A recent decision by the Ninth Circuit, Westwood Apex v. Contreras, holds that a defendant brought into a case as an additional defendant to a counterclaim cannot remove a case to federal court under the Class Action Fairness Act (CAFA).  The original plaintiff and counterclaim defendant, Westwood Apex, filed a collections action in California state court seeking to recover $20,000 on an unpaid student loan.  In response, the consumer filed class action counterclaims against Westwood Apex, Westwood College and others, alleging violation of California consumer protection laws.  The Ninth Circuit held that, because the well-established rule for traditional diversity jurisdiction is that a counterclaim defendant or additional counterclaim defendant cannot remove a case, and Congress did not expressly alter that rule for CAFA, the same rule applies under CAFA.  The Ninth Circuit cites consistent rulings by the Fourth and Seventh Circuits construing CAFA on this point.

Judge Bybee’s concurring opinion points out that the result “seems strange” and maybe Congress should amend CAFA to fix it:

In this case, 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. The original action filed by Westwood Apex against Jesus Contreras has been consumed by Contreras’s counterclaim. The original debt is now a sideshow, an insignificant offset to anything recovered by the class. It is thus counterintuitive that CAFA does not authorize the removal of this suit but, for the reasons explained in the principal opinion, the court has properly adopted the original defendant rule as CAFA’s own.

. . .

Given that “Congress expressly intended CAFA to expand federal diversity jurisdiction over class actions,” Lowery v. Alabama Power Co., 483 F.3d 1184, 1197 (11th Cir. 2007), it seems strange that Congress would have wanted to funnel class actions filed by means of an original complaint into federal court but keep those filed by means of a counterclaim in state court. But as the court correctly concludes, CAFA achieves this particular result, and if Congress does not like it, Congress should rethink the rule.  (Emphasis added.)

I’m not sure it makes sense to assume that CAFA jurisdiction should follow the same rules as traditional diversity jurisdiction, except where Congress has expressly said otherwise.  That is an easy thing for a court to do because it reduces the number of new issues that have to be decided.  But CAFA is really a different animal from traditional diversity jurisdiction, and intended to achieve a different purpose.  Individual suits seeking over $75,000 are not comparable to class actions with amounts in controversy over $5 million.  Traditional, “well-established” rules that made sense many years ago in construing the scope of federal jurisdiction in traditional diversity cases do not necessarily make sense as applied to CAFA.  Instead, applying these rules to CAFA can create unintended loopholes and leave cases in state court that should be in federal court.  At some point, if the political climate is right, an amendment to CAFA may be necessary to close some of the loopholes courts have created.

Commentary about this case on the Class Action Defense Review blog highlights one strategy a counterclaim defendant can take to try to avoid this result – seeking severance in state court prior to removal.

Here is what I see as the impact for insurers and their counsel:  Be careful in bringing “small” suits against insureds, such as collections actions for unpaid premiums or to recover erroneous claim payments.  These small suits can potentially turn into class actions via counterclaims that, at least in several circuits, may not be removable to federal court.  Look into whether collections cases can be brought in a manner that will prevent these types of counterclaims (maybe if brought in a small claims court?).  Be careful about where you file these cases, as some state courts are better places to be than others.