Ninth Circuit Holds that “any defendant” does not include a counterclaim defendant under CAFA

on May 6, 2011 ·

Posted in Class Action Law Suits

The Class Action Fairness Act of 2005 (“CAFA”) confers federal jurisdiction over class action lawsuits where the amount in controversy exceeds $5,000,000 and the adversaries are minimally diverse.  When a class action satisfying these conditions is filed in state court, Section 5 of CAFA provides that “such action may be removed by any defendant without the consent of all defendants.”  28. U.S.C. § 1453(b) (emphasis added).  This week, the Ninth Circuit addressed whether CAFA Section 5, U.S.C. § 1453(b) allows a party, who is joined as a defendant to a counterclaim, to remove the case to federal court.  The Court held that the phrase “any defendant” does not include a counterclaim defendant for purposes of removal to federal court under CAFA.

This litigation was commenced in San Bernardino County Superior Court when plaintiff Westwood Apex, a subsidiary of Westwood College, filed a breach of contract action against defendant Jesus Contreras to recover $20,000 on an unpaid student loan.  As a result, defendant, a former Westwood College student, answered the complaint and filed class action counterclaims alleging violations of California consumer-protection laws.  Specifically, the counterclaims alleged that plaintiff/counterclaim defendant Westwood Apex and Westwood College committed fraud and engaged in unfair and deceptive business practices in connection with their operation of the college.  The putative class consisted of all California residents who had attended or were presently attending the College.

The additional counterclaim defendants filed a notice of removal to federal court pursuant to Section 5 of CAFA, asserting that § 1453(b) expands removal authority beyond § 1441(a)’s limits so that “any defendant” includes a defendant joined by a counterclaim.  The Ninth Circuit, however, rejected this argument, explaining that it ignored the established meaning of “defendant” in Chapter 89 of the Judicial Code.  The Court explained that § 1441 has historically been limited to mean only an “original” or “true” defendant.  Furthermore, the Court emphasized that the law has been settled that a counterclaim defendant who is also a plaintiff to the original state action may not remove the case to federal court.  In holding that § 1453(b) did not override the accepted meaning of “defendant,” the Ninth Circuit noted that its decision was in line with the Fourth Circuit, which was the only other court of appeals to have addressed this precise issue.

Furthermore, the Court’s opinion explained that CAFA was intended to remove three longstanding obstacles to removal of interstate class actions: 1) the rule that in a diversity case, a defendant cannot remove a case from its home forum, 2) the rule that a defendant cannot remove a diversity case once it has been pending in state court for more than one year, and 3) the rule that all defendants must consent to removal.  In fact, the Court focused on the Senate Judiciary Committee report, which confirms Congress’s intent to remove these three longstanding barriers to removal.  Given the care Congress took to modify these three established principles, the Court found that if Congress intended to modify the original defendant rule, it would have done so.  In sum, the Ninth Circuit adhered to the narrow and historical interpretation by reading “any defendant” to mean “any defendant to the original suit” or “true defendant” and found that “while CAFA eliminated several important roadblocks to removal of class actions commenced in state court…it did not change the longstanding rule that a party who is joined to such an action as a defendant to a counterclaim or as a third-party defendant may not remove the case to federal court.”

As noted in Justice Bybee’s concurrence, although the Court properly adopted the original defendant rule, it seems “counterintuitive that CAFA does not authorize the removal of this suit…”  Indeed, “what started as a $20,000 debt-collection case has now morphed into a complex class action involving approximately 7,000 counter-plaintiffs and an amount in controversy in the hundreds of millions of dollars.”  This leads to the question of whether Congress should re-examine the applicability of the original defendant rule in the context of the CAFA and what effect this decision may have on other class action lawsuits.

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