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

Affirmative Defenses Have No Role in Determining the Amount in Controversy

Posted in Case Summaries, Jurisdictional Amount

Smith v. Manhattan Club Timeshare Association, Inc., 2013 WL 1955882 (S.D.N.Y. May 10, 2013).

In this action, a District Court in New York held that affirmative defenses asserted on the merits could not be used to cut down the amount in controversy even where the complaint itself discloses the existence of a valid defense.

In Sheppard v. Manhattan Club Timeshare Association, Inc., 2012 WL 1890388 (S.D.N.Y. May 23, 2012), the plaintiffs alleged that they were unlawfully induced into the purchase of ownership interests in The Manhattan Club.  The plaintiffs also alleged that they were misled about the unit reservation process and reservation availability because The Manhattan Club unlawfully rented rooms to members of the general public.  The District Court dismissed the action for failure to state a claim.

Soon thereafter, the plaintiff commenced the instant putative class action in the New York Supreme Court, New York County.  The plaintiff’s claims were based on the same facts and theory as in Sheppard and asserted against the same defendants.  Other than the identity of the class representative, the definition of the purported class in each case was identical in all material respects.

The defendants removed the action to the District Court, and the plaintiff moved for remand.  The plaintiff argued that the defendant failed to establish the amount in controversy and that the action came under the home-state and/or discretionary exceptions.  The defendants in turn moved to dismiss.

The Complaint did not make any specific damages demand, and the aggregate value of the claims were unclear from the face of the Complaint.  So, the defendants submitted the sworn affidavit of The Manhattan Club’s Vice President, along with five exhibits, to establish the amount in controversy.  The complaint alleged a class that included all persons who purchased timeshare interests in The Manhattan Club from its inception in 1997 through the present.  According to computer records maintained by The Manhattan Club, during the relevant time period, The Manhattan Club sold to members of the putative class a total of 14,696 timeshare interests for a total sales amount of $332,224,553.41.

The District Court observed that if during a portion of the class period members of the putative class paid over $330 million to purchase their timeshare interests, and if, as the Complaint alleged, those interests had been rendered virtually worthless by the defendants’ alleged conduct, then the amount in controversy comfortably exceeded the $5 million threshold.  Also, the District Court noted that the amount in controversy would still exceed $5 million even if an ultra-conservative diminution figure of 5% were applied.  In that instance, the amount in controversy would still exceed $16.6 million.

Further, the Complaint alleged that neither the plaintiff nor putative class members would have agreed to pay real estate taxes and Timeshare Charges if they had known of the defendants’ deceptive business practices.  These taxes and fees were charged to timeshare-interest holders annually, but in 2012 alone, the combined amount of real estate taxes and Timeshare Charges owed by members of the putative class exceeded $31 million.  This further demonstrated that the defendants satisfied the amount in controversy requirement.

The plaintiff argued that it must be presumed that if class certification was granted, the amount in controversy would be reduced by affirmative defenses, including the statute of limitations and release, and by other factors such as difficulties in proving damages, class members opting out of the class, and hypothetical settlements for less than $5 million.  The District Court, however, remarked that affirmative defenses asserted on the merits could not be used to cut down the amount in controversy even where the complaint itself discloses the existence of a valid defense.

Accordingly, the District Court opined that the defendants proved by a preponderance of evidence that CAFA’s amount-in-controversy requirement was satisfied.

The District Court then observed that under 28 U.S.C. § 1332(d)(4)(B), the home-state exception applied only when two-thirds or more of the members of all proposed plaintiff classes in the aggregate are citizens of the State in which the action was originally filed, and under 28 U.S.C. § 1332(d)(3) the discretionary exception applied only when greater than one-third but less than two-thirds of the members of all proposed plaintiff classes in the aggregate are citizens of the State in which the action was originally filed.

Here, the plaintiff offered no evidence to support the proposition that greater than one-third of the members of the proposed class were citizens of New York.  The District Court stated that the plaintiff’s contention that most timeshare interest holders were citizens of the State of New York who did not otherwise reside in the City of New York was pure speculation.  According to residency records maintained by the defendants in the ordinary course of business, as of September 10, 2013, there were a total of 18,480 timeshare owners in The Manhattan Club, of which 3,826 resided in New York, a mere 20.7% of the total.

Accordingly, the District Court opined that because the plaintiff failed to demonstrate that greater than one-third of the putative class members were citizens of New York, the plaintiff failed to establish that either CAFA exception applied.

The District Court further noted that res judicata barred this action because every claim asserted here was previously raised and decided in Sheppard.  Accordingly, the District Court dismissed the action.