CAFA Loophole Keeps Class Action in State Court

"Any" is a small word with a meaning that suggests both inclusivity and possibility. But a recent 7th Circuit ruling that creates a loophole in the Class Action Fairness Act's (CAFA) jurisdictional powers found there are limits to the power of "any."

As written in CAFA, "any defendant" includes defendants only--not counterclaim defendants too, according to the 7th Circuit's March 24 decision in First Bank v. DJL Properties, LLC. That literal interpretation means that although "any" of the defendants in the initial class action lawsuit can remove the case to federal court if they meet CAFA's other requirements, a plaintiff who becomes a defendant in a subsequent counterclaim class action cannot.

The case started in Illinois state court when First Bank filed two claims against DJL Properties for mortgage foreclosure. DJL filed class action counterclaims against First Bank.

First Bank filed for removal to federal court under CAFA. Separate district court judges ruled on each of First Bank's requests but with the same result: If a plaintiff originally chose a state venue for a suit, it doesn't have the right to later remove to federal court.

The 7th Circuit affirmed the lower court's decision, establishing a definition that some feel undermines Congress' purpose in enacting CAFA.

"'Any defendant' seems broad enough to cover a counterclaim defendant," says Dan Himmelfarb, a partner at Mayer Brown. "If you ask members of Congress who voted in favor of CAFA, 'Was it your intent [to include counterclaim defendants?],' they would surely say, 'Yes it was.'"

Circumventing CAFA

Congress passed CAFA to give class action defendants the opportunity to remove cases from state court--often friendlier jurisdictions for class actions--into federal court (see "Cutting Class"). Plaintiffs attorneys have seized the particular CAFA loophole at issue in First Bank as a way to keep class actions in state court.

Often plaintiffs attorneys use the tactic in debt-collection cases: They will contact debtors who've been sued in class-action friendly jurisdictions and persuade them to file a counterclaim class action, Himmelfarb says. In the 2008 4th Circuit case Palisades Collections LLC. V. Shorts, debt-collector Palisades sought to recover $800 from Charlene Shorts, who accrued the debt with AT&T Mobility. Shorts filed a counterclaim class action against Palisades and brought in AT&T as an additional counterclaim defendant, alleging the two companies violated a West Virginia consumer protection statute.

AT&T attempted to remove the case to federal court, but the 4th Circuit affirmed 2-to-1 the district court's decision that counterclaim class action defendants can't remove cases--even if, like AT&T, they weren't originally a direct party in the case. The 9th Circuit followed suit in a similar case.

Each of these circuits, including the 7th, based its analysis on Shamrock Oil & Gas Corp. v. Sheets, a case from 1941 in which the Supreme Court held a plaintiff can't remove a case to federal court, even if it becomes a counterclaim defendant. Shamrock Oil remains the broad standard for deciding removal.

But Himmelfarb, who represented AT&T Mobility in Palisades, says Shamrock Oil shouldn't be used to analyze removal in class actions because it interprets a different statute with a different purpose.

"This just seems like a crazy result [under CAFA] that no one could have intended," he says. "No one has suggested why Congress would want to do this."

Congress, however, had plenty of time to think about the possible implications of CAFA's language, says Foley & Lardner Partner Michael Leffel.

"Lots of people made an effort to help the courts interpret the decision down the road," he says. "Nothing [in CAFA] says 'We're trying to undo Shamrock Oil.' It would have been pretty easy to do."

Further Interpretation

Whether Congress or the Supreme Court will clarify CAFA's language is up for debate. Himmelfarb says it's crucial for one of them to provide more guidance. He's filed a petition for cert in Palisades but says the Supreme Court is most likely to address the issue if a circuit split occurs. Another case pending in the
6th Circuit, Deutsche Bank National Trust Co. v. Weickert, could create that split, but even without it, Himmelfarb says some of the dissents in existing decisions are potentially strong enough to persuade the high court to hear one of the cases.

Leffel doesn't think it's likely that Congress will address the issue.

"[Congress] thinks they're done with this," he says. "I don't think there's an interest in going back and correcting anything with CAFA."

For the most part, the loophole just creates one more headache for in-house counsel to consider when deciding whether to bring a suit, says Michael Rigney, a partner at Kelley Drye & Warren.

"If you're worried [about a counterclaim class action], pick the right forum for the underlying suit," Rigney says. If state court is the best forum for the original suit, he says to file in a state that has historically ruled fairly in class actions, if possible. "The worst that can happen is the pre-CAFA result that you're back in state court [fighting a class action]," he says. "So it's not the end of the world."

Contributing Author

Lauren Williamson

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