Lafalier v. State Farm Fire and Cas. Co., No. 10-5082, 2010 WL 3274438 (10th Cir. (Okla.) Aug 19, 2010).

The Tenth Circuit affirmed the remand order holding that the defendants, who put forth the argument of “fraudulent misjoinder of defendants,” (that the local defendant was joined to defeat CAFA jurisdiction) must first establish that even after severing the claims against the misjoined defendants; there still remains jurisdiction under CAFA.  

The plaintiffs brought an action against the Lead-Impacted Communities Relocation Assistance Trust’s (the “Trust”) related defendants alleging that the Trust deliberately used appraisals that undervalued their properties and conducted secret proceedings concerning the appraisals in violation of Oklahoma law. 

The plaintiffs either presently or previously owned property in the former mining town of Picher, Oklahoma. Because Picher is environmentally contaminated, the State established the Trust to buy properties and to assist residents in relocating. On May 10, 2008, a tornado damaged or destroyed many buildings in Picher. The Trust immediately decided to offset any amounts that applicants received from their insurance coverage against the amounts the Trust would pay for their properties.  The Trust required applicants to disclose their insurance information to the Trust and to authorize their insurance companies to communicate with the Trust. This suit involved the plaintiffs’ claims against: (1) persons and entities associated with the Trust (the “Trust-related Defendants”) and (2) the plaintiffs’ insurance companies.

In this case the defendants were the Trust-related Defendants and 10 insurance companies, seven of whom were not from Oklahoma. The Trust, however, was not a defendant, but it was the only named defendant in a separate suit, based on the same factual allegations as this case, that plaintiffs filed in Ottawa County, Oklahoma (the “Ottawa County Case”).  The Trust-related Defendants were Larry Roberts, the operations manager of the Trust; J.D. Strong, the Secretary of the Environment for Oklahoma; Cinnabar Service Company, a firm that conducted appraisals; and Van Tuyl and Associates, a firm that conducted or reviewed appraisals. In the second amended petition, the plaintiffs set forth claims on behalf 200 persons.

State Farm Fire and Casualty Company, one of the insurance company defendants, removed the action to the federal court. 

The District Court sua sponte noted that the local controversy exception might bar the exercise of federal jurisdiction, and it ordered the parties to show cause why the case should not be remanded to state court.  (Editors’ Note:  See the CAFA Law Blog analysis of the district court opinion in Lafalier posted on August 4, 2010).

The District Court found that more than two-thirds of the plaintiffs were citizens of Oklahoma as of the date of the filing of the second amended petition. Next, it found that Roberts, Strong, and Cinnabar were defendants (1) from whom the plaintiffs sought significant relief; (2) whose conduct formed a significant basis for the plaintiffs’ claims; and (3) who were citizens of Oklahoma as of the date of the filing of the Second Amended Petition. The District Court also concluded that the principal injuries were incurred in Oklahoma and no other class action had been filed against any of the defendants in the previous three years. Accordingly, the District Court remanded the case to the state court. 

On appeal to the Tenth Circuit, the Insurer Defendants argued (1) that the requirements of the local controversy exception were not met, but (2) if those requirements were met, then the District Court should have applied the procedural misjoinder doctrine, severed the claims against the Trust-related Defendants from the claims against the insurance companies, and allowed the claims against the insurance companies to proceed in federal court.

The Tenth Circuit noted that the local controversy exception requires that during the 3-year period preceding the filing of a class action, no other class action has been filed asserting the same or similar factual allegations against any of the defendants on behalf of the same or other persons. The Tenth Circuit found that the §1332(d)(4)(A)(ii) clearly states against any of the defendants as the criterion to invoke local controversy, and the Ottawa county case, which was based on the same cause of action, nevertheless had no defendants who were common from the defendants in this case. Accordingly, the Tenth Circuit concluded that the Ottawa County case did not preclude the ‘no other class action’ requirement from being satisfied.

The Insurer Defendants next argued that the District Court erred in concluding that Roberts, Strong, and Cinnabar qualified as local defendants. Before the District Court, the Insurer Defendants primarily relied on procedural mis-joinder. A Fraudulent misjoinder occurs when a plaintiff sues a diverse defendant in state court and joins a non-diverse or in-state defendant even though the plaintiff has no reasonable procedural basis to join such defendants in one action. 

In its order granting remand, the District Court had noted that, even if it was to apply procedural misjoinder, it was not clear that at least 100 plaintiffs with claims totaling $5 million had claims against the Insurer Defendants, and that the Court would be speculating if it determined that it had an independent basis for subject matter jurisdiction over the severed claims. The Tenth Circuit remarked that the District Court did not err, if it was not convinced it could appropriately exercise jurisdiction over the claims against the insurance companies. 

The Tenth Circuit remarked that the Insurer Defendants were not precluded from asserting the procedural mis-joinder before the state court, and if the court found that their claims must be severed, the insurance companies may again remove the case under CAFA. Accordingly, the Tenth Circuit affirmed the District Court’s order of remanding the case to the state court.