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CAFA Class Action Defense Cases–Johnson v. Advance America: Fourth Circuit Affirms Remand Of Class Action Against Payday Lender To State Court Because Minimal Diversity Under Class Action Fairness Act (CAFA) Not Met

District Court Properly Remanded Class Action to State Court because under Class Action Fairness Act (CAFA) a Defendant is Citizen of Both its State of Incorporation and the State where it has its Principal Place of Business Fourth Circuit Holds

Plaintiffs filed a class action against Advance America in South Carolina state court alleging labor law violations; alleging violations of state law in “payday loans” that were allegedly unconscionable and failed to meet the state law requirement for good faith and fair dealing; plaintiffs were South Carolina citizens, and brought the putative class action complaint on behalf of themselves and other South Carolina citizens. Johnson v. Advance America, 549 F.3d 932, 933 (4th Cir. 2008). Advance America removed the class action to federal court asserting removal jurisdiction under the Class Action Fairness Act (CAFA); defense attorneys asserted that minimal diversity existed because, even though it had its principal place of business in South Carolina, it was a Delaware corporation. Id. The defense argued also that minimal diversity existed because some class members may have moved out of state, id. The district court granted plaintiff’s motion to remand the class action to state court because Advance America and the putative class members were citizens of South Carolina. Id. The district court found also that the class action “fell within the ‘home-state exception’ to CAFA jurisdiction set forth in 28 U.S.C. § 1332(d)(4) because in a class limited by definition to ‘citizens of South Carolina,’ at least two-thirds of the class members necessarily are citizens of South Carolina.” Id. The Fourth Circuit granted defendant’s request for permission to appeal the remand order and affirmed.

The Circuit Court explained that despite the fact that Advance America was a citizen of Delaware, it was also a citizen of South Carolina. Johnson, at 934. Because the class action defined the class “to include only citizens of South Carolina, thus excluding persons who may have moved from South Carolina and established citizenship elsewhere at the time the action was commenced,” minimal diversity under CAFA had not been established. Id. Specifically, plaintiffs’ class action defined three proposed subclasses limited to “[a]ll citizens of South Carolina who are domiciled in South Carolina” or “[a]ll citizens of South Carolina,” id. The district court granted plaintiffs’ motion to remand both because minimal diversity had not been satisfied and because of the home-state exception. Id., at 934-35.

In broad terms, the Class Action Fairness Act permits removal of class actions if, inter alia, the citizenship of a single defendant is diverse from the citizenship of a single member of the class, and the defendant, as the removing party, bears the burden of establishing federal court jurisdiction. See Johnson, at 935. The Fourth Circuit first held that the fact Advance America has “dual citizenship” does not mean that it may select the citizenship of a diverse state to establish removal jurisdiction under CAFA: in short, Advance America has dual citizenship, not alternative citizenship, and it may not “rely on only one citizenship where its other citizenship would destroy federal jurisdiction.” Id., at 935-36. Further, the Circuit Court rejected defense efforts to create diversity among the plaintiffs, holding that the definitions of the proposed classes were limited to individuals who resided in South Carolina, not to former South Carolina citizens who had moved out of state. See id., at 936-37. The Court noted, “To be a citizen of a State, a person must be both a citizen of the United States and a domiciliary of that State.” Id., at 937 n.2 (citing Newman-Green, Inc. v. Alfonzo-Larrain, 490 U.S. 826, 828 (1989)). The fact certain Advance America customers may indeed have moved out of state was irrelevant for purposes of removal: “as the maters of their complaint, [plaintiffs] can choose to circumscribe their class definition” so as to exclude such persons and preclude removal. Id., at 937 (citations omitted). Accordingly, the defense failed to establish minimal diversity and the district court did not err in remanding the class action to state court. Id., at 937-38. (The Fourth Circuit found it unnecessary to reach the home-state exception argument, but noted “as a matter of logic, that if the class is limited to citizens of South Carolina, it could hardly be claimed that two-thirds of the class members were not citizens of South Carolina.” Id., at 938.)

NOTE: One circuit judge dissented in part, disagreeing that the class action complaint adequately limited class membership to citizens of South Carolina, but joining in the majority decision to remand because the circuit judge agreed that Advance America “failed to meet its burden of proof to establish the citizenship of any plaintiff in a state other than South Carolina.” Johnson, at 938-39.

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