First Bank v. DJL Properties, LLC, — F.3d —-, 2010 WL 1050283 (7th Cir. (Ill.), Mar 24, 2010)(NO. 10-8008, 10-8009).

Recently, the Seventh Circuit affirmed the order of the district courts in two related cases that remanded the actions removed by the plaintiff/counter defendant holding that CAFA permits a defendant only, and not a plaintiff/counter-defendant, to remove a class action to federal court.

First Bank brought two mortgage foreclosure suits in the state court of Illinois against DJL Properties.  (First Bank v. DJL Props., LLC, No. 09-cv-969-MJR; First Bank v. DJL Props., LLC, No. 09-cv-970-JPG.) In response, DJL Properties filed a class action counterclaim alleging state law causes of action. First Bank as the plaintiff/counter-defendant then removed the action to the federal court invoking CAFA.

The proceedings were assigned to different district judges.  Judge Gilbert remanded action no. 09-cv-970-JPG, concluding that a litigant who initially chose the state forum cannot remove even after becoming a counterclaim defendant.  Judge Reagan then remanded the other suit, No. 09-cv-969-MJR, adopting Judge Gilbert’s reasoning.  The Seventh Circuit then granted First Bank’s petition for leave to appeal because the cases presented an issue not yet resolved in that circuit.

The Seventh Circuit observed that Chapter 89 of the Judicial Code, 28 U.S.C. §§ 1441-53, which was enacted in 1867 authorizes removal of certain cases by ‘defendants.’  In 1941 the Supreme Court, in Shamrock Oil & Gas Corp. v. Sheets, 313 U.S. 100 (1941), concluded that a plaintiff cannot remove the case, even if the defendant files a counterclaim and the original plaintiff then wears two hats, one as plaintiff and one as defendant–and even if the counterclaim is distinct from the original claim and could have been a separate piece of litigation.  Palisades Collections LLC v. Shorts, 552 F.3d 327, 336 (4th Cir. 2008); Progressive West Insurance Co. v. Preciado, 479 F.3d 1014, 1018 (9th Cir. 2007) have applied Shamrock Oil to removal under CAFA in particular.  

(Editors’ Note: See the CAFA Law Blog analysis of 4^th Circuit decision in Palisades posted on March 9, 2009 and the analysis of the district court decision in Palisades posted on July 23, 2008.  As an added bonus, don’t forget about the guest post by Jonathan Bridges, counsel for Shorts, who shared his thoughts on the appeal filed by counter-defendant AT&T, and even showed us his briefs (thanks, Jonathan). His Guest Post  was published on September 11, 2008). (Editors’ Note: See the CAFA Law Blog analysis of Preciado published on August 1, 2007).

The Seventh Circuit noted that U.S.C. 28 § 1453(b) says that a class action may be removed in accordance with § 1446 whether or not ‘any defendant’ is a citizen of the state in which the suit is pending, and without the consent of all defendants.  Section 1441, which creates the right of removal for cases that could have been filed initially in federal court, also says that ‘defendants’ may remove a suit.

The Seventh Circuit stated that the word ‘defendant’ in § 1453(b) does not include a counterclaim defendant because § 1453(b) refers to § 1446; and unless the word ‘defendant’ means the same thing in both sections, the removal provisions are incoherent.  

The Seventh Circuit found that CAFA did not expand the set of removable cases that it must use ‘defendant’ in a novel way.  CAFA employs time-tested legal language.  If the drafters of CAFA wanted to negate Shamrock Oil, they could have written ‘defendant (including a counterclaim defendant)’ or ‘any party.’  But they chose the unadorned word ‘defendant,’ a word with a settled meaning.

The Seventh Circuit opined that in § 1453(b) the word ‘any’ is inclusive, but the word that it modifies remains ‘defendant.’  The function of the first ‘any’ in § 1453(b) is to establish that § 1441(b), which provides that a home-state defendant can’t remove a diversity suit, does not apply.  The function of the second ‘any’ is to establish that a single defendant’s preference for a federal forum prevails.  Thus, neither instance of the word ‘any’ implies that ‘defendant’ means something different in § 1441(b) and § 1453(b).

Although the Seventh Circuit agreed with First Bank that exempting counterclaims from § 1453 means that CAFA achieved less than it otherwise would, it found that “no legislation pursues its purposes at all costs.”

The Seventh Circuit thus concluded that the word ‘defendant’ in § 1453(b) means what the word ‘defendant’ means elsewhere in Chapter 89 and, as Shamrock Oil held, that word does not include a plaintiff who becomes a defendant on a counterclaim.

(Editors’ Note:  As loyal readers know, we don’t always agree with the decisions of our Article III judges, and we don’t mind saying so.  This is one of those instances.  For a different viewpoint on removal by counterclaim defendants, you may want to check out the following scholarly articles:   "How to Avoid Reaping What You Didn’t Sow: CAFA’s Solution for Removal of Counterclaim Class Actions," Consumer Financial Services Law Report, Volume 13, Issue 16, 2/2010;  A Move in the Right Direction – The Tide is Turning for Removal by Counterclaim Defendants Under CAFA,” BNA, Inc. Class Action Litigation Report, Vol. 10, No. 22 (November 27, 2009);  Requested En Banc Rehearing Petition to 4th Circuit in Palisades Could Breathe New Life into CAFA Removal Petition,” Consumer Financial Services Law Report, Vol. 12, Issue 14 (January 21, 2009).