Quoth the SCOTUS, Nevermore - Third Party Counterclaim Defendants May Not Remove Diverse Lawsuits

In Home Depot U.S.A., Inc. v. Jackson, the United States Supreme Court ruled that neither the General Removal Statute, 28 U.S.C. § 1441(a), nor the Class Action Fairness Act of 2005, 28 U.S.C. § 1453(b), permits removal by a third party counterclaim defendant. The Court concluded the term “defendant” in each removal statute refers only to the original party sued by the original plaintiff. Because neither allows third parties to remove, parties brought into an otherwise diverse lawsuit cannot remove the case to federal court.

In the underlying action, the lender filed a debt collection lawsuit against Jackson (the defendant). Jackson then filed a counterclaim against the lender and third party class action counterclaims against Home Depot, Inc., and Carolina Water Systems, Inc. The lender subsequently dismissed its complaint, leaving only Jackson’s claims against Home Depot and Carolina Water Systems. Home Depot then removed the lawsuit to federal court, asserting diversity jurisdiction. Jackson moved to remand the case, arguing controlling precedent barred removal by a third-party counterclaim defendant.

In reaching its decision, the Court relied upon its 1941 opinion in Shamrock Oil & Gas Corp. v. Sheets, 313 U.S. 100 (1941), which held an original plaintiff may not remove a counterclaim against it. Extending this holding and focusing on the term “action” in the removal statutes, the Court explained the word “defendant” in those statutes means only the original defendant or defendants named in the plaintiff’s complaint. Consequently, the Court held neither statute authorizes removal by a counterclaim defendant, “including parties brought into the lawsuit for the first time by the counterclaim.”

In a dissenting opinion that is over twice as long as the 5-4 opinion, Justice Alito argues that the majority not only reads an irrational distinction into the removal statutes, but also flouts their plain meaning, which is supported by context. The dissent argues that third-party defendants are a subset of “defendants;” thus they should have the option to invoke the removal statutes. As the dissent points out, this inability to remove may raise concerns about out–of-state bias, the inability to take advantage of federal procedural rules, and the inability to use multidistrict litigation procedures. Of course, a four-Justice dissenting opinion is one Justice short of precedential value. Thus, the majority’s holding rules the day: counterclaim defendants may not remove a lawsuit.

For more information on the legal implications of third party counterclaims in diverse lawsuit, please contact your local Quarles & Brady attorney or:

• Jacob Bradley: (317) 399-2884 / jacob.bradley@quarles.com