Alerts

When a third-party defendant is not a defendant – Supreme Court reinforces removal loophole

Alerts / June 4, 2019

In a 5-4 decision written by Justice Clarence Thomas, and in which Justices Ginsburg, Breyer, Sotomayor and Kagan joined, the U.S. Supreme Court recently held that third-party defendants in state court actions cannot remove causes of action to federal court. The decision turned on the meaning of the term “defendant” in the general removal statute (28 U.S.C. § 1441 (a)) and the Class Action Fairness Act (CAFA) (28 U.S.C. 1453(b)). The decision leaves in place what many consider a loophole that can, through the procedural device of naming a class action defendant as a third-party defendant in a debt collection or similar action, deprive the defendant of the opportunity to remove the case to federal court when it otherwise would have been able to do so.

In Home Depot U.S.A., Inc. v. Jackson, Citibank NA filed a debt collection action in North Carolina state court alleging the defendant debtor was liable for charges he incurred on a Home Depot credit card. Jackson answered and filed an individual counterclaim against Citibank and third-party class action claims against Home Depot U.S.A. Inc. and Carolina Water Systems Inc., claiming that the third-party defendants had a scheme to induce homeowners to buy water treatment systems at inflated prices. Citibank then dismissed its claims and Home Depot filed a notice of removal, relying on the general removal statute and CAFA. Jackson moved to remand, arguing that a third-party counter-defendant could not remove the case to federal court. Jackson then amended his third-party class action claims to remove any reference to Citibank. The district court granted Jackson’s motion to remand and the U.S. Court of Appeals for the 4th Circuit affirmed, holding that neither the general removal statute nor CAFA permitted Home Depot to remove the claims.

After granting certiorari, the Supreme Court affirmed. The majority first reasoned that the general removal statute allows for removal only by the “defendant or the defendants,” without any reference to “third-party defendants.” The majority noted this reasoning was “bolstered” by the Federal Rules of Civil Procedure, which differentiate between third-party defendants, counterclaim defendants and defendants. Second, in other removal provisions such as §1432(a), Congress extended removal to a “party,” rather than just a “defendant.” Third, the Court reasoned that not allowing a third-party defendant to remove was consistent with its decision in Shamrock Oil & Gas Corp. v. Sheets, 313 U.S. 100 (1941), where the Court refused to allow an original plaintiff to remove a case under the predecessor to the general removal statute. In Shamrock, the Court had reasoned that the original plaintiff was not a “defendant” entitled to removal even though a counterclaim had been filed against the plaintiff. Finally, the Court rejected Home Depot’s argument that CAFA allowed for removal by a third-party defendant, stating that CAFA permits removal only by a “defendant.”

Justice Alito dissented, joined by Chief Justice Roberts and Justices Gorsuch and Kavanaugh. The dissenters argued that the distinction between defendants and third-party defendants is an “irrational distinction” that defeats the intent that removal prevents a plaintiff from gaining a homecourt advantage against outsiders.

Following Home Depot, it will be interesting to see whether the plaintiffs’ bar attempts to leverage this removal exception by recruiting potential class representatives who have already been sued in state court debt collection cases to assert third-party class action claims to defeat removal. It is yet unclear whether this is the type of “loophole” that can be broadly exploited in practice – only time will tell. Nonetheless, companies and their counsel should be aware of this potential tactic.

Authorship Credit: James R. Morrison

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