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

A Single-State Class Action Fails to Qualify for the Local Controversy Exception If the Alleged Conduct Could Have Injured Consumers Throughout the Country

Posted in Case Summaries

Gonzalez v. Banco Santander, et al., 2017 WL 5957735 (D.P.R. Dec. 1, 2017).

In this action, while denying the plaintiffs’ motion to remand, a district court in Puerto Rico found that the “local controversy” exception to CAFA does not apply if the defendants engaged in conduct that could be alleged to have injured consumers throughout the country, or broadly throughout several states, even if it was filed as a single-state class action.

The plaintiffs brought an action in Puerto Rico state court, asserting derivative and class claims, alleging that defendants breached their fiduciary and contractual duties as to a number of closed-end Santander funds and that the funds’ investors violated various state laws.

The closed-end Santander funds in question were First Puerto Rico Tax-Exempt Target Maturity Fund II, Inc., First Puerto Rico Tax- Exempt Target Maturity Fund III, Inc., and First Puerto Rico Tax-Exempt Target Maturity Fund V, Inc. (collectively referred to as “Funds”), incorporated in Puerto Rico that pooled capital to earn income by investing in securities. The Funds, part of the Santander “First Puerto Rico Funds,” were offered exclusively to individuals having their principal residence in Puerto Rico and to others whose principal office and principal place of business were located in Puerto Rico.

The defendant Banco Santander, S.A. removed the action to the federal court pursuant to CAFA. The plaintiffs moved to remand, which was subsequently denied by the District Court.

The plaintiffs argued that the District Court lacked jurisdiction over the action based on the “local controversy” exception under CAFA. The parties disputed the application of the third requirement of the “local controversy” exception – whether the “principal injuries” resulting from the alleged conduct or any related conduct of each defendant were incurred in the State where the action was originally filed.

The District Court noted that “principal injury” is satisfied when either: (1) the principal injuries resulting from the alleged conduct of each defendant were incurred in the state in which the action was originally filed; or (2) the principal injuries resulting from any related conduct of each defendant were incurred in that state. In addition, the Court cited to the legislative history discussing the purpose underlying the “principal injury” requirement and found that if the defendants engaged in conduct that could be alleged to have injured consumers throughout the country or broadly throughout several states, then the case would not qualify for local controversy exception, even if it were filed as a single-state class action.

The plaintiffs contended that their principal injuries were caused by the defendants’ wrongdoing and, because the funds were offered only to Puerto Rico residents, there could be no doubt that the injuries were incurred in Puerto Rico.

The defendants contended that while it was true the Funds were marketed solely to Puerto Rico residents, to argue that the case concerned only the management of the Funds was to rob the allegations of their broader context. The defendants asserted that at the heart of the plaintiffs’ claims were allegations of self-dealing and conflicts of interest, and the defendants’ use of the Funds as just one part of an alleged intricate and elaborate fraudulent scheme.  Further, the defendants asserted that the alleged conduct could be alleged to have injured consumers throughout the country or broadly throughout the several states. Thus, CAFA’s broad jurisdictional reach was not annulled merely because the plaintiffs sought relief on behalf of a class of Puerto Rico residents.

The District Court found that the plaintiffs’ own allegations in the Complaint defeated their primary argument that the principal injuries resulting from the defendants’ alleged misconduct was localized and did not extend beyond the shores of Puerto Rico. Further, the court determined that filing other class actions in the District of Puerto Rico founded on essentially similar allegations, militated against the applicability of the “local controversy” exception to the instant case. The District Court thus concluded that the plaintiffs, as the party seeking remand, did not discharge their burden of proof, that would entitle them to the narrow local controversy exception to CAFA jurisdiction. Accordingly, the District Court denied the plaintiffs’ motion to remand.

– Melissa Broussard Carroll