it alleged that Paychex's wrongful acts and omissions had caused plaintiffs to incur tax penalties totaling $162,023.01. See Complaint at 4 ¶ 4.5. Thus, the original petition was removable to federal court pursuant to 28 U.S.C. § 1332, which confers subject matter jurisdiction on federal courts over actions in which there is complete diversity of citizenship between the plaintiffs and defendants and an amount in controversy exceeding $75,000. See 28 U.S.C. § 1441(a) (state court action may be removed to federal court if the action is one over which the federal court has original jurisdiction).

Under 28 U.S.C. § 1446(b), a notice of removal must generally be filed within thirty days after the defendant's receipt of the pleading. That statute also provides that "a case may not be removed on the basis of jurisdiction conferred by section 1332 of this title more than 1 year after commencement of the action."

Paychex did not initially seek removal of this action. Instead, on January 23, 2009, it filed a "Motion to Abate and to Compel Arbitration," see Dkt. #23-3 at 10, seeking an order that the state court abate all proceedings and compel plaintiffs to submit their claims to arbitration, pursuant to an arbitration clause in the contract. While that motion was pending, plaintiffs filed an amended petition (Dkt. #51-2), adding allegations that Paychex had "fraudulently induced Plaintiffs to enter into service agreements that included an arbitration provision." Dkt. #51-2 at 11, ¶ 11.4.

The state court denied Paychex's motion to abate and to compel arbitration, without prejudice, and directed that plaintiffs be allowed to "conduct discovery as to whether the arbitration provision is unconscionable in light of Defendant's business practices and whether Plaintiffs were fraudulently induced into entering into the arbitration provision." In re Paychex, Inc., No. 04-09-00145-CV, 2009 WL 1086445, at *1 (Tex. App. Apr. 22, 2009).

According to plaintiffs, during discovery, they learned for the first time that Paychex had not only breached the contract, but had engaged in a fraudulent scheme to gain access to its clients' monies in order to convert them for Paychex's own use and benefit. On October 19, 2009, Plaintiffs filed a second amended petition (Dkt. #51-3), which alleged additional facts concerning Paychex's fraudulent activities, and asserted additional claims for fraud, breach of fiduciary duty, and conversion. For example, plaintiffs alleged that Paychex had improperly held their funds "in order to profit from interest and investment income," and that Paychex's "scheme included 'skimming,'" whereby Paychex charged plaintiffs hidden and inflated fees for services, some of which were not even performed. Id. ¶ 4.6. Although the second amended petition was again brought only by MG and EML, it also alleged that Paychex engaged in similar practices with respect to other "small to medium size business owners across the country." Id. ¶ 4.8. Again, Paychex took no steps at that time to remove the action to federal court.

On March 19, 2010, Plaintiffs filed a third amended petition (Dkt. #51-4). In that pleading, plaintiffs dropped several causes of action, but for the first time, they also asserted class claims on behalf of "all Major Market Services clients ... for Paychex's Taxpay Services ... at any time since 2004." Id. ¶ 6.1. The class claims were based largely on the same theory as the claims set forth in the second amended petition, alleging that Paychex had "failed to provide full disclosure" regarding its use of client funds, that it had converted client funds for its own use, and that it breached its fiduciary duty to its clients by misusing client funds. Id. ¶ 6.4. The third amended petition, which is now the operative pleading in this action, asserts claims for: (1) a declaratory judgment that the contract's arbitration clause is unenforceable; (2) conversion; (3) breach of fiduciary duty; (4) fraud; (5) "fraud by nondisclosure"; (6) class damages; and (7) breach of contract on behalf of the named plaintiffs. Plaintiffs also seek attorney's fees, pre- and post-judgment interest, and an accounting.

On April 9, 2010, Paychex removed the case to the United States District Court for the Western District of Texas. The notice of removal states that "[t]his action is removed under the Class Action Fairness Act, 28 U.S.C. § 1453 ('CAFA')." Dkt. #23-2 at 2. Paychex also stated that the third amended petition "provides new grounds for removing this case to federal court and substantially changed the character of the litigation, thereby making this case removable." Dkt. #23-2 at 1-2.

Paychex then filed a motion to transfer venue to this district. Dkt. #23-5. Plaintiffs opposed that motion, and filed a cross-motion to remand the action to state court. Dkt. #23-11. On March 28, 2011, Chief Judge Fred Biery of the Western District of Texas granted Paychex's motion and transferred the case here. Dkt. #23-1. Because Judge Biery considered the motion to transfer first, see id. at 2, and found that transfer was warranted, he did not rule on plaintiffs' motion to remand.

Thus, plaintiffs' motion to remand is now pending before this Court. Since the parties' original briefs, filed in the Western District of Texas, focused on case law from the Fifth Circuit, the parties have filed supplemental briefs in this Court, citing additional case law from the Second Circuit. See Dkt. #47, #49.


I. General Principles

A. Removal Procedures

The procedures for removing an action to federal court are provided by 28 U.S.C. § 1446. That statute sets forth separate requirements and procedures for actions that are immediately removable when filed, and for those that are not. If the case presented by the initial pleading is removable, then a notice of removal must be filed within thirty days from the defendant's receipt of the initial pleading. See 28 U.S.C. § 1446(b). If the action is not immediately removable when filed, then a notice of removal must be filed within thirty days after the defendant's receipt of a copy of an amended pleading "or other paper from which it may first be ascertained that the case is one which is or has become removable, except that a case may not be ...

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