Litigation Update: 5th Circuit Adopts Presumption Favoring Federal Jurisdiction in CAFA Cases.
On January 7, 2016, the Fifth Circuit adopted a presumption in favor of retaining federal jurisdiction in class actions removed under the Class Action Fairness Act ("CAFA"). The decision is good news for class action defendants. It places the burden of proving CAFA exceptions squarely on plaintiffs, narrowing CAFA's already limited exceptions, and making it more likely that class actions will remain in federal court. Look for the plaintiff's bar to respond with pleadings explicitly tailored to remain within the CAFA exceptions.
CAFA makes federal jurisdiction mandatory over certain large, high-dollar class action lawsuits, with limited exceptions. See 28 U.S.C.A. § 1332(d). The local controversy exception divests federal jurisdiction when two-thirds of the proposed class and at least one key defendant are citizens of the state where the case was originally brought, and the class's "principal injuries" were incurred in that same state. See 28 U.S.C.A. § 1332(d)(4).
On January 7, 2016, in Arbuckle Mountain Ranch of Texas, Inc. v. Chesapeake Energy Corp., 15-10955, 2016 WL 98128, the Fifth Circuit held that "if the applicability of a [CAFA] exception is not shown with reasonable certainty, federal jurisdiction should be retained." Applying the "reasonable certainty" standard, the Fifth Circuit interpreted the plaintiff's ambiguous petition as failing to plead a class satisfying the local exception rule. It reversed the district court, which had granted a remand, and ordered the case to remain in federal court.
Defendants Chesapeake Energy Corporation, various Chesapeake subsidiaries and affiliates, and Chesapeake's joint venture partner, Total E&P USA, leased property from mineral interest owners in two Texas counties. The defendants operated wells on the leased property, paying the owners a percentage of their revenue.
The interest owners defaulted on their loans and their lenders foreclosed and sold the mineral interests. During and after the foreclosure process, the defendants continued to operate wells on the properties and sell the produced hydrocarbons.
Plaintiff Arbuckle Mountain Ranch acquired a mineral interest out of foreclosure and objected to the defendants' continued well operation. The plaintiff claimed the foreclosures had extinguished the defendants' leases, depriving them of any right to operate the wells, and that the defendants were not paying the post-foreclosure owners from their ongoing operations. Based on those allegations, the plaintiff sought a declaration that the defendants' pre-foreclosure leases had terminated and brought claims for trespass and conversion.
The plaintiff further sought to certify a class of similarly situated post-foreclosure interest owners, but its state court pleadings did not clearly identify the scope of the class. The defendants removed under CAFA. The plaintiff moved to remand, arguing that the local controversy exception applied. The district court granted the remand and the plaintiff appealed.
The Fifth Circuit's Decision.
The central issue on appeal was if the plaintiff's state court pleading alleged a class satisfying CAFA's local controversy exception. The local controversy exception requires that two-thirds of the proposed class be citizens of the same state as a defendant "from whom significant relief is sought" and "whose alleged conduct forms a significant basis for the claims asserted . . . ." 28 U.S.C. § 1332(d)(4)(A). The party seeking remand has the burden of proving that the proposed class meets the two-thirds citizenship requirement.
The plaintiff argued that it sought to certify a class of current post-foreclosure mineral interest owners, while the defendants characterized the proposed class as embracing all current and former owners, dating back to foreclosure actions in 2004. The plaintiff had offered expert testimony that the two-thirds of the current interest owners were Texas citizens, but had no evidence as to the citizenship of the former owners. Accordingly, if the Fifth Circuit adopted the defendants' interpretation of the class, the plaintiff could not satisfy the local controversy exception.
The appellate court analyzed the plaintiff's state court petition to determine the scope of its proposed class. The court found the petition included "two definitions of the two putative class in separate paragraphs" that were "in direct conflict with one another." 2016 WL 98128, at *3-4. One definition was limited to the current owners; the other definition expressly included former owners. Id.
Faced with the petition's ambiguity, the appellate court considered CAFA's intent. It noted that CAFA's "language, structure, and history . . . all demonstrate that Congress contemplated broad federal court jurisdiction with only narrow exceptions" and that other circuits recognized "all doubts [should be] resolved in favor of exercising jurisdiction over the case." Id. at *2 (internal quotations and citations omitted). Thus, the appellate court held that if a CAFA exception "is not shown with reasonable certainty, federal jurisdiction should be retained." Id.
Applying the presumption in favor of jurisdiction, the appellate court held the plaintiff had not proven the local controversy exception applied. The plaintiff's petition was "not clearly limited to current owners" and the plaintiff had offered no evidence on the former owner's citizenship. Id. at *6.
The dissenting judge contested the majority's interpretation of the petition, arguing that despite the conflicting class definitions, other aspects of the petition demonstrated that it sought to certify a class of only current owners. The dissent also took issue with the majority's adoption of the presumption in favor of federal jurisdiction. It argued such presumption was inconsistent with other Fifth Circuit decisions and that other appellate decisions adopting that presumption were wrongly decided.