On an issue of first impression, a unanimous panel of the Fifth Circuit Court of Appeals recently held that the applicability of CAFA’s local controversy exception to federal jurisdiction “depends on the pleadings at the time the class action is removed” and the exception cannot be triggered by a plaintiff’s post-removal addition of a significant local defendant.  Cedar Lodge Plantation, LLC v. CSHV Fairway View I, LLC, 2014 WL 4799702 (5th Cir. Sept. 26, 2014).

The local controversy exception provides that a district court “shall decline to exercise jurisdiction” under CAFA with respect to a class action in which (1) more than two-thirds of the proposed plaintiff class(es) are citizens of the state in which the action was originally filed, (2) there is at least one in-state defendant against whom “significant relief” is sought and “whose alleged conduct forms a significant basis for the claims asserted” by the proposed class, (3) the “principal injuries” resulting from the alleged conduct of each defendant were incurred in the state of filing, and (4) no other class action “asserting the same or similar factual allegations against any of the defendants” has been filed within three years prior to the present action.  28 U.S.C. § 1332(d)(4)(A).

As a general matter, it is well established that federal jurisdiction – including jurisdiction under CAFA – is established at the time of removal and cannot be destroyed by post-removal events.  However, several courts have concluded that the local controversy exception operates as a mandatory abstention provision, separate from CAFA’s requirements for subject matter jurisdiction.  In an earlier post, we noted the growing consensus among federal courts that the local controversy exception and the related “home state” exception, unlike jurisdictional requirements, can be waived by plaintiffs.

In Cedar Lodge, the district court further distanced the exception from traditional jurisdictional analysis by holding that, where the plaintiffs amended their complaint to add a significant local defendant after removal and the amendment was not shown to be solely for the purpose of forum manipulation, remand to the state court was mandated.  2014 WL 972033 (M.D. La. Mar. 12, 2014).

The Fifth Circuit Court of Appeals – in a somewhat terse opinion – reversed, finding that the text and history of the statute establish that the local controversy exception must be analyzed with respect to a class action when it is filed, not based on later events.

The Cedar Lodge Action

The Cedar Lodge action concerned the alleged discharge of raw sewage and other contaminants from an apartment complex in Baton Rouge known as the Fairway View Apartments.  The plaintiffs filed, in Louisiana state court, a putative class action on behalf of individuals and entities that live or had lived at the Fairway View Apartments, or who work or own property in the immediate vicinity of the apartment complex.  The original named defendants were the owners and the manager of the apartment complex (the “Fairway Defendants”).  One week after filing suit, the plaintiffs sent a subpoena to Sewer Treatment Specialists, LLC (“STS”) for information regarding the Fairway Defendants’ wastewater lift station and wastewater treatment system.  The plaintiffs later asserted that a “primary reason” for their decision to file suit was to utilize the subpoena power to obtain documents the Fairway Defendants had been unwilling to produce voluntarily.

The Fairway Defendants removed the action to federal court under CAFA.  Seven days later, STS (also being represented by the Fairway Defendants’ counsel) responded to the subpoena and provided information that revealed – for the first time, according to the plaintiffs – that the Fairway Defendants had contracted with STS since 2009 to operate, maintain, service, inspect, test, and repair the Fairway Defendants’ sewage facility.  Eleven days later – and before the Fairway Defendants responded to the original complaint – the plaintiffs filed an amended complaint, adding STS a defendant.

The District Court Orders Remand

After filing their amended complaint, the plaintiffs sought an order remanding the action to state court under CAFA’s local controversy exception.  The Fairway Defendants objected, arguing that – in line with the general principle – the local controversy exception must be analyzed based on the pleadings and parties at the time of removal.

The district court rejected this argument as “unpersuasive.”  The court explained:

The local controversy exception requires remand to the state court of a class action that otherwise satisfies CAFA’s jurisdictional requirements.  Thus, an amendment with allegations that establish the exception does not “destroy” CAFA jurisdiction in the usual sense, but remand is nonetheless required.

2014 WL 972033 at *3.

The district court then immediately turned to an analysis as to whether the addition of STS was for the sole purpose of circumventing federal jurisdiction.  The parties disputed the extent to which the plaintiffs were aware of STS’s role and involvement prior to filing suit.  The Fairway Defendants argued that the plaintiffs added STS as a defendant solely to defeat federal jurisdiction, while the plaintiffs claimed they did not learn material facts about STS’s role until the subpoena response.  The court concluded there was no evidence of forum manipulation.

The district court also dismissed as “without merit” the Fairway Defendants’ argument that STS was not a significant defendant, as required for the local controversy exception to apply.  The court observed that “STS is charged with directly causing or significantly contributing to the main harm allegedly suffered by plaintiffs,” and noted that the plaintiffs “are not required to prove their case to establish that CAFA’s local controversy exception applies.”  Id. at *5

The Fifth Circuit Reverses

The Fifth Circuit Court of Appeals reversed, holding that “the application of the local controversy exception depends on the pleadings at the time the class action is removed, not on an amended complaint filed after removal.”  Cedar Lodge, 2014 WL 4799702 at *1.

The Court referenced “the overwhelming and unanimous authority” of other federal circuit court rulings holding, in other contexts, that post-removal events do not impact CAFA jurisdiction.  Id. at *2 (quoting State of Louisiana v. Am. Nat’l Prop. & Cas. Co., 746 F.3d 633, 639-40 (5th Cir. 2014)).  The Court suggested it would be a “very odd situation” if post-removal events that eliminate the class status of the case could not remove CAFA jurisdiction (as other courts have held), but the post-removal addition of a “significant” local defendant would require remand.  Id. at *3.

But the Court’s specific analysis rested on the text and legislative history of CAFA.  The local controversy exception applies to a district court’s jurisdiction “over a class action” (28 U.S.C. § 1332(d)(4)(A)(i)) and CAFA defines “class action” as “any civil action filed under rule 23...” (28 U.S.C. § 1332(d)(1)(D)).  “Thus,” the Court reasoned, “when Congress provided that district courts are to decline to entertain jurisdiction over ‘class actions,’ it meant that the courts are to look at the action when it is filed in order to determine whether the conditions for abstention are present.”  Cedar Lodge, 2014 WL 4799702 at *3.

The Court also looked to the Senate Judiciary Report on CAFA.  The Court observed that Congress “was well aware of the potential for forum manipulation in class actions by the addition of local, non-diverse defendants” and that the Judiciary Committee had noted “this was one of the most common tactics used to guarantee a state court tribunal.”  Id. (citing S. Rep. 109-14 (Feb. 28, 2005)).  The Court further cited the Committee’s description of the local controversy exception as “a narrow exception that was carefully drafted to ensure that it does not become a jurisdictional loophole.”  Id.  The Court concluded that “[a]llowing Cedar Lodge to avoid federal jurisdiction through a post-removal amendment would turn the policy underlying CAFA on its head.”  Id. at *4.

A Narrow Exception... And Even Narrower Facts?

What is the practical effect of the Cedar Lodge decision?  The bright line “at the time of removal” rule is easy to apply and avoids potentially difficult inquiry into the plaintiff’s motives in seeking joinder.  It could also be viewed as a win for defendants seeking federal court jurisdiction under CAFA, as plaintiffs will be bound by their original pleadings when seeking remand based on the exception.

Seemingly, however, it will be a relatively rare case in which the application of the local controversy exception hinges on a late-added in-state defendant against whom “significant relief” is sought and “whose alleged conduct forms a significant basis for the claims asserted” by the proposed class.  The Cedar Lodge action presented such a case; it was filed on behalf of a proposed class of Louisiana plaintiffs for contamination and related damages that allegedly occurred in Louisiana, against entities that own and operate apartment complexes in Louisiana (but whose corporate citizenship is elsewhere).  Information produced to the plaintiffs shortly after removal revealed that STS, a Louisiana limited liability company, was contractually responsible for operating and maintaining the sewage facilities at issue.  The district court thus concluded that all of the criteria for the local controversy exception were satisfied.

While Congress intended for the exception to be narrow in scope, it also intended federal courts to abstain from exercising jurisdiction over “truly local” controversies.  S. Rep. 109-14.  The Fifth Circuit commented that “a post-removal attempt to add a local defendant may raise doubts about that party’s ‘significance.’”  Id. at *3.  But the Court did not conclude that STS was not a significant defendant or that the Cedar Lodge action was not a local controversy under the exception’s criteria.  Where a plaintiff can otherwise establish the criteria, an examination of motives would seem unnecessary and there would appear to be little utility to limiting the exception to the pleadings at the time of removal in terms of dissuading attempts at forum manipulation.  It will be interesting to see whether other circuits follow the Fifth Circuit’s lead on this issue – or, perhaps, how often this situation will arise.