Sunday, December 14, 2008, 6:53 PM

Fourth Circuit Rejects CAFA Diversity Jurisdiction

On Friday, in a pair of class actions against payday lenders who removed the cases to federal court under the Class Action Fairness Act (CAFA), the Fourth Circuit held that federal jurisdiction was lacking under CAFA's "minimal diversity" provision. Thus, the cases will proceed in state court. The cases are Dennison v. Carolina Payday Loans and Johnson v. Advance America, Cash Advance Centers of S.C., Inc. Johnson is the lead opinion. Both opinions were written by Judge Niemeyer and featured the same panels. Both cases arose from South Carolina and involved state law claims.

The class action complaints defined the proposed classes as consisting of S.C. citizens. The defendant in Johnson is a Delaware corporation with its principal place of business in S.C. The defendant argued that because of its dual citizenship, it should be considered a citizen of Delaware, thus making it diverse to the S.C. plaintiffs. The Fourth Circuit disagreed. Likewise, and conversely, in Dennison the Fourth Circuit rejected the defendant's argument that for CAFA diversity purposes the court should look at the defendant's principal place of business (Georgia) rather than its state of incorporation (S.C.).

The bottom line: dual citizenship isn't sufficient to establish minimal diversity under CAFA; both a defendant's state of incorporation and its principal place of business will be considered in determining diversity. (This conclusion hasn't been embraced by all courts: the N.D. Ga. reached the opposite conclusion last year.)

In addition, in both cases the Fourth Circuit rejected the defendants' alternative arguments that CAFA's minimal diversity requirement was satisfied on the ground that the complaints' class definitions include citizens of multiple states--i.e., the classes aren't limited to S.C. citizens. The Court disagreed, reading the class definitions to limit membership to persons who were S.C. citizens at the time the complaints were filed. In other words, plaintiffs, as masters of their complaints, pleaded their way out of CAFA.

The Court (particularly Judge Agee writing separately) added that the defendants' proof of non-S.C. citizenship for some class members wasn't sufficient. Defendants contended in affidavits that some class members changed their residency to other States. Residency, the Court emphasized, isn't the same as citizenship for diversity purposes; the fact that a class member may reside outside S.C. doesn't mean the person is no longer a citizen of S.C.

Judge Agee dissented in part in both cases because he disagreed that the class definitions in the complaints (particularly the damages classes, as opposed to the injunction classes) include only S.C. citizens. Those classes are defined as "[a]ll citizens of South Carolina who borrowed money from Defendant" and "[a]ll citizens of South Carolina who renewed a loan with Defendant" during a period before the complaint. Judge Agee said these backward-looking definitions lack a temporal limitation requiring that class members must've been S.C. citizens at the time the complaints were filed. He thought these class definitions left open potential membership to persons who were S.C. citizens when they transacted with defendants but who weren't S.C. citizens when the complaints were later filed.

One wonders if plaintiffs deliberately crafted their definitions in this way so they could try to have it both ways: if the cases were removed to federal court under CAFA (as they were), plaintiffs could argue (as they did) that the classes are limited to S.C. citizens at the time the complaints were filed; but if the cases hadn't been removed, one wonders if plaintiffs would've contended in state court that their damages classes include former S.C. citizens.


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