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. 

Tags: Counterclaims
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Photo of Wystan Ackerman Wystan Ackerman

I am a partner at the law firm of Robinson+Cole in Hartford, Connecticut, USA.  My contact information is on the contact page of my blog.  I really enjoy receiving questions, comments, suggestions and even criticism from readers.  So please e-mail me if you…

I am a partner at the law firm of Robinson+Cole in Hartford, Connecticut, USA.  My contact information is on the contact page of my blog.  I really enjoy receiving questions, comments, suggestions and even criticism from readers.  So please e-mail me if you have something to say.  For those looking for my detailed law firm bio, click here.  If you want a more light-hearted and hopefully more interesting summary, read on:

People often ask about my unusual first name, Wystan.  It’s pronounced WISS-ten.  It’s not Winston.  There is no “n” in the middle.  It comes from my father’s favorite poet, W.H. (Wystan Hugh) Auden.  I’ve grown to like the fact that because my name is unusual people tend to remember it better, even if they don’t pronounce it right (and there is no need for anyone to use my last name because I’m always the only Wystan).

I grew up in Deep River, Connecticut, a small town on the west side of the Connecticut River in the south central part of the state.  I’ve always had strong interests in history, politics and baseball.  My heroes growing up were Abraham Lincoln and Wade Boggs (at that time the third baseman for the Boston Red Sox).  I think it was my early fascination with Lincoln that drove me to practice law.  I went to high school at The Williams School in New London, Connecticut, where I edited the school newspaper, played baseball, and was primarily responsible for the installation of a flag pole near the school entrance (it seemed like every other school had one but until my class raised the money and bought one at my urging, Williams had no flag pole).  As a high school senior, my interest in history and politics led me to score high enough on a test of those subjects to be chosen as one of Connecticut’s two delegates to the U.S. Senate Youth Program, which further solidified my interest in law and government.  One of my mentors at Williams was of the view that there were far too many lawyers and I should find something more useful to do, but if I really had to be a lawyer there was always room for one more.  I eventually decided to be that “one more.”  I went on to Bowdoin College, where I wrote for the Bowdoin Orient and majored in government, but took a lot of math classes because I found college math interesting and challenging.  I then went to Columbia Law School, where I was lucky enough to be selected as one of the minions who spent their time fastidiously cite-checking and Blue booking hundred-plus-page articles in the Columbia Law Review.  I also interned in the chambers of then-Judge Sonia Sotomayor when she was a relatively new judge on the Second Circuit, my only connection to someone who now has one-ninth of the last word on what constitutes the law of our land.  I graduated from Columbia in 2001, then worked at Skadden Arps in Boston before returning to Connecticut and joining Robinson+Cole, one of the largest Connecticut-based law firms.  At the end of 2008, I was elected a partner at Robinson+Cole.

I’ve worked on class actions since the start of my career.  Being in the insurance capital of Hartford, we have a national insurance litigation practice and most of the class actions I’ve defended have been brought against insurance companies. I’ve also handled some involving products liability, managed care, health care, utilities, financial services, higher education and environmental issues.

My insurance class action practice usually takes me outside of Connecticut.  I’ve had the pleasure of working on cases in various federal and state courts and collaborating with great lawyers across the country.  While class actions are an increasingly large part of my practice, I don’t do exclusively class action work.  The rest of my practice involves litigating insurance coverage cases, often at the appellate level.  That also frequently takes me outside of Connecticut.  A highlight of my career thus far was working on Standard Fire Ins. Co. v. Knowles, the U.S. Supreme Court’s first Class Action Fairness Act case.  I was Counsel of Record for Standard Fire on the cert petition, and had the pleasure of working with Ted Boutrous on the merits briefing and oral argument.

I started this blog because writing is one of my favorite things to do and I enjoy following developments in class action law, writing about them and engaging in discussion with others who have an in interest in this area.  It’s a welcome break from day-to-day practice, keeps me current, broadens my network and results in some new business.

When I’m not at work, you might find me running lines or watching a musical with my teenage daughter who hopes to be a Broadway star (or taking her to voice or dance lessons) or reading a good book.

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