Thursday, April 30, 2015

FYI: 9th Cir Holds State Court Order Expanding Class Size to Exceed CAFA Threshold Triggers 30-Day Removal Opportunity

The US. Court of Appeals for the Ninth Circuit recently reversed a district court’s order remanding a class action to state court, holding that a second removal was proper and timely-filed 30 days after the state court entered an order that expanded the class definiton after the first removal.

The plaintiff, an assistant store manager at a nationwide chain of discount retail stores, filed this action in state court in July of 2012, alleging that the employer supposedly violated the California Labor Code by denying 10-minute rest breaks to its employees.

As you may recall, in order for a federal court to have subject matter jurisdiction under CAFA, and among other things, the amount in controversy must exceed $5,000,000, exclusive of interest and costs, in order for a federal district court to have subject matter jurisdiction. See 28 U.S.C. § 1332(d).

The defendant employer removed the case in 2012 invoking jurisdiction under CAFA.  The plaintiff moved to remand the case to state court, arguing that defendant improperly went beyond the amended complaint by using a 65% violation rate, i.e., that rest breaks were not allowed in 65% of the shifts that were long enough to require a rest period, to support removal, resulting in an amount in controversy in excess of the $5,000,000 threshold. Instead, the plaintiff argued that the amended complaint was limited to a smaller class, namely, managers working shifts without another manager, and that only one-third of such shifts were worked alone, meaning that the amount in controversy was approximately $2.8 million, well under the jurisdictional minimum.

The district court agreed and remanded the case to state court, finding that because the plaintiff limited the putative class to employees who worked alone, the amount in controversy did not reach the CAFA jurisdictional threshold.

Back in state court, the plaintiff moved to certify the class of assistant store managers who worked without another assistant store manager according to defendant’s time records without another store manager scheduled to work, and who worked more than 3.5 hours.

The state court, however, expanded the class to include all assistant managers who did not receive breaks, regardless of whether they worked alone.

With this broader class defintion, the defendant employer filed a second notice of removal in June of 2014, arguing that the expanded class certified by the state court meant that at least $5,000,000 was in controversy. The plaintiff again moved to remand the case to state court, which the district court again granted, holding that the second removal was untimely because it was based on the same class definition that had been the subject of the first removal.

On appeal, the issue before the Ninth Circuit was whether the state court’s class certification order created a new opportunity for removal. The Court concluded that it did, and remanded the case to the district court to exercise jurisdiction under CAFA.

In support of its ruling, the Ninth Circuit reasoned that successive removal petitions are permitted only when there has been a relevant change of circumstances, such as when subsequent pleadings or events reveal a new and different basis for removal. The Ninth Circuit held that this includes when the pleadings are amended to create federal subject-matter jurisdiction for the first time.

The Ninth Circuit held that the state court’s order certifying the class expanded the amount in controversy because it included in the class employees who worked shifts without proper rest breaks, not just those who worked alone.

The Court found this to be indistinguishable from an order allowing the pleadings to be amended to alter the class definition, conferring CAFA jurisdiction for the first time. According to the Ninth Circuit, because a successive removal petition is clearly appropriate when the pleadings are amended, the Court found no good reason to reach a different conclusion simply because the same result was obtained through a class certification order.  

By certifying a broader class, the Ninth Circuit noted, the state court it increased the amount in controversy, effectively amended the complaint. Accordingly, the Ninth Circuit held that the second removal was proper.

Having concluded that the second removal was permissible, the Ninth Circuit found that it was also timely because the removal statute provides for two 30-day windows during which a case can be removed: (1) during the first 30 days after the defendant receives the initial pleading, or (2) during the first 30 days after the defendant receives “an amended pleading, motion, order or other paper from which it may first be ascertained that the case is one which is or has become removable.” 28 U.S.C. § 1446(b).

The Ninth Circuit held that the second window of opportunity to remove (i.e., 30 days after a defendant receives an amended pleading, motion, order or other paper from which it can be ascertained that the case has become removable), was triggered by the state court’s class certification order, not the amended complaint.

Beause the defendant employer filed the second removal within 30 days after the class certification order, the Ninth Circuit held that the removal was timely. Accordingly, the Court reversed and remanded the case to the district court, with instructions to exercise jurisdiction over the case under CAFA.

Eric Tsai
Maurice Wutscher LLP

71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654
Fax: (866) 581-9302
Mobile: (714) 600-6000

Admitted to practice law in California, Nevada and Oregon

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Saturday, April 18, 2015

FYI: 9th Cir Allows Removals Under CAFA Even If Prior Pleading Revealed Alternative Basis for Removal

The U.S. Court of Appeals for the Ninth Circuit recently reversed a district court’s order remanding a putative class action proceeding to state court on the basis that the removal was untimely under 28 U.S.C. § 1446(b).

In so ruling, the Ninth Circuit held that a defendant may remove a case from state court within thirty days of ascertaining that the action is removable under the federal Class Action Fairness Act (“CAFA”), even if an earlier pleading, document, motion, order, or other paper revealed an alternative basis for federal jurisdiction.

A borrower (“Borrower”) obtained a loan to purchase a house in Washington state. The loan was secured by a deed of trust, with the mortgage loan servicer (“Servicer”) as the beneficiary to the deed of trust. The deed of trust contained provisions permitting the beneficiary to enter the house and change the locks if the Borrower fails to perform the covenants and agreements contained in the deed of trust, or if the Borrower abandons the property. In April 2011, after the Borrower defaulted on her loan, the Servicer’s agents entered the Borrower’s home without notice, removed the existing locks, and installed a lockbox.

The Borrower, “as her separate estate, and on behalf of others similarly situated,” sued the Servicer in Washington state court, alleging six causes of action, including violations of the federal Fair Debt Collection Practices Act (“FDCPA”). The Borrower later filed a Second Amended Complaint, adding additional allegations and defining the proposed class.  The Borrower did not specify an amount in controversy in the complaint, but requested “damages in an amount to be proven at trial, including treble damages . . . .” The state court certified the proposed class on May 9, 2014. On June 3, 2014, the Borrower submitted responses to the Servicer’s discovery, stating that “the total amount of monetary damages is expected to exceed $25,000,000.00.”

On June 5, 2014, the Servicer filed a notice of removal to federal court pursuant to CAFA.

The Borrower moved to remand the case to state court, arguing that the Servicer’s notice of removal was untimely because it was filed more than two years after the Borrower’s initial complaint triggered federal question jurisdiction under the FDCPA. See 28 U.S.C. § 1331.

The Servicer countered that removal was timely because the Borrower’s answers to the Servicer’s discovery requests were the first “other paper from which it could be ascertained that the matter in controversy exceed[ed] $5,000,000,” one of the three necessary elements for triggering removal under CAFA.  The Servicer argued for extending the logic of Durham v. Lockheed Martin Corp. and recognize “a second and separate ground for removal, even if the initial complaint provided some other ground for removal,” thereby “reopen[ing]” the thirty-day removal window.

The district court remanded the case to state court because it was “not persuaded by Defendant’s policy argument not supported by the wording of the statute or case law.” The lower court found that “the general principles of removal jurisdiction apply in CAFA cases,” and “the relevant removal date is the date on which the case itself becomes removable, rather than the date on which the case first becomes removable under CAFA.”  The district court held that because the first amended complaint included a federal cause of action, the case was rendered removable within 30 days of the filing of the first amended complaint. 

The Servicer appealed, arguing that “[t]he same three reasons Durham cited for applying the broad interpretation of ‘removable’ to federal officer removals apply with equal force to CAFA removals.” First, the Servicer argued, Congress and the Supreme Court have instructed that section 1453, like section 1442 in Durham, should be interpreted broadly in favor of removal. Second, the Servicer argued, both section 1442 and section 1453 permit a single defendant to remove without the consent of other defendants, and a strict interpretation of “removable” would effectively eliminate single-defendant removals. Durham, 445 F.3d at 1253. Finally, as with section 1442, the Servicer argued that interpreting “removable” strictly would “encourage gamesmanship and defeat the policies underlying” CAFA. Id.

As you may recall, a defendant who is sued in state court may remove the action to federal court on various grounds, such as if the case presents a federal question under 28 U.S.C. § 1331, or if the requirements for diversity of citizenship are met under 28 U.S.C. § 1332. Section 1446(b)(1) requires the defendant to file a notice of removal “within 30 days after the receipt by the defendant, through service or otherwise, of a copy of the initial pleading setting forth the claim for relief upon which such action or proceeding is based.” 28 U.S.C. § 1446(b)(1).

However, if the case stated by the initial pleading is not removable, a notice of removal may be filed within 30 days after receipt by the defendant, through service or otherwise, of a copy of an amended pleading, motion, order or other paper from which it may first be ascertained that the case is one which is or has become removable. 

In 2005, Congress passed CAFA to permit defendants to remove class actions to federal court if they meet three requirements: (1) there must be minimal diversity of citizenship between the parties; (2) the proposed class must have at least 100 members; and (3) the aggregated amount in controversy must equal or exceed the sum or value of $5 million.  The Senate Report on CAFA explains that “[b]ecause interstate class actions typically involve more people, more money, and more interstate commerce ramifications than any other type of lawsuit, the Committee firmly believes that such cases properly belong in federal court.” S. Rep. No. 109–14, at 5; see Dart Cherokee, 135 S. Ct. at 554.

In Durham, the Ninth Circuit recognized that “there are two plausible ways to construe” the term “removable” in section 1446. The first way to interpret “removable” is as “binary—either there’s some basis for removal, or there’s not. . . . The second way to interpret ‘removable’ is to look to each ground for removal separately. Under this reading, a case does not become removable until the particular basis on which removal is sought becomes apparent from the record.” Id.

The initial complaint in Durham made the case eligible for removal on federal enclave grounds, but Lockheed Martin chose not to remove the case at that time. Durham’s answers to the defendant’s subsequent interrogatories, however, revealed that the case was also removable on federal officer grounds under section 1442(a)(1). Lockheed Martin removed the case to federal court within thirty days of discovering this new basis for removal, but more than thirty days after the initial basis for removal had been disclosed. The Ninth Circuit addressed whether Lockheed was “entitled to a new thirty-day period to remove” the case when it discovered a basis for federal jurisdiction under section 1442(a)(1), or whether removal was untimely based on the date of the initial complaint.

The Ninth Circuit held that “a federal officer defendant’s thirty days to remove commence when the plaintiff discloses sufficient facts for federal officer removal, even if the officer was previously aware of a different basis for removal.” Id. at 1253.  In so ruling, the Ninth Circuit noted that “the Supreme Court has mandated a generous interpretation of the federal officer removal statute ever since: ‘It scarcely need be said that such measures are to be liberally construed to give full effect to the purposes for which they were enacted.’” Id.

The Ninth Circuit generally “strictly construes” the requirements of removal, and that in the past, it “declined to construe CAFA more broadly than its plain language indicates,” Progressive W. Ins. Co. v. Preciado, 479 F.3d 1014, 1018 (9th Cir. 2007). See also Nevada v. Bank of Am. Corp., 672 F.3d 661, 667 (9th Cir. 2012). However, it was persuaded that the Supreme Court’s recent decision in Dart Cherokee makes clear that the “federal officer” category identified in Durham as an exception to the strict construction of removal statutes must now be expanded to include CAFA removals.

In Dart Cherokee, the Supreme Court addressed “[w]hether a defendant seeking removal to federal court is required to include evidence supporting federal jurisdiction in the notice removal, or [whether] alleging the required ‘short and plain statement of the grounds for removal’ [is] enough.” 135 S. Ct. at 552–53. There, the defendant removed a case from state to federal court under CAFA, alleging that the three elements triggering CAFA jurisdiction were present. Id. at 552–53. The plaintiff argued, and the district court agreed, that the notice of removal was “deficient as a matter of law” because it included “no evidence” proving that the amount in controversy exceeded $5 million. The district court remanded the action to state court, and the Tenth Circuit denied review. Id. at 552.

The Supreme Court reversed, noting that, no antiremoval presumption attends cases invoking CAFA, which Congress enacted to facilitate adjudication of certain class actions in federal court. See Standard Fire Ins. Co., 568 U.S.[ —, —], 133 S. Ct.[ 1345,] 1350 [(2013)].

The Borrower argued that this statement constituted dicta that could not overcome the Ninth Circuit’s long applied rule of strict construction against removal of class actions.  The Ninth Circuit again looked to the Supreme Court’s decision in Dart Cherokee. According to the Ninth Circuit, even though Dart Cherokee focused primarily on how specifically the “amount in controversy” requirement must be asserted in a defendant’s removal notice under CAFA, the Supreme Court left no doubt “that no antiremoval presumption attends cases involving CAFA.” 135 S. Ct. at 554. The Ninth Circuit noted that this declaration is bolstered by the Court’s reference to Congress’s “overall intent . . . to strongly favor the exercise of federal diversity jurisdiction over class actions with interstate ramifications.” S. Rep. No. 109–14, at 35.

The Ninth Circuit rejected that Borrower’s argument that any presumption in favor of removal expressed in Dart Cherokee and the Senate Report on CAFA applies only to section 1332, and not to removal procedure under section 1446. In Durham, the Ninth Circuit specifically addressed the “clear command from both Congress and the Supreme Court . . . to interpret section 1442 broadly in favor of removal,” and then recognized the need to “extend section 1442's liberal interpretation to section 1446.” Durham, 445 F.3d at 1253. Similarly, the Ninth Circuit held, Congress and the Supreme Court have instructed courts to interpret CAFA’s provisions under section 1332 broadly in favor of removal. 

Accordingly, the Ninth Circuit extended that liberal construction to section 1446.

The Ninth Circuit concluded that the Servicer’s removal under CAFA was timely, and that the action therefore properly belonged in federal court. The Borrower filed her initial complaint on April 3, 2012. The only basis for removal at that time was under section 1331. Not until June 3, 2014, when the Borrower specified in her answers to the Servicer’s interrogatories that the total amount in controversy exceeded $25 million, did the case become removable under CAFA. Two days later, the Servicer timely removed the case to federal court.

Lastly, the Ninth Circuit reversed the award of attorneys’ fees to the Borrower for wrongful removal because it found that the Servicer did have a reasonable basis for removal.

Eric Tsai
McGinnis Wutscher LLP
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654
Fax: (866) 581-9302
Mobile: (714) 600-6000

Admitted to practice law in California, Nevada and Oregon

Friday, April 17, 2015

FYI: Cal App Ct Reverses Jury's Finding That Personal Guaranties of Principals of Corporate Borrower Were Unenforceable "Shams"

The Court of Appeal of the State of California, First Appellate District, recently reversed a jury’s finding that personal guaranties signed by principals of the corporate borrower were unenforceable “shams,” thereby allowing the loan owner to pursue a deficiency judgment against the guarantors.

A copy of the opinion is available at:

As you may recall, under California law, a lender cannot seek a deficiency judgment where the proceeds of the sale of the property securing the debt by the mortgagee or trustee under power of sale contained in the mortgage or deed of trust are less than the debt.  A lender may pursue a deficiency judgment against a “true” guarantor, but where the borrower and guarantor are the same, the guaranty is considered an unenforceable sham.

In 2006, the corporate borrower obtained a $2.1 million loan secured by a deed of trust against a parcel of undeveloped land. Two individuals also signed personal guaranties at the same time.

In early 2011, the State closed the lender bank and the FDIC was appointed as receiver. Shortly thereafter, the loan went into default and then was acquired by the plaintiff in this action, which sued to foreclose in January of 2012.  Later that year, the plaintiff purchased the collateral property at a non-judicial foreclosure sale for substantially less than the balance owed on the loan.

The plaintiff then sued to enforce the guaranties. The guarantors defended on the basis that the guaranties were unenforceable shams, and countersued the plaintiff for allegedly violating California’s Unfair Competition Law (“UCL”) by trying to enforce sham guaranties.

The case proceeded to trial, after which the jury returned a verdict for the defendant guarantors. The trial court ruled in favor of the plaintiff on the UCL claim, finding that whether the guaranties were a sham was a close question and, therefore, plaintiff’s attempt to enforce them was not done in bad faith.

On appeal, the Appellate Court noted that California’s anti-deficiency statutes do not prevent a lender from pursuing a deficiency judgment against a guarantor who waives his anti-deficiency protection, even though the lender cannot recover a deficiency against the primary borrower. However, the debtor must be a “true” guarantor and “not merely the primary debtor under a different name. When the principal borrower takes on additional liability as a guarantor, that guaranty is a sham and adds nothing to the primary obligation.”

The Court also noted that, although California law does not define what constitutes a sham guaranty, a threshold issue in such cases is “whether the guarantor of a loan is also obligated as a borrower.” Courts have also considered whether the lender structured the loan to circumvent the protections of the anti-deficiency statutes. However, a sham guaranty defense is not available where there is “adequate legal separation between the borrower and the guarantor. e.g., through the appropriate use of the corporate form.”

The plaintiff argued that the verdict was not supported by substantial evidence and the Appellate Court agreed, reasoning that because there was legal separation between the corporate borrower and the guarantors, the Court could not conclude the borrower was a mere alter ego of the guarantors or that they were directly obligated for the borrower’s debts.

The Appellate Court pointed out that under California law “ownership is a pre-requisite to alter ego liability,” and courts consider factors such as whether there has been “commingling of funds, personal use of corporate assets, inadequate corporate records, lack of employees, offices, or operating funds, and inadequate capitalization.”

The guarantors did not have any direct ownership interest in the corporate borrower, but owned the parent company that, in turn, owned the borrower. Because the evidence showed that the parent company observed the required corporate formalities like “passing corporate resolutions, holding corporate meetings, and maintaining separate bank accounts and assets” the parent company was legally distinct from the defendant guarantors, they were not directly liable for the borrower’s obligation and they thus failed to establish that the parent company’s veil should be pierced.

Having concluded that the defendant guarantors were not directly liable for the borrower’s debts, the Appellate Court turned to the question of whether the lender “structured the loan transaction to subvert the antideficiency laws.”

The Court first pointed out that there was no evidence that the lender “forced defendants to borrow through a shell entity or that it dictated the form that shell entity should take,” and that the ultimate issue it confronted was a question of law: “Can guarantors disclaim their antideficiency waivers if they decide to borrower through a shell entity for their own purposes and there is adequate legal separation between the guarantors and the borrower?”

Noting that antideficiency statutes and case law shed no direct light on this issue, the Appellate Court concluded that “the answer must be no. Where individuals purposefully take advantage of the benefits of borrowing through a corporate entity, they must also assume the risks that come with it.”

The Appellate Court then addressed the defendant guarantors’ argument that the plaintiff’s attempt to enforce the guaranties was an unfair and unlawful business practice under the UCL. The Court found that the attempt to enforce the guaranties was not unlawful because it did not violate any predicate law. It then found that enforcement was also not unfair because the defendant guarantors expressly waived their anti-deficiency protections and, thus, the guaranties were valid and enforceable. It was also not unfair for the plaintiff to exercise its legal right to pursue a non-judicial foreclosure and then sue on the guaranties instead of pursuing a work-out, as the guarantors alleged the loan servicer had promised. Just because the servicer discussed the possibility of a work-out did not obligate the plaintiff or servicer to follow-through.

The Court reversed the judgment in the guarantors’ favor, directed the lower court to enter judgment for the plaintiff on its guaranty claims, and affirmed the trial court’s judgment in plaintiff’s favor on the guarantors’ UCL counterclaim.

Eric Tsai
McGinnis Wutscher LLP
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654
Fax: (866) 581-9302
Mobile: (714) 600-6000

Admitted to practice law in California, Nevada and Oregon