Facts
- A partnership holding a leasehold-type interest in New Orleans property granted a first mortgage to Regions Bank of Louisiana and later a second mortgage to the petitioners.
- The partnership entered bankruptcy, and the Bankruptcy Court approved sale of the leasehold interest to the Bank.
- The Bank later acquired the underlying land and sold the combined property interests to Fountainbleau Storage Associates.
- Petitioners sued in Louisiana state court, asserting state-law claims that the property transfer impaired or violated their rights as second mortgage holders.
- Defendants removed to federal district court, arguing federal-question jurisdiction existed because prior Bankruptcy Court orders extinguished petitioners’ interests, thereby precluding the state-law claims.
- The district court denied remand and granted summary judgment for defendants; the Fifth Circuit affirmed on the theory that “complete” claim preclusion by a prior federal judgment permits removal.
Issues
- Whether removal under 28 U.S.C. § 1441(b) is proper when the only asserted federal basis is a defendant’s claim-preclusion defense resting on prior federal bankruptcy orders.
Decision
- The Supreme Court unanimously reversed the Fifth Circuit and remanded.
- The Court held that claim preclusion based on a prior federal judgment is a defensive plea that does not supply a basis for removal.
- The Court directed that the preclusion defense be raised in the state-court action, with state-court resolution subject to eventual Supreme Court review.
Legal Principles
- Federal-question jurisdiction for removal exists only when a federal issue appears on the face of the plaintiff’s properly pleaded complaint (well-pleaded complaint rule).
- A federal defense—including res judicata based on a prior federal judgment—cannot create federal-question jurisdiction and therefore cannot justify removal.
- Claim preclusion differs from “complete preemption”: a prior federal judgment, even if dispositive, does not convert state-law claims into federal claims; it only bars them if applicable.
- State courts may adjudicate the preclusive effect of federal judgments, subject to Supreme Court review of any federal questions.
Conclusion
Removal was improper because the asserted federal ingredient—preclusion by prior federal bankruptcy orders—was solely a defense, not a federal question presented by the complaint; defendants had to litigate that defense in state court.