592 Arbuckle Mountain Ranch of Texas, Inc. v. Chesapeake Energy Corporation, 810 F.3d 335 (5th Cir. 2016)

Tuesday, December 6th, 2016

Richard F. Brown

The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.

In Arbuckle Mountain Ranch of Texas, Inc. v. Chesapeake Energy Corporation, 810 F.3d 335 (5th Cir. 2016), cert. denied, 136 S. Ct. (2016). (Class action on leases terminated by foreclosure) the Fifth Circuit held that the exception for local controversies under the Class Action Fairness Act (“CAFA”) did not apply, and the federal court had jurisdiction over the putative class action. Chesapeake, et al (“CEX”) took leases in and around Fort Worth that were subordinate to various deeds of trust, which CEX did not attempt to cure by obtaining subordination agreements. Regardless of foreclosures, CEX simply continued to produce. Arbuckle, for the putative class of approximately 4,000 owners, originally filed in state court alleging that CEX failed to obtain subordinations of the prior mortgages to the oil and gas leases, the leases terminated upon foreclosure, and CEX’s ongoing operation of the wells was a trespass and conversion. CEX removed the action to federal court under CAFA which applies to class action controversies involving a minimum of 100 members; an amount in controversy over $5 million dollars; minimal geographic diversity between class members and defendants; and no states, state officials, or other governmental entities among the primary defendants. It was agreed that all of these conditions were met. The federal district court remanded the case to state court after Arbuckle argued that the local controversy exception applied.

The issue was whether the local controversy exception applied. The exception requires federal courts to decline jurisdiction over class actions where:

(I)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;

(II)at least 1 defendant is a defendant—
(aa) from whom significant relief is sought by members of the plaintiff class;
(bb) whose alleged conduct forms a significant basis for the claims asserted by the proposed plaintiff class; and
(cc) who is a citizen of the State in which the action was originally filed;

(III)principal injuries resulting from the alleged conduct or any related conduct of each defendant were incurred in the State in which the action was originally filed; and

(ii) during the 3-year period preceding the filing of that class action, no other class action has been filed asserting the same or similar factual allegations against any of the defendants on behalf of the same or other persons.

Thus, the class definition in the petition played a critical role in determining whether the local controversy exception applied.

The petition contained two different conflicting class definitions. The first definition narrowly described the class as “Plaintiff and all class members [who] are currently mineral interest owners . . .” while the second, broader definition stated, “Plaintiff seeks and requests the certification of a class . . . comprised of the following: All non-excluded persons or entities, in Johnson or Tarrant Counties, Texas, who are, or were, since 2004, purchasers of property, including mineral interests . . . .” If the class definition included only current owners of mineral interests, then Arbuckle had presented sufficient evidence that the class consisted of greater than two-thirds Texas citizens. However, if the class included all current and former owners of mineral interests, then Arbuckle had failed to produce evidence to satisfy this element, and the local controversy exception would not apply.

The Fifth Circuit reviewed the record and Arbuckle’s petition as a whole to determine which class definition should apply. The court disagreed with Arbuckle’s argument that the definition that is placed earliest in a document should control. The Fifth Circuit opined that the broad definition should control because it appeared in the paragraph that formally identified the class.

Further, the Fifth Circuit found that only one other paragraph in the petition supported interpreting the class as limited to current owners of mineral interests. Another paragraph, relied upon by the plaintiff and the dissent as supporting the narrow definition, stated “the defendants’ acts of trespass ‘have caused, and continue to cause damage to Plaintiff and the Class.’” The majority instead interpreted the paragraph to mean that “damage was previously caused to some class members and continues to occur for others” and not that all class members were currently experiencing damage.

Additionally, Arbuckle argued that the request for injunctive relief would not make sense if the class definition included former owners, but the court reasoned that the class members could seek different remedies: former owners would seek money damages only and current owners would seek money damages, plus injunctive relief. Upon determining there was no basis for the narrow class definition to apply and that Arbuckle presented no evidence of the citizenship of the interim owners under the broad class definition, the court held that no CAFA exception to federal jurisdiction applied, and it remanded the case to the federal district court.

When federal courts can exercise jurisdiction over an action under CAFA, the class definition in the petition will greatly impact whether the local controversy exception can be applied to preclude federal court jurisdiction. Congress intended broad federal court jurisdiction under CAFA; thus, federal courts will retain jurisdiction unless an exception is shown to apply with great certainty.