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

CAFA Doesn’t Bar A Stipulation Of Dismissal For Re-filing An Un-certified Class Action In State Court For The Purpose Of Settlement.

Posted in Case Summaries

Adams v. USAA Casualty Insurance Company, No. 16-3382 (8th Cir. July 25, 2017).

In this action, while reversing a district court’s order, the Eighth Circuit found that CAFA doesn’t bar a stipulation of dismissal for re-filing an un-certified class action in state court for the purpose of seeking approval of settlement. The Eighth Circuit maintained that Congress rejected a proposed draft of CAFA that would have potentially prevented federal class actions from being refiled and settled in state court.

The plaintiffs originally filed their class action in state court, claiming that the defendant insurer improperly applied depreciation when adjusting claims for structural losses under their homeowners insurance policies.

The defendant removed the case to the federal court in January 2014, and then moved for partial judgment on the pleadings in April 2014. Soon thereafter the parties jointly moved to stay the case pending mediation.  Later, the District Court lifted the stay and the parties filed a stipulation of dismissal on June 19, 2015.  An order of dismissal was entered on June 22, 2015.

On June 23, 2015, the parties refiled the action in Polk County Circuit Court, together with a motion for preliminary approval of class settlement. The state court certified a settlement class and eventually entered its final order approving settlement.  On learning that the parties had refiled the action in the state court, the District Court entered a show-cause order as to why a non-monetary sanction should not be imposed for violations of Rule 11(b)(1) of Federal Rules of Civil Procedure.

On April 14, 2016, the District Court issued an order finding that the plaintiffs’ counsel and the defendant’s counsel violated Rule 11 when they stipulated to dismissal of the federal action for the improper purpose of seeking a more favorable forum and avoiding an adverse action. The District Court concluded that the “mid-litigation forum shopping” was “objectively unreasonable under the circumstances.”

On appeal, the Eighth Circuit found that counsel’s conduct was proper because a reasonable lawyer would have had a colorable legal argument that a stipulation of voluntary dismissal is permissible in a case in which the class has not yet been certified.

The Eighth Circuit began its discussion by analyzing whether a stipulated dismissal of a putative class action for the purpose of re-filing in state court violated Rule 41(a), which governs voluntary dismissal of action. The Eighth Circuit held that Rule 41(a)(1)(A)(ii), which allows a plaintiff to dismiss an action without court approval pursuant to a stipulation of dismissal signed by all parties who have appeared, authorized the plaintiffs’ counsel to dismiss the federal lawsuit even when the dismissal was entered “for the specific purpose of refilling in another court.”  Relying on Wolters Kluwer Financial Services v. Scivantage, 564 F.3d 110 (2nd Cir., 2009) , the Eighth Circuit concluded that the plaintiffs’ counsel had the “unfettered right voluntarily and unilaterally” to dismiss the action pursuant to a stipulation and that the reason for the dismissal is irrelevant under Rule 41(a)(1).

The Eighth Circuit then considered whether Rule 23(e), which required court approval in order to dismiss or settle the claims of a certified class, barred counsel for the putative class from dismissing the lawsuit for the purpose of re-filing and seeking settlement approval in state court. While the Eighth Circuit expressly declined to hold that Rule 23(e) applied only to class actions that had already been certified, it found that there was a colorable legal argument that Rule 23(e) only applies to certified class actions and accordingly did not serve as a basis for sanction.  The Eighth Circuit acknowledged the precedent holding that Rule 23(e) applied even if a class has not yet been certified.  The Eighth Circuit nonetheless held that the 2003 amendments to Rule 23 arguably limited its scope to encompass only those cases where a class had been certified.  The Eighth Circuit therefore rejected the proposition of Amicus Curiae-Competitive Enterprise Institute Center’s for Class Action Fairness (“CCAF”) that defended the District Court’s judgment, that the CAFA barred a stipulation of dismissal for the purpose of re-filing an un-certified class action in state court.  CCAF argued that CAFA prevented a stipulation of dismissal in light of CAFA’s purpose—to prevent state court abuse of absent class members.  According to the Eighth Circuit, however, whether or not CAFA was intended to prevent state court abuse of absent class member, nothing in CAFA altered the 2003 amendment to Rule 23(e).  The Eighth Circuit noted that Congress rejected a proposed draft of CAFA that would have potentially prevented federal class actions from being refiled and settled in state court.

Given that the overwhelming majority of courts have held that when no class has been certified, voluntary dismissal of a putative class action was governed not by Rule 23 but by Rule 41, and CAFA did not affect the 2003 amendment to Rule 23, the Eighth Circuit concluded that a reasonable lawyer would have a colorable legal argument that a stipulation of voluntary dismissal under Rule 41(a)(1)(A)(ii) was permissible in a case in which the class had not yet been certified.

The Eighth Circuit therefore concluded that the District Court abused its discretion when it imposed sanctions upon the parties and their counsel.

-Melissa M. Grand