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CAFA Law Blog Information, cases and insights regarding the Class Action Fairness Act of 2005

Severance Under Rule 21 May Defeat CAFA Jurisdiction

Posted in Case Summaries

State of Louisiana v. American National Property And Casualty Company, 2013 WL 5201146 (E.D. La. Sept. 11, 2013).

In this case, the District Court for the Eastern District of Louisiana held that, while subject matter jurisdiction is generally determined at the onset of litigation, when an action is severed under Federal Rule of Civil Procedure 21, the severed action must have an independent jurisdictional basis to remain in federal court.

Procedural History.

In Louisiana v. AAA Insurance, Case No. 07-5528 (the “Road Home Litigation”), the State of Louisiana (the “State”), brought an action in state court to recover funds from over 200 insurers.  Recipients of Road Home grants had assigned the disputed funds to the State pursuant to subrogation agreements with the recipients’ insurers.  In the aftermath of Hurricanes Katrina and Rita, the State, with funding from the United States Department of Housing and Urban Development, created The Road Home program to distribute federal grants to assist Louisiana residents in rebuilding their homes damaged by the storms.

Pursuant to CAFA, the defendant-insurers removed the Road Home Litigation to the Eastern District of Louisiana, where the case was consolidated with another pending class action, In re Katrina Canal Breaches Consolidated Litigation (“Katrina Canal Breaches Litigation”).

The State initially filed a motion to remand, which the Katrina Canal Breaches court denied.  The defendant-insurers then filed a motion to dismiss, which was granted in part and denied in part.  Specifically, the Katrina Canal Breaches court dismissed the State’s extra-contractual claims and claims for declaratory relief, but found that the subrogation agreements’ anti-assignment clauses did not bar the State’s subrogation claims.  The defendant-insurers appealed the issue of the anti-assignment clauses’ enforceability to the Fifth Circuit, which in turn certified the question to the Louisiana Supreme Court.  Thereafter, the Road Home Litigation was deconsolidated from the Katrina Canal Breaches Litigation and transferred to another division in the Eastern District.

In the interim, the Katrina Canal Breaches court dismissed the class action in the master complaint in the Katrina Canal Breaches Litigation, which effectively dismissed the class allegations in Road Home Litigation as well by virtue of the State’s stipulation agreeing to be bound by that ruling.  Subsequently, the Louisiana Supreme Court, answering the Fifth Circuit’s certified question, held that Louisiana public policy does not prohibit anti-assignment clauses to post-loss assignments, but the Court warned that the language in such a clause must be evaluated on a policy-by-policy basis and clearly and unambiguously state that it applies to post-loss assignments.  Thus, the Fifth Circuit vacated the Katrina Canal Breaches court’s ruling on the enforceability of the anti-assignment clauses and remanded.

In light of the Katrina Canal Breaches court’s dismissal of the class allegations in the Road Home Litigation, the State filed another motion to remand, arguing that the court no longer had subject matter jurisdiction under CAFA.  The Road Home court, however, denied the State’s motion to remand, noting subject matter jurisdiction existed when the action was removed.  Because CAFA jurisdiction is not contingent upon class certification, the court retained jurisdiction over the Road Home Litigation after the class allegations were dismissed.

Finally, in April 2013, the magistrate judge overseeing the Road Home Litigation issued an order severing the action into individual suits based on the Louisiana Supreme Court’s holding that each subrogation claim must be individually analyzed on a policy-by-policy basis.  This severance order required the State to file separate amended complaints for each insured-subrogor, and those cases would randomly be allotted to judges in the Eastern District.

District Court’s Ruling.

This case involves one of those severed, individual actions.  In the amended complaint that initiated this separate action, the State alleged that subject matter jurisdiction no longer existed because (1) the State’s claims did not satisfy all of the jurisdictional requirements under CAFA and (2) the amount in controversy did not exceed $75,000.  The district court agreed and granted the State’s motion to remand.

The district court noted that in diversity cases, subject matter jurisdiction is ordinarily assessed under the jurisdictionally significant facts that exist at the time of removal, and later developments compromising diversity will not defeat jurisdiction.  Moreover, the Sixth, Seventh, Eighth, Ninth, and Eleventh Circuits have held that a district court retains jurisdiction over a case properly filed or removed under CAFA, even if post-removal events defeat subject matter jurisdiction.  See, e.g., Metz v. Uizan Bank, 649 F.3d 492, 500–01 (6th Cir. 2011); Buetow v. A.L.S. Enter., Inc., 650 F.3d 1178, 1182 n.2 (8th Cir. 2011); Cunningham Charter Corp. v. Learjet, Inc., 592 F.3d 805, 806 (7th Cir. 2010); United Steel Workers Int’l Union v. Shell Oil Co., 602 F.3d 1087, 1092 (9th Cir. 2010); Vega v. T-Mobile USA, Inc., 564 F.3d 1256, 1268 n.12 (11th Cir. 2009)

Next, the district court noted that Federal Rules of Civil Procedure 21 and 42 – the two Federal Rules addressing severance – are distinct.  Separate trials of claims originally sued upon together and severed under Rule 42 usually result in the entry of one judgment, whereas claims severed under Rule 21 become separate actions that are independently tried and adjudicated.  Furthermore, in Honeywell v. Phillips Petroleum Company, 415 F.3d 429, 431 (5th Cir. 2005), the Fifth Circuit held that, although subject matter jurisdiction is generally determined at the time an action commences, when an action is severed under Rule 21, that action must have an independent jurisdictional basis.

 Here, the action was severed pursuant to Rule 21, and the magistrate judge’s severance order commanded that each case be filed separately and assigned a new caption, docket number, and judge.  Pursuant to this order, the severed cases became independent actions that would be separately tried and adjudicated.  The district court therefore concluded that each severed case must have an independent basis for subject matter jurisdiction apart from CAFA.  Because the amount in controversy of this severed action did not exceed $75,000 – nor did any other basis for subject matter jurisdiction exist – the district court granted the State’s motion to remand.

In sum, while post-removal events, such as decertification or the striking of class allegations, generally will not compromise subject matter jurisdiction in a case properly removed under CAFA, severance under Federal Rule of Civil Procedure 21 is a post-removal event that may provide an exception to this general rule.