Carl E. Berg v. Hayden Leason Heller, Ehrman, White & McAuliffe Paul Alexander

Citation: 32 F.3d 422Docket: 93-15498

Court: Court of Appeals for the Ninth Circuit; September 7, 1994; Federal Appellate Court

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

Carl E. Berg, the plaintiff-appellant, appealed after the Ninth Circuit affirmed a summary judgment favoring defendants Hayden Leason and Heller, Ehrman, White, McAuliffe in a previous federal action under the Securities Exchange Act of 1934 and RICO. Subsequently, Berg pursued a malicious prosecution claim against Leason and his attorneys in state court. Leason removed the case to federal court, asserting that the claim "arises under" federal law due to alleged violations of federal statutes. The district court denied remand, but the Ninth Circuit reversed this decision, determining that the federal element in Berg's malicious prosecution claim was not substantial enough to establish federal jurisdiction. The court emphasized that the state law governed the cause of action, and the malicious prosecution claim's viability relied on the legal tenability of the underlying federal claim, not on substantial federal questions. The court referenced established precedents regarding federal question jurisdiction, noting that most federal cases involve causes of action created by federal law, and that a claim can arise under federal law only when state law claims necessarily depend on federal law interpretation. The case referenced, Hunter v. United Van Lines, illustrated a similar scenario, reaffirming that a claim must present a significant federal issue to qualify for federal jurisdiction.

The determination that a state claim does not convert into a federal claim, even when federal law is involved at a preliminary level, relies on the Supreme Court's ruling in Gully v. First National Bank. The court must assess whether the federal aspect of the claim is 'basic' rather than 'collateral,' and 'necessary' rather than 'merely possible.' Courts further analyze if the federal element is 'pivotal' or 'substantial' compared to being 'incidental,' with a significant role in the proceedings being essential for federal jurisdiction. 

In the context of California's duty of good faith, the claim must be triggered by a valid claim rather than a 'colorable claim,' indicating that the federal element was not sufficiently substantial. The analysis then shifts to Berg's malicious prosecution claim, which requires proof that the prior action was initiated by the defendant, concluded favorably for the plaintiff, was without probable cause, and was initiated with malice. Berg's complaint cites a malicious prosecution based on a favorable resolution of a prior federal action involving federal securities fraud and RICO claims against him by Leason. 

Leason argues that the federal nature of the underlying claims necessitates a federal jurisdictional analysis. However, the court disagrees, stating that Berg's burden is not to prove violations of federal law but rather to establish whether the prior action was legally tenable based on the facts known to the defendant, which is a low threshold. This aligns with the principle that a state law claim does not raise a substantial federal question solely because it involves a 'colorable' federal claim. The conclusion underscores that the federal element in a malicious prosecution claim lacks substantiality if it is merely tied to a legally tenable state law claim.

Malicious prosecution is governed by state law, which dictates the necessary elements and the definition of probable cause. In California, the probable cause analysis involves both factual and legal components. Initially, a factfinder must assess the defendant’s knowledge or belief regarding the facts before determining if the underlying action was legally tenable. California case law distinguishes between relying on facts that a litigant has no reasonable cause to believe and pursuing a legal theory that is untenable based on known facts. The assessment of both probable cause and malice is independent of federal law. Malicious prosecution claims are generally disfavored in California, and the merits of underlying complaints are interpreted liberally in favor of the plaintiff rather than the malicious prosecution claimant.

The merits of the underlying action, including whether a federal claim meets the probable cause threshold, are determined by state law. Concerns about malicious prosecution actions inhibiting legitimate federal claims are unfounded, as federal courts have already ruled that the federal claims in question lacked merit. The federal interest in providing a forum for federally-created rights is adequately addressed, allowing state courts to evaluate the legal tenability of federal complaints. While the argument about exclusive federal jurisdiction under the 1934 Act suggests federal judges may better interpret securities laws, state courts have effectively resolved federal law issues in similar contexts, indicating no substantial federal question arises from the state court's assessment of the underlying claim.

State courts have the authority to make decisions on federal law issues within the framework of the well-pleaded complaint rule. Concerns for the consistency of federal law, which underpin preemption and exclusive jurisdiction doctrines, do not justify transforming a state cause of action with only minor federal elements into a significant federal question. Leason's assertion that federal jurisdiction is necessary for evolving federal law claims is unpersuasive, as the federal court will have already assessed the scope of the federal law in question. State courts possess equal competence to determine if a claim is legally tenable. Consequently, Berg's malicious prosecution claim does not arise under federal law, despite one element concerning the legality of the underlying federal action. The absence of original federal jurisdiction under 28 U.S.C. § 1331 renders the removal to federal court improper, necessitating remand to state court. The appellate court reverses previous decisions and vacates the district court's merits ruling due to the lack of federal jurisdiction. Two district courts in the circuit have addressed similar issues, consistently concluding that federal jurisdiction is absent, which aligns with the present ruling against a contrary conclusion from another district court. Even if California law required proof of a valid Carmack claim, federal jurisdiction would still be insufficiently prominent to apply.