January 16, 2018

Tenth Circuit: Case Properly Remanded to State Court Under the Class Action Fairness Act

The Tenth Circuit Court of Appeals issued its opinion in Speed v. JMA Energy Company, LLC on Monday, October 2, 2017.

Plaintiff Speed filed a petition in the District Court of Hughes County, Oklahoma, asserting a class action against JMA Energy Company, alleging that JMA had willfully violated an Oklahoma statute that requires interest payments of revenue from oil and gas production. Speed further asserted that JMA fraudulently concealed from mineral-interest owners that JMA owed interest to the owners, intending to pay only those who requested the interest.

JMA removed the case to the United States District Court for the Eastern District of Oklahoma, asserting that the district court had jurisdiction under the Class Action Fairness Act (CAFA). Speed then filed an amended motion to remand the case to state court. The district court granted this motion, relying on an exception to CAFA that permits a district court to decline to exercise jurisdiction over a class action meeting certain prerequisites based on consideration of certain factors.

JMA appealed, challenging the district court’s remand order. The Tenth Circuit Court of Appeals found the district court properly considered the statutory factors and did not abuse its discretion by remanding to state court.

CAFA permits a class action to be brought in or removed to federal court if: (1) the proposed class includes at least 100 persons with claims; (2) the aggregate amount in controversy on all claims exceeds $5 million; (3) at least one proposed plaintiff and one defendant have diverse citizenship; and (4) the primary defendants are not governmental entities or officials against whom a federal court cannot order relief.

CAFA also recognizes three statutory exceptions. The exception at issue in this case is the discretionary exception. This exception allows a federal court to decline to exercise jurisdiction over a class action that is otherwise covered by CAFA based on six enumerated factors. The Tenth Circuit considered each factor in turn to determine if there was a legal error or other abuse of discretion by the district court.

The first factor is whether the claims asserted involve a matter of national or interstate interest. The Tenth Circuit found that JMA failed to explain how there could be a significant national interest in the mere allocation of interest between producers and royalty owners. The only thing national or interstate about this case is that some of the owners of Oklahoma property, who are basing their claims on alleged violations of an Oklahoma statute, happen to live in other states and receive their royalty checks there. The Tenth Circuit determined that was not enough to reverse the district court’s finding.

The second factor was whether the claims asserted would be governed by Oklahoma law or the laws of other states. The district court found JMA’s argument that a fraud claim against Oklahoma may be governed by the law of a different state unpersuasive and concluded that this factor weighed in favor of Speed’s motion to remand. The Tenth Circuit concluded that Oklahoma law controlled.

The third factor was whether the class action had been pleaded in order to avoid federal jurisdiction. JMA asserted that Speed attempted to avoid federal jurisdiction by excluding from the class any publicly traded companies and affiliated entities that produced, gathered, processed, or marketed oil and gas. The district court found this argument unpersuasive, reasoning that Speed had proposed a class that encompassed all the people and claims that one would expect to include in a class action. The Tenth Circuit agreed.

The fourth factor was whether the action was brought in a forum with a distinct nexus with the class members, the alleged harm, or the defendants. The Tenth Circuit found no abuse of discretion by the district court, as the factors of this case demonstrated the required nexus between Oklahoma and the class members, the alleged harms, and the defendant, including that the action was related to real-property interests in Oklahoma, the class members owned royalty interests in Oklahoma property, JMA is a citizen of Oklahoma, and the underlying alleged actions that gave rise to this suit took place in Oklahoma.

The fifth factor was whether the number of citizens of the state in which the action was originally filed is substantially larger than the number of citizens from any other state for plaintiffs in the class, and whether the citizenship of the other members of the proposed class was dispersed among a substantial number of states. The Tenth Circuit found the district court correctly determined that this factor weighed in favor of remand, as the number of Oklahoma citizens was about 2.5 times the number of citizens from any other state.

The sixth, and last, factor was whether, during the three-year period preceding the filing of the class action, one or more other class actions asserting the same or similar claims on behalf of the same or other persons had been filed. No other actions have been filed; therefore, this factor favors remand.

The Tenth Circuit determined that the district court did not abuse its discretion in ruling that each factor supported remand.

The Tenth Circuit Court of Appeals AFFIRMED the decision remanding the case to state court.

Tenth Circuit: Diversity Jurisdiction Requires Complete Diversity of Parties

The Tenth Circuit Court of Appeals issued its opinion in Grynberg v. Kinder Morgan Energy Partners, L.P. on Monday, November 2, 2015.

Celeste Grynberg, individually and on behalf of several trusts of which she is trustee, and Jack Grynberg petitioned the U.S. District Court for the District of Colorado to vacate an arbitration award entered against them in favor of Kinder Morgan Energy Partners L.P. and Kinder Morgan CO2 Company L.P. (Kinder Morgan entities). The Grynbergs alleged diversity jurisdiction since the amount in controversy was over $75,000, they were residents of Colorado, Kinder Morgan Energy Partners (KMEP) was a Delaware limited partnership with its principal place of business in Texas, and Kinder Morgan CO2 Company (KMCO2) was a Texas limited partnership with its principal place of business in Texas. The district court issued an order to show cause that said the Grynbergs’ petition did not adequately allege diversity jurisdiction because it did not properly identify the citizenship of the Kinder Morgan entities as of the filing date. In response, the Grynbergs explained that KMEP was a publicly traded Delaware master limited partnership (MLP) and KMCO2 was a Texas limited partnership wholly owned by KMEP. The Kinder Morgan entities responded and explained that KMEP had unitholders who were citizens of Colorado. The district court dismissed the action without prejudice based on lack of diversity jurisdiction.

On appeal, the Tenth Circuit analyzed the jurisdictional statutes and the citizenship of MLPs. The Tenth Circuit noted it could only find diversity jurisdiction if no plaintiff is a citizen of the same state as any defendant. The Tenth Circuit turned to the citizenship of MLPs and determined that an MLPs citizenship consists of its unitholders’ citizenship. First, the Tenth Circuit analyzed the long-standing rule regarding citizenship of corporations and unincorporated entities, finding that under Carden v. Arkoma Associates, 494 U.S. 185 (1990), an unincorporated entity’s citizenship is determined by the citizenship of its members. The Tenth Circuit next found that the narrow exception set forth in Puerto Rico v. Russell & Co., 288 U.S. 476 (1933), did not apply because the entity at issue in Russell was wholly unique to Puerto Rico and resembled a corporation more than an unincorporated entity. The Tenth Circuit noted that the Supreme Court had declined to apply the Russell exception to any entities other than the type enunciated in Russell. Finally, the Tenth Circuit addressed the Grynbergs’ argument that applying Carden would preclude jurisdiction over MLPs, noting that these policy arguments were best addressed to Congress.

The Tenth Circuit affirmed the district court’s dismissal without prejudice.

Tenth Circuit: Citizenship of LLC for Diversity Jurisdiction Based on Citizenship of Each LLC Member

The Tenth Circuit Court of Appeals issued its opinion in Siloam Springs Hotel, L.L.C. v. Century Surety Co. on Tuesday, March 31, 2015.

Siloam Springs Hotel, L.L.C. operates a Hampton Inn in Siloam Springs, Arkansas. It purchased a commercial general liability insurance policy from Century Surety Co. During the applicable coverage period, the heating element of an indoor swimming pool suddenly malfunctioned, causing a sudden carbon monoxide leak and injuring several guests. Siloam sought coverage from Century, but Century denied coverage, relying on an exclusion in the insurance policy for injuries arising from noxious characteristics of indoor air. In response, Siloam filed suit in Oklahoma state court, seeking a declaration of coverage. Century removed the case to the U.S. District Court for the Western District of Oklahoma, asserting complete diversity jurisdiction and an amount in controversy exceeding $75,000. The parties filed cross-motions for summary judgment in district court, and the district court granted summary judgment to Century.

Siloam timely appealed, challenging the district court’s ruling that the indoor air exclusion barred coverage. After the parties filed their merits briefs, the Tenth Circuit recognized a jurisdictional defect in Century’s notice of removal, which labeled Siloam as a “corporation” and asserted it was organized under Oklahoma law and had its primary place of business in Arkansas. The Tenth Circuit ordered Century to show cause regarding the discrepancy, noting that although the Tenth Circuit had not addressed the issue, every other circuit to consider citizenship of an LLC for diversity jurisdiction purposes has held citizenship of the LLC is defined by citizenship of its members.

Century responded by arguing the LLC’s citizenship should be determined by treating it as a corporation, or, alternatively, the court should find Siloam’s citizenship to be of Oklahoma, Florida, New York, North Carolina, and Texas. The Tenth Circuit disagreed. First, the Tenth Circuit found that Oklahoma law defines an LLC as an unincorporated association or proprietorship, not a corporation. Following Supreme Court precedent, the Tenth Circuit determined that citizenship of an unincorporated association or proprietorship is decided based on citizenship of all its members. Next, the Tenth Circuit rejected Century’s offer that the LLC’s citizenship be Oklahoma, Florida, New York, North Carolina, and Texas, since Century based its determination on an unsworn letter from Siloam’s counsel dated after the notice of removal. The Tenth Circuit found two flaws with Century’s argument. First, residence is not equivalent to domicile, and domicile is used to determine citizenship, so the information in the unsworn letter regarding residence of the LLC’s members did not adequately address domicile. Second, the letter was dated after the notice of removal, and relevance regarding removal is to be determined at the time of removal, not after.

Without addressing the merits of the appeal, the Tenth Circuit remanded to the district court to consider whether diversity jurisdiction is proper and whether the insurance coverage questions would be better answered by certification to the appropriate state court.

Tenth Circuit: Sua Sponte Amendment of Original Opinion by Tenth Circuit

The Tenth Circuit Court of Appeals re-issued its opinion in ConAgra Foods, Inc. v. Americold Logistics, LLC on Thursday, April 9, 2015. The opinion was originally published on January 27, 2015, but the court sua sponte amended a sentence in the conclusion of the decision. Read the previous Legal Connection summary here.

Tenth Circuit: Citizenship of Beneficiaries to Trust Necessary to Determine Diversity Jurisdiction

The Tenth Circuit Court of Appeals issued its opinion in ConAgra Foods, Inc. v. Americold Logistics, LLC on Tuesday, January 27, 2015.

Multiple plaintiffs brought suit against Americold Logistics, LLC and Americold Realty Trust (collectively, Americold) in Kansas state court. Americold removed to the U.S. District Court for the District of Kansas, asserting complete diversity of the parties. No party challenged removal and the district court did not address the issue. The district court granted summary judgment to Americold and plaintiffs timely appealed on the merits. On appeal, the Tenth Circuit noticed a potential defect in the notice of removal and ordered Americold to file supplemental briefing to address whether Americold’s Notice of Removal was sufficient to establish diversity jurisdiction and, if not, what curative facts could correct the defect in the appeal?

In its supplemental briefing, Americold asserted the omission of the citizenship of the beneficiaries of the Americold Realty Trust was not a jurisdictional defect because the citizenship of a trust is determined solely by the citizenship of its trustees. The Tenth Circuit disagreed. After analyzing Supreme Court precedent in Navarro and Carden, the Tenth Circuit found the citizenship of a trust depends on not only the citizenship of the trustees but also that of its beneficiaries. The Tenth Circuit ruled that when a trustee is a party to litigation, it is the trustee’s citizenship that controls for diversity jurisdiction purposes, as long as the trustee satisfies Navarro‘s real-party-in-interest test. However, when a trust itself is party to the litigation, the citizenship of the trust is derived from all of the trust’s “members.” In this case, the Tenth Circuit found that at a minimum the trust’s “members” were its beneficiaries.

The Tenth Circuit found Americold failed to meet its burden to establish diversity jurisdiction because it failed to present evidence of the citizenship of its beneficiaries. The Tenth Circuit remanded to the district court to vacate its judgment on the merits and remand to state court.

Tenth Circuit: Creating Diversity Jurisdiction by Collusively Assigning Interest Is Improper

The Tenth Circuit Court of Appeals issued its opinion in National Fitness Holdings, Inc. v. Grand View Corporate Centre, LLC on Thursday, April 24, 2014.

Several Utah citizens sued J. Hoyt Stephenson in the United States District Court for the District of Utah. Stephenson responded with state-law counterclaims and a third-party complaint asserting state-law claims against other Utah citizens. The district court dismissed Stephenson’s counterclaims and third-party claims, finding that Stephenson was a Utah citizen—not a Wyoming citizen—so it lacked diversity jurisdiction to hear Stephenson’s claims. Stephenson then created National Fitness Holdings, Inc. and incorporated it in Wyoming. Stephenson was the sole director, officer, and shareholder. A week after creating National, Stephenson assigned it all his stock in three companies and his interest in Utah real property. Four days after that, National sued Grand View Corporate Centre, LLC in the United States District Court for the District of Utah. Defendants moved to dismiss under F.R.C.P. 12(b)(1), arguing that Stephenson improperly made the assignments to manufacture diversity jurisdiction. The district court agreed and granted defendants’ motion.

The Tenth Circuit affirmed, undergoing a detailed analysis of 28 U.S.C. § 1359 and concluding that the district court properly dismissed the case for lack of diversity jurisdiction.

Tenth Circuit: Removal Requirements Under the Class Action Fairness Act of 2005

The Tenth Circuit Court of Appeals published its denial of Petition for Rehearing En Banc and dissent in Dart Cherokee Basin Operating Co., LLC v. Owens on Tuesday, September 17, 2013.

This opinion is a four judge dissent from denial of the petitioners’ Petition for Rehearing En Banc. The denial was a result of an evenly divided vote. The Petitioners removed the case to federal court under the Class Action Fairness Act of 2005 (CAFA) and alleged the amount in controversy to be $8 million. After the Respondent, Owens, moved to remand the case to state court, Petitioners submitted undisputed proof that the amount in controversy exceeded $14 million but the district court granted Owens’s motion. It did so only because the notice of removal itself had failed to provide evidentiary support, “such as an economic analysis . . . or settlement estimates” for the $8 million figure. An divided Tenth Circuit panel denied the Petitioner’s request to appeal. The author of the dissent discusses the procedural requirements for removal in diversity cases under CAFA.