Unreported / Non-Citable
Background
Plaintiff Kathleen Hawks, a long-time employee and former student of California Southern University (CalSouthern), filed suit in Orange County Superior Court against California Southern University, LLC (CSU LLC), Perdoceo Education Corporation (Perdoceo), and American Intercontinental University System, Inc. (AIUS). Hawks alleged a 2015 agreement with CalSouthern under which all tuition, costs, and fees for her PsyD program—including extensions and repeated courses—would be fully covered. After CalSouthern was acquired by Perdoceo and became CSU LLC (now part of AIUS), Hawks was removed from the PsyD program despite having completed 52 of 66 semester credits with a 4.0 GPA and achieving doctoral candidacy. Her complaint asserts eight causes of action, including breach of the 2015 tuition-waiver contract.
Perdoceo removed the case to federal court based on diversity jurisdiction, arguing that CSU LLC was fraudulently joined and its California citizenship should be disregarded. Perdoceo contended that CSU LLC had been suspended by the California Franchise Tax Board since August 1, 2014—years before the alleged conduct—and was a distinct legal entity from the operating institution that employed Hawks and ran the PsyD program. Perdoceo further asserted that before 2022, CalSouthern was operated by CSU Corp., a separate entity that was purchased by Sunshine Newco, LLC and merged into AIUS, a Perdoceo subsidiary. Hawks moved to remand, arguing that complete diversity was lacking because CSU LLC is a California citizen.
The Court’s Holding
The court granted the motion to remand, finding that Perdoceo failed to meet its heavy burden of proving fraudulent joinder by clear and convincing evidence. Applying Ninth Circuit precedent, the court emphasized that the fraudulent-joinder standard is more exacting than a Rule 12(b)(6) dismissal standard: a claim may fail under Rule 12(b)(6) without the defendant being fraudulently joined. The court found a non-fanciful possibility that Hawks could state a claim against CSU LLC, noting that CSU LLC was an active, fully empowered California entity from November 2010 through August 2014—covering the first nearly four years of Hawks's employment and the 2015 tuition agreement. The court also held that Hawks's alter-ego allegations, while not factually detailed, could be amended to survive, and that alter ego is a factual determination unsuitable for summary resolution on a fraudulent-joinder motion.
The court further held that CSU LLC's suspension by the California Franchise Tax Board did not eliminate its California citizenship for diversity purposes. Citing De Rojas v. Smart Transp., the court explained that a suspended California corporation does not cease to exist and remains empowered to take actions to relieve the suspension; therefore, its citizenship is determined by its state of incorporation, not its status. The court also rejected Perdoceo's argument that the citizenship of CSU Corp. and CalSouthern is irrelevant because they are not named defendants, noting that any deficiency in naming the correct California entity could be cured by amendment in state court. Because CSU LLC's citizenship destroys complete diversity, the court lacks subject-matter jurisdiction and must remand.
Key Takeaways
- The fraudulent-joinder standard requires clear and convincing evidence that a plaintiff has no possibility of stating a claim against the non-diverse defendant—a higher bar than Rule 12(b)(6).
- A California LLC's suspension by the Franchise Tax Board does not terminate its existence or alter its citizenship for diversity-jurisdiction purposes.
- Alter-ego allegations, even if currently under-pled, may defeat fraudulent joinder if they could be amended to state a plausible claim, because alter ego is a fact-intensive inquiry for the state court.
- Courts must resolve doubts about pleading sufficiency in favor of remand when fraudulent joinder is asserted.
- The possibility of curing any defect by amendment in state court supports remand where the plaintiff intends to add the correct entity.
Why It Matters
This decision reinforces the strong presumption against removal jurisdiction and the heavy burden defendants bear to prove fraudulent joinder in the Ninth Circuit. It clarifies that corporate suspension under California law does not strip an entity of its citizenship for diversity analysis, preserving plaintiffs' ability to maintain non-diverse defendants in state court. The ruling also underscores that federal courts should not resolve fact-intensive alter-ego disputes at the jurisdictional stage, leaving such merits questions for state courts. Practically, the decision ensures that Hawks's contract and employment claims will proceed in Orange County Superior Court, where she can amend her complaint to name additional entities such as CSU Corp.