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seventh Circuit (Posner) Examines CAFA Amount in Debate considering Knowles & Rooker-Feldman Doctrine

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seventh Circuit (Posner) Examines CAFA Amount in Debate considering Knowles & Rooker-Feldman Doctrine

Now we consider the Seventh Circuit (Posner) decision in Manley v. Pushpin Holdings, LLC that examined whether a named complaintant inside a class action lawsuit could stipulate to limit damages recovery to underneath the $5 million threshold requirement of federal jurisdiction underneath the Class Action Lawsuit Justness Act (CAFA). The situation also, briefly, walked in to the arena of analyzing the Rooker-Feldman doctrine that bars overview of a condition court decision with a federal court apart from the final Court and just how that may affect removal underneath the CAFA.

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April 11 2014
by: Colin E. Flora
Associate Civil Litigation Attorney

7th Circuit (Posner) Examines CAFA
Amount in Controversy in Light of
Knowles & Rooker-Feldman Doctrine
As a general rule, if the Seventh Circuit hand down a class action decision, it
has a solid chance of finding its way onto the Hoosier Litigation Blog. If that
decision is authored by Judge Richard Posner, then it is almost a certainty. Some of
you might wonder why I have an apparent obsession with decisions by Judge
Posner. The answer is quite simple: he writes his own opinions and does so in a way
that seems to convey an authentic attempt to show the thought process that led to
the decision. This style of writing produces more than the run-of-the-mill legal
insight. It has the tendency to add minor issues to the case law that have never
before been considered, let alone explored. A good example of this was the Hughes v.
Kore of Ind. Enterprise, Inc. decision this past fall that tossed out the idea of seeking
class action recovery for a designated charitable purpose instead of for individual
persons where the recovery would be too small to justify individual recovery. Judge
Posner seems to have created this concept out of whole cloth and wrote it into the
opinion for the sole purpose of “the possibility of it for future reference.”

Ever since I was a law clerk while still a student, I have described class
action law as sitting on the cutting edge of the law. Class action law itself is
constantly evolving at a rapid pace and covers a vast spectrum of legal concepts and
methods of recovery. That coupled with the fact that the potential for very lucrative
April 11 Hoosier Litigation Blog by Pavlack Law, LLC 2014

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recoveries, sees class actions at the forefront of novel and ingenious legal
arguments. That brings us to today’s case for discussion: Johnson v. Pushpin
Holdings, LLC.

The Pushpin Holdings case brings us back to a topic we’ve previously
discussed: removal of a case from state court to federal court under the Class Action
Fairness Act (CAFA). This case also touches upon a case we discussed a little over a
year ago: Standard Fire Insurance Co. v. Knowles. Like most every interesting
CAFA case, the story begins with a filing of a case in state court. Here, that state
court was Illinois. The defendant, as they are apt to do, invoked CAFA to pull the
case out of what are perceived to be plaintiff friendly state courts into federal court.
The underlying decision that went up on appeal to the Seventh Circuit was the
federal trial court’s determination that the case did not meet the requirements of
CAFA and therefore that the trial court lacked subject matter jurisdiction over the
case. The single issue was whether the case met the threshold amount in
controversy requirement of CAFA.

CAFA, like many federal laws, did not smoothly slide into the U.S. Code. It
altered numerous existing sections. One of those sections is 28 U.S.C. § 1332, the
section most well known for permitting diversity jurisdiction. Section 1332(d)(2)
sets the amount in controversy to exceed $5 million. This means simply that the
stakes of the case for the defendant is at least $5 million – well, technically a penny
more than $5 million, for at $5 million even, the amount in controversy does not
“exceed” $5M. Exactly how, when, and to what degree of certainty this amount
needs to be shown has been the topic of much debate and was the catalyst for the
Knowles decision last year. We’ll take a look at that a little bit later on.

First, we need to look at the amount in controversy in the Pushpin Holdings
case to get a grasp on the facts we are working with. The claim alleged that the
defendant filed approximately 1,100 fraudulent lawsuits the penalty for which must
be at most $1,000 each. The opinion does not explain this point, and since the
underlying legal claim is a violation of Illinois law, I am not personally familiar
with the legal mechanism for recovery. However, the court, quoting from the class
action complaint, recognizes that no more than $1.1 million was sought in
compensatory damages – i.e. $1k per fraudulent suit. The complaint also stated that
the class sought $2 million in punitive damages and that the attorneys’ fees – this,
like many consumer protection statutes, apparently permits recovery of attorneys
fees and costs – would not exceed $400,000. All told, the plaintiffs claimed to be
seeking $3.5 million. A hefty sum no doubt, but only 70% of the way to the $5
million needed to meet CAFA.
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The defendant had a different interpretation of the amount in controversy.
The defendant took the position that its exposure could exceed $5 million. It, oddly
enough, argued that the class was actually bigger than the plaintiff alleged at 1,300
potential members and that the compensatory damages are actually upward of $3.3
million. I’m going to pause for a second here. I know lawyers are notoriously bad at
math, but where in the world did this $3.3 million number come from? I am willing
to believe that the applicable Illinois statute has a trebling provision (a quick peak
at the Illinois Consumer Fraud Act shows that it does) that would allow three times
the compensatory damages amount. But if the defendant argues that there are
actually 1,300 potential class members, shouldn’t the number be $3.9 million not
$3.3 million? Either way, if the plaintiff seeks $2 million in punitive damages and
there can be at least $3.3 million in compensatory damages on the line, the amount
in controversy could plausibly exceed $5 million.

Judge Posner continued the analysis with a poignant recognition of what one
might expect where the complaint specifically rejects recovery above the threshold
amount.

One might suppose that whatever potential damages the class might
have sought, remand is required because the complaint forswears any
claim for more than $3.5 million. The district judge said, however, that
“once the proponent [of removal, and hence opponent of remand—
Pushpin] has plausibly suggested that the relief exceeds $5 million,
then the case remains in federal court unless the plaintiff can show it
is legally impossible to recover that much.” The term we’ve italicized
appears in many cases, as does the older formula that to prevent
removal the plaintiff must demonstrate to a “legal certainty” that his
claim is for less than the jurisdictional amount. Neither “legal
impossibility” nor “legal certainty” seems descriptive of what is after
all just a party’s commitment not to seek damages above an amount
specified by him, whether to avoid removal or for some other reason. A
court can’t force a plaintiff to accept greater damages than he wants;
and it might seem that class counsel in this case had made a
commitment, in the passages that we quoted from the complaint, not to
seek a judgment for more than $3.5 million.

Judge Posner easily dispenses with this – let’s call it a hypothetical. Under Illinois
law, at least as interpreted by the Seventh Circuit, for a plaintiff’s commitment to
limit the amount he seeks “to be effective, [he must] file a binding stipulation or
affidavit with the complaint.” Indeed, the only similar statements from Illinois state
cases is that a plaintiff is “not limited to the amount sought in the complaint.”
April 11 Hoosier Litigation Blog by Pavlack Law, LLC 2014

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So there is no binding stipulation, but what if there was one? Judge Posner
phrases the problem eloquently: “there would remain a question whether a named
plaintiff (class representative) should be allowed to discard, without explanation or
notice to the other members of the class, ‘what could be a major component of the
class’s recovery,’ merely to ‘ensure that the stakes fall under $5 million.’” Indeed, as
the court recognizes, there may certainly be class members who would prefer to
maximize the recovery and take the federal court gamble. In discussing the
interplay between absent class member interest and legal strategy Judge Posner
adds:

But tugging against this type of objection to obtaining a remand in
exchange for surrendering part of the class damages claim is the lack
of realism in thinking that the class members can make an informed
decision on whether the case should be litigated in federal or state
court. What is required for such a decision is an expert legal judgment,
and that is something that class counsel can provide but not class
members—at least in a case like this; for remember that the members
of the class are just small debtors who happen to have been sued by
[the defendant] and many of whom, for lack of legal sophistication or
lack of resources or because the amount of the alleged debt was too
small to justify the expense of a lawyer, simply defaulted.

This is where the Knowles decision comes into play. Shockingly, neither the
plaintiff nor defendant made any citation to Knowles in its briefing. Had they been
followers of the HLB, they would’ve known better. In Knowles the Supreme Court
determined that a stipulation to limit recovery prior to class certification can only
apply to the named plaintiffs, not the absent class members. As such, a pre-
certification stipulation cannot prevent removal under CAFA. There may be a minor
wrinkle to this that we will discuss a bit later. Judge Posner offered an interesting
critique of Knowles. He criticizes the decision for not looking to the effect of state
law – there, Arkansas. He concludes, “If Arkansas limits damages by a procedural
rule, the limitation would not affect removability under the Class Action Fairness
Act; but if the limitation is substantive, it might.” Peculiarly, his citation in support
of this conclusion was to the Supreme Court case Shady Grove Orthopedic
Associates, P.A. v. Allstate Ins. Co. It is peculiar, because none of the opinions in the
decision constituted a majority opinion. Thus, none of the opinions constitute
binding authority.

After further criticizing the decision for not examining “the tradeoff between
class counsel’s giving up a part of the class damages claim and, by doing so, being
April 11 Hoosier Litigation Blog by Pavlack Law, LLC 2014

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able to litigate in a forum believed to be more favorable to the class,” the judge
concedes that Knowles is a binding decision and it must be followed.

The little wrinkle that I alluded to above is that there is one aspect of a pre-
certification stipulation that was not foreclosed by Knowles. Although the named
plaintiff cannot bind any absent class member to take a lesser amount, there is a
group with a stake in the case that he can bind: class counsel. If the amount in
controversy is sufficiently close to the $5 million number, the class counsel may
commit to limiting the class counsel fee so as to bring the amount under the
threshold. That would not have changed things here: the complaint already
acknowledged seeking $2 million in punitive damages, and the trebling effect upon
the compensatory damages (regardless of whether the class was 1,100 or 1,300
persons) would exceed the $5 million threshold.

There was one last issue argued by the plaintiffs. Oddly, the court was
comfortable handling the issue in a single paragraph. The plaintiff argued that the
Rooker-Feldman doctrine – “that the Supreme Court is the only federal court that
can entertain an appeal from a decision by a state court” – barred this particular
case from being pulled into state court. It is a very interesting argument. Judge
Posner dismisses it perhaps too flippantly. He, through citation, finds that “[t]he
rule does not bar a federal suit that seeks damages for a fraud that resulted in a
judgment adverse to the plaintiff.” It is my recollection, though it has been years
since I was faced with a Rooker-Feldman conundrum, that the analysis is really not
that simple. Judge Posner couches it as not a violation of the doctrine to seek
damages for fraud because “[s]uch a suit does not seek to disturb the judgment of
the state court, but to obtain damages for the unlawful conduct that misled the
court into issuing the judgment.” This statement necessitates a subsequent one in
which he insists that even though plaintiff also seeks to vacate the fraudulent
judgments, such other relief “can be rejected without affecting the damages claim.”
The problem is that under the law of some states, perhaps not Illinois, any claim of
fraud derived out of the judgment must be brought as an action to assault the
judgment. This is my vague recollection.

There was one last insightful line added in the CAFA analysis. The federal
trial judge stated that “‘there is a strong presumption in favor of remand’ when a
case has been removed under the [CAFA].” Judge Posner found that “[t]here is not.”

Join us again next time for further discussion of developments in the law.

April 11 Hoosier Litigation Blog by Pavlack Law, LLC 2014

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Sources
• Hughes v. Kore of Ind. Enter., Inc., 731 F.3d 672 (7th Cir. 2013) (Posner, J.).

• Johnson v. Pushpin Holdings, LLC, —F.3d—, No. 14-8006, 2014 WL 1383027
(7th Cir. Apr. 9, 2014) (Posner, J.).

• Standard Fire Ins. Co. v. Knowles, 568 U.S. ––––, 133 S.Ct. 1345, 185
L.Ed.2d 439 (2013).

• Shady Grove Orthopedic Associates, P.A. v. Allstate Ins. Co., 559 U.S. 393,
130 S. Ct. 1431, 176 L. Ed. 2d 311 (2010).

• Class Action Fairness Act of 2005 – P.L. 109-2.

• 28 U.S.C. § 1332.

• Illinois Consumer Fraud Act codified at 815 ILCS 505/2.

• Colin E. Flora, 7th Circuit: Posner Explains Notice Requirements & Utility of
Cy Pres Decrees in Small Class Actions, HOOSIER LITIGATION BLOG
(September 13, 2013).

• Colin E. Flora, 7th Circuit Examines Boundaries of Class Action Fairness Act,
HOOSIER LITIGATION BLOG (Oct. 4, 2013).

• Colin E. Flora, Class Action Fairness Act: Amount in Controversy After
Knowles, HOOSIER LITIGATION BLOG (Mar. 22, 2013).

• Colin E. Flora, Federal Diversity Jurisdiction and the “Gaping Hole Problem”,
HOOSIER LITIGATION BLOG (Jan. 25, 2013).

*Disclaimer: The author is licensed to practice in the state of Indiana. The information contained
above is provided for informational purposes only and should not be construed as legal advice on
any subject matter. Laws vary by state and region. Furthermore, the law is constantly changing.
Thus, the information above may no longer be accurate at this time. No reader of this
content, clients or otherwise, should act or refrain from acting on the basis of any
content included herein without seeking the appropriate legal or other professional
advice on the particular facts and circumstances at issue.

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