Pleading Under the Federal Rule 12(B)(6) Standard is not a Requirement in Assessing the Applicability of CAFA’s “Local Controversy” Exception

By McGlinchey Stafford on July 21, 2017

MD Haynes, Inc. v. Valero Marketing and Supply Co., 2017 WL 1397744 (S.D. Tex. Apr. 19, 2017).

In this action, a federal court in Texas found that while the plaintiffs did not plead according to federal standards or explicitly distinguish the conduct of individual defendants in their complaint, they had no obligation to do so for CAFA’s local-controversy exception to apply. Accordingly, the court granted plaintiffs’ motion to remand.

The Plaintiffs, which included individuals and businesses, were residents of the city of Corpus Christi, Texas. They brought a putative class action in County Court at Law No. 1, Nueces County, Texas. Their suit against Defendants Ergon Asphalt & Emulsions, Inc. (“Ergon”) and several affiliated Valero entities (“Valero,” and collectively with Ergon, “Defendants”), alleged that Defendants’ negligent conduct caused a water contamination event in the City that resulted in a four-day ban on the use of municipal tap water (the “Contamination Event”). Specifically, Plaintiffs alleged that Defendants caused an incident “at the Valero plant in Corpus Christi which put an asphalt emulsifier pollutant, called Indulin AA-86, into the water supply.”

Ergon removed the action to the federal court under CAFA. Plaintiffs conceded that their petition satisfied the threshold CAFA requirements but moved to remand anyway, arguing that CAFA’s local-controversy exception warranted it. The only element of the “local controversy” exception at issue between the parties was 28 U.S.C. § 1332(d)(4)(A)(i)(II)(bb), which demands that the alleged conduct of at least one local defendant form a “significant basis of all the claims asserted.” See Opelousas General Hosp. Authority v. FairPay Solutions, Inc., 655 F.3d 358, 361 (5th Cir. 2011). (Editor’s Note: See the CAFA Law Blog analysis of this case posted on April 30, 2012).

Plaintiffs had sued five Valero defendants, at least two of whom the parties agreed were proper defendants and Texas citizens, and Ergon, a Mississippi defendant. That is, that if the alleged conduct of at least one proper Valero defendant with Texas citizenship “formed a significant basis for the claims asserted,” Plaintiffs had satisfied their burden to show that the exception applied.

In their live complaint, Plaintiffs alleged that, based on information and belief, Defendants’ “conduct caused the ‘backflow incident’ at the Valero plant in Corpus Christi, Texas, which put an asphalt emulsifier pollutant, called Indulin AA-86 into the water supply.” Ergon alleged that Plaintiffs did not distinguish between the conduct of various Defendants, and they also failed to allege specific facts regarding the conduct of “a particular local defendant.” Ergon further argued that Plaintiffs were bound by CAFA to have alleged in their initial complaint “specific facts regarding the conduct of a particular local defendant,” and that the sufficiency of their complaint must be assessed by the federal pleading standard articulated in Ashcroft v. Iqbal, 556 U.S. 662 (2009). Plaintiffs replied that such specificity isn’t required, and the allegations in their complaint satisfied Texas’s notice-pleading standard.

In addressing Ergon’s procedural argument, the Court held Plaintiffs needed only to file their complaint in compliance with the notice-pleading standard required by Texas Rule of Civil Procedure 47(a), not according to the provisions of the federal rules. The Court found that, while the Fifth Circuit had applied the Rule 12(b)(6) standard to judge the sufficiency of complaints in certain remand contexts, it was not aware of a precedent requiring application of that standard in assessing the applicability of CAFA’s “local controversy” exception. It noted that the application of the local controversy exception depended on the pleadings at the time the class action was removed but that did not equate to a mandate that federal courts applied federal procedure in their interpretation of state-court pleadings.

The Court further found that while Plaintiffs did not explicitly distinguish the conduct of individual defendants in their complaint, they had no obligation to show any joint activity to support their claims. The Court noted that Plaintiffs had directly identified the Valero plant as the site of the Contamination Event and pleaded that Defendants’ negligent conduct in operation of the plant rendered them liable on many of common-law claims. It further noted that Valero admitted that “the premises where the alleged incident occurred” was “Valero’s Corpus Christi asphalt terminal,” and that the terminal was both “owned” and “operated” by Valero defendant entities whose status as proper parties was undisputed.

In addition to the above, Plaintiffs also argued that the live pleadings and extrinsic, publicly available evidence showed that Defendants each had a role in the Contamination Event. The parties disagreed over whether the Court should consider extrinsic evidence submitted by Plaintiffs. But the Court held that Plaintiffs’ satisfied their burden to show that Valero’s conduct “formed a significant basis for their claims” irrespective of any extrinsic evidence.

That is, because Plaintiffs alleged that the Contamination Event occurred at the Valero plant in Corpus Christi, and was caused by Valero’s negligent conduct, they had alleged that at least one local Valero defendant’s conduct “forms a significant basis” of their negligence and other common-law claims. Therefore, the Court held that Plaintiffs had demonstrated with reasonable certainty that it should be prevented from exercising jurisdiction over their claims. Accordingly, the Court granted Plaintiffs’ motion to remand.

–Barry A. McCain