More on SCOTUS’ 5-4 Holding in Home Depot that Third-Party Counterclaim Defendants Can’t Remove a Class Action
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As promised, here’s a more detailed analysis of the Supreme Court’s Home Depot decision that the term “defendant,” as used in the general removal statute and in the class action removal statute, CAFA, was not intended by Congress to extend to third-party defendants.

We reported in SAA 2019-21 (May 29) that the Supreme Court held 5-4 in Home Depot U.S.A., Inc. v. Jackson, No. 1701471 (May 28), that neither the Class Action Fairness Act (“CAFA”) -- nor the general removal rights in 28 U.S.C. § 1441(a) permit a third-party defendant to remove an action from State to federal court. At that time, we promised more thorough coverage in the Alert, courtesy of our SOLA sister publication.

Class Action Fairness Act

CAFA was enacted by Congress in 2005 to permit defendants in covered class actions to remove the matter to federal court, if filed in state court. The general removal statute -- 28 U.S.C. § 1441(a) -- permits defendants to remove “any civil action” to federal court, if the court would have original jurisdiction (i.e., federal question or diversity) over the matter. “In this case,” writes Justice Thomas, on behalf of a 5-4 majority, “we address whether either provision allows a third-party counterclaim defendant -- that is, a party brought into a lawsuit through a counterclaim filed by the original defendant -- to remove the counterclaim filed against it.” For removal to be denied, the Court must find -- and it does -- that the term “defendant,” as used in either statute does not encompass third-party defendants. 

Back to Fed Jur 101

Justice Thomas starts with the observations that federal district courts have only the limited jurisdiction specifically accorded them by statute and that both general forms of federal jurisdiction -- federal question and diversity -- serve a distinct purpose. CAFA adds to those general grants of jurisdiction federal domain over class actions involving controversy amounts exceeding $5 million, where “at least one class member is a citizen of a State different from the defendant.” Section 1441, the general removal statute, is also limited by conditions, such as complete diversity and unanimous consent by all defendants to removal. Removal must occur within one year and only when no defendant is a citizen of the host state.

The Case at Bar

In the case at bar, Citibank was seeking to collect on a credit card debt. The alleged debtor, George Jackson, believed Home Depot and Carolina Water Systems had entered into a scheme to “induce homeowners to buy water treatment systems at inflated prices” and that Citibank facilitated that scheme by providing credit for such purchases. Citibank reacted by dismissing its claims and Defendant Jackson dropped Citibank from his third-party class-action claims. The trial court granted a motion to remand and the Fourth Circuit affirmed, holding that neither Section 1441, nor CAFA, permitted removal by Home Depot.

Statutory Construction: What’s a “Defendant”?

Of consequence here was the Court’s prior holding in Shamrock Oil & Gas Corp. v. Sheets, 313 U.S. 100 (1941), which held that “original plaintiffs” subject to a counterclaim did not become “defendants,” for purposes of the general removal statute. Should Shamrock extend to third-party defendants? Yes, rules the majority, as there is no textual basis for distinction. Moreover, the statutory text, which refers to a “civil action,” not just a “claim,” implies that the original case lay in Congress’ focus. That is how diversity jurisdiction is determined and removal, under diversity tests, may not be made on the basis of a qualifying counterclaim. In other contexts, the Federal Rules distinguish between “defendants” and “third-party defendants,” as in FRCP 12 and 14. Finally, extending “defendant” status to Home Depot would mean overturning Shamrock and that would logically mean that removal would require the consent of all parties under Section 1441 -- a nonsensical result.

CAFA’s Text of No Help

CAFA’s removal provisions, too, disfavor a reading broadly encompassing Home Depot. While it allows removal by “any defendant” without the consent of others, CAFA was enacted, not to alter “who” could remove, but, rather, to facilitate the removal of covered class actions. Thus, the term, “any defendant” was meant to “simply clarify that certain limitations on removal that might otherwise apply do not limit removal” under CAFA. The context demonstrates “that Congress did not expand the types of parties eligible to remove a class action....” It makes sense that the term “defendant” should have the same meaning in §1441 and in its modifying enactment, CAFA. To hold otherwise “would render the removal provisions incoherent.”

(ed: That Justice Thomas would lead the so-called liberal wing of the Court has garnered comment, but this Opinion, compact and relatively brief, concentrates entirely on statutory construction, with barely a nod to litigation practice. The dissent, which was written by Justice Alito and joined by the Chief Justice and Justices Gorsuch and Kavanaugh, runs almost half again as long as the majority Opinion and argues common sense, tactical practicalities, and plain meaning of the word “defendant.” It’s no wonder, given the persuasive arguments on both sides, that Justice Thomas became the swing vote on this one.) (SAC Ref. No. 2019-23-01)

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