Meiman v. Kenton County, Ky., No. CIV.A. 10-156-DLB, 2011 WL 350465 (E.D. Ky. Feb. 02, 2011).

A District Court in Kentucky, while declining to remand the action to state court, held that “the primary defendants” are those defendants who are the real ‘targets’ of the lawsuit–i.e., the defendants that would be expected to incur most of the loss if liability is found.

The plaintiffs originally filed a class action complaint in the state court alleging that the defendant municipalities improperly assessed a tax, enacted under KRS § 91A.080, on insurance premiums and, consequently, received and retained taxes to which it was not entitled. 

Later, in response to the state court’s finding that the insurance companies which collected (and retained a percentage of) the disputed taxes were, under Kentucky law, indispensable parties to the action, the plaintiffs filed an amended complaint naming Allstate Insurance Company and Standard Fire Insurance Company and the Automobile Insurance Company of Hartford, Connecticut (AIC-Hartford) as defendants and proposing a class of defendant insurers. The plaintiffs sought declaratory judgment and corresponding injunctive relief that (1) the tax must be paid by the defendant insurers rather than the policyholders; or, (2) in the alternative, that the tax is being improperly assessed based on the policyholders’ zip code, rather than the location of the insured risk. 

Allstate removed the case to federal court. The plaintiffs then moved to remand the case to the state court, which the District Court denied.

 Then, the plaintiffs argued that the Court should remand the action under “home state” exception, 28 USC §1332(d)(4)(B), and “state action” exception, which requires remand if the primary defendants are States, State officials, or other governmental entities against whom the district court may be foreclosed from ordering relief, §1332(d)(5)(A). 

Given the statutory language, the Court remarked that determining which defendants were the “primary defendants” could be dispositive of whether any of these exceptions would apply. All the parties to the action except the defendants Allstate, AIC-Hartford, and Standard Fire are a citizen of Kentucky.

Because neither CAFA nor the Sixth Circuit has defined “the primary defendants,” the Court looked to CAFA’s legislative history. (Editors’ Note: regular readers of the CAFA Law Blog (all of whom have brilliant legal minds and are also sexy) know that the CAFA Law Blog has encouraged its readers (some of whom are judges) to look at the legislative history.)

The Senate Report, issued after CAFA was enacted, explains that “the primary defendants” is intended to reach, “those defendants who are the real ‘targets’ of the lawsuit–i.e., the defendants that would be expected to incur most of the loss if liability is found. Thus, the term ‘primary defendants’ should include any person who has substantial exposure to significant portions of the proposed class in the action, particularly any defendant that is ‘allegedly liable to the vast majority of the members of the proposed classes’ (as opposed to simply a few individual class members).”

The plaintiffs argued that under this definition, the defendant municipalities were the ‘real targets’ of the lawsuit; and would be ‘liable to the vast majority of the members of the proposed classes.’ Notwithstanding the plaintiffs’ arguments, the Court observed that determining who are primary defendants is problematic when a defendant class has been proposed but whose membership has yet to be identified. Here, the plaintiffs proposed a plaintiff class and two defendant classes; additionally, plaintiffs argued an alternative basis for relief with an accompanying proposed plaintiff subclass. Nonetheless, the Court considered the plaintiffs’ arguments, and disagreed with them.

The plaintiffs first contended that the defendant municipalities were the ‘real targets’ of this action because they retain 85% of the taxes collected and the defendant insurers retain only 15% (their fee for collecting the tax). The amended complaint did not allege that municipalities were not entitled to the tax, only that they must collect it from insurers, not the policyholders. Thus, the Court remarked that the practical effect of the plaintiffs’ requested relief would be to shift the tax from the insurance policyholders to the defendant insurers–which, correspondingly, suggested that the insurers were the real target of the litigation. The Court, however, maintained that it was not so simple because the statute also permits the insurers to receive a fee for collecting the tax.

The plaintiffs conceded that their interpretation of the statutory provisions created a potential ambiguity because it was unlikely that the statute contemplated that the insurers paying the tax would also retain a percentage of the tax as a ‘collection fee.’ Thus, the Court remarked that even if it determined that the statute was being improperly interpreted, the correct interpretation, and corresponding relief, would remain contested issues. Consequently, which class of defendants would bear the burden of a ruling in the plaintiffs’ favor–and the exact weight of that burden remains an open question.

The Court pointed that these unknowns point to a concern expressed by several courts: Identifying the real targets of litigation often requires a court to wade into the merits of the underlying claim. Thus, to adopt the plaintiffs’ argument, and hold that municipalities (and not insurers) were the real targets of the action, the Court would have to assume more than merely that the statute in question had been improperly interpreted and implemented. Rather, the Court would also need to assume that the statute had been improperly implemented for the reasons the plaintiffs say; that the proper interpretation of an ambiguous statute is the one the plaintiffs propose; and, consequently, that the proper relief is what the plaintiffs request.

Next, the Court found that the second prong of the plaintiffs’ argument that the defendant municipalities were allegedly liable to the vast majority of the members of the proposed classes because Kenton County and Franklin County might potentially be liable to thousands of policyholders also required a series of assumptions the Court cannot make at this procedural juncture. Further, Allstate’s declaration that it alone had 66,138 policyholders in Kentucky who paid a surcharge on their insured risks in 2008 and 2009 pursuant to the tax at issue here called the plaintiffs’ assertion into question. At this stage in the litigation, analyzing which proposed defendant class would be liable to more members of the plaintiff class would be an exercise in guesswork–particularly before the members of the classes had been identified and liability between the defendant classes apportioned, the Court reiterated.

To complicate matters further, the plaintiffs argued alternative grounds for relief and proposed an alternative plaintiff subclass, both of which would require new sets of factual and legal assumptions. The Court observed that these were assumptions it could not make in adjudicating a motion to remand, particularly when the plaintiffs acknowledged that the statute in question could yield multiple, and sometimes contradictory, interpretations and the members of the proposed classes had not been identified.

The Court stated that concern about wading into the merits of an action merely to determine whether federal jurisdiction exists has led courts to adopt simpler and more direct approaches to identifying the primary defendants. Thus, the courts identified the primary defendants by looking exclusively to the face of the complaint. Accordingly, the Court looked into the amended complaint, which contained two counts, both of which asserted a claim and demand relief directly against the defendant insurers. Thus, the Court concluded that the defendant insurers were primary defendants.