The Supreme Court Of The United States Hands Defendants A Setback In Their Removal Quests: Third-Party Defendants Asserting Counterclaims Cannot Remove Counterclaims To Federal Court. Home Depot U.S.A., Inc., v. Jackson, 2019 WL 2257158 (U.S. May 28, 2019)

SUMMARY:

The Supreme Court of the United States held that the general removal statute, 28 U.S.C. §1441, and the Class Action Fairness Act of 2005 (“CAFA”), 28 U.S.C §1453, does not allow third-party counterclaim defendants to remove a case to federal court.  Home Depot U.S.A., Inc., 2019 WL 2257158, at *2.  The Court concluded that the term “defendant,” within the removal provisions, refers only to the party that the original plaintiff sued.  Id.  So holding, the Court affirmed the United States Court of Appeals for the Fourth Circuit’s decision in favor of an original defendant, turned counterclaim plaintiff. 

CASE BACKGROUD:

In June 2016, the original plaintiff, Citibank, N.A., filed a debt collection action in North Carolina state court against the original defendant George Jackson (“Jackson”).  Id. at *3.  In August 2016, Jackson filed an individual counterclaim against Citibank and third-party class-action claims against Home Depot U.S.A, Inc., and Carolina Water Systems, Inc.  Id.  Jackson alleged that Home Depot and Carolina Water systems engaged in unlawful referral sales and unfair trade practices by inducing homeowners to buy water treatment systems at inflated prices.  Id.  Jackson further alleged that his payment obligations to Citibank were null and void because Citibank was jointly and severally liable for the conduct of Home Depot and Carolina Water Systems.  Id.  In October 2016, Home Depot filed a notice of removal to federal court of Jackson’s third-party class-action counterclaim.  Id.  Jackson filed a motion to remand, asserting that a third-party counterclaim defendant could not remove the original action.  Id. The District Court granted Jackson’s motion to remand and the Court of Appeals for the Fourth Circuit affirmed.  Id.

LEGAL HISTORY:

Reaching its decision, the Fourth Circuit gave a primer on removal jurisdiction.  The United States Constitution limits the cases over which the federal court system has jurisdiction.  U.S. Const. art. III, §2, cl. 1.  Congress granted federal courts jurisdiction over two general types of cases.  The first are cases that involve federal questions of law, or cases that have “federal question” jurisdiction.  28 U.S.C. §1331.  The second are cases those where the amount in controversy exceeds $75,000 and there is diversity of citizenship among the parties, or cases that have “diversity jurisdiction” and meet the minimum amount in controversy.  28 U.S.C. §1332.  The Class Action Fairness Act, or CAFA, applies to the second type of case that also allows federal courts jurisdiction over “class action” cases when the matter in controversy exceeds the sum of $5,000,000 and involves at least one class member that is a citizen of a State different from the defendant.  §1332(d)(2)(A). 

Congress also enacted provisions that allow a defendant to remove a state court action to federal court through the general removal statute.  §1441.  The general removal statute allows “the defendant or defendants” in a state court action to remove that action if the federal courts would have had original jurisdiction.  Id.  If, however, the state court action involves multiple defendants, the defendant seeking removal must receive consent for removal from all other defendants.  §1441(b)(2).  The CAFA allows the removal of class action cases by “any defendant without the consent of all defendants” and “without regard to whether any defendant is a citizen of the State in which the action is brought.”  Id.

ISSUE:

In Home Depot, the Court faced the question of the meaning of the term “defendant,” in the general removal statute and the CAFA.  The question was whether this term limits the removal authority to the original defendant or extends to a party brought into a lawsuit to defend against a counterclaim filed by the original defendant.

DECISION:

Answering the question, the Court first turned its attention to the general removal statute, and whether it permits a third-party counterclaim defendant to remove a claim filed against it.  Id. at *4.  Home Depot argued that the general removal provision applied to Home Depot because it is a “defendant” of a third-party counterclaim.  Id.  The Court found Home Depost’s argument plausible but unpersuasive.  Id.  The Court criticized Home Depot’s emphasis on being a “defendant” to a “claim,” noting that the general removal statute only refers to “civil action[s],” and not to “claims.”  Id.  The Court explained that when a federal district court determines whether it has original jurisdiction over a civil action, that court should evaluate whether a plaintiff could have brought that action originally in federal court.  Id.  The Court concluded that the “civil action” is the action defined by the original plaintiff’s complaint, and the defendant to the original action is the defendant to that complaint.  Id.  Therefore, the Court held that the general removal statute does not allow removal based on counter claims, as counter-claims are irrelevant to the district court’s original jurisdiction determination over the civil action.  Id

The Court bolstered its conclusion by demonstrating how the Federal Rules of Civil Procedure (“FRCP”), that are similar to the removal provisions, and decisions, differentiate between “defendants” and third-party counterclaim defendants.  Id. at *4-5.  The Court cited multiple rules in the FRCP that differentiate between “defendants”, counterclaim defendants, and third-party defendants.  Id. at *4.  For example, Rule 14 distinguishes between a defendant who becomes a third-party plaintiff, and a third-party defendant sued by the original defendant.  Id.  Likewise, Rule 12 distinguishes between “defendants” and counterclaim defendants, and specifies when each must serve an answer.  Id.  The Court also cited to several removal provisions that extend the reach of the general removal statute to include parties other than the original defendant.  Id. at *5.  Section 1452(a) permits “[a] party” to remove a bankruptcy civil claim or cause of action, while §§ 1454(a) and (b) allow “any party” to remove patent and copyright claims.  Id.  The Court also cited to Shamrock Oil & Gas Corporation v. Sheets, 313 U.S. 100, 61 (1941), where the court held that a counterclaim defendant, who was also the original plaintiff, could not remove under the general removal statute’s predecessor statute, concluding that if a counterclaim defendant who was the original plaintiff was not considered a defendant, as in Shamrock Oil, then there is “no reason to reach a different conclusion for a counterclaim defendant who was not originally party of the lawsuit.”  Id.

The Court then turned its attention to the CAFA, and addressed whether the CAFA permits a third-party counterclaim defendant to remove a claim filed against it.  Id.  Home Depot argued that wording within the CAFA is different from the general removal statute, and that this supported allowing the counterclaim defendant to remove the claim.  Id.  The Court also rejected this argument, opining that Congress’ intention in passing the CAFA was to alter certain restrictions on removal, and not to expand the class of parties who can remove a class action.  Id.  Elaborating further, the Court explained that the two clauses in the CAFA that use the term “any defendant” are meant to “simply clarify that certain limitations on removal that might otherwise apply do not limit removal under [the CAFA].  Id. at *6.  The first clause gives no indication that the term “any defendant” does anything more than alter the general rule of diversity jurisdiction.  Id.  The second clause simply amends the general removal statute’s procedural requirement that all defendants must join in or consent to the removal of the action.  Id.  The Court concluded that accepting Home Depot’s argument would render the general removal procedures, 28. U.S.C. §1446, which includes the term “defendant” and allows both the general removal statute and the CAFA to operate, incoherent and inoperative.  Id

WHAT DOES THIS MEAN:

The term “defendant” in both the general removal statute and the CAFA limits the removal authority to the original defendant in a civil action.  Only this “defendant” may remove an action to federal court.

 

 

For More Information

  • This field is for validation purposes and should be left unchanged.