Brady v. Denton County Elec. Co-op., Inc., No. 4:09-CV-130, Slip Copy, 2009 WL 3151177 (E.D. Tex. Sep 28, 2009)().

Every TV cop show has a story line that involves Internal Affairs.  But did you know that CAFA has Internal Affiars as well?  In Brady, a District Court in Texas remanded the case to Denton County court finding that CAFA’s internal affairs exception negated the federal court jurisdiction, and also that the home state exception favored remand.

Janice Brady, the plaintiff, brought an action in state court seeking a declaratory judgment stating that (1) the defendant’s – Denton County Electric Cooperative, Inc. d/b/a CoServ Electric (“CoServ”) – policies violated Texas state law, and (2) CoServ may not declare her in breach and it may not terminate her membership rights, as a result of the alleged violation of those policies. Brady particularly challenged CoServ’s Policy 310, which requires its members to provide that information which was of a confidential corporate nature – such as the names and addresses or telephone numbers of members. Brady contended that during the course of her membership, CoServ acquired confidential corporate information of approximately 2% of the cooperative’s eligible voting members. Brady challenged Policy 310 contending that it was contrary to Texas state law requiring the transparency of voting members. 

Subsequently, Brady, and other two plaintiffs – Duncan Duval and Paul Confer – filed an amended counterclaim and petition of intervention on behalf of themselves and others similarly situated, and sought, inter alia, class certification, declaratory relief, injunctive relief, and damages for breach of fiduciary duties, breach of contract, and improper use of plaintiffs’ property. The plaintiffs filed a second amended counterclaim and petition of intervention which alleged the same claims brought in the third petition except that the plaintiff Confer was excluded. 

In response to the third and fourth petitions, CoServ removed the action to the federal court under CAFA. 

CoServ argued that due to the nature and substance of the class action alleged in the third petition (class size, diversity, and the issues relating to non-members), the district court had jurisdiction under CAFA. The plaintiffs on the other hand, however, contended that CAFA did not confer jurisdiction because of the internal affairs exception. 

According to the CAFA, internal affairs are matters peculiar to the relationships among or between the corporation and its current officers, directors and shareholders. 

The District Court agreed finding that each of plaintiffs’ claims necessarily turned towards questions that related to the internal affairs of the corporation and were under the laws of Texas, therefore, these claims invoked the internal affairs exception to CAFA.

Alternatively, the District Court noted that CAFA prevents the federal district court from exercising subject matter jurisdiction under the home state exception, and plaintiffs stated that CoServ’s current membership consisted of approximately 142,000 members. The plaintiffs proposed two putative classes – the Voting Subclass, and the Equity Subclass. The plaintiffs stated that 92% of the 142,000 members were residential and each of those members purchased electricity from within CoServ’s area of operation. The plaintiffs also stated that less than 7% of the county population to which CoServ provided electricity moved out of state, and nearly 70% of those who had changed homes remained within the same county. Based on this information coupled with the membership data, the district court remarked that common sense dictated that it was more likely than not that at least two-thirds of the aggregate putative class members were Texas Citizen.

The District Court, therefore, remanded the case to state court.