Werner v. Kpmg Llp
| Decision Date | 07 February 2006 |
| Docket Number | No. Civ.A. H-05-0821.,Civ.A. H-05-0821. |
| Citation | 415 F.Supp.2d 688 |
| Parties | Marc WERNER, et al., Plaintiffs, v. KPMG LLP, et al., Defendants. |
| Court | U.S. District Court — Southern District of Texas |
David E. Warden, Yetter & Warden, L.L.P., Demetrios Anaipakos, Ahmad, Zavitsanos & Anaipakos, P.C., Houston, TX, for Plaintiffs/Intervenor Plaintiffs.
Alexander C. Chae, Amy Catherine Dinn, Gardere Wynne Sewell LLP, Paul J. Dobrowski, Dobrowski L.L.P., Bradley R. Gammell, Attorney At Law, Thomas C. Godbold, Fulbright & Jaworski L.L.P., Houston, TX, for Intervenor Plaintiffs.
The Class Action Fairness Act (CAFA),1 enacted on February 18, 2005, expands federal jurisdiction over certain class actions that assert state-law claims. CAFA applies to civil actions "commenced" on or before February 18, 2005.2 In the year since CAFA's enactment, courts have had to determine whether cases pending in state courts before February 18, 2005 can be removed to federal court based on amendments filed on or after that date. The appellate courts and many district courts examining motions to remand such cases have stated that if an amendment adds a new party or adds a new cause of action that does not relate back to the date of the original complaint or petition, a new action may have "commenced," making removal proper under CAFA. See, e.g., Plubell v. Merck & Co., 434 F.3d 1070, 1071-72 (8th Cir.2006); Schorsch v. Hewlett-Packard, 417 F.3d 748, 750 (7th Cir.2005); Knudsen v. Liberty Mut. Ins. Co., 411 F.3d 805, 807 (7th Cir.2005). Some district courts reject the notion that post-CAFA amendments trigger a relation-back analysis, instead holding that a civil action "commences" only once under CAFA. See, e.g., Weekley v. Guidant Corp., 392 F.Supp.2d 1066 (E.D.Ark.2005); Comes v. Microsoft, 403 F.Supp.2d 897 (S.D.Iowa 2005).
The issue before this court is the effect of post-CAFA pleadings on the removability of a class action filed in a Texas state court before CAFA. Before February 18, 2005, the removing parties were sued in a third-party petition under a Texas statute permitting "designation" of "responsible third parties."3 Before February 18, 2005, the removing parties filed a responsive pleading to this third-party petition, denying that they were properly designated as "responsible third parties" and filing a cross-claim and a fourth-party petition designating "responsible third parties" and asserting contribution rights against them. One of the removing parties also filed a breach of contract claim against the plaintiffs. After February 18, 2005, the plaintiffs sued the removing parties directly, and they removed to this court. Plaintiffs moved to remand.
Whether this case was properly removed depends on whether those removing became "parties" before or after February 18, 2005. This court concludes that this action "commenced" as to the individual and entities on whom CAFA removability depends before February 18, 2005. Because there is no other basis to trigger CAFA's application, or any independent basis for federal jurisdiction, this case is remanded to state court. The reasons are set out below.
The named plaintiffs, two investors in two Texas limited partnerships, the St. James Capital Partners L.P. and St. James Merchant Bankers L.P., filed an original petition against KPMG in Texas state court on December 14, 2004. Plaintiffs alleged that as an outside auditor for the partnerships, KPMG facilitated the general partners' mismanagement and self-dealing, in violation of Texas law. Plaintiffs sought class certification under Texas law on behalf of investors in the partnerships.
On January 6, 2005, KPMG filed a third-party complaint "designating" the general partners and individuals involved in managing the limited partnerships as "responsible third parties" under Section 33.004 of the Texas Civil Practice and Remedies Code. That statute, amended in 2003, allows a defendant to designate "responsible third parties" whose fault will be submitted to the finder of fact without making them "parties" to the suit. A responsible third party may include "any person who is alleged to have caused or contributed to causing in any way the harm for which recovery of damages is sought .. .." TEX. CIV. PRAC. & REM.CODE § 33.011(6). The defendant may introduce evidence about the designated responsible third parties' role in the alleged injury or damages and ask the fact-finder to include those designated in allocating responsibility. The responsible third parties are not limited to those who can be made parties in the traditional sense; responsible third parties may be persons or entities outside the court's jurisdiction, unable to be sued, or even unknown. TEX. CIV. PRAC. REM.CODE § 33.004.
Section 33.004 does not require a designated responsible third party to file an answer or responsive pleading, and a failure to do so cannot result in a default judgment. A finding of responsibility against a designated responsible third party cannot "impose liability on the person" and by itself has no preclusive effect. Id. at § 33.004(i). If a person or entity is designated as a responsible third party, the plaintiff can join that person or entity as a party in the suit, without a limitations bar that otherwise might have arisen, if the plaintiff proceeds against the designated responsible third party within sixty days after the designation was filed. Id. at § 33.004(e).
After plaintiffs filed their class action suit against KPMG in state court, but before CAFA's enactment, KPMG designated as responsible third parties a group of related entities collectively referred to as the "St. James Entities," the general partners of the two limited partnerships.4 KPMG also designated three individuals, Charles E. Underbrink, John L. Thompson, and Alan D. Feinsilver. Underbrink and Thompson controlled one of the St. James Entities, St. James Capital Corp.; Thompson served as President and Chief Operating Officer and Underbrink served as Chairman and Chief Executive Officer. The pleadings do not make Feinsilver's alleged role clear.
On January 31, 2005, the St. James Entities and Underbrink answered KPMG's third-party petition. They denied responsibility for any of the injuries or damages alleged. They cross claimed against Thompson, asserting that he should be a designated responsible third party and that he was liable for contribution and indemnity,5 not limiting their contribution and indemnity claims to Section 33.004. The St. James Entities and Underbrink also filed fourth-party claims under the Texas responsible third party statute against additional individuals and entities collectively referred to as the "Doerge Defendants,"6 who were not designated as responsible third parties by KPMG, and asserted claims for contribution and indemnification (not limited to Section 33.004) against the Doerge Defendants. Finally, the St. James Entities—but not Underbrink—asserted causes of action against the plaintiffs for breach of contract and sought damages.7
On March 7, 2005, plaintiffs answered and amended their petition to assert damages claims directly against not only KPMG, but also the St. James Entities and Underbrink, for fraud, breach of fiduciary duty, knowing participation, and violations of the Texas Securities Act. On March 15, 2005, the St. James Entities and Underbrink removed the suit to federal court based on minimal diversity jurisdiction under CAFA. (Docket Entry No. 1). Plaintiffs have filed a motion to remand, (Docket Entry No. 94), to which the various defendants have responded, (Docket Entry Nos. 96, 97, 100). Plaintiffs have replied, (Docket Entry No. 101), and the defendants have surreplied, (Docket Entry Nos. 107, 113). Plaintiffs and certain defendants have also filed letter briefs and supplemental materials on this issue. (Docket Entry Nos. 148, 150). The issue is whether CAFA applies so as to make the case removable.8
CAFA broadened federal court jurisdiction over class actions that are based on state law. Under CAFA, subject to certain exceptions and exclusions, a defendant may remove a class action to federal court if: (1) minimal diversity exists; (2) the aggregate amount in controversy exceeds $5,000,000; and (3) the proposed class includes more than 100 people. Pub.L. 109-2, 119 Stat. 4 (2005), § 4. In addition to changing the jurisdictional basis to minimal diversity for covered cases, CAFA changed removal practice under the statute. Cases subject to CAFA may be removed by a single defendant, eliminating the rule that all defendants must consent to removal. The one-year limit on removing diversity cases is eliminated. CAFA, however, applies only to "civil actions" "commenced" on or after February 18, 2005.
As an initial matter, the parties dispute which side has the burden of proof on the motion to remand. The established rule is that because the party seeking to invoke federal jurisdiction has the burden of proof, the removing party has the burden of showing the propriety of removal. See Delgado v. Shell Oil Co., 231 F.3d 165, 178 n. 25 (5th Cir.2000); Frank v. Bear Stearns & Co., 128 F.3d 919, 921-22 (5th Cir.1997); see also Coury v. Prot, 85 F.3d 244, 248 (5th Cir.1996) ().
The text of CAFA says nothing about the burden of proof on removal. Several courts have held that CAFA nonetheless shifted the burden to the plaintiff to demonstrate that federal jurisdiction does not exist. See Harvey v. Blockbuster, Inc., 384 F.Supp.2d 749, 752 (D.N.J.2005); Judy v. Pfizer, Inc., No. 4:05CV1208RWS, 2005 WL 2240088, *1-2 (E.D.Mo. Sep.14, 2005); In re Textainer Partnership Sec. Litig, No. C 05-0969 MMC, 2005 WL 1791559, *3 (N.D.Cal. Jul....
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