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CAFA Class Action Defense Cases-Smith v. Nationwide: Sixth Circuit Affirms Applicability Of CAFA To Class Action Complaint And Affirms Order Remanding Class Action To State Court Because Plaintiff Disclaimed Damages Over $5 Million

Amendment to Complaint Adding Class Action Allegations “Commences” Action within Meaning of Class Action Fairness Act (CAFA) but Plaintiff may Disclaim Damages in Order to Defeat Federal Court Jurisdiction and Defense Failed to Establish Requisite Amount in Controversy to Satisfy CAFA Removal Jurisdiction Sixth Circuit Holds

In 2004, plaintiff filed an individual lawsuit (not a class action) in Tennessee state court against his automobile insurance carrier for failing to pay for the post-repair loss of value he suffered – that is, alleging that when the insurer pays for repairs to the vehicle, it is further “obligated to restore vehicles to their prior appearance, function and value” and breaches this alleged duty “by not assessing the vehicle after it [is] repaired, not informing Plaintiff of any lost value following such an assessment, and failing to pay the post-repair loss of value unless Plaintiff demands and proves loss of value.” Smith v. Nationwide Prop. & Cas. Ins. Co., 505 F. 3d 401, 403 (6th Cir. 2007). Plaintiff amended the complaint so as to assert class action allegations in September 2006, and limited recovery on behalf of individual insureds to $74,999, and on behalf of the class to $4,999,999. Id. Defense attorneys removed the class action complaint to federal court under the Class Action Fairness Act of 205 (CAFA), but the district court granted plaintiff’s motion to remand the class action to state court. Id., at 402-03. Defense counsel appealed this order pursuant to 28 U.S.C. § 1453(c)(1), id., at 404, and the Sixth Circuit affirmed.

The Sixth Circuit began its analysis by employing the majority rule that CAFA does not alter the defendant’s burden of establishing federal court jurisdiction. Smith, at 404-05. It then turned to the question of whether CAFA applies to this class action, given that the original complaint was filed in 2004 but the class action allegations were not added until 2006. Id., at 405. The Circuit Court held that under Tennessee law the class action was “commenced” after the effective date of CAFA because “Defendant was neither afforded adequate notice of the generic identity of the proposed class nor provided adequate notice of claims of all plaintiffs who might someday fall within a putative class by virtue of [the] original complaint.” Id., at 406. Accordingly, the Sixth Circuit resolved the threshold inquiry by holding that defendant’s notice of removal was timely, id., at 406-07.

The Circuit Court agreed, however, that defense attorneys failed to establish that the amount in controversy satisfied CAFA’s $5 million jurisdictional limit. Smith, at 407. In the Sixth Circuit, the plaintiff – as the “master of his complaint” – is permitted to limit the amount in controversy or otherwise plead to avoid federal court jurisdiction, id. The Court held at page 407, “A disclaimer in a complaint regarding the amount of recoverable damages does not preclude a defendant from removing the matter to federal court upon a demonstration that damages are ‘more likely than not’ to ‘meet the amount in controversy requirement,’ but it can be sufficient absent adequate proof from defendant that potential damages actually exceed the jurisdictional threshold.” (Citation omitted.) In this case, defense attorneys conceded that compensatory damages would not exceed $5 million, and the Circuit Court rejected defense arguments that “an award of punitive damages could reasonably result in a damage award well in excess of $5,000,000.” Id., at 407-08. The Sixth Circuit explained that under Tennessee law punitive damages are generally not awardable in breach of contract cases, and this fact – coupled with plaintiff’s express disclaimer of the right to recover punitive damages – rendered it a “legal certainty” that punitive damages could not be recovered. Id., at 408. Accordingly, defendant failed to establish the requisite amount in controversy to support CAFA removal jurisdiction, id.

NOTE: While this strategy may work to defeat federal court jurisdiction, defense attorneys should keep in mind that limiting damages recoverable on behalf of the class may render plaintiff and their counsel inadequate class representatives for purposes of class action certification motions.

Download PDF file of Smith v. Nationwide Property & Casualty