United States: Facts Outside Of The Complaint And Notice Of Removal Are Irrelevant For Deciding CAFA Jurisdiction

Last Updated: May 22 2014
Article by CAFA Law Blog

Owens v. Dart Cherokee Basin Operating Co., LLC, 2013 WL 2237740 (D. Kan. May 21, 2013).

The U.S. District Court of Kansas has held that reference to factual allegations or evidence outside of the complaint and notice of removal is not permitted to determine the amount in controversy.

The plaintiff brought an action in state court, representing a class of royalty owners who were underpaid royalties from the defendants working interest Kansas wells. The plaintiff alleged breach of contract and unjust enrichment claims and sought compensatory damages, costs, and further relief as the court deemed just and proper. The petition did not state a specific amount of damages.

The defendant removed the action to the District Court, asserting CAFA jurisdiction and contending that the amount in controversy was in excess of $8.2 million. Thereafter, the plaintiff moved to remand, and the District Court granted the motion.

The District Court stated that, in determining the amount in controversy for an action removed pursuant to CAFA, the question is not how much the plaintiff will recover but rather is an estimate of the amount that will be put at issue in the course of the litigation. The District Court further noted that the amount in controversy is ordinarily determined by either the allegations of the complaint or by the allegations in the notice of removal where the allegations of the complaint are not dispositive. If the jurisdictional amount is not shown by the allegations of the complaint, then the burden is on the removing party to set forth in the notice of removal the underlying facts supporting the assertion that the amount in controversy exceeds the threshold limit.

The District Court observed that, in McPhail v. Deere & Co., 529 F.3d 947, 956 (10th Cir. 2008), the Tenth Circuit held that a plaintiff cannot avoid removal merely by declining to allege the jurisdictional amount; however, in the absence of an explicit demand for more than the jurisdictional amount, the defendant must show how much is in controversy through other means such as interrogatories obtained in state court prior to the removal, affidavits, or other evidence submitted to the federal court.

In support of their calculation that the amount in controversy exceeded $8.2 million, the Owens defendants presented the declaration of Charles E. Henderson, Vice President of Legal Affairs and General Counsel. Henderson stated that these calculations showed that the plaintiff's claims for the entire class period exceeded the jurisdictional threshold. Upon service of the Petition, Henderson quantified the damages at issue based on the allegations in the petition, the claims, the class period, and the number of leases.

Assuming that the royalty paid to the plaintiff class should have been calculated on 100% of the proceeds and not 75%, using a "back of the envelope" calculation, Henderson concluded the class was underpaid by approximately $11 million. Using the same back of the envelope analysis, he further asserted that the claim for shrinkage was approximately $3.52 million. Assuming the allegations in the petition were correct, the defendants located and analyzed the actual production and sales data for the period in question and ran a formal economic analysis of the potential damages. Based on those assumptions, it was determined that the amount in controversy for the five year period prior to the filing of the petition was $8,224,798.62 and $11.86 million for the entire ten year period claimed by the plaintiff class.

Owens, however, asserted that the defendants could not meet their burden to show that it was more likely than not that the amount in controversy exceeded $5 million, because the defendants submitted no evidence with their unsworn notice of removal that the amount in controversy exceeded the statutory requirement.

The District Court observed that the defendants did not submit any supporting documentation, affidavit or declaration as evidence of the amount of compensatory damages, although the defendants conceded that they had the actual production and sales data at the time of the notice of removal.

The defendants argued that the amount in controversy could be demonstrated by the allegations in the petition alone and made their calculations from those allegations, along with additional facts. The defendants relied on McPhail, contending that the court held the allegations of the complaint alone was sufficient to find the amount in controversy exceeded the jurisdictional threshold for diversity jurisdiction.

The District Court, however, observed that in McPhail, the plaintiff brought a wrongful death action. The McPhail complaint cited to the Oklahoma wrongful death statute and requested all relief enumerated therein, which provided recovery for several categories of compensatory damages alleged in the complaint, as well as punitive damages up to $100,000. The Tenth Circuit held that, given the allegations and the nature of the damages sought, the complaint on its face may be sufficient by itself to support removal. The Tenth Circuit, however, declined to decide the question based on the complaint alone because the plaintiff had incorporated correspondence between counsel in the notice of removal that demonstrated her counsel believed the amount in controversy could be in excess of $75,000.

Owen's petition, however, did not include a claim based on statutory liability or a claim for punitive damages, and the jurisdictional amount was not readily apparent from the face of the petition. Further, Owens did not attempt to limit the amount in controversy to less than the jurisdictional amount. Although the defendants stated in the notice of removal that they had undertaken to quantify the amount of additional royalties that would be owed, they failed to incorporate any evidence supporting this calculation in the notice of removal, such as an economic analysis of the amount in controversy or settlement estimates.

Accordingly, the District Court remarked that in the absence of such evidence, the general and conclusory allegations of the petition and notice of removal did not establish by a preponderance of the evidence that the amount in controversy exceeded $5 million.

Next, the District Court evaluated whether the defendants could rely on factual allegations to meet their jurisdictional burden which were not contained in the notice of removal but instead were subsequently submitted with their response as additional support. The District Court observed that the Tenth Circuit consistently held that reference to factual allegations or evidence outside of the petition and notice of removal was not permitted to determine the amount in controversy. The District Court noted that, although the Tenth Circuit appeared to have carved out a limited exception to this rule by holding that a party may seek limited discovery to determine the amount in controversy, it did not give any guidance on when it was appropriate to grant or deny a request. Nevertheless, in McPhail, the Tenth Circuit contemplated a situation in which the defendant had no information from which to establish the amount of damages.

 In Owens, the District Court found that discovery was not justified, because the defendants conceded in their response and Henderson's Declaration that they were aware of additional facts and data at the time of removal, but they did not allege all of these facts in their notice of removal. Further, although the McPhail court indicated that evidence of settlement proposals and estimates were permitted as a basis for establishing the amount in controversy, such was possible only when those facts were incorporated into the notice of removal.

The District Court found that, although the petition was silent on the jurisdictional amount, it had enough detail regarding the basis of the claims of the underpayment of royalties to enable defendants to use their data to calculate an amount in controversy, albeit data and/or evidence they did not include in their notice of removal. Even assuming that the defendants could establish the amount in controversy exceeded $5 million, the District Court concluded that the defendants were obligated to allege all necessary jurisdictional facts in the notice of removal.

Thus, because the jurisdictional facts alleged in the petition and notice of removal did not show by a preponderance of the evidence that the amount in controversy exceeded $5 million, the District Court remanded the action to state court.

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