Losing the Texas Declaratory Judgment Action by Removal to Federal Court

Here is something to be careful with before removing a case to federal court. If a party has a declaratory judgment action filed in Texas then they can recover legal fees because Texas law allows for the recovery of legal fees. Section 37.009 of the Texas Civil Practices and Remedies Code provides that in a proceeding under chapter 37, “the court may award costs and reasonable and necessary attorney’s fees as are equitable and just.”

But when the same case is removed to federal court, that is converted into one brought under the federal Declaratory Judgment Act, 28 U.S.C. §§ 2201, 2202. Pittman v. Seterus, Inc., 3:14-CV-3852-M (BF), 2015 WL 7444108, at *6 (N.D. Tex. Oct. 28, 2015); Redwood Resort Props., L.L.C. v. Holmes Co., No. 3:06–CV–1022–D, 2007 WL 1266060, at *4 (N.D.Tex. Apr. 30, 2007).

The Declaratory Judgment Act has been understood to confer on federal courts unique and substantial discretion in deciding whether to declare the rights of litigants. Wilton v. Seven Falls Co., 515 U.S. 277, 286 (1995). The courts hold that the act only enlarges the range of remedies available in the federal courts; it does not create a new right to seek those remedies. Harris Cty. Tex. v. MERSCORP Inc., 791 F.3d 545, 552 (5th Cir.2015)

The Declaratory Judgment Act alone does not create a federal cause of action. A defendant might believe it to be expedient to remove a case to federal court where the courts are tougher with debtors and the case can be dismissed much quicker through a motion to dismiss or a summary judgment proceeding. When doing so the lender loses its right to recover legal fees in defense of the declaratory judgment action brought in state court and under the Texas Declaratory Judgment Act. As they say be careful what you ask for because you might get it.

Congress should change federal law to allow for the recovery of legal fees in federal declaratory judgment actions or provide that state law where such relief is available is not lost simply because a party removes a case to federal court.