Third Circuit Affirms Remand of Class Action to State Court Under “Local Controversy” Exception

In a decision that may broaden application of the “local controversy” exception to removal under the Class Action Fairness Act (“CAFA”), 28 U.S.C. § 1332(d)(4), the Third Circuit recently affirmed the remand of a putative class action to New Jersey state court holding a corporate defendant with New Jersey citizenship could be considered a “local defendant” because it did not fully divest itself of liability after previously transferring its potential liabilities to a Delaware entity and, thus, remained a real party in interest.

In Walsh v. Defenders, Inc., putative class members filed their complaint in New Jersey Superior Court alleging that the contracts they entered into with Defendants related to the class members’ purchase of home security equipment and monitoring services violated New Jersey’s Truth-in-Consumer Contract, Warranty, and Notice Act (“TCCWNA”) and the New Jersey Consumer Fraud Act (“NJCFA”). Defendants removed the matter to federal court asserting CAFA jurisdiction, and Plaintiff moved to remand under CAFA’s local controversy exception. After initially denying Plaintiff’s motion to remand, the District Court granted Plaintiff’s motion for reconsideration when additional discovery showed that the only defendant with New Jersey citizenship, ADT SSI-Tyco, had contracted with 35.3% of the putative class members.

Defendants appealed and argued that ADT SSI-Tyco should have been ignored in the District Court’s diversity of citizenship analysis because, prior to the litigation, ADT SSI-Tyco had transferred the contracts and liabilities at issue to co-defendant ADT LLC, a Delaware citizen, and therefore ADT SSI-Tyco remained only a “nominal” party to the litigation. In affirming the District Court’s decision to remand, the Third Circuit focused on three key facts: (1) ADT SSI, a Delaware corporation, owned and drafted the residential contracts at issue here; (2) ADT SSI converted to ADT SSI–Tyco, a Delaware limited liability company with New Jersey citizenship; and (3) though ADT SSI–Tyco transferred the residential contracts and related liabilities to co-defendant ADT LLC, it remained an active entity and continued to service other contracts. The court held that ADT SSI-Tyco was still a “real and substantial party to the controversy” because the putative class members who previously contracted with ADT SSI-Tyco had not consented to the transfer of liability to ADT LLC, and thus retained their ability to sue ADT SSI-Tyco under the contracts. The court also distinguished Walsh from cases of successor liability or when an entity “completely dissolves” and all of its liabilities are inherited by a new, re-domesticated entity.

The Third Circuit affirmed the District Court’s finding that Plaintiff had established the second and third prongs of the local controversy exception explaining that: 1) Plaintiff sought “significant relief” against ADT SSI-Tyco; and 2) ADY SSI-Tyco’s alleged conduct formed a “significant basis” for the claims asserted. The Third Circuit had “no difficulty” concluding that Plaintiff sought “significant relief” against ADT SSI-Tyco, as Plaintiff’s amended complaint collectively sought monetary, declaratory, and injunctive relief, TCCWNA and NJCFA statutory damages, and fees from ADT SSI-Tyco. Whether this “significant relief” could actually be obtained from ADT SSI-Tyco was irrelevant to the court’s analysis. With respect to the “significant basis” prong, the Third Circuit found that ADT SSI-Tyco’s contracting with 35.3% of the class members was sufficient. The court explained that there was no “absolute quantitative requirement” to constitute a “significant basis,” and that the local controversy exception did not require that the local defendant’s conduct be the “most” significant conduct.

In light of Walsh, New Jersey companies should be aware that the sale or transfer of liabilities and assets to a resident of a different state may not be sufficient to defeat the local controversy exception to removal under CAFA. Particular attention should be paid to the relevant state corporate laws governing the assumption or transfer of liabilities and contractual obligations, and to the terms and conditions of the sale or transfer.