First Federal Savings & Loan Ass'n v. McReynolds

The previous three cases (Smith, Moore, and Grable) concerned an exception to Mottley's well-pleaded complaint rule. This case demonstrates either another exception to that rule, or a clarification of how the federal declaratory judgment statute, 22 U.S.C. § 2201, works in conjunction with section 1331. Most students prefer to think of it the second way, meaning not an exception to Mottley but as a clarification of how section 2201 works. Either way works, so long as you get the right answer in the future.

The following opinion has virtually no facts in it.  So, time to make some up.  Imagine that a federal statute exists stating that big banks are really important, and that an agency called the “Federal Home Loan Bank Board” should make sure that only qualified people work in high positions in banks.  To implement this statutory directive, the agency promulgates regulations saying that anyone of the position of bank vice-president or above who deals with accounting issues must be a CPA.  Neither the statute nor the regulation purports to create a federal cause of action to anyone.

A Kentucky bank called First Federal Savings has a vacancy in a position called Vice President of Loan Portfolios.  Jane Schmoe, a Kentucky citizen, submits a resume stating, among other things, that she is a CPA.  First Federal hires Jane Schmoe.  The written and signed employment contract provides that the employment will last for five years, and that First Federal can discharge Schmoe only for “good cause.” The contract further has a “golden parachute” provision stating that if First Federal fires Schmoe without good cause, it must immediately place $1,000,000 in an account of her choosing.

After a year, First Federal discovers that Schmoe is not, in fact, a CPA.  The bank wants to get rid of Schmoe without paying the $1M golden parachute.  The bank believes that if it simply fires Schmoe for resume fraud, she will sue it in state court for breach of the employment contract, arguing that being a CPA is not a material requirement for her job.  Unfortunately for the bank, Schmoe plays golf every weekend with the chief judge of the local state court, so the bank wants to get into federal court.  It sues Schmoe in the United States District Court for the Western District of Kentucky seeking a declaratory judgment under 28 U.S.C. §2201(a) to the effect that the Federal Home Loan Bank Board regulation requiring that persons of Schmoe’s level be CPAs renders its employment contract with Schmoe void. The bank argues that there is arising under jurisdiction under Section 1331 because it is invoking the the federal declaratory judgment statute (i.e., section 2201). Schmoe moves to dismiss for lack of subject matter jurisdiction.

To reiterate:  the above discussion is 100% fictional.  The Federal Home Loan Bank Board does exist, but I have no clue whether it could or has promulgated a CPA-type regulation.