Consumer Finance Insights
August 4, 2014

Realigned Defendants May Remove Case To Federal Court

A recent South Carolina district court decision further strengthens the line of cases which allow a realigned defendant to remove a case to federal court.  District courts around the country are generally split on this issue, and there is no Fourth Circuit precedent.  On July 30, 2014 however, South Carolina Judge Gergel held that the proper analytic framework for determination of whether a realigned defendant is a defendant for removal purposes is the Fourth Circuit’s test to assess parties for purposes of diversity jurisdiction. In Poulter, a bank initially brought a foreclosure action against plaintiff Poulter.  Poulter asserted various counterclaims with class allegations in response, and during the pendency of the action, the state court dismissed all of the bank’s foreclosure-based claims with prejudice.  The state court then realigned the bank as a defendant, and only then did the bank attempt to remove the claims against it to federal court.

With no controlling Fourth Circuit precedent, the Poulter court recognized that other district courts to have considered this issue have come out on both sides, with some court’s reasoning that a parties’ alignment is decided at the time of removal, and other courts concluding that “once a plaintiff, always a plaintiff.”  Id.  Finding the first line of reasoning more persuasive, the Poulter court explained that it would rely on precedent that governed in a related jurisdictional area, namely realigning parties when determining diversity jurisdiction.  The Fourth Circuit diversity test is the “principal purpose test,” which requires the court to (1) identify the primary issue and (2) align the parties with respect to the primary issue at the time of removal.  Id. at 6-7.

Using this test, the Poulter court reasoned that, as the only claims at issue at the time of removal were class action claims brought by Poulter against the defendant bank, the primary purpose of the litigation was the remaining class action claims.  Further, it held that it would be absurd to find that the primary purpose of the litigation was the dismissed foreclosure claims, and to realign the parties so that the one with no claims would be the Plaintiff.

The court’s reasoning is quite persuasive, as it both identifies the absurdity of an outcome that makes a party with no affirmative claim the plaintiff, and it relies on an established test to conduct the analysis, borrowing from a very similar jurisdictional question related to realigned parties.  Accordingly, the Poulter court’s analysis can be easily transferred to any similar case where a realigned defendant seeks to remove its case to federal court. 

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