Louisiana v. I3 Verticals Inc.

• Docket Number: 22-30553
• Decision Date: 01 September 2023
• Parties: State of Louisiana, By and Through its Division of Administration; East Baton Rouge Law Enforcement District; Claiborne Parish Law Enforcement District; Rapides Parish Law Enforcement District; East Feliciana Parish Law Enforcement District; West Feliciana Parish Law Enforcement District; Grant Parish Law Enforcement District; Acadia Parish Law Enforcement District; Tangipahoa Parish Law Enforcement District; Franklin Parish Law Enforcement District; Ascension Parish Law Enforcement District; Sid J. Gautreaux, III, in his official capacity as Sheriff of East Baton Rouge Parish; Samuel A. Dowies, in his official capacity as Sheriff of Claiborne Parish; Mark Wood, in his official capacity as Sheriff of Rapides Parish; Jeff Travis, in his official capacity as Sheriff of East Feliciana Parish; Brian Spillman, in his official capacity as Sheriff of West Feliciana Parish; Steven McCain, in his official capacity as Sheriff of Grant Parish; K. P. Gibson, in his official capacity as Sheriff of Acadia Parish; Daniel Edwards, in his official capacity as Sheriff of Tangipahoa Parish; Kevin Cobb, in his official capacity as Sheriff of Franklin Parish; Bobby Webre, in his official capacity as Sheriff of Ascension Parish, Plaintiffs-Appellees, v. I3 Verticals Incorporated; I3 Verticals, L.L.C.; I3- Software & Services, L.L.C.; 1120 South Pointe Properties, L.L.C., formerly known as Software and Services of Louisiana, L.L.C.; Gregory Teeters; Scott Carrington, Defendants-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

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State of Louisiana, By and Through its Division of Administration; East Baton Rouge Law Enforcement District; Claiborne Parish Law Enforcement District; Rapides Parish Law Enforcement District; East Feliciana Parish Law Enforcement District; West Feliciana Parish Law Enforcement District; Grant Parish Law Enforcement District; Acadia Parish Law Enforcement District; Tangipahoa Parish Law Enforcement District; Franklin Parish Law Enforcement District; Ascension Parish Law Enforcement District; Sid J. Gautreaux, III, in his official capacity as Sheriff of East Baton Rouge Parish; Samuel A. Dowies, in his official capacity as Sheriff of Claiborne Parish; Mark Wood, in his official capacity as Sheriff of Rapides Parish; Jeff Travis, in his official capacity as Sheriff of East Feliciana Parish; Brian Spillman, in his official capacity as Sheriff of West Feliciana Parish; Steven McCain, in his official capacity as Sheriff of Grant Parish; K. P. Gibson, in his official capacity as Sheriff of Acadia Parish; Daniel Edwards, in his official capacity as Sheriff of Tangipahoa Parish; Kevin Cobb, in his official capacity as Sheriff of Franklin Parish; Bobby Webre, in his official capacity as Sheriff of Ascension Parish, Plaintiffs-Appellees,
v.
I3 Verticals Incorporated; I3 Verticals, L.L.C.; I3- Software & Services, L.L.C.; 1120 South Pointe Properties, L.L.C., formerly known as Software and Services of Louisiana, L.L.C.; Gregory Teeters; Scott Carrington, Defendants-Appellants.

No. 22-30553

United States Court of Appeals, Fifth Circuit

September 1, 2023

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Appeal from the United States District Court for the Middle District of Louisiana USDC No. 3:21-CV-572

Before ELROD, HO, and OLDHAM, Circuit Judges.

JAMES C. HO, Circuit Judge

The Class Action Fairness Act excludes federal jurisdiction over class actions with "less than 100" plaintiff class members. See 28 U.S.C. § 1332(d)(5)(B). In this class action brought by Louisiana sheriffs and law enforcement districts, we hold that the law enforcement districts are separate entities from the sheriffs, and that together, they bring the total number of Plaintiffs over the hundred-plaintiff threshold.

We nevertheless conclude that this class action does not belong in federal court. That's because the Act also establishes a local controversy exception to federal jurisdiction. 28 U.S.C. § 1332(d)(4). This exception requires at least one in-state defendant "whose alleged conduct forms a significant basis for the claims asserted" and "from whom significant relief is sought." Id. § 1332(d)(4)(A)(i)(II).

Plaintiffs allege harm from unlawful conduct spanning from 2015 to 2020. Defendants include an in-state business allegedly responsible for all of Plaintiffs' harms until 2018, when it was acquired by an out-of-state business. We must decide whether the in-state Defendants' conduct forms a "significant basis" for Plaintiffs' claims, and whether Plaintiffs are seeking "significant relief" from the in-state Defendants. We answer yes to both questions and therefore affirm the district court in remanding this case to state court under the local controversy exception.

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I.

This is a class action brought by Louisiana sheriffs and Louisiana law enforcement districts against purveyors of software. The sheriffs and law enforcement districts allege that the software purveyors sold them defective software and then failed to administer the software properly. This failure to service the software properly took place continuously over a period from 2015 to 2020.

Crucially for this appeal, Defendants include both in-state and out-of state software purveyors. From 2015 to late 2018, only in-state Defendants were responsible for the alleged wrongdoing-South Pointe, a Louisiana company, and its owner, Gregory Teeters, a Louisiana individual. In late 2018, out-of-state company i3-Software and Services acquired South Pointe's software business. As a result, i3-Software and Services-together with its alter egos, out-of-state entities i3 Verticals, LLC and i3 Verticals, Inc., and its Louisiana owner, Scott Carrington-bears responsibility for the alleged conduct after 2018.

Plaintiffs originally sued in Louisiana state court. But Defendants removed to federal district court. Plaintiffs then sought remand to Louisiana state court, arguing that the local controversy exception to the Class Action Fairness Act applied. The magistrate issued a report that recommended remand under the local controversy exception. The district court adopted the magistrate's report. Defendants now appeal the district court's remand to state court.

II.

To be heard in federal court, a class action must have at least a hundred plaintiff class members. That's because the Class Action Fairness Act excludes federal subject-matter jurisdiction over a class action where "the number of members of all proposed plaintiff classes in the aggregate is

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less than 100." 28 U.S.C. § 1332(d)(5)(B). See Mississippi ex rel. Hood v. AU Optronics Corp., 571 U.S. 161, 169 (2014) ("CAFA provides that in order for a class action to be removable, 'the number of members of all proposed plaintiff classes' must be 100 or greater.").

Plaintiffs argue that this class action is not removable to federal court because it has fewer than a hundred class members. This argument goes to subject-matter jurisdiction, so we are duty-bound to consider it, even though Plaintiffs raise it for the first time on appeal. See Capron v. Van Noorden, 6 U.S. 126, 126-27 (1804).

As Plaintiffs explain, you can reach the hundred-person jurisdictional threshold only by adding the sixty-four Louisiana law enforcement districts to the sixty-four Louisiana sheriffs. And Plaintiffs urge that the law enforcement districts are not separate entities capable of suit. Instead, Plaintiffs claim, each law enforcement district is one with its sheriff. Take away the law enforcement districts as separate juridical persons, and you're left with the sixty-four sheriffs-far fewer than the hundred plaintiffs required for federal jurisdiction.

State law determines whether a local government entity, such as a law enforcement district, is a person capable of suit. Under the Federal Rules, an entity's "[c]apacity to sue or be sued is determined . . . by the law of the state where the court is located." FED. R. CIV. P. 17(b)(3). See Edmiston v. Louisiana Small Business Development Center, 931 F.3d 403, 406 (5th Cir. 2019) ("[T]he capacity of an entity which is neither an individual nor a corporation to be sued in federal court is determined by state law."); Darby v. Pasadena Police Dep't, 939 F.2d 311, 313 (5th Cir. 1991) (applying Texas state law to determine whether a Texas local government entity had the capacity to sue or be sued in an appeal from the Southern District of Texas).

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This is an appeal from the Middle District of Louisiana. So Louisiana state law governs whether the Louisiana law enforcement districts can sue as plaintiffs, distinct from the Louisiana parish sheriffs.

"Under Louisiana law, a governmental entity is an independent juridical entity when 'the organic law grants it the legal capacity to function independently and not just as the agency or division of another governmental entity.'" Edmiston, 931 F.3d at 407 (quoting Roberts v. Sewerage &Water Bd. of New Orleans, 634 So.2d 341, 347 (La. 1994)).

Louisiana law, including the organic law that establishes the law enforcement districts, grants the districts the capacity to function independently from the sheriffs. So the law enforcement districts are distinct juridical persons capable of suit.

The sheriffs and the law enforcement districts stem from distinct sources of organic law. The state constitution directly creates the office of parish sheriff. See LA. CONST. art. 5, § 27 ("In each parish a sheriff shall be elected for a term of four years. He shall be the chief law enforcement officer in the parish."). The law enforcement districts, by contrast, are creatures of statute. See LA. STAT. ANN. § 13:5901 ("There is hereby created, in each parish . . . a special district to be known as a law enforcement district for the purpose of providing financing to the office of sheriff for that parish.").

State statute empowers law enforcement districts to "execute . . . contracts and other instruments." LA. STAT. ANN. § 13:5904(A)(1). And it makes those contracts "binding upon the district . . . notwithstanding that the term of such contract . . . extends beyond the expiration of the term of the current ex officio chief executive officer," that is, the sheriff. Id. § 13:5904(B).

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As the state Attorney General has explained, this means that a law enforcement district is distinct from the sheriff. The organic statutes "create a public entity known as the 'Law Enforcement District' for each parish, separate from the Sheriff, which has perpetual existence and which is therefore capable of entering into obligations exceeding the term of a Sheriff." Louisiana Attorney General Opinion No. 09-0003 (Apr. 30, 2009), 2009 WL 1416444, at *2 (quoting Louisiana Attorney General Opinion No. 08-0072 (Apr. 10, 2008)).

A sheriff's contracts only bind that sheriff, and not his successor. By contrast, a law enforcement district's contracts may bind that district even past the current sheriff's term of office. See id. at *2-3. And that's why the state legislature created separate law enforcement districts: as a workaround for the problem of a sheriff's contracts binding only the current sheriff. Id. at *2.

So a law enforcement district can enter contracts that bind the district beyond the sheriff's term. Similarly, a law enforcement...