Not A Federal Case

The United States Court of Appeals for the Second Circuit returned a legal malpractice  case that had been removed to federal court to the state court

Link Motion Inc. (“LKM”), a Chinese company incorporated in the Cayman Islands, brought this legal malpractice action against the law firm of DLA Piper LLP (US) and one of its attorneys (hereafter referred to collectively as “DLA Piper”) in the New York State Supreme Court for New York County. After DLA Piper removed the case to the United States District Court for the Southern District of New York (Victor Marrero, Judge), that court entered a judgment of dismissal on May 26, 2023, finding LKM’s action to have been untimely filed. On this appeal, LKM challenges both that timeliness determination and the district court’s earlier denial of LKM’s motion to remand the case to state court. For reasons explained in this opinion, we conclude that the case must be returned to state court for lack of federal jurisdiction over LKM’s state law claim. The federal law standing question that the district court identified as embedded in LKM’s malpractice claim does not fall within the narrow category of “disputed and substantial” questions of federal law permitting the exercise of federal jurisdiction over a state law claim. Gunn v. Minton, 568 U.S. 251, 258 (2013); see Grable & Sons Metal Prods., Inc. v. Darue Eng’g & Mfg., 545 U.S. 308, 316 (2005). Accordingly, we vacate the judgment of dismissal without considering the question of timeliness, and we remand the case to the district court with instructions that it return LKM’s malpractice action to the New York Supreme Court.

Facts

In July 2018, LKM engaged DLA Piper for “corporate advice,” both generally and specifically in connection with a stock offering. LKM Compl. ¶ 12, J. App’x 22. Later that year, Wayne Baliga, a holder of LKM’s American Depositary Receipts (“ADRs”), sued LKM; its chairman, Vincent Shi; and other executives and directors by filing what was styled as a “Verified Shareholder Derivative Complaint” in the United States District Court for the Southern District of New York. See Compl., Baliga v. Link Motion Inc., No. 1:18-cv-11642 (S.D.N.Y. Dec. 13, 2018), Dkt. 1 [hereafter “Baliga Compl.” and “Baliga Dkt.”].  In that action—also assigned to Judge Marrero—Baliga asserted common law claims for breach of fiduciary duty and unjust enrichment, and federal securities law claims. Id. ¶¶ 36–54. LKM’s present malpractice action arises out of DLA Piper’s purported negligent representation of LKM in the Baliga action. 

The underlying representation

On March 1, 2019, DLA Piper sought leave to withdraw from the Baliga action, citing LKM’s failure both to pay the firm’s overdue legal fees and “to cooperate in the [firm’s] representation by failing to respond to [counsel’s] inquiries.” Letter at 3, Baliga Dkt. 28. The district court granted the request the same day.

Federal jurisdiction

The question of federal jurisdiction here depends on whether the asserted claim “aris[es] under the Constitution, laws, or treaties of the United States.” Id. § 1331.7 A claim most directly “arises under federal law when federal law creates the cause of action asserted.” Gunn v. Minton, 568 U.S. at 257. Nevertheless, the Supreme Court has identified a “‘special and small’ category of actual state claims that present significant, disputed issues of federal law.” NASDAQ OMX Grp., Inc. v. UBS Sec., LLC, 770 F.3d 1010, 1019 (2d Cir. 2014) (quoting Gunn v. Minton, 568 U.S. at 258). For a state law claim to fall within this “slim category,” the embedded federal issue must be “(1) necessarily raised, (2) actually disputed, (3) substantial, and (4) capable of resolution in federal court without disrupting the federal-state balance approved by Congress.” Gunn v. Minton, 568 U.S. at 258; see Grable & Sons Metal Prods., Inc. v. Darue Eng’g & Mfg., 545 U.S. at 314. While the first two factors here support the exercise of federal jurisdiction, the third and fourth do not.

Left to the state

In sum, DLA Piper has not adduced the “something more” required by Gunn v. Minton to view the federal law standing issue in LKM’s state malpractice claim as anything other than backward-looking and hypothetical. 568 U.S. at 264. The claim looks backward to ask whether the district court would have denied Baliga’s motions for a TRO, preliminary injunction, and appointment of a receiver if, hypothetically, DLA Piper had timely challenged Baliga’s standing under federal securities law. Thus, because the federal issue raised by LKM’s state malpractice claim “is not substantial in the relevant sense,” id. at 260, the district court was without jurisdiction to hear the claim.

(Mike Frisch)