State of California ex rel. Ken Elder v. J.P. Morgan Chase Bank, N.A.

Background

The two related cases involved claims under California’s False Claims Act, which allows a private person to sue to recover money allegedly owed to the State of California. Kenneth Elder alleged that J.P. Morgan Chase Bank, N.A., and U.S. Bank N.A. improperly reported the value of uncashed cashier’s checks purchased in California as subject to escheatment—transfer of abandoned property to a state—in Ohio. He alleged that the money instead should have been escheated to California under California’s Unclaimed Property Law.

The banks allegedly took the position that they lacked records showing the payees’ addresses, so Ohio was entitled to the funds under federal priority rules. Elder alleged that some checks were payable to California institutions or government bodies and that, for some checks, the purchaser and payee were the same person and the banks knew that person resided in California. The Attorney General declined to intervene in both cases. Elder then amended the complaints to remove references to the federal priority rules and stated that the claims were based specifically on California’s Unclaimed Property Law.

The banks removed the cases from California Superior Court to the Northern District of California, asserting federal-question jurisdiction. Elder moved to remand, meaning to return the cases to state court.

Legal standard

A defendant may remove a state-court case only if the case could originally have been filed in federal court. Federal-question jurisdiction generally exists when federal law creates the claim. In a limited category of state-law cases, jurisdiction can also exist when a federal issue is necessarily raised, actually disputed, substantial, and capable of resolution in federal court without disrupting the federal-state balance. The defendant bears the burden of showing that removal was proper.

Under the well-pleaded complaint rule, a federal question generally must appear on the face of the plaintiff’s properly pleaded complaint. A federal defense, including federal preemption, ordinarily does not create federal-question jurisdiction.

Court’s analysis

The court held that the federal priority rules were not necessarily raised by Elder’s complaints. The complaints alleged violations of California’s Unclaimed Property Law and California’s False Claims Act. The court rejected the banks’ argument that determining whether they owed an obligation to escheat necessarily required applying the federal priority rules.

The court explained that the banks could argue that they complied with California law without relying on federal law. For example, California’s statute requires certain sums payable on similar written instruments to be escheated to California when the instrument was purchased there, while the parties could dispute whether cashier’s checks qualify as instruments similar to money orders and travelers’ checks. The court also noted that some claims involved checks whose purchaser and payee were allegedly the same person and whose records allegedly showed a California residence, circumstances the court said did not present a federal preemption defense.

The court further held that exercising federal jurisdiction would disrupt the federal-state balance. Escheatment is traditionally an exercise of state power, and allowing removal based on federal priority arguments could bring many state-law escheatment cases into federal court. The banks had not shown that Congress intended or anticipated that shift.

Disposition

The court concluded that there was no federal-question jurisdiction under the applicable standard because the federal issue was not necessarily raised and federal jurisdiction would disrupt the balance of federal and state judicial responsibilities. Judge Charles R. Breyer granted the motions to remand both cases. The order addressed where the cases should proceed; it did not decide the underlying California-law claims or whether the banks were required to escheat the funds to California.