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CAFA Exceptions Clarified By Third Circuit In Oil And Gas Lease Case

In a precedential decision issued by the Third Circuit Court of Appeals in the case of Vodenichar v. Halcon Energy Properties, Inc., No. 13-2812 (Aug. 16, 2013), the Court addressed the two exceptions to the Class Action Fairness Act that permits remand to state courts of class action complaints over which the federal courts would otherwise have jurisdiction.  First, the Court provided guidance as to the interpretation of the term “primary defendants” for the purposes of 28 U.S.C. § 1332(d)(4)(B) and, second, held that the “other class action” language of 28 U.S.C. § 1332(d)(4)(A) was not intended to encompass prior actions between the same parties where the procedural history indicates that the second suit was merely a continuation of the prior suit.

The facts of Halcon are rather straight-forward.  Plaintiffs, landowners in Mercer County, Pennsylvania, engaged defendants Morascyzk & Polochak and Co-eXprise, dba CX-Energy (the “Agent Defendants”) to act as their agents in negotiating oil and gas leases with defendant Halcon Energy Properties, Inc. (“Halcon”).  Under the leases negotiated by the Agent Defendants, Halcon was permitted to reject any lease under pursuant certain identified conditions.  Subsequently, Halcon rejected many of the leases on a basis – the geology – that was not set forth in the leases, claiming that the operative language was fraudulently omitted from the leases by the Agent Defendants.

Initially, the Plaintiffs sued only Halcon in federal court, asserting diversity jurisdiction as Halcon was a Delaware corporation headquartered in Texas (the “First Action”).  However, after Halcon indicated that it intended to join the Agent Defendants as “necessary parties,” the Plaintiffs moved to dismiss the First Action in order to file a new complaint against both Halcon and the Agent Defendants, who were not diverse, and did so in state court (the “Second Action”).  Given the fact that discovery had already begun and the parties were engaged in an ADR process at the time, and recognizing that there would no longer be complete diversity, when granting the Motion to Dismiss the District Court ordered the parties to complete ADR and to retain all discovery for use in the state court proceedings.  In response to the filing of the Second Action in state court, Halcon then removed the Second Action to federal court pursuant to the Class Action Fairness Act (“CAFA”), 28 U.S.C. § 1332(d). 

Among other things, CAFA provides federal courts with jurisdiction over class action lawsuits that meet certain criteria, even if there is no federal question or complete diversity, in order to “assure fair and prompt recoveries for class members with legitimate claims,” to permit federal courts to “consider interstate cases of national importance under diversity jurisdiction,” and to “benefit society by encouraging innovation and lowering consumer prices.” 28 U.S.C. § 1711 (notes).  Because the stated intent of the Act was to address cases with “national importance,” CAFA contains two exceptions.  First, CAFA jurisdiction is defeated under the Home State Exception when two-thirds or more of the members of the plaintiff class and the “primary defendants” are citizens of the state in which the action was commenced.  Second, remand may be proper under the Local Controversy Exception, which provides that cases where, again, two thirds of the plaintiff class resides in the state, the "principal injuries" were incurred in the forum state and at least one defendant from whom "significant relief is sought" and whose alleged conduct is a "significant basis" of the claims is a citizen of the forum state.  Additionally, and key in the Halcon case, for the Local Controversy Exception to apply, there must have been no class action asserting similar factual allegations filed against any of the defendants in the preceding three years.

After removal, the Halcon Plaintiffs filed a Motion for Remand, arguing that jurisdiction was lacking under both CAFA exceptions.  Plaintiffs successfully argued that the Home State Exception applied as the resident Agent Defendants were the “primary defendants” and all other elements of the exception had been met.  Plaintiffs were less successful in the trial court with their argument that the Local Controversy Exception applied, the district court finding that the existence of the First Action precluded its application.  On appeal, the Third Circuit affirmed the remand, but flipped on the basis, holding that Halcon was a primary defendant and hence the Home State Exception did not apply, but that as the Second Action was, in essence, a continuation of the First Action, the Local Controversy Exception mandated the remand.

With respect to the Home State Exception, the Third Circuit clearly rejected the district court’s finding that, because Halcon denied all liability, it was not a “primary defendant.”   Rather, the Court provided the following guidance for future cases:

In short, courts tasked with determining whether a defendant is a “primary defendant” under CAFA should assume liability will be found and determine whether the defendant is the “real target” of the plaintiffs’’ accusations.  In doing so, they should also determine if the plaintiffs seek to hold the defendant responsible for its own actions, as opposed to seeking to have it pay for the actions of others.  Also, courts should ask whether, given the claims asserted against the defendant, it has potential exposure to a significant portion of the class and would sustain a substantial loss as compared to other defendants if found liable.

Moreover, the Court stated that remand under the Home State Exception will be required “only if all primary defendants” are citizens of the forum state.  As Halcon met all of the requirements of a “primary defendant” but was not a citizen of Pennsylvania, remand under the Home State Exception was in error. 

Turning to the Local Controversy Exception, the Third Circuit rejected the notion that the First Action was a disqualifying class action asserting similar factual allegations against Halcon and having been filed in the preceding three years.  Deciding that the “no other class action” factor should “not be read too narrowly” to preclude remand, the Court explained that the statutory language was intended to protect defendants from facing a multiplicity of copycat lawsuits in different fora brought by different representative plaintiffs and different class counsel.  As the Second Action clearly did not fall within that category of lawsuits, remand under the Local Controversy Exception “mandate[d] remand of this truly local case involving Pennsylvania landowners and their land.”