Plaintiffs’ Day in (Federal) Court

On January 7, 2016, the United States Court of Appeals for the Fifth Circuit ruled in Arbuckle Mountain Ranch of Tex. v. Chesapeake Energy Corp. that a proposed class action against Chesapeake Energy Corp. and others accused of trespassing on foreclosed oil and gas leases must proceed in federal court.  The defendants were a group of oil and gas companies operating wells in Johnson and Tarrant Counties, Texas.  The defendants had obtained oil and gas leases on commercial and residential property in downtown Fort Wort, including many covering only fractions of an acre.  The original petition alleged that the defendants had not obtained subordinations of prior mortgages to the oil and gas leases and thus allowed the mortgaged property to pass free and clear of the leases to the proposed class members, namely, those who purchased through foreclosure.  The plaintiffs further alleged that, after foreclosure, the defendants continued to produce from the relevant wells without “undertaking the significant, expensive curative work” to address the ownership changes.

The plaintiffs initially filed suit in Texas state court. Chesapeake and the other defendants then timely removed the case to federal court pursuant to the Class Action Fairness Act (CAFA), 28 U.S.C. §§ 1332(d), 1453.  Plaintiffs moved to remand the case back to Texas state court under the “local controversy exception.”  This exception to CAFA applies when greater than two-thirds of the members of all proposed plaintiff classes in the aggregate are citizens of the state in which the action was originally filed.  The federal district court granted the plaintiffs’ motion to remand, and the Fifth Circuit granted the defendants an immediate right to appeal.

A split panel of the Fifth Circuit ruled that the district court erred and that the case was properly removed to federal court. The panel majority’s decision hinged on an ambiguity over the defined plaintiff class.  While one paragraph in the state court petition defined the class as current property owners in Texas , another paragraph defined the class as those “who are, or were, since 2004” citizens of Texas. Because there was no examination of the residency of owners who bought the subleased property after foreclosure and since sold it, it was uncertain if under this class definition the exception would be satisfied.  Following established Fifth Circuit precedent, the panel majority reasoned that, once CAFA’s general requirements are met, any ambiguities regarding the application of an exception must be resolved in favor of federal jurisdiction.  Accordingly, the Fifth Circuit reversed and remanded the case, instructing the federal district court to reinstate the case on its docket.

Judge Elrod dissented from the panel majority. In her opinion, the petition when taken as a whole did not reveal “compelling contextual clues” to warrant application of the broader class definition.  Instead, she believed that in context the more narrow definition was appropriate, satisfying the local controversy exception.

This case may provide useful lessons for plaintiff and defense attorneys alike. Plaintiffs wishing to remain in state court need to be attentive to how they refer to their class.  One sloppily worded paragraph and a class may have opened itself up to removal under CAFA.  Conversely, defendants wishing to remove to federal court should scrutinize plaintiffs’ class definitions, as any opening may be exploited to get your case to federal court, which many defendants view as a more favorable forum.  What may throw attorneys off balance in class actions is that the presumptions are in a sense reversed from the usual rule.  In the vast majority of cases, great deference is given to the plaintiffs’ forum selection, and there is a presumption against federal jurisdiction.  However, when CAFA is in play, the exact opposite is true.  In the end, plaintiffs will receive their day in court.  Just not in the court they wanted.

footer image footer image footer image