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CAFA Law Blog Information, cases and insights regarding the Class Action Fairness Act of 2005

Local Controversy Exception, Not Home State Exception Wins the Day

Posted in Case Summaries

Vodenichar v Halcon Energy Properties Inc., 733 F.3d 497 (3d Cir. Aug. 16, 2013).

In this action, the Third Circuit affirmed the remand of the case based on a local controversy exception rather than the applying the home state exception as the basis for the district court’s remand.

The plaintiffs, individuals along with the Grove City Country Club, filed a suit on behalf of themselves and other similarly situated landowners who sought to lease the oil and gas rights in their land in Mercer County, Pennsylvania.  Defendants Morascyzk & Polochak (“M & P”) and Co-eXprise, d/b/a/ “CX-Energy” agreed to act as the plaintiffs’ agents to negotiate leases of their oil and gas interests to energy companies under the Landowner Marketplace Agreements for a transaction fee.  M & P and CX-Energy entered into a Letter of Intent with Halcon, who agreed to lease up to 60,000 acres of the oil and gas rights from landowners.  Each landowner was guaranteed a $3,850 per acre plus 18% royalty on the net amount that Halcon realized from the oil and gas recovered from the property.

Plaintiffs claimed that Halcon rejected several leases for reasons other than mentioned under the Halcon agreement.  Accordingly, plaintiffs filed a putative class action against Halcon upon diversity jurisdiction in the District Court for the Western District of Pennsylvania alleging breach of agreement and duty of fair dealing.  The plaintiffs later added M & P and CX-Energy to the action, as this move would destroy diversity jurisdiction, the plaintiffs dismissed their own complaint.  On the same day, the plaintiffs filed their state action in the Mercer County, which was removed to federal court, and was assigned to the same district judge who had granted the plaintiffs’ motion to dismiss.

The plaintiffs filed a motion to remand based on CAFA’s local controversy exception.  The District Court however, found that the local controversy exception did not apply, but held that CAFA’s home state exception required remanding the case to the Court of Common Pleas.  Halcon then appealed.  The Third Circuit, reversed the District Court’s remand based on the home state exception, but still remanded the case.  Here’s the Third Circuit take on the CAFA’s exceptions.

The Third Circuit noted that the home state exception requires a federal court to decline subject matter jurisdiction where 2/3rd or more of the members of the proposed plaintiff classes in the aggregate, and the primary defendants, are citizens of the State in which the action was originally filed.  Here, all the criterion were met, i.e., it was undisputed that over 2/3rd of the putative class members and the defendants M & P and CX-Energy were Pennsylvania citizens, and that Halcon was headquatered in Texas, hence, not a Pennsylvania citizen.  Having established this, the Third Circuit was faced with an issue as to which of the Defendants was the principal defendant.  As CAFA itself does not define the “primary defendant” the Third Circuit looked at precedents, and concluded as follows: A PRIMARY DEFENDANT MUST BE THE REAL TARGET OF THE PLAINTIFFS’ ACCUSATION.  The Third Circuit remarked that the courts should determine if the plaintiffs sought to hold the defendant responsible for its own actions, as opposed to seeking to have it pay for the actions of the others. 

Here, the Third Circuit found that the plaintiffs alleged that each defendant was directly liable, and appeared to apportion liability equally among the defendants, and sought similar from all defendants.  The Third Circuit noted that while more claims were asserted against M & P and CX-Energy than against Halcon, the claims against Halcon were as, if not more, significant in that the plaintiffs alleged Halcon breached its lease agreement with more than 1,000 landowners and owed damages exceeding $50,000 to each class member.  Accordingly, the Third Circuit concluded Halcon was the primary defendant, hence the home state exception was not applicable, and that the remand under this exception was improper.

Next, the Third Circuit turned to the other exception to CAFA’s subject matter jurisdiction: the local controversy exception.  The District Court had ruled that this exception did not apply because the class action had been filed arising from the same facts and asserting similar claims as the one filed before the District Court which the plaintiffs had got voluntarily dismissed.  The Third Circuit noted that the ingredients of a local controversy exception are (1) > 2/3rd putative class members from the state; (2) at least 1 defendant citizen of the state where action was filed; (3) local defendant’s conduct forms a significant basis for the claims; (4) significant relief from the local defendant; (5) principal injuries occurred in the state where the action was filed; and (6) no other class action was filed in the preceding three years.

Here, the Third Circuit found that all the elements are met.  First, over 2/3rd putative class members were from Pennsylvania.  Second, at least one defendant was local.  Third, each defendant’s alleged conduct did form a significant basis for the claim, because as agents for the putative class members, the local defendants entered into an agreement with Halcon.  Fourth, Plaintiffs were seeking significant relief from both local defendants.  And fifth, there was no dispute that the principal injuries were incurred in the Pennsylvania.

Accordingly, the only element in dispute was had the plaintiffs filed a similar class action in the last three years.  Here, the Third Circuit noted that CAFA does not define what constitutes an “other class action” other than to limit it to filed cases asserting similar factual allegations against a defendant.  By imposing this condition, the Third Circuit observes that the congress wanted to ensure that the defendants did not face copycat, or near copycat, suits in multiple forums.  Therefore, the question here was, did the previous action, which the plaintiffs had got voluntarily dismissed, qualify as an “other class action.” 

Here, when the plaintiffs filed a motion to get the first action dismissed, in order to include new parties, the District Court granted the motion without prejudice, but ordered the parties to participate in ADR (“Alternative Dispute Resolution”) and to retain the discovery that they had exchanged for use in both the ADR and the case that joined the two local defendants.  Thus, according to the Third Circuit, the District Court’s action showed that it considered the second filed action a continuation of the first action, and took practical steps to ensure that the act of filing the second complaint did not delay the parties’ ability to proceed.  In addition, the Third Circuit noted that this was not a copycat situation, rather the named plaintiffs’ action to file a separate action was no different from a situation where a party amended a pleading to join parties to an existing case.  In short, the Third Circuit concluded Halcon defending the new action did nothing radical in its approach vis-à-vis defending the first action.

Accordingly, the Third Circuit concluded that the second action was not a copycat action, and that the case qualified for a remand under CAFA’s local controversy exception.  – JR