Werner v. KPMG LLP, No. 05-0821, 2006 WL 295394 (S.D. Tex. Feb. 7, 2006).
Texas Federal District Judge Lee H. Rosenthal provides the parties — and anyone who is interested in class action practice — a thorough background and straightforward analysis of some of the prominent issues presently surrounding Class Action Fairness Act litigation. In conducting her tour of CAFA, Judge Rosenthal discusses several timely issues, including the burden of proof in remand battles, and the “date of commencement” issue, and specifically the link between the relation-back doctrine and whether amended pleadings trigger the application of CAFA to an existing action.
The framework providing the judge with her opportunity to discuss these wide-ranging issues centers around an interesting Texas statute, which allows a defendant to name “responsible parties” without actually making the “responsible” entity a party to the lawsuit. The original putative class action was filed pre-CAFA in state court by investors of two Texas limited partnerships who claimed that KPMG facilitated the general partners’ self dealing and mismanagement of the limited partnerships. On January 6, 2005, pre-CAFA, KPMG filed a third-party complaint designating the general partners and other individuals as “responsible third parties” under Section 33.004 of the Texas Civil Practice and Remedies Code, the statute which allows defendants to designate “responsible parties” who may have caused or contributed to causing the harm the defendant is accused of in order to allocate responsibility to those parties. The statute “does not require a designated responsible third party to file and answer or responsive pleading, and a failure to do so cannot result in a default judgment.”
Despite this, two of the parties KPMG designated – St. James Entities and Charles E. Underbrink, answered KPMG’s third-party petition prior to CAFA becoming law. After CAFA’s effective date, the plaintiffs, not surprisingly, amended their petition to include the St. James Entities and Underbrink, who subsequently removed the action, asserting minimal diversity jurisdiction under CAFA. Equally unsurprisingly, the plaintiffs moved to remand, setting the stage for Judge Rosenthal’s CAFA exhibition.
Judge Rosenthal first recognized the debate CAFA has induced regarding the burden of proof in the remand context. After reviewing the arguments made to date on both sides of the debate, the court discusses the legislative history relied on by some courts to find a shift in the traditional burden of proving federal jurisdiction from the party invoking federal jurisdiction to the party advocating remand. Instead, relying on the Seventh Circuits’ language in Brill v. Countrywide (Editor’s Note: see CAFA Law Blog summary of Brill posted on November 2, 2005), she concludes that the statute’s textual silence, when contrasted with its explicit modification of other aspects of removal practice, indicated Congress’s intent not to disturb the status quo, thus declining to transfer the burden, holding that “the party opposing remand continues to bear the burden of proving federal jurisdiction.”
In addressing the commencement issue, Judge Rosenthal takes an in-depth look at the host of federal decisions finding that state law determines when a case “commences.” After reviewing the landscape of cases applying the relation-back doctrine to determine when an amended pleading kicks off a new action, Judge Rosenthal described the common invocation of this doctrine: “The relation-back concept is applied as an analytic tool, a way of determining whether amended pleadings so change the claims or parties as to be a new civil action, rather than a ‘workaday change’ that continues a pending action.”
However, Judge Rosenthal’s analysis of the case focused not on whether the plaintiffs’ decision to sue the St. James Entities and Underbrink was a post-CAFA amendment of their complaints and thus the commencement of a new action, but rather, that the real determination was whether the two new defendants had turned themselves into “parties” to the suit before the plaintiffs amended their complaint to include them. Judge Rosenthal found in the affirmative that the former non-party “responsible parties” had in effect “intervened and became parties to the action when they filed breach of contract claims against the plaintiffs” in their answers to KPMG’s third party complaint. The court concluded that the St. James Entities and Underbrink morphed into “parties” on January 31, 2005, upon the filing of their responsive pleadings to KPMG’s third-party petition, officially intervening in the action under Texas law.
The last stop on the tour: Judge Rosenthal concluded that the plaintiffs’ March 2005 amended petition did not “commence” a new action for removal purposes, since the removing defendants were already parties to the suit, and since the amendments, which, according to relation-back principles, “ar[o]se out of the same transactions or occurrences as the pre-CAFA claims against KPMG.” The court concluded, “CAFA does not apply because this action ‘commenced’ as to the removing defendants before CAFA’s enactment and the plaintiffs’ amended pleading filed after CAFA did not ‘commence’ a new action,” and accordingly, shipped the case back to Texas state court.