On November 27, 2013, the Ninth Circuit Court of Appeals issued its opinion in Mondragon v. Capital One Auto Finance, following other circuits in holding that the "local controversy" exception to federal jurisdiction under the Class Action Fairness Act of 2005, 28 U.S.C. Sections 1332(d), 1453, and 1711–1715 (CAFA) requires an evidentiary showing that two-thirds of the putative class members are local state citizens.
In so doing, the Ninth Circuit reversed the district court and remanded this "fee lumping" case for further proceedings allowing the plaintiff to present evidence that the "local controversy" exception applies. How does the plaintiff do that, you ask? It's simple; he conducts discovery of the dealer's customers to determine their state of residence at the time that the case was removed from state court to federal court, an expensive and invasive process that has the potential to disrupt the dealer's relationship with its customers and potentially expose the dealer to other claims.
We don't know what motivated Capital One to make the decision it did to remove this case to federal court, since it should have known that Mondragon would fight the federal court's jurisdiction, or appeal the grant of the remand motion, given the authority from the other circuits that should have served as a cautionary tale. From an outside perspective the decision to remove the case seems like a clever, but ill-conceived gambit that had the potential for more negative consequences, than positive.
First, the back story: Mondragon filed a class action lawsuit against Ron Baker Chevrolet and Capital One Auto Finance (the finance company that financed Mondragon's purchase of a vehicle from Ron Baker Chevrolet) under California's Consumers Legal Remedies Act, Automobile Sales Finance Act and Unfair Competition Law. At issue, for purposes of the circuit court's opinion, were two putative classes:
"CLASS 1:" All persons who, in the four years prior to the filing of this complaint, (1) purchased a vehicle from Ron Baker for personal use to be registered in the State of California, and (2) signed a [Retail Installment Sale Contract (RISC)] that failed to separately disclose, on the RISC, the amounts paid for license fees and/or the amounts paid for registration, transfer, and/or titling fees.
. . .
"CLASS 3:" All persons who, in the four years prior to the filing of this complaint, (1) purchased a vehicle in California for personal use to be registered in the State of California, (2) signed a RISC that failed to separately disclose on the RISC the amounts paid for registration/transfer/titling fees, and (3) whose RISC was assigned to Capital One.
While there is overlap in the two classes, the first class is primarily a dealership class for government or DMV "fee lumping" and the second class is primarily a statewide class against the finance company for government or DMV "fee lumping."
Notably, Mondragon's counsel is Christopher "Hawk" Barry, of consumer advocate law firm, Rosner, Barry & Babbitt, the main law firm that files F&I class actions against dealers and finance companies in California. It is commonly known among dealer and finance company counsel that most, if not all, of the lawsuits that this firm files are filed in state court, suggesting that these attorneys are more comfortable in state court or are uncomfortable proceeding in federal court. Of course, the federal court's unanimous jury requirement makes it more advantageous to a plaintiff to proceed in state court.
Capital One timely removed the case to federal district court under CAFA, which expanded federal jurisdiction over many large class-action lawsuits and mass actions filed in the United States. The Act gives federal courts jurisdiction over certain class actions in which the amount in controversy exceeds $5 million, and in which any of the members of a class of plaintiffs is a citizen of a state different from any defendant, unless at least two-thirds or more of the members of all proposed plaintiff classes in the aggregate and the primary defendants are citizens of the state in which the action was originally filed. The Act also directs the Courts to give greater scrutiny to class action settlements, especially those involving coupons.
Mondragon promptly moved to remand the case to state court, arguing that his class definitions, limiting putative class members to those consumers who purchased and registered cars in California, were sufficient to establish that this action fell within CAFA's local controversy exception. The federal district court agreed and remanded the case to state court, concluding that the "class allegations sufficiently show that at least two-thirds of the potential class members will be California citizens. As such, Plaintiff has satisfied his burden of proving that CAFA's local controversy exception applies."
Dismayed at having to litigate this case in state court, where these cases are traditionally litigated, Capital One appealed the district court's ruling to the Ninth Circuit Court of Appeals. But a quick review of the law in the other circuits that have considered the "local controversy" exception should have dissuaded the finance company from this approach.
The fifth, seventh and eleventh circuits previously considered this issue and concluded that there must ordinarily be at least some facts in evidence from which the district court may make findings regarding class members' citizenship for purposes of CAFA's local controversy exception. See In re Sprint Nextel Corp., 593 F.3d 669, 673-76 (7th Cir. 2010); Preston v. Tenet Healthsystem Mem'l Med. Ctr., Inc., 485 F.3d 793, 798-802 (5th Cir. 2007); Evans v. Walter Indus., Inc., 449 F.3d 1159, 1165-66 (11th Cir. 2006). In fact, a review of those cases reveals that when, as here, the district court remanded the case where plaintiff failed to put any evidence forth concerning the elements of the "local controversy" exception, the circuit court will generally remand the case to the district court for further proceedings to allow the plaintiff to present such evidence.
So it should have come as no surprise to Capital One that the Ninth Circuit followed its brethren and found that Mondragon did not meet his burden of proof to establish by an evidentiary showing that the local controversy exception applies. In fact, following other circuits, the Ninth Circuit reversed the district court and remanded the case for further proceedings to allow Mondragon to present evidence to establish the application of the exception.
Thinking it through to its logical conclusion, then, Mondragon will be entitled to obtain the evidence required to make such a showing. A source of such information could include DMV records. But class counsel would first have to know the identity of putative class members to be able to make a narrowly tailored and relevant request to the DMV. Wouldn't that logically mean that the court could order production of information or records sufficient to establish the citizenry requirement? Shouldn't Capital One have considered this outcome before appealing the remand order?
The Mondragon court addressed these issues in the following excerpt:
We acknowledge that our holding may result in some degree of inefficiency by requiring evidentiary proof of propositions that appear likely on their face. The inference drawn by the district court in this case was understandable. It is likely that most of the prospective class members -- we would guess more than two-thirds of them -- were California citizens at the time the lawsuit was filed. But it is also likely that some of them were not.
. . .
Similarly, in this case, we suspect that, if he decides to expend the effort, Mondragon will be able to gather and submit evidence to support his contention that more than two-thirds of prospective class members were citizens of California at the time the case became removable, thereby justifying a remand to state court and landing the case back in the same place it was before this appeal. Any such inefficiency is largely of the parties' own making, though. Mondragon could have limited the class by defining it to consist only of California citizens, or he could have proceeded in federal court once Capital One chose to remove the case. Likewise, Capital One could have allowed the case to proceed in state court initially or once the district court had entered its remand order. Instead, both parties chose to assert their rights to the utmost, and that is there prerogative.
Perhaps recognizing that Mondragon will probably be able to prove that this class action is subject to remand under the local controversy exception, Capital One argues that we should remand the case to the district court with instructions to deny the motion to remand, requiring the case to continue in federal court without giving Mondragon another opportunity to establish the facts that would require remand. Capital One contends that we should preclude Mondragon from what it calls "another bite at the apple" because of the inefficiency and delay that will result from permitting the district court to revisit the issue. But that inefficiency and delay is at least equally attributable to Capital One for insisting that Mondragon affirmatively prove with evidence a proposition that seems likely to be true.
The Ninth Circuit's scolding words ring true. Many litigants like to argue merely for the sake of arguing. But careful deliberation in making and crafting an argument or deciding to bring it in the first place is paramount to making sound business and legal decisions. If plaintiff is permitted to obtain discovery of the deal files in the state-wide class, it might not be just Ron Baker Chevrolet whose deals could be exposed, the deals of every dealer who assigned contracts to Capital One during the class period could be ordered produced, providing ample evidence for the initiation of other class actions against other dealers.
So while Capital One technically scored a win, obtaining a victory in the Ninth Circuit, as a practical matter it was a colossal defeat for dealers and other finance companies who followed in Capital One's footsteps and removed these types of cases to federal court under CAFA jurisdiction. They've potentially given consumer advocates carte blanche to open the floodgates of discovery into deal jackets to obtain information concerning the citizenry of putative class members in the context of a mere pleading motion. That's snatching defeat from the jaws of victory.
Luckily, the case continued to proceed in the trial court while the Ninth Circuit decided whether to take the appeal. A class certification motion was filed, but not heard before the trial court stayed the case pending the Ninth Circuit's opinion. Now that the appeal has been decided, it remains to be seen whether Capital One will stipulate to allow this case to be heard in the trial court where this two year saga could potentially end if the dealer is successful in defeating class certification. The dealer is well positioned to prevail if the arguments used in Harrelson v. Carmax and Martinez v. Santa Maria Ford are queued up in that class certification motion.