Westwood Apex v. Contreras, No. 11-55362, 2011 WL 1744960 (9th Cir. May 2, 2011).

Do you remember the famous line, “It depends on what the meaning of the word ‘is,’is”? You can relive the whole sordid, but titillating, Clinton/Lewinsky sex scandal with the excerpt of the President’s deposition by clicking here: https://www.youtube.com/watch?v=j4XT-l-_3y0

Well, in this case, which does not refer to cigars or stains on dresses, the appellate court was concerned with the meaning of the word “any.” 

While CAFA eliminated several important roadblocks to removal of class actions commenced in state court, the Ninth Circuit held that 28 U.S.C. §1453(b) did not change the longstanding rule that a party who is joined to such an action as a defendant to a counterclaim or as a third-party defendant may not remove the case to federal court.  (Editors’ Note:  Regular readers of the CAFA Law Blog, who are all smart and sexy, know that we disagree.  See the article published in the Consumer Financial Serivces Law Report by clicking here).  

The plaintiff, Westwood Apex, filed a breach of contract action against the defendant, Jesus Contreras, and a bunch of other peopld, to recover $20,000 on an unpaid student loan. Contreras, a former Westwood College student, answered the complaint and, filed class action counterclaims alleging violations of California consumer protection laws, against Westwood Apex, its main institution–Westwood College, and certain affiliated individuals and entities alleging that these counterclaim defendants committed fraud and engaged in unfair and deceptive business practices in connection with their operation of the college.

The additional counterclaim defendants (i.e., all Westwood College entities except Westwood Apex) removed the action to the federal court arguing that 28 U.S.C. §1453(b), added by CAFA, expands removal authority, conferring on “any defendant” the right to remove a class action. The district court, relying on the fourth circuit’s opinion in Palisades Collections, LLC v. Shorts, 552 F.3d 327, 328-29 (4th Cir. 2008) that CAFA does not permit removal by additional counterclaim defendants, remanded the action to state court. Upon appeal, the Ninth Circuit affirmed the order. (Editors’ Note: See the CAFA Law Blog analysis of Palisades Collections posted on March 9, 2009).

Discussing the relevant provisions of law, which authorize removal, the Ninth Circuit noted that §5 of CAFA augmented Chapter 89 of the Judicial Code (which governs the removal of state court actions to federal courts) by the addition of 28 U.S.C. §1453. Section 1453 (b) provides that a class action may be removed to a district court in accordance with §1446, without regard to whether “any defendant” is a citizen of the State in which the action is brought, except that such action may be removed by “any defendant” without the consent of all defendants.

Section 1446 (a) sets forth the procedures a removing defendant must follow and provides, inter alia, that “a defendant or defendants” desiring to remove any civil action … shall file in the district court … a notice of removal…

The “general” removal statute, 28 U.S.C. §1441(a), which was not amended by CAFA, provides that any civil action… may be removed by “the defendant or the defendants”…

Under this background, the Ninth Circuitexamined whether the phrase“any defendant” in §1453(b) permits removal by additional counterclaim defendants. The Ninth Circuit had addressed the meaning of §1453(b) in Abrego Abrego v. Dow Chemical Co., 443 F.3d 676, 684 (9th Cir. 2006) and Progressive West Ins. Co. v. Preciado, 479 F.3d, 1014, 1017-18 & n.2 (9th Cir. 2007). (Editors’ Note: See the CAFA Law Blog analysis of Abrego Abrego posted on May 25, 2006 and the CAFA Law Blog analysis of Progressive West posted on August 1, 2007).

In these cases, where the question of removal by a plaintiff/cross defendant arose, the Ninth Circuit recognized that the phrase “any defendant” is used twice in §1453(b), first as part of the language eliminating the so-called ‘home-state defendant’ restriction on removal, and second part allowing the removal without obtaining the consent of “all defendants”.

Despite this, the removing parties contended that §1453(b) also authorized removal by additional counterclaim defendants. They pointed to §1453(b)’s final clause — “such action may be removed by ‘any’ defendant without the consent of ‘all’ defendants” and argued that “any defendant” of whatever kind may remove a class action to federal court. The Ninth Circuit stated that in Palisades the court opined that given that theword “any” is being employed in connection with the word “all” later in the sentence, they should be read that way and interpreted consistently with the sentence’s structure.

The Ninth Circuit remarked that the argument that §1453(b) allows for additional counterclaim defendants to remove depends on the faith in the redeeming power of one adjective—“any”, it eschews the established meaning of “defendant” in Chapter 89 of the Judicial Code. Since the Supreme Court’s decision in Shamrock Oil & Gas Corporation v. Sheets, 313 U.S. 100, 104-08 (1941), “defendant” for purposes of designating which parties may remove a case under §1441 has been limited by a majority of the courts to mean only “original” or “true” defendants; “defendant” in Chapter 89, thereby, excludes plaintiffs and non-plaintiff parties who become defendants through a counterclaim. The Shamrock Oil Court traced the amendments in removal law back to the first Judiciary Act and emphasized that, at different times, removal was either afforded to “defendants” or, alternatively, to “either party.” Shamrock Oil Court thus opined because Congress was presumed to be aware of the statutory history, the choice of “defendant” was a deliberate exclusion of other classes of parties.

Since Shamrock Oil, the law has been settled that a counterclaim defendant who is also a plaintiff to the original state action may not remove the case to federal court. This accepted understanding of “defendant” as excluding plaintiff/counterclaim defendants and third-party defendants survived the enactment of §1453(b). The Ninth Circuit recognized this, albeit in dicta, in Progressive West, where it observed that § 1453(b) “did not create an exception to Shamrock’s longstanding rule that a plaintiff/cross-defendant cannot remove an action to federal court.” 

The Seventh Circuit, in First Bank v. DJL Props., LLC, 598 F.3d 915, 917-18 (7th Cir. 2010), endorsing Progressive West, held that §1453(b)’s use of “any” is not enough to alter the meaning of the term “defendant.” (Editors’ Note: See the CAFA Law Blog analysis of First Bank posted on May 8, 2010).

In Palisades Collections, the Fourth Circuit, the only other Court of Appeals to have addressed the precise issue presented here, also concluded that §1453(b) did not overwrite the accepted meaning of “defendant.” Palisades Collections aptly highlighted that “Congress has shown the ability to clearly extend the reach of removal statutes to include counter defendants, crossclaim defendants, or third party defendants” by using the term “party” in other sections (28 U.S.C. §1452(a)) of Chapter 89. The Fourth Circuit further explained that §1453(b) was drafted to comport with both §1441 and §1446, which each employ the word “defendant.” If the meaning in §1441 (a) and §1446 is dictated by Shamrock Oil, and excludes third parties (i.e., both third-party defendants and counterclaim defendants), then §1453(b) does as well.

Palisades Collections opined that to the extent there is any ambiguity about the meaning of “defendant” as it is used in §1453(b), the legislative history reveals that Congress’s purpose in drafting CAFA Section 5 was not animated by concerns regarding Shamrock Oil or its progeny, nor was §1453(b) drafted with the intention of changing the meaning of “defendant.” 

Thus, the Ninth Circuit opined that the additional counterclaim defendants asked the Court to do what Congress did not, by rewriting the meaning of an accepted and understood term. To do so and change the meaning of “defendant” in §1453(b) would, as First Bank phrased it, “make hash of Chapter 89, because §1453(b) refers to §1446; unless the word ‘defendant’ means the same thing in both sections, the removal provisions are incoherent.”

The concurring judge joined the opinion of the majority judges, but wroteseparately to emphasize that Congress may wish to reexamine the applicability of the original defendant rule in CAFA Act context.

The Concurring judge stated that in this case, the parties were forced into state court when Contreras transformed a $20,000 debt collection lawsuit into an unrelated multi-million dollar class action by filing a counterclaim consisting of over 7,000 class members not only against the original plaintiff, but also against the removing parties—who are unrelated to the original action.

Because the original action had been consumed by Contreras’s counterclaim, and now became a sideshow, the concurring judge observed that given that “Congress expressly intended CAFA to expand federal diversity jurisdiction over class actions,” it seemed 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 “CAFA achieves this particular result, and if Congress does not like it, Congress should rethink the rule.”

The decision of the Ninth Circuit may influence the Congress to re-define the meaning of “any defendant” in § 1453(b) to include counterclaim defendants to combat the situations like this.