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For-Profit College Can’t Move Countersuit

(CN) - A class action alleging fraud and deceptive business practices against for-profit Westwood College will remain in California state court, the 9th Circuit ruled Monday, affirming a longstanding legal principle that counterclaim defendants cannot remove an action to federal court.

Westwood College subsidiary Westwood Apex sued California resident Jesus Contreras in San Bernardino Superior Court for breach of contract in 2010, seeking to recover some $20,000 in unpaid student loans. Contreras subsequently filed a class-action counterclaim against Westwood College and others, claiming the for-profit educational institution committed fraud, engaged in unfair and deceptive practices and violated a number of California's consumer-protection laws.

The counterclaim defendants (made up of all Westwood College entities except Westwood Apex) petitioned to remove the case to federal court in the Central District of California. But the District Court sent it back to state court, finding that removal by a counterclaim defendant was not authorized under the Class Action Fairness Act of 2005 (CAFA).

On appeal, a three-judge panel of the federal appeals court in Pasadena agreed, ruling that it would violate both established law and apparent Congressional intent if it allowed Westwood to remove the class action to the District Court.

"While CAFA eliminated several important roadblocks to removal of class actions commenced in state court, we hold that [the section of the Act relating to removal] did not change the longstanding rule that a party who is joined to such an action as a defendant to a counterclaim or as a third-party defendant may not remove the case to federal court," Judge Milan Smith wrote for the panel.

In a concurring opinion, Judge Jay Bybee wrote that while "it seems strange that Congress would have wanted to funnel class actions filed by means of an original complaint into federal court but keep those filed by means of a counterclaim in state courts, ... the CAFA achieves this particular result, and if Congress does not like it, Congress should rethink the rule."

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