Can A Complaint Be Mislabeled To Avoid CAFA?

Erie Insurance Exchange v. Erie Indemnity Company, 722 F.3d 154 (3d Cir. 2013).

In this appeal, a majority of a Third Circuit panel held that an action brought by an insurance exchange - an entity, not a conglomerate of individuals - was not class action under CAFA.

The plaintiff, a reciprocal insurance exchange (the "Exchange"), brought suit in Pennsylvania state court, asserting claims for breach of contract, breach of fiduciary duty, and equitable relief arising out of the defendant Erie Indemnity Company's alleged misappropriation of funds.

Members of the Exchange purchased insurance policies and received indemnification for losses out of the Exchange's pool of funds. To receive insurance, exchange members signed identical subscriber agreements, which appointed the defendant as attorney-in-fact for the Exchange. These agreements gave the defendant broad managerial power over the Exchange's business affairs, including issuing policies, collecting premiums, and investing the Exchange's funds. Exchange members who paid their insurance premiums in installments also paid service charges, as well as late payment and policy reinstatement fees.

The state court complaint alleged that, beginning in 1997, the defendant retained for itself the service charges that exchange members paid to the Exchange. Additionally, the complaint stated that, starting in 1998, the defendant misappropriated more than $300 million in late payment and policy reinstatement fees. The complaint named the Exchange as plaintiff and stated that four exchange members, as trustees ad litem, were prosecuting the suit on behalf of all exchange members.

The defendant filed a notice of removal in the United States District Court for the Western District of Pennsylvania on the basis that this suit was a class action within the meaning of CAFA. The Exchange moved to remand, and the district court granted the Exchange's motion. On appeal, a Third Circuit majority affirmed.

The Third Circuit majority began its analysis by noting that CAFA defines a "class action" as any civil action filed under Federal Rule 23 or a similar state statute authorizing an action by one or more representative persons as a class action. 28 U.S.C. § 1332(d)(1)(B). Here, the defendant did not argue that this dispute satisfied CAFA's statutory definition. Instead, this action was originally brought pursuant to Pennsylvania Rule of Civil Procedure 2152, which allows members of an unincorporated association to...