4th Circuit Defines “Defendant” Narrowly under CAFA for Federal Jurisdiction
The Fourth Circuit recently reaffirmed its holding in Palisades Collections LLC v. Shorts, 552 F.3d 327 (4th Cir. 2008), that an additional counter-defendant is not entitled to federal removal jurisdiction under the Class Action Fairness Act of 2005 (“CAFA”).
As background, this case began with a bank filing a debt collection action against a debtor in state court. The debtor filed an answer and asserted a counterclaim against the bank and third-party class action claims against two additional counter-defendants for unfair and deceptive trade practices. After the filing of the counter-suit, the bank voluntarily dismissed its claims against the debtor without prejudice, leaving only the counter-suit in state court. One of the counter-defendants subsequently filed a notice of removal, citing federal jurisdiction under CAFA. The debtor moved to remand, and also amended his third-party complaint to remove any reference to the original plaintiff/bank.
After the federal district court remanded the case back to state court, the moving counter-defendant appealed to the Fourth Circuit, arguing that it was entitled to removal for two reasons. First, it argued that the Supreme Court’s guidance in Dart Cherokee Basin Operating Co., LLC v. Owens, 135 S. Ct. 547 (2014)—that no anti-removal presumption applies to CAFA—required the Fourth Circuit to reconsider whether an additional counter-defendant is entitled to remove a class action counterclaim. The counter-defendant also argued that it was entitled to removal because it was a “defendant” to the only remaining dispute in the case.
The Fourth Circuit ultimately disagreed with the counter-defendant’s arguments. Palisades held that both the federal removal statute, 28 USC § 1441, and CAFA preclude an additional counter-defendant from removing an action to federal court because it was not a defendant against whom the original plaintiff asserted a claim. Both the federal removal statute and CAFA refer to “defendants,” not counter-defendants, cross-claim defendants, or third-party defendants. The Court explained that its statutory analysis in Palisades is not contradicted by the absence of an anti-removal presumption in CAFA. Even without an anti-removal presumption, the Court held that CAFA does not expand removal authority to an additional counter-defendant. At least two other circuits—the Seventh and Ninth—have considered whether an additional counter-defendant can remove a class action counterclaim and found that they cannot.
Finally, the Fourth Circuit addressed the counter-defendant’s argument that it was a “defendant”—not a counter-defendant—in the only remaining dispute in the case. The Court explained, however, that it evaluates removability at the time the notice of removal is filed. Here, the counter-defendant filed its notice of removal while the original plaintiff was still part of the case, which means it was still considered an additional counter-defendant and was therefore not entitled to removal. Allowing such a third-party defendant to remove would fly in the face of precedent to only allow removal by parties against whom an original plaintiff asserts claims. The Court chose not to opine on how the federal removal statute or CAFA would apply if, at the time the notice of removal was filed, the debtor had already dropped his counterclaim against the original plaintiff/bank.
A link to the Fourth Circuit opinion is available here.
