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CAFA Law Blog Information, cases and insights regarding the Class Action Fairness Act of 2005

CAFA Applies Only To Plaintiff Class, And Not To Defendant Class

Posted in Case Summaries

Saskatchewan Mutual Insurance Co. v. CE Design, Ltd., 2017 WL 3165437 (7th Cir. July 26, 2017).

In this action, affirming the judgment of a district court, the Seventh Circuit found that although Rule 23 of the Federal rules of Civil Procedure allows one or more members of a class to sue or be sued as representative parties on behalf of a class, the key jurisdictional language in CAFA, 28 U.S.C. § 1332(d)(2) speaks only of plaintiff classes; thus, CAFA applies only to plaintiff class and not to defendant class.

Saskatchewan Mutual Insurance (“SMI”) brought an action in a district court in Illinois to enforce a Canadian judgment that was the result of an unsuccessful attempt by CE Design’s to enforce an earlier Illinois judgment against SMI in Saskatchewan.

Originally, CE Design, an Illinois corporation, brought a class action in Illinois state court against Homegrown Advertising, a Canadian marketing firm, alleging that Homegrown sent junk faxes to CE Design in violation of Illinois state law and the Telephone Consumer Protection Act (“TCPA”). The parties settled in February 2007 for $5 million plus interest and costs, and the settlement was structured to be enforceable only against Homegrown’s commercial liability policy with SMI. Homegrown, however, failed to notify its insurer, SMI, about the litigation and instead hired its own counsel in Illinois. SMI only first learned of the case in May 2006.

In March 2007, CE Design (to which Homegrown had assigned all its rights under the policy) filed a citation to discover assets in the state court of Lake County, Illinois, in an effort to recover some or all of the judgment from SMI. At that point SMI’s Canadian attorney, wrote a letter to the state court advising that SMI was denying coverage. SMI, however, took no steps to fight the citation on the merits. Accordingly, on May 3, 2007, the state court entered judgment for CE Design.

As the state court litigation unfolded, CE Design decided to try another approach – enforcement of the Illinois judgment in Saskatchewan, where SMI is based. On January 8, 2008, the Queen’s Bench of the Saskatchewan province, concluded that SMI had not received sufficient notice of the Illinois judgment and, as a result, determined the judgment was unenforceable and awarded SMI costs of $1,000.

After seven years, in June 2015, SMI revived the issue by filing a motion to enforce the Saskatchewan judgment in district court, Illinois. The district court, relying on Travelers Prop. Cas. v. Good, 689 F.3d 714, 723 (7th Cir. 2012), concluded that CAFA applied only to plaintiff classes, not to the defendant class as in this suit. The Seventh Circuit affirmed.

The proposed class, as defined by CE Design, had 23,541 members who are defendants in the present action. However, the fundamental obstacle for the Seventh Circuit was its ruling in Good, which stated that CAFA “applies only where there is a plaintiff class, not a defendant class.”  Thus, the Seventh Circuit remarked that a straightforward application of Good took CAFA jurisdiction off the table. Good has striking resemblance to this case because in Good, the insurer brought a declaratory judgment of non-coverage when the insured class tried to enforce the settlement against the insurer.

The Seventh Circuit maintained that Good’s application of CAFA to this case was fully in line with the statutory text. The court noted that although FRCP Rule 23 allows one or more members of a class to sue or be sued as representative parties on behalf of a class, the key jurisdictional language in CAFA speaks only of plaintiff classes. Nowhere in 28 U.S.C. § 1332(d)(2) does the phrase “defendant class” appear, and references to the “defendant” or “defendants” consistently place them in opposition to the “class.”

The Seventh Circuit stated that remaining doubts, if any, would be resolved by the enacted findings that accompanied CAFA. Congress stressed in Class Action Fairness Act of 2005, Pub. L. 109-002, 119 Stat 4 (2005) that “abuses of the class action device” harmed “the free flow of interstate commerce,” and that state courts were “bias[ed] against out-of-State defendants.” The Seventh Circuit concluded that although Congress intended for courts to read CAFA broadly, it does not mean that courts can stray from the plain language of the statute.

Recognizing CAFA’s limitations on the defendant class, SMI tried an alternative argument. SMI asserted that it was the de facto defendant and so CAFA applied by its terms. SMI claimed that it was the defendant in the Saskatchewan action and it was merely enforcing the resulting judgment—a ministerial matter that preserved the judgment’s substance, including the parties’ positions relative to the “v.” The Seventh Circuit remarked that it was SMI that invoked the federal court’s authority, and registration of a judgment (or a stand-alone action on a foreign judgment) was not always a routine administrative task.

SMI next asserted that judgments entered by the courts of Canada (or other foreign countries) were entitled to “full faith and credit” in the United States. The Seventh Circuit stated that although the law of Illinois governs recognition and enforcement of foreign judgments in state court, the Illinois courts permit an inquiry into the jurisdiction of the rendering court, as well as into fraud in the inducement.  On the assumption that the federal courts of Illinois would follow Illinois law in this case, the Seventh Circuit found that SMI still had real work to do as the plaintiff seeking recognition and enforcement of the judgment.  In so concluding, the court remarked that even assuming full faith and credit applied, nothing required the second court to follow the alignment of parties that was before the foreign court, and from an administrative point of view, it is best to evaluate the new case on its own facts, which is what the district court did here.

The Seventh Circuit reiterated the Supreme Court’s caution that statutes conferring federal jurisdiction should be read with sensitivity to “federal-state relations” and “wise judicial administration.” Because CAFA is such a jurisdictional statute, the Seventh Circuit reasoned that it was neither sensitive nor wise for federal courts to insert themselves into litigation that has busied the Illinois and Saskatchewan courts for such a considerable amount of time. The Seventh Circuit noted that SMI’s remedy was an appeal to a higher Illinois court, not using federal authority to convert a $1,000 (Canadian) award into a $5 million (US) trump card.

In affirming the judgment of the district court dismissing the case for lack of subject matter jurisdiction, the Seventh Circuit thus concluded that when “litigation has dragged on for a decade across two countries and three jurisdictions, comity and common sense both counselled forbearance on the part of the federal courts.”

-Melissa Broussard