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1 April 2010

Seventh Circuit Rules That Class Actions Pleaded as Counterclaims Are Not Removable Under the Class Action Fairness Act

Congress enacted the Class Action Fairness Act of 2005 (“CAFA”), Pub. L. No. 109-2, 119 Stat. 4, to ensure that major interstate class action lawsuits can be litigated in federal court, where Congress believed they belong. In furtherance of that goal, CAFA provides that a qualifying class action lawsuit filed in state court may be removed to a federal district court “by any defendant,” even if some defendants object to removal. 28 U.S.C. § 1453(b). 

Last week, in an opinion authored by Chief Judge Easterbrook, the Seventh Circuit held that defendants that are the target of class–action lawsuits pleaded as counterclaims may not remove those counterclaims under CAFA. First Bank v. DJL Properties, LLC, Nos. 10-8008 & 10-8009. The court noted that, nearly seven decades ago, the Supreme Court had interpreted the phrase “may be removed by the defendant” in the general removal statute (28 U.S.C. § 1441(a)) as not covering a counterclaim defendant. Id., slip op. at 2-5 (citing Shamrock Oil & Gas Corp. v. Sheets, 313 U.S. 100 (1941)). The Seventh Circuit concluded that CAFA’s removal provision, which provides that certain class actions “may be removed by any defendant” (28 U.S.C. § 1453(b) (emphasis added)), should also be interpreted to preclude removals by counterclaim defendants. Id. The Ninth Circuit and Fourth Circuit have reached the same conclusion, the latter over a spirited dissent by Judge Niemeyer. See Palisades Collections LLC v. Shorts, 552 F.3d 327 (4th Cir. 2008); Progressive West Ins. Co. v. Preciado, 479 F.3d 1014 (9th Cir. 2007). But at least one district court within the Sixth Circuit has “agree[d] with Judge Niemeyer that CAFA expanded removal authority to include parties added as counterclaim defendants to a class action by authorizing removal by ‘any defendant,’ rather than ‘the defendant.’” Deutsche Bank Nat’l Trust Co. v. Weickert, 638 F. Supp. 2d 826, 829 (N.D. Ohio 2009). The Sixth Circuit is currently considering the issue.

The reading of CAFA adopted in First Bank, Palisades Collections, and Progressive West substantially undermines the statute’s essential purpose—to permit businesses targeted by qualifying class actions to litigate in federal court. The Seventh Circuit’s decision invites plaintiffs’ attorneys to circumvent CAFA by recruiting a defendant in a state-court action—such as a customer sued by a debt-collection agency to recover on a debt owed to a business—to serve as a “counterclaim plaintiff” in an otherwise-removable class action.

For further information about this case, please contact Dan Himmelfarb (+1 202 263 3035) or Archis Parasharami (+1 202 263 3328) in our Washington, D.C. office.

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