Meiman v. Kenton County, Ky., No. 10-156-DLB, 2011 WL 350465 (E.D. Ky. Feb. 2, 2011). 

A District Court in Kentucky held that the court does not delve into the merits of the claim in order to identify a primary defendant; instead, it identifies by looking exclusively to the face of the complaint.

The plaintiffs filed a class action alleging that the defendants, Municipalities and Insurers, were improperly charging insurance policyholders a tax on insurance premiums.

The plaintiffs initially alleged that Kenton and Franklin Counties, as representatives of a class of Municipal Defendants, improperly assessed a tax, enacted under KRS § 91A.080, on insurance premiums and, consequently, received and retained taxes to which it was not entitled. The plaintiffs later inserted the insurance companies, Allstate, Standard Fire and the AIC-Hartford, that collected and retained a percentage of the disputed taxes, as defendants. 

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 was being improperly assessed based on the policyholders’ zip code, rather than the location of the insured risk.

With the consent of Standard Fire and AIC-Hartford, Allstate removed the case to federal court. Shortly thereafter, the plaintiffs moved to remand the case to state court, arguing that several exceptions to CAFA divested the federal court of subject matter jurisdiction. 

The District Court denied the plaintiffs’ motion to remand.

The plaintiffs argued that CAFA’s mandatory “home state” and “state action” exceptions, and “discretionary” exception applied here. Under these exceptions, the “primary defendant” and majority of the plaintiffs shall be citizens of the state where the action was originally brought. Thus, determining which defendants were the primary defendants was dispositive of whether any of these exceptions applied here.

The District Court noted that as neither CAFA nor the Sixth Circuit has defined “the primary defendants,” CAFA’s legislative history is relevant here. (Editors’ Note: Again, a court correctly looks to CAFA’s legislative history. Hip hip hooray!) The Senate Report, S.Rep. No. 109-14, at 43-44 (2005), 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).

Relying on this definition, the plaintiffs argued that the defendant Municipalities were the “real targets,” of the lawsuit, and that they would be liable to the vast majority of the members of the proposed classes. Notwithstanding the plaintiffs’ arguments, the Court remarked that determining who were ‘primary defendants’ was problematic in this case, because two defendant class had been proposed but whose membership had yet to be identified.

The Court observed that although the plaintiffs contended that Municipalities were the “real targets” of this action because they retain 85% of the taxes collected and Insurers retain only 15% (their fee for collecting the tax), their 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, it seemed to the Court that the practical effect of the plaintiffs’ requested relief would be to shift the tax from the insurance policyholders to the Insurers-which, correspondingly, suggested that the Insurers were the real target of the litigation. The Court, however, remarked that it was not so simple because the statute also permits the Insurers to receive a collection fee for collecting the tax.

Because members of the defendants’ class were not identified yet, the Court remarked that identifying the real targets of litigation required it to wade into the merits of the underlying claim. The Court pointed out that to adopt the plaintiffs’ argument, and hold that Municipalities and not Insurers were the real targets of the action; it would have to assume more than merely that the statute in question had been improperly interpreted and implemented. 

Second, the Court stated that the plaintiffs’ argument also required a series of assumptions the Court could not make at this procedural juncture. The plaintiffs stated that Municipalities might potentially be liable to thousands of policyholders, and that an insurance company’s connection to either of the plaintiff classes was very limited. The Court, however, remarked that 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. 

But Allstate’s statistic also underscored a larger problem for the plaintiffs: At that 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 have been identified and liability between the defendant classes apportioned, the Court remarked.

The Court noted 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. The courts identify the primary defendants by looking exclusively to the face of the complaint as those parties having a dominant relation to the subject matter of the controversy, in contrast to other defendants who played a secondary role by merely assisting in the alleged wrongdoing, or who are only vicariously liable. The ‘secondary defendants’ are those parties sued under theories of vicarious liability or joined for purposes of contribution or indemnification. The benefit of this approach is that it “does not require a court to make a pretrial determination of liability or culpability, but rather requires only a review of the complaint to determine which defendants are sued directly.”

The Court found that the amended complaint contained two counts, both of which asserted a claim and demand relief directly against Insurers; thus, the defendant Insurers were primary defendants.

The plaintiffs, however, argued that Insurers were secondarily liable through theories of respondeat superior and vicarious liability. Specifically, the plaintiffs alleged that Municipalities, the masters, acting through local ordinances, ordered Insurers, the servants, to collect the tax from policyholders; therefore, only Municipalities, and not Insurers, were the primary defendants. The Court disagreed and held that it would only look to the face of the complaint and the complaint allegations asserted claims directly against both defendant classes. Specifically, both the defendants’ classes claiming — declaratory and injunctive reliefs provided no principled distinction upon which the Court could hold that Insurers were secondary, rather than primary, defendants.  

Accordingly, the Court concluded that because all three primary defendants, Allstate, AIC-Hartford, and Standard Fire, were not a citizen of Kentucky, the state in which this action was originally filed. Consequently, neither exception divested the Court of jurisdiction.