Local Controversy Finding Must Stem From Lawsuit

(CN) - Federal District Courts are confined to the allegations in a complaint when deciding whether to transfer a diversity class action to state court under the local controversy exception, the 9th Circuit ruled.

The federal appeals court on Tuesday joined two other circuits in finding that District Courts cannot consider independent evidence to decide if a class action can be remanded back to state court under the Class Action Fairness Act after it has been first sent to federal court.

Defendants may remove diversity class actions from state to federal court under the act if the parties are "minimally diverse and the amount in controversy exceeds $5 million," according to the ruling. Under the local controversy exception, plaintiffs can send the case back to state court if they can prove that at least two-thirds of the proposed class members are citizens of the state where the complaint was filed, that at least one of the defendants is a citizen of the same state, and that the injuries alleged in the complaint occurred in the state as well.

The 9th Circuit made the finding in connection to a proposed class action filed in California by Bradford Coleman against Virginia-based Estes Express Lines and its California subsidiary Estes West fka G.I. Trucking.

Coleman's complaint did not distinguish between the defendants' actions, alleging that both had failed to pay overtime, refused to give employees meal and rest breaks, and had broken several state employment laws.

After Estes successfully removed the case to federal court, Coleman sought to have it remanded to state court as a local controversy. In opposing remand, Estes argued that its California subsidiary had insufficient funds to pay a judgment should it lose the case, as it was wholly controlled by its Virginia-based parent. To prove this, the company submitted a statement by its director of human resources.

A federal judge sided with Coleman and sent the case back to the state court, finding that it could not consider evidence outside of the complaint in deciding whether the action satisfied the local controversy criteria.

The three-judge panel in Pasadena agreed, noting that jurisdictional hearings cannot turn into a trial on the merits.

"Such a determination necessarily implicates the merits of the case," Judge William Fletcher wrote for the court. "We see nothing in CAFA [the Class Action Fairness Act] that indicates a congressional intention to turn a jurisdictional determination concerning the local defendant's 'alleged conduct' into a mini-trial on the merits of the plaintiff's claims."

The panel added that "the complaint alleges that Estes West employed the putative class members during the relevant period, and that Estes West has violated California law in a number of ways with respect to those employees."

"The complaint also alleges that Estes Express has violated the same provisions of California law, but the allegations against Estes Express in no way make the allegations against Estes West, the actual employer, insignificant," the ruling states.

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