Arbuckle Mountain Ranch of Tex., Inc. v. Chesapeake Energy Corp., 810 F.3d 335 (5th Cir., 2016).

The Fifth Circuit found that in an ambiguous complaint suggesting two class definitions (one a narrow definition, the other a broad definition), if the pleading taken as a whole indicates a broader definition, it should be assumed that the plaintiff intended to define a broader class. The Fifth Circuit in this case found that the broader definition defeated CAFA’s local controversy exception, and reversed and remanded.

The defendants were a group of oil and gas companies who operated producing wells in Johnson County and Tarrant County in Texas. The defendants had obtained oil and gas leases on commercial and residential property in downtown Fort Worth and adjacent locations. As a result, the defendants leased a substantial number of “third-of-an-acre, quarter-of-an-acre” ploys. Allegedly, numerous lessors lost their property through foreclosure after the execution of their leases. The plaintiff and the putative class, claiming to be post-foreclosure owners of the disputed oil and gas interests, brought an action in Texas state court claiming that the defendants’ oil and gas leases automatically terminated upon foreclosure.  According to the plaintiff and the putative class, the defendants’ continued operation of those wellheads constituting trespass and conversion.

The defendants removed the action pursuant to CAFA. The District Court remanded, finding that CAFA’s “local controversy” exception deprived it from exercising federal jurisdiction. The defendants appealed to the Fifth Circuit.

The defendants argued that remand was improper based on two factors of the “local controversy” exception: (i) that greater than two-thirds of the putative class included Texas citizens; and (ii) that the action contained at least one local defendant, whose action formed a significant basis of the plaintiff’s claim.

The plaintiff contended that the class included only current owners of mineral interests, which the Fifth Circuit construed as a “narrow definition.” The defendants, however, contended that the class included all current and former owners of mineral interests since the foreclosure actions in 2004–“the broad definition.” The Fifth Circuit remarked that the class definition issue was critical to determine whether the local controversy exception applied in this matter. The Court observed that the plaintiff presented sufficient evidence to show that, under the narrow definition, the proposed class consisted of over two-thirds of Texas citizens, but failed to show any evidence about those owners who purchased mineral interests post-foreclosure but had since sold or otherwise given up their interests.

The Fifth Circuit observed that the complaint had two definitions: the narrow definition appeared in paragraph 14 of the complaint; and the broad definition appeared in paragraph 23 of the complaint, which was the formal description of the class that the plaintiff wished to certify. The District Court, however, characterized paragraph 23’s broader definition as a mere pleading error and held that the totality of the pleadings made it clear that the plaintiff was talking only about the current owners.

The Fifth Circuit noted that paragraph 14 states that “all class members are currently mineral interest owners,” whereas paragraph 23 defined the class to include “all non-excluded persons or entities who are, or were since 2004, purchasers of property or owners who took title by, through or under such a purchaser.” The Fifth Circuit remarked that paragraph 23 reasonably reads to include all non-excluded purchasers since 2004: the initial purchasers at foreclosures who no longer were owners; purchasers from the original or later purchasers who no longer were owners; and the current owners no matter when they acquired their interest on tracts that passed through foreclosures. The Fifth Circuit found that paragraph 23 had the stronger claim and was more authoritative, and hence, found the broader definition as the class defined by the plaintiff.

The Fifth Circuit next remarked that after a review of the plaintiff’s petition, one other paragraph supported the narrow definition in paragraph 14 and was inconsistent with the broader language in paragraph 23. The Fifth Circuit observed that of the five counts that the plaintiff alleged, in count 3, the plaintiff claimed that “Plaintiff, and the Class, is the rightful owners of the mineral estates of the properties by virtue of a valid foreclosure action.” The Fifth Circuit, however, observed that there was no support for either class definition in any of the other four counts.

Because the complaint was ambiguous, the plaintiff asked the Fifth Circuit to rely on Mangiarelli v. Sixty-Fifth & One, L.L.C. (In re Chinese-Manufactured Drywall Prods. Liab. Litig. Ralph) (5th Cir., 2015), which interpreted the scope of a settlement class to determine whether a new claim is precluded under the terms of the former settlement agreements. On appeal, the Fifth Circuit noted that the past settlement agreement contained conflicting language about the scope of the settlement classes, defining the class broadly in parts and narrowly in others. In that case, the Fifth Circuit ruled that the narrow definition trumped a broad definition.

The Fifth Circuit found that the ruling in Chinese-Manufactured Drywall did not affect its analysis in this case because that case involved the interpretation of a Settlement Agreement, i.e., a contract, and not the pleadings, and more importantly, it stood for the uncontroversial idea that context mattered. The Fifth Circuit summarized the conflicting indications in the petition and concluded that the formal definition of the class included “all” those who were purchasers of interests as a result of the foreclosure, a different part of the complaint limited the class to current owners, and one count was limited, primarily, but not entirely, to current owners.

The class at the time of removal that the complaint sought to have certified was not clearly limited to the current owners. With inadequate evidence of the citizenship of the interim owners in the broader class, the Fifth Circuit concluded that the plaintiff failed prove that local controversy exception applied. Accordingly, the Fifth Circuit reversed and remanded the action.

-Melissa M. Grand