The Third Circuit has remanded a class action against an oil and gas company to state court, giving firm direction on how the circuit will interpret and apply the Class Action Fairness Act's two exceptions to federal jurisdiction.
The trial judge in Pittsburgh had remanded the case under CAFA's "home state" exception, but the U.S. Court of Appeals for the Third Circuit ruled that the proper route to remand was through the "local controversy exception," lending clear guidance on how the circuit will treat suits under CAFA, which is still less than 10 years old.
"The statute authorizes federal jurisdiction over class actions even in the absence of complete diversity between the parties, except where the 'controversy is uniquely' connected to the state in which the action was originally filed," Judge Patty Shwartz wrote in her opinion on behalf of a unanimous three-judge panel. Shwartz, the newest judge on the Third Circuit's bench, quoted from the court's 2009 opinion in Kaufman v. Allstate New Jersey Insurance.
Also on the panel were Judges Marjorie O. Rendell and D. Brooks Smith.
The court defined the terms of CAFA's exceptions and sent a clear signal on how they should be applied.
The suit, which was filed on behalf of 1,300 landowners in Western Pennsylvania, was first brought in federal court against an out-of-state oil and gas drilling company called Halcon Energy Properties.
After Halcon alerted the court that it planned to join two Pennsylvania-based firms that acted as agents for the landowners when they signed their leases with Halcon, the plaintiffs decided to file direct claims against the agents, along with their claims against Halcon, and sought to do so in state court since they realized that they would no longer have diversity jurisdiction in federal court. The two Pennsylvania agents are Morascyzk & Polochak, called M&P, and Co-eXprise, called CX-Energy.
Halcon didn't object to joining the agents but did want to keep the suit in federal court and removed the action back to federal court after the plaintiffs filed in state court.
U.S. District Judge Arthur J. Schwab of the Western District of Pennsylvania remanded the case after finding that the plaintiffs had satisfied the requirements for CAFA's "home state" exception, which says that a case should be heard in state court if two-thirds of the plaintiffs and the primary defendants are citizens of the state in which the suit was filed.
While two-thirds of the plaintiffs are clearly from Pennsylvania, as are the two agents, the Third Circuit held that the "home state" exception wouldn't apply because Halcon, which is a Delaware corporation headquartered in Texas, is also a primary defendant and is not a citizen of Pennsylvania.
In order to determine whether or not Halcon would be a primary defendant, the appeals court had to define the word "primary," which is left open in the text of CAFA.
"Some courts have embraced the definition of primary to mean direct and construed the words 'primary defendants' to capture those defendants who are directly liable to the proposed class, as opposed to being vicariously or secondarily liable based upon theories of contribution or indemnification," Shwartz said.
"This construction finds support in the statements of CAFA's sponsors, which describe the primary defendants as those who are the 'real targets' of the lawsuit," she concluded.
Similarly, courts should weigh which defendants are saddled with the greatest liability or to what degree the liability is shared among defendants.
Here, the plaintiffs apportioned the liability equally among the defendants, Shwartz said, explaining, "While more claims are asserted against M&P and CX-Energy than against Halcon, the claims against Halcon are as, if not more, significant in that the plaintiffs allege Halcon breached its lease agreement with more than 1,000 landowners and owes damages exceeding $50,000 to each class member. Thus, Halcon is a 'primary defendant.'"
Although the Third Circuit disagreed with the route taken by the district court to remand, it agreed with the ultimate position for the case. The appeals court took the other avenue to remand allowed by CAFA, the "local controversy" exception.
In order to satisfy that exception, no similar class-action suit could have been filed within the last three years.
"Contrary to the district court, we determine that no other class action, as contemplated by CAFA, asserting the same or similar allegations against any of the defendants had been filed in the preceding three years," Shwartz said.
Again, CAFA itself doesn't specify what qualifies as an "other class action," so the Third Circuit looked to congressional intent to establish parameters.
"Congress wanted to ensure that defendants did not face copycat, or near copycat, suits in multiple forums and hence excluded from the local controversy exception cases where a defendant was named in multiple similar cases," Shwartz said.
The question for the Third Circuit to resolve is whether the first federal case and the second state case filed by the plaintiffs would be separate class filings or if the second would be a continuation of the first. The appeals court followed the second line of reasoning.
"In practical terms, plaintiffs' actions were no different from a situation where a party amends a pleading to join parties to an existing case, which is indeed what Halcon itself stated it intended to do during the original district court proceeding," Shwartz said.
David Borkovic, of Jones, Gregg, Creehan & Gerace in Pittsburgh, represented the class and was pleased with the Third Circuit's opinion.
"Frankly, this is the outcome that makes sense," he said. "It's hard to get much more local than this."
He also noted that this is the first time the Third Circuit has spoken on this kind of issue.
Kevin Colosimo, of Burleson in Canonsburg, Pa., represented Halcon and couldn't be reached for comment.
(Copies of the 17-page opinion in Vodenichar v. Halcon, PICS No. 13-2448, are available from The Legal Intelligencer. Please call the Pennsylvania Instant Case Service at 800-276-PICS to order or for information.)