Monday, September 20, 2010

Westerfeld v. Independent Processing, LLC[1]

Opinion handed down September 20, 2010.
Link to Eighth Circuit Opinion

The Eighth Circuit Court of Appeals examined the meaning and applicability of the “local-controversy exception” to the Class Action Fairness Act of 2005. In particular, the court said that, for the purposes of the “significant defendant” provision of the exception, a court must consider a class action suit as a whole, instead of separately examining significant defendant status for each count, as the district court did. Therefore, the Eighth Circuit vacated the district court’s judgment and remanded the case for further consideration.

I. Facts and Holding

Ms. Westerfeld, a Missouri resident, filed a class action suit in Missouri state court against Independent Processing, LLC (“Independent”), a Missouri company, and Provident Funding Associates, LP (“Provident”), a California limited partnership.[2] Independent processes residential mortgage documents, and Provident provides financing for residential mortgages.[3]

At trial, Ms. Westerfeld testified that “when Independent and Provident charged her and other Missouri residents a ‘broker processing fee’ and an ‘administrative fee,’ respectively, in residential mortgage financing transactions, the two entities engaged in the unauthorized practice of law and violated the Missouri Merchandising Practices Act.”[4] Pursuant to the Class Action Fairness Act of 2005 (CAFA), Provident removed the case to the United States District Court for the Eastern District of Missouri.[5] Ms. Westerfeld moved to remand the case based on the “local-controversy exception” to CAFA.[6] The district court granted Ms. Westerfeld’s motion and remanded the case to the Circuit Court of St. Louis County.[7]

Westerfeld asserted two claims against Independent based on Missouri state law and asserted the same two claims against Provident on behalf of two separate plaintiff classes.[8] In addition, she sought certification of a separate plaintiff class against each defendant.[9] In her motion to remand, Westerfeld argued that the local-controversy exception prohibited the district court from exercising jurisdiction over the action.[10]

Provident argued that the local-controversy exception was inapplicable because Independent did not qualify as a “significant defendant” under CAFA.[11] To support its position, Provident submitted evidence that “Independent provided services in connection with only 56 loans in Missouri,” while Provident, the out-of-state defendant, “originated 3,894 loans in Missouri.”[12] In addition, Provident alleged that Independent charged $16,800 in contested fees, while Provident charged $2.7 million.[13]

To determine if Independent was a significant defendant, Provident urged the district court to consider “the class action as a whole” and not consider “the claims on a class-by-class basis.”[14] According to this analysis, Ms. Westerfeld did not seek significant relief from Independent because Independent participated in fewer than 1.5% of the loans and accumulated only 0.6% of the fees.[15] Therefore, Provident argued that “Westerfeld was not seeking significant relief, Independent’s conduct did not form a significant basis for Westerfeld’s claims, Independent did not qualify as a significant defendant, and thus the local-controversy exception did not apply to defeat federal jurisdiction.”[16]

The district court rejected Provident’s arguments because “Westerfeld filed her claims against Independent ‘as an individual class,’ [so] Independent was necessarily a significant defendant with respect to the claims asserted against it.”[17] The district court analyzed the issue separately for each class and concluded that Independent was a significant defendant with respect to Counts I and II, because each count “defined a class and asserted claims against Independent alone.”[18]

Provident appealed the order of the district court and the Eighth Circuit granted the appeal.[19] The Eighth Circuit reviewed the district court’s interpretation of CAFA de novo, vacated the district court’s judgment, and remanded the case for further consideration consistent with its opinion.[20]

II. Legal Background

CAFA provides for “broad federal jurisdiction over class actions and establishes narrow exceptions to such jurisdiction.”[21] Federal courts have jurisdiction over class actions if the amount in controversy exceeds $5,000,000, “any class member and any defendant are citizens of different states,” and the class contains at least 100 members.[22]

Under CAFA, one of the exceptions to federal jurisdiction is the “local-controversy exception.”[23] Pursuant to this exception, a district court must not exercise jurisdiction over a class action if “more than two-thirds of the class members in the aggregate are citizens of the state in which the action was originally filed, at least one defendant ‘from whom significant relief is sought by members of the plaintiff class’ and ‘whose alleged conduct forms a significant basis for the claims asserted by the proposed plaintiff class’ is a citizen of the state in which the class action was originally filed,” the principal injuries were suffered in the forum state, and no other class action based on similar facts was filed in the three years prior to the current class action.[24]

CAFA did not change the general rule that the removing party bears the burden of establishing jurisdiction.[25] Once the initial jurisdictional requirements are met by the removing party, the burden of establishing a jurisdictional exception to CAFA shifts to the party seeking remand.[26] As a result, Provident bore the burden of proving whether CAFA’s jurisdictional requirements were met.[27] The district court stated that any doubt about the application of the local-controversy exception is resolved in favor of remand.[28] According to the Eighth Circuit, this was a misstatement of the law.[29]

When Provident satisfied the “basic jurisdictional requirements” of CAFA, the burden shifted to Westerfeld to establish that the local-controversy exception applied.[30] By resolving doubt concerning application of the exception in favor of remand, the district court resolved doubt in favor of Westerfeld, even though Westerfeld had the burden of establishing that the exception applied.[31] According to the Eighth Circuit, “the party bearing the burden of proof is not entitled to the benefit of the doubt.”[32] Therefore, on remand, the Eighth Circuit directed the district court to resolve any doubt concerning the applicability of the local-controversy exception against Westerfeld.[33]

Provident then argued that the district court erroneously concluded that the local-controversy exception precluded the district court from exercising jurisdiction over the class action.[34] According to the Eighth Circuit, the exception mandates that an in-state defendant must be a significant defendant, one “‘from whom significant relief is sought by members of the plaintiff class’ and one ‘whose alleged conduct forms a significant basis for the claims asserted by the proposed plaintiff class.’”[35]

When interpreting a statute, the Eighth Circuit said that federal courts must “‘interpret the words of the[ ] statute[ ] in light of the purposes Congress sought to serve.’”[36] A court must not “interpret[ ] a statute in a manner that renders any section of the statute superfluous or fails to give effect to all of the words used by Congress.”[37]

CAFA defines “class” as “all of the class members in a class action.”[38] “[T]herefore, ‘the plaintiff class’…and ‘the proposed plaintiff class’…include all of the class members in the class action as a whole.”[39] As a result, when determining if an in-state defendant is a significant defendant, courts must consider the claims of all the class members instead of considering the claims on a class-by-class basis.[40]

The Eighth Circuit adopted the reasoning of Kaufman v. Allstate N.J. Ins. Co., a case from the Third Circuit, and said, “Whether the [in-state] defendant’s alleged conduct is significant cannot be decided without comparing it to the alleged conduct of all the Defendants . . . . The local defendant’s alleged conduct must be an important ground for the asserted claims in view of the alleged conduct of all the Defendants.”[41] Accordingly, the Eighth Circuit found that the district court’s construction of the statute strips the provision of substantive meaning because determining an in-state defendant’s significance on a class-by-class basis will always result in a finding that the in-state defendant is significant.[42] The district court’s reading of the exception allows class-action plaintiffs to avoid federal jurisdiction “simply by pleading their claims against an in-state defendant as separate counts on behalf of a separate class.”[43]

The Eighth Circuit concluded that the district court erred in ruling that the local-controversy exception to CAFA precluded federal jurisdiction in this case.[44] On remand, the Eighth Circuit ordered the district court to “determine whether Independent is a significant defendant for purposes of the local-controversy exception by considering all the claims in the action and not by considering the claims on a class-by-class basis.”[45]

III. Comment

While not specifically mentioned in Westerfeld, the frequently repeated disdain for form over substance was seemingly on the mind of the Eighth Circuit judges. Westerfeld’s division of claims convinced the federal district court to remand the case back to state court.[46] However, this result was unappealing to the Eighth Circuit because, in enacting CAFA, Congress specified that the local-controversy exception was a narrow exception.[47] Since the same claims were asserted against each defendant,[48] the only reason for the separate suits was to invoke the local-controversy exception. The district court focused more on the form of the pleading than the substance of the issues. If Westerfeld were permitted to separate her claims as she did, then the local-controversy exception could become quite large. Hower, this decision ensures that the congressional intent in enacting CAFA is not hindered by such distinctions without a difference.

-Drew Weber

[1] 621 F.3d 819 (8th Cir. 2010).
[2] Id. at 821.
[3] Id.
[4] Id. (citing Mo. Rev. Stat. §§ 407.010-407.1500 (2000)).
[5] Westerfeld, 621 F.3d at 821.
[6] Id. See 28 U.S.C. § 1332(d)(4)(A) (2005).
[7] Westerfeld, 621 F.3d at 821-22.
[8] Id. at 823.
[9] Id.
[10] Id.
[11] Id.
[12] Id. at 823-24.
[13] Id. at 824.
[14] Id.
[15] Id.
[16] Id.
[17] Id.
[18] Id.
[19] Id. at 822.
[20] Id.
[21] Id.
[22] Id.
[23] Id.
[24] Id. (quoting 28 U.S.C. § 1332(d)(4)(A) (2005)).
[25] Id.
[26] Id.
[27] Id. at 823.
[28] Id.
[29] Id.
[30] Id.
[31] Id.
[32] Id.
[33] Id.
[34] Id.
[35] Id. (quoting 28 U.S.C. § 1332(d)(4)(A)(i)(II)(aa) & (bb) (2005)).
[36] Id. at 824. (quoting Chapman v. Houston Welfare Rights Org., 441 U.S. 600, 608 (1979)).
[37] Id. (citing Windsor on the River Assocs. v. Balcor Real Estate Fin., Inc., 7 F.3d 127, 130 (8th Cir. 1993)).
[38] Id. (quoting 28 U.S.C. § 1332(d)(1)(A) (2005)).
[39] Id.
[40] Id. at 824-25.
[41] Id. at 825 (quoting Kaufman v. Allstate N.J. Ins. Co., 561 F.3d 144, 157 (3d Cir. 2009)).
[42] Id.
[43] Id.
[44] Id.
[45] Id.
[46] Id.
[47] Id.
[48] Id. at 823.