Marshall v. H&R Block Tax Services, Inc., No. 09-8002 (7th Cir. 04/30/09)
Heads up defense attorneys, if you want to remove under CAFA for claims filed before it became effective, all you have to do is increase your client’s potential liability by getting all the other defendants dismissed and decertifying the defendant class. Seriously, this just happened. You should be sure to make it look like an accident though, if the admonition Posner included in his opinion carries any weight.
In this case, removal to federal court had initially been denied under CAFA because the claim had been filed before CAFA’s effective date. H&R Block Tax Services, Inc. (“TSI”) was originally one of four representative defendants until the judge dismissed the other three from the complaint. TSI realized it was the only one left and moved to have both the plaintiff and defendant classes decertified. This turned out to be a wise move. Those smart tax guys!
The court narrowed the plaintiff class to 13 states (from all 50) and granted TSI’s request, leaving TSI with no class-representative status on the basis that there was no longer a defendant class. TSI then removed the case to federal district court on the ground that the decertification occurred after CAFA’s effective date and TSI’s potential liability was increased beyond the nature and scope of the original complaint, and therefore did not relate back.
The 7th Circuit did recognize the possibility that the enlarged liability was deliberately undertaken in order to qualify under CAFA, but didn’t address it because the plaintiffs did not argue it in this case.
In the initial removal, the district court judge said no. But on the appeal, Posner said yes. The 7th Circuit held that the claim did not relate back and, therefore, the removal should be granted under CAFA.
First, TSI did not have derivative liability for the actions of the other corporations because nothing had been pled to pierce the corporate veil of limited liability; TSI’s status as a class-representative did not create derivative liability because class certifications are for economic and judicial efficiency reasons and do not alter substantive rights.
Second, because the plaintiffs now will be attempting to pin the entire liability for all former members of the defendant class on TSI, they had enlarged TSI’s liability beyond what had originally been pled.
Third, the enlargement of the potential liability was a surprise and did not meet the federal law criterion for relating back because it was outside the nature and scope of the original claim.
So, let’s get this straight. TSI saw the other defendants get dismissed from the suit, then got their own defendant class decertified in response, leaving it alone to face potential liability, and then removed on the basis that the newly enlarged liability was a surprise and therefore did not relate back to the original claim. Why did this grant removal under CAFA?
The 7th circuit put heavy weight on two reasons. First, they said that even though TSI was the party that moved to decertify the defendant class, they moved to decertify the plaintiff class as well. Apparently, the fact that TSI failed and ended up with much higher potential liability was a significant reason why the claim did not relate back. Second, appeal court said that while they could “imagine a situation in which a defendant deliberately increases its potential liability in an attempt to be allowed to remove the case under the Class Action Fairness Act…that is not argued.” So, according to Posner, if you’re looking to perform this maneuver to get an older claim removed under CAFA, you might be able to do it, but be careful not to make it look like you’re doing it. Instead, it should be the unfortunate result of an overall litigation strategy that just didn’t work out the way you had hoped.