Wednesday, March 7, 2012

FYI: 9th Cir Holds State AG Action Against Servicer Not Removable to Federal Court

The U.S. Court of Appeals for the Ninth Circuit recently held that:  (1) the Class Action Fairness Act did not provide a basis for removal of an action to federal court, where the state attorney general was the real party in interest in a lawsuit alleging violations of the Nevada Deceptive Trade Practices Act; and  (2) federal question jurisdiction did not exist where the complaint raised exclusively state law claims and did not raise any substantial issues of federal law. 
Seeking declaratory and injunctive relief, as well as civil penalties and restitution for allegedly defrauded consumers, the Nevada Attorney General filed a lawsuit against a bank and related entities, including a  home mortgage servicer (collectively the "Defendant Bank"). 
The Nevada AG's complaint alleged that the Defendant Bank had engaged in deceptive practices with respect to mortgage servicing, loan modifications, and foreclosures in violation of the Nevada Deceptive Trade Practices Act, Nev. Rev. Stat. §§ 598.0903-.0999 ("NDTPA").  As part of its NDTPA allegations, the Nevada AG alleged that the Defendant Bank misrepresented consumers' credit histories to credit agencies in violation of the federal Fair Debt Collection Practices Act, 15 U.S.C. § 1692e et seq.  ("FDCPA"), and that the Defendant Bank made various misrepresentations about loan modification requirements under the federal Home Affordable Mortgage Program ("HAMP"), 12 U.S.C. § 5219a.  The Nevada AG also sought enforcement of a consent judgment entered against the Defendant Bank in a prior action.
The Defendant Bank removed the action to federal district court, asserting various bases for federal jurisdiction including the Class Action Fairness Act, 28 U.S.C. § 1332(d)(10),(d)(11) ("CAFA"), and federal question jurisdiction under 28 U.S.C.  § 1331 by virtue of the FDCPA allegations.  Denying Nevada's motion to remand, the district court concluded that federal question jurisdiction existed because of issues related to HAMP and that this action moreover constituted a "mass action" under CAFA.  Nevada appealed. 
The Ninth Circuit reversed, concluding federal subject matter jurisdiction did not exist.
As you may recall, the NDTPA authorizes the state attorney general to file a lawsuit in the state's name for deceptive trade practices.  Nev. Rev. Stat. § 598.0963(3).  In addition, CAFA provides for the removal of "class actions" and "mass actions" involving claims that meet certain jurisdictional requirements related to numerosity of claimants, minimal diversity, and amount in controversy. 28 U.S.C. § 1332(d).   CAFA defines "mass action" in part as an action involving "monetary relief claims of 100 or more persons . . . proposed to be tried jointly" due to the presence of common questions of law or fact.  CAFA's definition of "mass action," however, excludes civil actions in which all the claims arise from a single event or occurrence.  See 28 U.S.C. § 1332(d)(11)(B)(ii)(I).
The Ninth Circuit first considered the Bank's argument that CAFA provided a basis for removal of this case as a "class action."  In ruling that this case did not involve a class action under CAFA, the Court relied on its recent opinion in Washington v. Chimei Innolux Corp., 659 F.3d 843 (9th Cir. 2011), which held that attorney general enforcement actions were not removable as "class actions" under CAFA, because the attorney general -- and not a class representative -- was the real party in interest in such "parens patriae" actions.   
The Court next considered the Defendant Bank's argument that the suit was removable as a "mass action" under CAFA.  The Ninth Circuit ruled that CAFA's "event or occurrence" exclusion did not apply here, because multiple alleged acts of fraud and misrepresentation gave rise to the claims in this case.  
Analyzing conflicting opinions from the Fifth and Seventh Circuits, the Court concluded that the characterization of this case as a "mass action" hinged on identifying the real party in interest.  The identity of the real party in interest, the court noted, would determine whether CAFA's numerosity and diversity requirements were satisfied.  Compare LG Display Co., Ltd. v. Madigan, 665 F.3d 768 (7th Cir. 2011)(viewing complaint as a whole and thus concluding that parens patriae suit was not a mass action because the Attorney General was the only plaintiff) with Louisiana ex rel. Caldwell v. Allstate Ins. Co., 536 F.3d 418 (5th Cir. 2008)(adopting a claim-by-claim approach to conclude that parens patriae antitrust action against insurance companies was mass action because insurance policyholders were the real parties in interest).
Relying on its opinion in Department of Fair Employment and Housing v. Lucent Technologies, Inc., 642 F.3d 728 (9th Cir. 2011), which held that the "aggrieved" party was the real party in interest, the Ninth Circuit considered the complaint as a whole and determined that Nevada was the real party in interest.  In so ruling, the Court considered various factors including Nevada's interest in protecting the integrity of the mortgage servicing business, eliminating the causes of the state's foreclosure crisis, and Nevada's sovereign interest in protecting its citizens.  The Court also determined that Nevada's claim for restitution on behalf of its consumers did not change its status as the real party in interest and render the action removable under CAFA's diversity and numerosity requirements.
With regard to the Defendant Bank's assertion that federal jurisdiction existed because the claims involved federal law, namely the Nevada AG's allegations regarding HAMP and the FDCPA raised under the rubric of state consumer fraud violations, the Court ruled that this case did not raise a substantial federal issue that justified removal.  See, e.g., Grable & Sons Metal Prods. V. Darue Eng'g & Mfg., 545 U.S. 308, 314 (2005).  The Court determined that the complaint raised exclusively state claims despite the allegations referencing the HAMP program and the FDCPA.  The Court held that any "glancing reference" to federal law in the complaint was not sufficient to confer federal jurisdiction, because the federal issues here were not "pivotal" to the resolution of Nevada's claims, and that Nevada's strong sovereign interest in enforcing the consent judgment and its state laws weighed in favor of remanding the case back to state court. 

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
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