The Third Circuit upheld a decision to remand a class action to state court, agreeing that one of the defendants could not be disregarded as a “nominal party” even though it had transferred all of its contracts, assets, debts, and liabilities to another company. Walsh v. Defenders, Inc., Civ. No. 18-2156 (3d Cir. July 2, 2018).
The plaintiff is a New Jersey citizen who filed a class action, consumer fraud complaint in New Jersey state court relating to cancellation fees under contracts for home security equipment. The plaintiff named three entities as defendants: Defenders, Inc., an Indiana citizen; ADT Security Services, Inc., n/k/a Tyco Integrated Security LLC (ADT SSI-TYCO), a New Jersey citizen; and ADT LLC, a Delaware citizen. The Defendants argued that ADT SSI-TYCO should be disregarded as a “nominal party” for purposes of determining Class Action Fairness Act (CAFA) diversity jurisdiction because years before the suit, it had transferred all its assets and liability to ADT LLC.
Rejecting this argument and finding that ADT SSI-TYCO was a real party to the suit, the Third Circuit noted that, though ADT SSI-TYCO transferred the contracts and related liabilities to co-defendant ADT LLC, it nonetheless continued in operation and serviced the commercial contracts. Because ADT SSI-TYCO remainaaked an active company, its transfer of assets and liabilities could not discharge claims unless the plaintiff consented to the transfer and discharge.
The Third Circuit then affirmed the District Court’s ruling that the case fit the “local controversy exception” to the federal court’s CAFA jurisdiction—ADT SSY-TYCO is a New Jersey citizen, just like the named plaintiff, and its conduct formed a significant basis for the claims asserted.
The Third Circuit’s decision highlights the difficult questions that can arise when a company merges with or sells assets to a different entity. These issues can be amplified in the class action context where a party’s citizenship can make the difference in keeping the case in state court and out of federal court.
For more information on the Walsh decision and on jurisdictional issues, please contact Kathleen Barnett Einhorn, Esq., Director of the firm’s Complex Commercial Litigation Group at email@example.com, or Jennifer Borek, Esq., a Partner in the Complex Commercial Litigation Group at firstname.lastname@example.org.