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

Plaintiff is the Master and Commander of Her Compaint and Can Limit the Amount in Controversy

Posted in Case Summaries

McClendon v. Challenge Financial Investors Corp., No. 1:11 CV 1597, 2011 WL 5361069 (N.D. Ohio Nov. 3, 2011).

While remanding the action to state court based on the plaintiff’s disclaimer of an award greater than $5 million, a District Court in Ohio held that the plaintiff being master of her complaint can plead in good faith to avoid federal jurisdiction.

Two years after the plaintiff, Jacqueline D. McClendon, filed her complaint against Challenge Financial Investors Corp.—a defunct mortgage broker, she filed a second amended class-action complaint and added as defendants, Hartford Fire Insurance Co., Travelers Casualty and Surety Company of America, and the Ohio Superintendent of Financial Institutions.  Hartford and Travelers are the bonding companies from which Challenge obtained its mortgage-broker surety bonds; and the Ohio Superintendent is a titular obligee on Challenge’s bonds.

McClendon alleged that in June 2007 Challenge served as her mortgage broker in connection with a $40,000 loan transaction secured by her property located at 14206 South Marks Road, Columbia Station, Ohio. McClendon used this address to maintain and operate a drug house in which she packaged heroin purchased in bulk from a Cleveland supplier, and from which she sold the heroin to a large number of customers. Nice lady. The Government imposed, and McClendon agreed to pay, $40,000 in criminal forfeiture representing the proceeds of her criminal drug enterprise. Shortly after signing the plea agreement, McClendon sought and obtained a mortgage loan from Challenge. She used the mortgage proceeds to satisfy the $40,000 criminal forfeiture. 

On behalf of herself and the class of persons who purchased services from Challenge relating to a mortgage loan on Ohio realty, McClendon asserted a claim for monetary damages against Challenge for its failure to provide mortgage loan origination disclosure statements in compliance with the Ohio Mortgage Brokers Act, O.R.C. Chapter 1322 et seq. (“OMBA”); a claim for monetary damages against Hartford and Travelers, if liability is proven in the first instance against Challenge, based on the surety bonds they posted supporting Challenge’s activities in Ohio; and a claim for an order requiring the Ohio Superintendent to declare that Hartford and Travelers are liable on the surety bonds.

Hartford removed the case to federal court pursuant to CAFA. 

McClendon filed a motion to remand the action to state court, which the District Court granted. 

At the very outset, the Court, relying upon precedents, explained that “the first and fundamental question presented by every case brought to the federal courts is whether it has jurisdiction to hear the case. This is because the district courts are courts of limited jurisdiction. They possess only that power authorized by the Constitution and by statute. In considering whether remand is appropriate, the statutes conferring removal jurisdiction are to be construed strictly because removal jurisdiction “encroaches on a state court’s jurisdiction.” Thus, in the interest of comity and federalism, federal jurisdiction should be exercised only when it is clearly established, and any ambiguity regarding the scope of the removal statute should be resolved in favor of remand to the state courts.”

In order to establish the amount in controversy, Hartford produced a declaration, which stated that the total revenue challenge generated from the mortgage loans associated with realty in the State of Ohio for the purported class period was $9,021,538.  

McClendon did not challenge the amount stated in the declaration; rather, she contended that removal was improper because, prior to removal, she expressly disclaimed any award or combination of awards greater than $5 million.

Thus, the question before the Court was whether McClendon could properly avoid removal by limiting potential damages to an amount less than the CAFA threshold. The Court relied on two decisions of Sixth Circuit — Smith v. Nationwide Prop. & Cas. Ins. Co., 505 F.3d 401, 407 (6th Cir. 2007) and Freeman v. Blue Ridge Paper Prods., Inc., 551 F.3d 405, 409 (6th Cir. 2008), which discussed the effect of pre-removal damage disclaimers on class action cases over which the federal courts would otherwise have CAFA jurisdiction.

In Smith, the plaintiffs limited the individual as well as class claims to less than $4,999,999. The Sixth Circuit observed that the plaintiff is master of his complaint and can plead to avoid federal jurisdiction. Accordingly, subject to a “good faith” requirement in pleading, a plaintiff may sue for less than the amount he may be entitled to if he wishes to avoid federal jurisdiction and remain in state court. Further, the amount in controversy should be determined from the perspective of the plaintiff, with a focus on the economic value of the rights he seeks to protect. (Editors’ Note: See the CAFA Law Blog analysis of Smith posted on July 11, 2008). 

In Freeman,the plaintiffs divided the class action into five separate cases covering distinct six-month time periods, limiting the total damages for each case to no more than $4,999,999. The insurer removed all five cases under CAFA; the district court, however, remanded the action to state court. The Sixth Circuit reversed recognizing that the plaintiffs can avoid removal under CAFA by limiting the damages they seek to amounts less than the CAFA thresholds. Expressly confining its ruling to the specific facts of the case, the Sixth Circuit stated that its holding was limited to the situation where there was no colorable basis for dividing up the sought-for retrospective relief into separate time periods, other than to frustrate CAFA, but where recovery is expanded, rather than limited, by virtue of splintering of lawsuits for no colorable reason, the total of such identical splintered lawsuits may be aggregated. (Editors’ Note: See the CAFA Law Blog analysis of Freeman posted on February 17, 2009). 

The Court thus observed that although neither Smith nor Freeman was directly on point with the instant case, the Sixth Circuit was clear in both cases that a class representative can avoid CAFA jurisdiction by expressly limiting the class members’ damages. Here, unlike the disclaimers in Freeman, McClendon had not divided the retrospective relief of the putative class into separate cases for the sole purpose of avoiding federal CAFA jurisdiction.  Rather, she had done what the Sixth Circuit said she had the right to do: limit the total potential damage award to less than $5 million to litigate her case in state court. Because she disclaimed any combination of awards over $5 million prior to removal, the Court concluded that Hartford lacked jurisdiction to remove the case.  

Hartford, however, argued that the Court should ignore McClendon’s disclaimer because it contradicted her effort to adequately represent the class. Specifically, Hartford raised a colorable question whether McClendon had standing to bring her own OMBA claim, and whether she could adequately represent the putative class.The Court concluded that these were all questions the state court was perfectly capable of deciding, and it was generally more desirable for an Ohio court to interpret Ohio statutes. 

Because this is not a case of national importance, and it involved only Ohio insurance questions, the Court remanded the case to the state court.