Jessica Karmasek Feb. 22, 2016, 1:49pm


NEW ORLEANS (Legal Newsline) - A federal appeals court recently sided with a group of oil and gas companies, ruling that a lawsuit filed against them by a class of post-foreclosure owners of disputed mineral interests should remain in federal court.

The U.S. Court of Appeals for the Fifth Circuit, in an opinion filed last month, also noted that the burden should be placed on the plaintiffs who seek to remand a case based on one of the Class Action Fairness Act’s limited exceptions.

“If the applicability of an exception is not shown with reasonable certainty, federal jurisdiction should be retained,” Circuit Judge Leslie Southwick wrote for a majority of the three-judge panel.

The defendant oil and gas companies, including Chesapeake Energy Corp., operate producing wells in Johnson and Tarrant counties, Texas.

The companies had obtained oil and gas leases on commercial and residential property in downtown Fort Worth and adjacent locations. As a result, the defendants leased a substantial number of third-of-an-acre, quarter-of-an-acre plots.

Allegedly, numerous lessors lost their property through foreclosure subsequent to the execution of their leases.

A petition filed in state court claimed the defendants had not always obtained subordinations of prior mortgages to the oil and gas leases, which allegedly caused the mortgaged property to pass free and clear of the leases to those who purchased through foreclosure. The petition also asserted that after foreclosure, the defendants continued to produce from the relevant wells without “undertaking the significant, expensive curative work” to address the ownership changes.

Plaintiff Arbuckle Mountain Ranch of Texas Inc. filed a lawsuit on behalf of itself and a putative class of 3,000 to 5,000 members in a Texas state court in November 2014.

The class -- post-foreclosure owners of the disputed oil and gas interests -- claims the defendants’ oil and gas leases automatically terminated upon foreclosure and the companies’ continued operation of these wellheads constituted trespass and conversion.

The defendants removed the case to the U.S. District Court for the Northern District of Texas, pursuant to CAFA, soon after.

In August, the Northern District of Texas granted Arbuckle’s motion to remand the case to Texas state court, holding the local controversy exception applied.

The local controversy exception requires that two-thirds of the proposed class, along with at least one defendant, be citizens of the state where the class action was originally filed. Under the exception, the class’ principal injuries also must be incurred in that same state.

The defendant companies appealed to the Fifth Circuit.

The Fifth Circuit, in its Jan. 7 decision, reversed the Northern District of Texas’ ruling, concluding that Arbuckle’s state court petition was ambiguous as to the scope of the proposed class.

“Arbuckle’s petition contains two conflicting class definitions,” Southwick wrote in the 13-page majority opinion. “After reviewing Arbuckle’s petition, the parties’ briefs, and the record, we have no basis to conclude the class is only of current owners, or conversely that it covered all post-foreclosure owners including interim owners. Further, plaintiffs concede there is no evidence that, under the broad definition, over two-thirds of the class are Texas citizens.

“Because the class that the petition at the time of removal sought to have certified is not clearly limited to current owners, and with inadequate evidence of the citizenship of the interim owners in the broader class, Arbuckle has not proven that the exception for local controversies applies.”

Circuit Judge Jennifer Walker Elrod, in her dissent, agreed with the district court’s determination that the local controversy exception required remand of the case to state court.

“The law of our circuit does not require such a presumption in favor of federal jurisdiction, nor should it,” she wrote. “Moreover, if the facts of this case do not satisfy the local controversy exception ‘with reasonable certainty,’ then the majority’s presumption is a strong one indeed.”

From Legal Newsline: Reach Jessica Karmasek by email at jessica@legalnewsline.com.

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